Bernanke on July 10 delivered a classic Bernanke speech: 44 footnotes.
Title: “The First 100 Years of the Federal Reserve: The Policy Record, Lessons Learned, and Prospects for the Future.” Setting: a conference sponsored by the National Bureau of Economic Research. The NBER is the #1 academic organization devoted to studying America’s business cycles. It designates when recessions begin and end.
Here is where he summarizes his life’s work. Here is where he justifies his actions in front of his peers. We should pay attention.
He called the FED “The Great Experiment.”
In the words of one of the authors of the Federal Reserve Act, Robert Latham Owen, the Federal Reserve was established to “provide a means by which periodic panics which shake the American Republic and do it enormous injury shall be stopped.”1 In short, the original goal of the Great Experiment that was the founding of the Fed was the preservation of financial stability.
Clearly, this goal failed. Bernanke and the apologists cannot escape this fact: the Great Depression proved this goal was a pipe dream. So have all recessions.
The new institution was intended to relieve such strains by providing an “elastic” currency–that is, by providing liquidity as needed to individual member banks through the discount window; commercial banks, in turn, would then be able to accommodate their customers.
THE FED-MODIFIED GOLD STANDARD
The FED operated under a gold standard. It fought this standard.
As I mentioned, the Federal Reserve pursued this approach to policy in the context of the gold standard. Federal Reserve notes were redeemable in gold on demand, and the Fed was required to maintain a gold reserve equal to 40 percent of outstanding notes. However, contrary to the principles of an idealized gold standard, the Federal Reserve often took actions to prevent inflows and outflows of gold from being fully translated into changes in the domestic money supply. This practice, together with the size of the U.S. economy, gave the Federal Reserve considerable autonomy in monetary policy and, in particular, allowed the Fed to conduct policy according to the real bills doctrine without much hindrance.The policy framework of the Fed’s early years has been much criticized in retrospect. Although the gold standard did not appear to have greatly constrained U.S. monetary policy in the years after the Fed’s founding, subsequent research has highlighted the extent to which the international gold standard served to destabilize the global economy in the late 1920s and early 1930s.
Academic economists hate the gold standard, weak as it was after 1913.
What about accountability to the voters? There never has been any, as his brief discussion admits. The system was set up to undermine any accountability.
(To read the rest of my article, click the link.)