Roger Lowenstein on Wishing for the End of the Fed

Financial journalist Roger Lowenstein has a nice essay in today’s New York Times opinion section on the Fed or, more exactly, calls for its abolition.  Be careful what you wish for, he says.  Regardless of one’s take on the existence of the Fed, or its policies, or Ben Bernanke, or anything else, the essay offers a good reflection on what it means to have fiat money.  It has a good discussion, for example, of why any form of money needs some authority, even if it’s just a computer.  And why control of money can be either through price or supply or both:

In any monetary system, some authority must fix either the price of money or the supply. McDonald’s can either set the price of a hamburger and let the market consume the quantity it will — or, it can insist on selling a specified quantity, in which case consumer demand will determine the price.

The Fed has a similar choice with money. The Bernanke Fed, which is trying to stimulate the economy, regulates the price of money — the interest rate — presently 0.0 percent. Paul Volcker, who assumed command of the Fed in 1979, when inflation was rampant, chose the opposite tactic. Mr. Volcker provided a specific (and, dare I say, miserly) quantity of liquidity, letting interest rates go where the market directed — ultimately 20 percent. There is an element of arbitrary choice either way.