No, the Fed Did Not Stabilize the Economy

Commenting on a recent article of mine in The Wall Street Journal, Peter Gartside claims that:

Prior to 1913, the U.S. annual gross domestic product changes oscillated between extremes of approximately plus or minus 15%.   After the establishment of the Federal Reserve Board, the limits of GDP oscillations narrowed to approximately plus or minus 6%.

You may well wonder where he got that idea, since there are no official estimates of gross domestic product (GDP) for years before 1929.  In the early 1960s, however, John Kendrick and Simon Kuznets bravely attempted to construct such estimates for gross national product (GNP).  That would be close enough to modern GDP data were it not for the primitive statistics and technology they had to work with.

The table (after the jump) shows these heroic old estimates for real GNP from 1889 to 1914.  In that period, there was only one year (1908) in which the drop in GNP exceeded 6% and none that remotely approaches the  “minus 15%” figure of Mr. Garstide’s imagination.

Real GNP
billions of 1958$

1889    49.1
1890    52.7
1891    55.1
1892    60.4
1893    57.5
1894    55.9
1895    62.6
1896    61.3
1897    67.1
1898    68.6
1899    74.8
1900    76.9
1901    85.7
1902    86.5
1903    90.8
1904    89.7
1905    96.3
1906    107.5
1907    109.2
1908    100.2
1909    116.8
1910    120.1
1911    123.2
1912    130.2
1913    131.4
1914    125.6

Historical Statistics of the U.S., Series F4

CEA chair Christina Romer’s research shows that these early estimates “exaggerate the size of cycles because they are based on the assumption that GNP moves approximately one for one with commodity output valued in producer prices.” If we tried to estimate recent GDP figures on the basis of commodity output and prices, then postwar cycles would look even wilder than they already do.  Consider, for example, using the recent gyrations in producer prices of oil and metals as a proxy for GNP.

Even if we relied on the ancient and flawed pre-Romer GNP estimates above, however, there were still no downturns before 1913 that were nearly as extreme as 1929-33 or even 1920-21.  And there was no recession between the 1870s and 1913 that lasted as long as the slump of 2008-2009.

Whether we’re talking about fiscal or monetary fine-tuning, all the technocrats efforts at taming the business cycle in the past 40 years appear no more successful than the pre-Fed policies of doing without a central bank and doing without deferred tax increases (debt-financed “fiscal stimulus” plans).