History is only as useful as the lessons it imparts. With that in mind, the Federal Reserve Bank of Cleveland kicked off events marking the 100-year anniversary of the Federal Reserve with a gathering of giants in the field of economic history.
Presenters at the December 13-14, 2012 conference, titled Current Policy under the Lens of Economic History: A Conference to Commemorate the Federal Reserve System’s Centennial, cast an analytical eye on the evolution of Fed policies over the past century. Conference organizers also used the occasion to celebrate the lifetime achievements of Michael Bordo of Rutgers University. Bordo, a longtime visiting scholar at the Cleveland Fed and other Reserve Banks, is one of the country’s leading economic historians. He is known both for his detailed knowledge of monetary and central-bank history as well as his ability to discern lessons from the past and relate them to current events.
This was no meeting of Fed partisans, per se, although many of the presenters hold or formerly held positions in the System. These were reflective economists who share a deep interest and sometimes concern about the abiding impact of central-bank policies. In studying the Fed’s history, it’s safe to say they hope to improve our economic future. Among them:
- Marvin Goodfriend, formerly of the Richmond Fed and now Carnegie Mellon University, has long distinguished himself as an economist who cares not only about decisions at the next Fed policy meeting, but about the long-term durability of the institution.
- Allan Meltzer, also of Carnegie Mellon, is perhaps best known for his two-volume A History of the Federal Reserve, considered the definitive word on the subject. He might also be called among the world’s first-generation of “monetarists,” a branch of economic thought popularized by Milton Friedman.
- Hugh Rockoff and Eugene White of Rutgers University, who presented “The Oeuvre of Michael D. Bordo.”
- From the Bank of Canada, Lawrence Schembri, and Carleton University’s Ehsan Choudhri, who compare the very different booms and busts in the United States and Canada.
- Barry Eichengreen, from the University of California, Berkeley, who is an economic historian. Eichengreen is one of those rare economists who is lauded for his technical work, such as the book, Golden Fetters: The Gold Standard and the Great Depression, as for his missives in the popular press.
Eichengreen summed up the spirit of the conference when he noted that history’s ultimate utility may not lie just in its predictive or explanatory power, but in its capacity for giving us humility as we address current events. Watch for a full report on the conference and key takeaways in the next issue of Forefront.
Mark Sniderman, executive vice president and chief policy officer with the Cleveland Fed, welcomed participants to Current Policy Under the Lens of Economic History: A Conference to Commemorate the Federal Reserve System’s Centennial.
I joined the Federal Reserve in 1976, fresh out of graduate school. Inflation was running at about 7 percent after having registered in the low double digits the year before. It looked as though the Federal Reserve was bringing inflation under control. I remember people feeling fairly confident. After all, we had what seemed to be good theory, good models, and certainly, good intentions. We know now that our optimism was misplaced—core inflation hit double digit rates again in 1980. Bringing inflation under control subsequently entailed two recessions, and 30-year Treasury debt required 14 percent interest rates at auction.
Dissatisfaction with economic performance provided an opening for new ideas. The rational expectations revolution took hold for a good reason—it provided badly needed perspectives on macroeconomic theory, modeling, and policy design. The literature blossomed with new ways of thinking about expectations, macro model building and estimation, time consistency, and policy rules. Inside the Federal Reserve, these new ways of thinking took hold at different paces in different places.
Eventually, what had been the old “conventional wisdom” was replaced by a new “conventional wisdom.” Change did not come quickly, and it wasn’t always pleasant. This happens in all areas of science. To paraphrase the physicist Max Planck, “Science advances one funeral at a time.” Some of the people in this room were deeply engaged in the culture wars of those days.
The policymaking framework at the Fed is quite different today from when I began my career. The amount of cumulative change has been rather significant, I think. Today, the Federal Open Market Committee (FOMC) publishes press statements after its meetings, releases minutes within three weeks of its meetings, and provides a summary of its economic projections each quarter, including a distribution of the participants’ expectations of the timing of the liftoff of the federal funds rate from the zero bound. The FOMC has been making extensive use of forward guidance to help the public understand how the Committee intends to respond to changes in the economic outlook. Last year the FOMC published the principles that will guide its exit from nontraditional monetary policy; earlier this year it established explicit numerical objectives for its Congressionally mandated objectives of price stability and maximum employment.
Despite these and other changes that are intended to keep the policy formulation and design process current with the “state of the art,” we are working through a period of time of great stress in the global financial system, widespread deleveraging, and regulatory reform in the U.S. financial services industry. These developments, coming on the heels of a severe financial crisis and deep recession, have created an environment in which central bankers around the world are asking themselves what they can do to make positive contributions, and what constitutes a “bridge too far.” A quotation from Abraham Lincoln might be appropriate here: “The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew.”
With the stakes as enormous as they are, and the situation as novel as it is, opinions on what has been done and what should be done are varied and sometimes heated. I’m eager to hear what everyone has to say about events of the moment, as well as events in the Fed’s past. However, in regard to events of the moment—with no disrespect to anyone here today—I will be far more interested in what economic historians will say about them 26 years from now, on the Federal Reserve’s 125th anniversary. Why don’t we agree to reconvene then?