Debating the existence of the Federal Reserve

The folks at Marginal Revolution are conducting a small debate over whether we're actually better off with a Federal Reserve or without. This is a discussion, as entertaining as it is, that resembles the proverbial sports argument, which of course is the genesis of the vast sports talk radio phenomenon. Is Peyton as good as Johnny U? Is LeBron the equal of Kareem? There's a reason alcohol is necessary for most of these discussions. They all involve essentially untestable propositions, usually focused on historical comparisons. They are, in essence, philosophical dialogues, only loosely connected with the real world, but (sometimes) fascinating: thought experiments, opportunities to display erudition -- Tyler Cowen and Alex Tabarrok at Marginal Revolution fling citations at each other like cream pies -- and usually soapboxes for current predispositions or biases. They're perfect for the blogosphere. It's fantasy economics.

Cowen thinks that generally the Fed has done a decent job (with some bad stretches), and Tabarrok argues that we were better off in the pre-Fed 19th century. Like any blogospheric conversation, this one takes many twists and turns, particularly in the comments, touching on quantitative easing, the role of President Bush in crisis management, the motivations of Ben Bernanke, who resembles here a desperate manager of an underperforming team. The real problem, despite attempts to compare inflation rates and nations that have central banks to those that don't, is that there's no control: The proposition, pro or con, is untestable. Tabarrok at one point acknowledges the problem, but argues that "at least facts put some constraint on the imagination."

The comparison of choice here seems to be between the 19th and 20th centuries (and into the 21st). This takes us into deep waters with strange beasts. It's true, the 19th century saw the rupture of the Civil War, but the 20th century experienced two World Wars and a global depression. In the 19th century, the U.S. was an emerging debtor nation, dominated by agriculture, with a burgeoning industrial base; in the 20th century the U.S. became a nation of surpluses, then of the globe's reserve currency. The gold standard collapsed. Agriculture was succeeded by industry, which passed the baton to a service-based post-industrial economy driven by consumers. Technological innovation from the automobile to the semiconductor spawned enormous change, not least in banking. Standards of living and life expectancy soared. So too have expectations about the government's role as a provider of safety nets. Besides, as Cowen says at one point, we're a superpower and superpowers need the tools of a central bank to, at the very least, go to war. And of course there's not "one" Fed: There's the Benjamin Strong Fed, the Marriner Eccles Fed, the Paul Volcker, Alan Greenspan and Bernanke Feds.

You could go on and on and on. The better question here is not whether the Fed has made life better than a free market (regulated by gold), but how we would even begin to evaluate whether we should have a central bank or not. Obviously, there are libertarian arguments (fed by the Austrians) against central banks, which in democracies are always exposed to pressures to debase the currency on the altar of full employment or growth; and there are liberal arguments in its favor. But man does not live, like the blogosphere, on philosophical conversations alone, although there are folks who seem to survive on beer and sports. In a sense, the notion of eliminating the Fed resembles that of nationalizing the banks or breaking them up into smaller units. All of these are dramatic economic experiments based on an ideal or ideology that, for all the erudition tossed at the problem, cannot predict the consequences. Each of them gestures toward some golden age when conditions were supposedly better: the '50s or the 19th century. Each of them would, in greater or lesser ways, rip an historical fabric that's been woven over many decades. Change would require a cataclysm far greater than what we have today.

As a result we tend to resort to a kind of pragmatic Burkean conservatism, understanding full well how conservatives (and populists: strange collection) before World War I viewed the creation of a central bank as foreign deviltry, or creeping Wall Street-ism, smacking of revolution. Unlike the U.S. central banks of the 19th century, which never had time to anchor themselves institutionally in a rapidly changing country, the Fed has survived multiple crises and wars, not always covering itself in glory but having its moments. It's hard to imagine life without it -- a very Burkean sentiment. The back-and-forth on the question is always fun; bars and blogs are like that. But we're probably stuck with the Fed for some time.

Robert Teitelman is editor in chief of The Deal.