NCPA - National Center for Policy Analysis

Europe Must Avoid Fed's Historical Mistakes

December 31, 1998

Economist Anna J. Schwartz, co-author with Milton Friedman of "A Monetary History of the United States, 1867 to 1960," is offering some advice to the European Central Bank, which opens this week. Her cautions are based upon a review of some noteworthy historical flubs by the U.S. Federal Reserve.

Here is a thumbnail sketch of some of her warnings:

  • The Fed and other central banks have been prone to misinterpret movements in interest rates, particularly during the Great Depression, and consequently did "too little, too late" when it came to adequately increasing the money supply.
  • When central banks do not adequately allow for the lagged response of monetary aggregates and bank credit to changes they initiate in bank reserves, the danger is they will do "too much, too often."
  • The ECB should avoid initiating "stop and go" policies in misguided attempts to fine-tune the economy rather than pursue price stability as the chief objective.
  • Thus the ECB can best contribute to the economic stability of the European Union by following a stable, steady-as- you-go monetary policy -- shunning wide swings in the provision of bank reserves, neither adding to nor withdrawing them excessively.

Source: Anna J. Schwartz (National Bureau of Economic Research), "What Europe Can Learn From the Fed," Wall Street Journal, December 31, 1998.


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