Before and after the Fed

"Didn't we do better before there was a Federal Reserve?" This was a question President Reagan casually threw out to his chief economic adviser in the midst of a serious economic crisis. Yes, we did. In less than a hundred years, the American central banking system has co-sponsored one great depression, one stagflation, and the current economic mess in addition to a few smaller booms and busts.

Now Ben Bernanke intends to strengthen the "fundamentals of the dollar" by pumping another $600 billion into the banking system through open market purchases of U.S. Treasury securities-i.e., turning one type of IOU (government debt) into another type of IOU (green pieces of paper that we have been persuaded to accept as money). While the Fed is throwing currency at us, pretending that it has the power to cure recessions, gold and silver futures are reaching new highs, food and energy prices are creeping up, my landlord has increased the rent, and before I meet the New Year I'll be paying 17 percent more for New York's Metropolitan Transportation Authority services.

The Fed was created in 1913 to serve as a lender of last resort for temporarily illiquid but solvent financial intermediaries. Its mission was simple: prevent panics by stopping runs on private commercial banks. Its first test came a few months after the stock market crash of 1929. Anti-Semitic sentiments played a role in the decision not to help the Jewish-owned Bank of the United States in New York. This irresponsible decision of the Federal Reserve not only destroyed the livelihood of hundreds of thousands of the bank's depositors and many more business ventures and jobs, but also triggered a tsunami of bank failures across the country.

If a private company had failed so spectacularly, market forces would have ripped it apart. But political forces play by different rules. Not only was the Fed not closed, Congress gave it more power than was yielded in the early 13th century by Genghis Khan and Pope Innocent III combined.

"We are absolutely committed to keeping inflation low and stable," Bernanke said recently. "We have the tools to unwind and tighten policy at the appropriate time, when that time comes." Shall we just trust him? That would be as prudent as trusting a teenager who regularly drinks and drives with the keys to your vintage 1960s Corvair!