The article by Ben S. Bernanke is devoted to the episodes of the history of US Central Banking that have been given the epithet “great”. The author believes that they demonstrate the evolution of the role of the Federal Reserve and provide the information on the central banking mechanisms.
The author begins with the creation of the Federal Reserve. The Great Experiment, according to Bernanke, was aimed at ensuring the financial stability, and the “Fed” establishment was aimed at preventing financial panics, a seasonal occurrence at the time (3). Established in 1913, the Fed soon had to support the country during the war, and the organization could start working in normal, non-stress conditions only in 1923.
The policy for this work was suggested by the Board and included ensuring financial and economic stability by supporting the business through liquidity increase or decrease. As a result of being procyclical, Fed’s actions increased volatility, and the institution failed to respond to the panics of the 30s. The Fed was not ready for the Great Depression, as suggested by the author, and its mistakes could have resulted from the lack of adequate experience. Other complications included political development and the abandonment of the gold standard. As a result, the Fed was to change dramatically, which it did.
Its goals now included employment maintenance (though rather informally or, possibly, articulated in a different way before the Federal Reserve Reform Act 1977), while the stability goal was at least partially delegated to other institutions (Exchange Commission, for example). The independence of the institution was legally improved, and the controlling body was reorganized to restrict the control of the Treasury over the Fed, even though it was relatively ineffective until after the World War II.
For the next step, the Great Inflation and Disinflation, however, the Fed was independent in terms of policy. At the time, the two objectives (stability and employment) were achieved through the influence on the federal fund interest rate, which caused the stable inflation of the 50s and the first part of the 60s. After that, however, the control over the inflation became dubious. The responding policy of Fed was caused by a faulty interpretation of the reasons for the inflation and included wage and price control, which did cause the Great Inflation of the 70s (Bernanke 9).
As a result, the Fed had to change the policy again (with the help of Chairman Paul Volcker) and promote a new understanding of inflation as a monetary phenomenon. Other lessons of the period included greater caution (or reduced optimism) in the terms of the economic development, the understanding of the difference between the real and nominal interest rates, the recognition of firm anchor and the willingness to respond to inflation faster.
The Great Moderation (1984-2007) was grounded on the Disinflation and pursued the goals of price stability and maximum employment with noticeable success. It was achieved through motoring and responding to threats and shocks actively and adequately. The important lessons of the time included the gradual understanding of the importance of communication and transparency for central banks around the world, which increased the effectiveness of the Fed’s policy and public accountability. As Bernanke points out, it is a highly important outcome for a democratic country (10).
According to Bernanke, it is a widely spread supposition that the financial crisis of 2007, the Great Recession, could have resulted from the calmness of the Moderation and is, therefore, its logical continuation, a new stage in the development of the history of economics (9). The lessons of the crisis, according to Bernanke, include the forgotten truth of the danger of financial instability that needs to be controlled by the central bank, which brings forth the initial goal of the Fed, that is, the prevention of panics. Bernanke concludes by analyzing the steps that can be taken to ensure the stability and points out the importance of the experience gained and the dynamic nature of the central bank policy development in the constantly changing environment.
Works Cited
Bernanke, Ben S. “A Century of US Central Banking: Goals, Frameworks, Accountability.” Journal of Economic Perspectives 27.4 (2013): 3-16. American Economic Association. Web.