How did monetary policy work before the Federal Reserve?

This is the 3rd iteration of an american central bank.

controlled inflation is stealth taxation.

You had rich dudes like J.P. Morgan bailing out the government.

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As you know, there is lots of talk on the libertarian side about doing away with the Federal Reserve.

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Say goodbye to whatever senator, congressman or president that tries that.

I have some thoughts on it, but you didn't ask me, so I'll let the other guy answer. But generally I'm not opposed to uncontrolled deflation, or inflation. Let the strongest, wisest, and most nimble survive. Let everyone else fend for themselves. As was intended. And later bastardized. No one bailed me out when I got in over my head in South Florida real estate. And I did the right thing. And I survived, and even thrived. I get tired of so called free market people defending government intervention at every level. There are bankruptcy laws. Several varieties. Some more unethical and immoral than others. Let people and entities sink and rise to their own level of equilibrium. And depending on whether they worship government, science or God, they can answer for their own decisions at some point, to whomever is their to answer to.

Well you made the insinuation that being oriented toward pro-free market implies that one doesn't want any type of centralized authority or intervention. Why not have competing currencies and let it all play out?

A number of different ways.

(For what it's worth, we had a thread a couple of weeks ago on the PT Board where I posted some thoughts on the last couple of pages related to my preference for classical 19th century monetary policy in the U.S. But that only referenced the previous era of monetary policy obliquely, so...)

Before the 2nd Bank of the United States (BUS), I'd say that the USA barely even had a monetary policy, other than to authorize coinage backed by gold and silver. The American colonies used money that was mostly backed by hard-money foreign coins (such as the Germanic thaler or the Spanish piece-of-eight), and the post-Revolution USA coined its own money, but stuck to hard money. The 1st BUS (1791-1811) was mostly just a government subsidy for commercial loans to industry, rather than being what we would think of as a modern central bank.

From Jackson's Specie Circular EO in 1836 to the passage of the Gold Standard Act in 1900 under McKinley, there were quite a lot of dramatic political battles in the U.S. over monetary policy, mostly related to the complicated and confusing topic of "bimetallism."

Of course Jackson famously had a bitter conflict with the 2nd BUS, and the resulting attacks on the bank led to a monetary panic in 1837, and a deflationary monetary "depression" that lasted until 1844. In one of the fascinating little side notes of American history, William Henry Harrison kept strictly silent on the heated issue of bimetallism during the 1840 campaign (playing it safe, because the Whigs knew they would win), and he seemed to reference a definite hostility to hard money policy in his inaugural address (which also includes an approving nod to the spirit of Helvetic Confederacy):

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Connected with this subject is the character of the currency. The idea of making it exclusively metallic, however well intended, appears to me to be fraught with more fatal consequences than any other scheme having no relation to the personal rights of the citizens that has ever been devised. If any single scheme could produce the effect of arresting at once that mutation of condition by which thousands of our most indigent fellow-citizens by their industry and enterprise are raised to the possession of wealth, that is the one. If there is one measure better calculated than another to produce that state of things so much deprecated by all true republicans, by which the rich are daily adding to their hoards and the poor sinking deeper into penury, it is an exclusive metallic currency. Or if there is a process by which the character of the country for generosity and nobleness of feeling may be destroyed by the great increase and neck toleration of usury, it is an exclusive metallic currency.

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But then he caught pneumonia and died 31 days into his term. And the U.S. pretty much kept on a hard gold standard path until 1933, albeit with some occasional flare-ups with legislation favoring silver. There were events like the (then) unprecedented step of Lincoln & Chase to issue the greenback in 1862 (legal tender paper totally unbacked by silver or gold), but that was more of a war-time, temporary-redeemability-restriction type of event rather than a solid break.

You can check out "primers" like this one from FEE, but probably the best starting point to study the monetary policy battles of the 19th century would be with the Coinage Act of 1873, consistently referred to as the "Crime of '73" by Silverite Progressives like William Jennings Bryan. The Bland-Allison Act in 1878 was a near turning point for the silverites who advocated bimetallism, but the gold standard still narrowly held the day, and become solidly entrenched in 1900.

The Federal Reserve from 1913-1933 was still operating on a strong gold standard, and so was not really the same thing as the Fed from 1933-1971 or 1971-present, but it did pursue its own monetary policy to maintain proper balance (in its view) between interest rates and gold reserves (albeit in a somewhat haphazard and uncoordinated manner).

Before 1913, monetary policy was mostly just a matter of letting prices spike during war-time (with prices sharply correcting a year or two after), and letting general deflation take hold due to hard money policy over the longer term. After 1913, monetary policy became more inflationary, and indeed the Bureau of Labor did not even track consumer prices before then.

Of course I'm leaving out a bunch of stuff about banking regulation and federal and state charters, and the regulation of bank notes and other forms of paper money, but I just wanted to give a brief outline of the core, "hard money" monetary policy stuff.


P.S. -- If 90proof is reading, I came across an interesting article published last Friday by the long-winded Jeffrey Snider, who made arguments somewhat related to my references to the neo-Fisherites of the present day.

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Doc Fenton

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Great post. I have seen your commentary here before and have enjoyed them. Are you an economist or some kind of economics teacher, because you sure sound like one.

Do you have any thoughts on the effect on the economy and inflation if the government did away with the Fed?

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Thoughts on uncontrolled deflation

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price of inputs going down?

or purchasing power of existing money increasing?

how do you interpret it?