Roger Lowenstein’s hagiography of Ben Bernanke, the cover story in the April issue of The Atlantic magazine, sums up the Federal Reserve chairman’s singular power over monetary policy and the economy with a pithy quote from Harvard economist Lawrence Katz: “He’s sort of the only game in town.”
That is true, and has been so for Fed rulers since the the central bank was given full discretion over the U.S. money supply when the dollar was detached from gold in 1971. Until that point, our monetary policy was arranged so that the money supply was determined by a market mechanism via gold-dollar redemption (except in times of war).
In the ‘50s and ‘60s it was foreigners who could exchange excess dollars for gold. For most of the 19th century and through the 1920s, American citizens could do this. The gold standard’s ability to let money supply automatically match money demand gave the country price stability against other financial challenges, namely a patchwork banking system that wasn’t organized to provide for an elastic currency or emergency lender until the Fed opened its doors in 1913.
We can continue with Bernanke (and his successors) trying to execute price stability, or move that back under the purview of the marketplace through the gold standard. Lowenstein makes the case for Bernanke. History says the people did it better.