WI: No Federal Reserve

Status
Not open for further replies.
Milton Friedman blamed the Fed for not acting aggressively enough as opposed to its existance.

Friedman did indeed argue that the Fed should have acted more aggressively--but that was in the context of an economy where the Fed did exist and was the lender of last resort. He explicitly states elsewhere (in *Free to Choose*) that it would have been better in the early 1930's if the Fed had not existed at all rather than exist and carry out faulty policies:
Had the Federal Reserve System never been established, and had a similar series of runs started, there is little doubt that the same measures would have been taken as in 1907 — a restriction of payments. That would have been more drastic than what actually occurred in the final months of 1930.
The existence of the Reserve System prevented this drastic therapeutic measure: directly, by reducing the concern of the stronger banks, who, mistakenly as it turned out, were confident that borrowing from the System offered them a reliable escape mechanism in case of difficulty; indirectly, by lulling the community as a whole, and the banking system in particular, into the belief that such drastic measures were no longer necessary now that the System was there to take care of such matters.
http://books.google.com/books?id=F5z1B5SwGUEC&pg=PT233
 
Making mildly foolish claims subject to massive butterflies is...kind of what AH is all about. All the moreso when preceded trite, ideologically driven statements. That said, I have no problem arguing that, under most alternatives, banking panics would have been more prevelent without the Fed or without a substitute that, practically speaking, acts like the Fed.

I am not familiar with Canada's banking system at the time so I can offer nothing in the way of agreeing or disagreeing to what has happened north of the border.

The US would do better with a substitute that didn't act like the Fed.

The Canadian banking system was one of automatic monetary expansion and contraction -- when the demand for cash balances went up, the demand for bank reserves went down, and banks were able to expand their lending against a stable proportion of reserves -- rather than having to increase their proportion of reserves in order to increase their lending -- which allowed the money supply to grow and shrink in line with what the economy needed out of it.

In the pre-Fed era and occasionally in the post-Fed era, the US had times when the money supply was allowed to shrink but not expand, so a sudden increase in the demand for cash balances would meet a relatively static money supply and bring on deflation.

An asset-based currency (for instance, where banks are allowed to back their currency issues with gold, like it was in other countries) is an automatic stabilizer that responds to changes in the economy to push it back to long run trend. The public debt-backed currency the US had IOTL wasn't able to respond when the economy changed in one particular direction.

This isn't necessarily what the US would have ended up with, however. The contemporary progressive movement was all about central management and planning so a solution that is essentially decentralist is swimming against the tide. If you want an asset currency to be able to take root as the aim of reform, you need to go earlier than the 1910's, making reform happen in the 1890's when an asset currency (and other reforms, like branch banking) was still popular with reformists. If you do that, the Fed is obviously butterflied -- no one will think it is necessary if the economy is more stable and less subject to annual and periodic swings like it was under the OTL National Banking System -- and that fulfills the requirements of the OP, albeit probably with some bending of the spirit of the question.
 
Status
Not open for further replies.
Top