The Founding of the Fed and the Destabilization of the Post-1914 Economy

50 Pages Posted: 11 Mar 2002

See all articles by Jeffrey A. Miron

Jeffrey A. Miron

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 1988

Abstract

A standard assumption in the literature on optimal monetary policy is that the proper goal of policy is the reduction of the variation in output around its natural rate level. The stabilization of output has not always been accepted as the primary goal of policy, however. This paper argues that neither the founders of the Federal Reserve System nor the central bankers in charge during the first twenty-five years of the Fed's existence viewed the elimination of short term movements in output as an important objective for policy. Instead, the framers of the Federal Reserve System and the early practitioners of central banking in the United States apparently thought that "stabilization" of asset markets was the crucial task for the monetary authority. The paper compares the performance of the United States economy during the twenty-five year periods before and after 1914 and shows that after the founding of the Fed the variance of both the rate of growth of output and of the inflation rate increased significantly, while the average rate of growth of output fell, and real stock prices became substantially more volatile. The remainder of the paper then suggests that the deterioration in the performance of the economy after 1914 can be attributed directly to the actions of the Fed.

Suggested Citation

Miron, Jeffrey A., The Founding of the Fed and the Destabilization of the Post-1914 Economy (September 1988). NBER Working Paper No. w2701. Available at SSRN: https://ssrn.com/abstract=250340

Jeffrey A. Miron (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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