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December 22, 2013

Fed aims to smooth out economy

Are you celebrating yet? The United States came late to a party, and it has defined us ever since.

The party I mean is membership to that elite group of central bankers around the world. A hundred years ago tomorrow, our Federal Reserve was born. By that time, Britain had a central bank for more than two centuries. The United States resisted following their lead for a run of consecutive recessions until we realized we could no longer count on financiers to hold our economy together.

The motivation for a government-sanctioned monetary authority was the Great Panic of 1907. This was the last financial meltdown for which the nation trusted the private sector could sort out by itself. As the panic took hold, J. P. Morgan commanded his fellow bankers into his library and had his assistant lock the door from the outside. He then told his captive audience that the door would not be unlocked until everyone agreed to a strategy to return confidence in the nation’s financial markets.

Participants agreed to a strategy, to have their surrogates lend confidence by speaking to their church flocks the following Sunday, and they all agreed to meet at an offshore island to give the public a sense they were determined to forge a concerted plan to avert future monetary crises.

A growing nation discovered that its prosperity could ill-afford such solutions based on powerful personalities rather than effective policies. Six years later, the Federal Reserve System was created.

The Fed really did not have its head in the game for a couple more decades, though. They had drunk the Kool-aid and refused to intervene sufficiently in the Great Crash in 1929. While a central bank rarely throws a nation into a great recession, in both 1929 and 2008 they failed to intervene in a way that could ward one off.

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