Working Paper No. 2

Has the Fed Been a Failure?

As the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation’s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment. (2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.

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George Selgin is a professor at the Terry College of Business at the University of Georgia, and a senior fellow at the Cato Institute. William D. Lastrapes is a professor at the Terry College of Business at the University of Georgia. Lawrence H. White is a professor at the Department of Economics at George Mason University, and an adjunct scholar at the Cato Institute.