This was published on January 2, 2013, in Ron Paul’s Monetary Policy Anthology: Materials From the Chairmanship of the Subcommittee on Domestic Monetary Policy and Technology, US House of Representatives, 112th Congress.
We have heard the objection a thousand times: why, before we had a Federal Reserve System the American economy endured a regular series of financial panics. Abolishing the Fed is an unthinkable, absurd suggestion, for without the wise custodianship of our central bankers we would be thrown back into a horrific financial maelstrom, deliverance from which should have made us grateful, not uppity.
The argument is superficially plausible, to be sure, but it is wrong in every particular. We heard it quite a bit in the financial press ever since the announcement that Congressman Ron Paul, a well-known opponent of the Fed, would chair the House Financial Services Subcommittee on Domestic Monetary Policy. Fed apologists were beside themselves – a man who rejects the cartoon version of the history of the Fed will hold such an influential position? He must be made into an object of derision and ridicule.
The conventional wisdom runs something like this: without a central bank or its lesser cousin, a national bank, we had frequent episodes of boom and bust, but since the creation of the Federal Reserve System the economy has been far more stable. People who believe in a free market in banking, as opposed to these cartel arrangements, are evidently so uninformed or so blinded by ideology that they have never heard or internalized this one-sentence encapsulation of 19th- and 20th-century monetary history.
Modern scholarship has not been kind to this thesis. Mainstream economists have begun to acknowledge that the alleged instability of the period before the Federal Reserve has been exaggerated, as the posited stability of the post-Fed period. Christina Romer, who chaired the Council of Economic Advisers under Barack Obama, finds that the numbers and dating used by the National Bureau of Economic Research (NBER, the largest economics research foundation in the U.S., founded in 1920) exaggerate both the number and the length of economic downturns prior to the creation of the Fed. In so doing, the NBER likewise overestimates the Fed’s contribution to economic stability. Recessions were in fact not more frequent in the pre-Fed than the post-Fed period.
Read more at LewRockwell.com. By Thomas E. Woods, Jr.