NCPA - National Center for Policy Analysis

Meltzer Study Illuminates Early Fed's Limits of Economic Understanding

February 28, 2003

In his multivolume, "A History of the Federal Reserve," Allan Meltzer, an economist at Carnegie Mellon University, covers the years 1913-1951. Fed Chairman Alan Greenspan calls it a "methodical illumination" of the confusing events of the period.

Confronted by boom or bust, the early Fed bumbled from crisis to crisis, says Meltzer -- showing little understanding of economic relationships, and failed to implement sensible economic policies we take for granted today.

  • The Fed's "pro-cyclical" monetary policies precluded an effective response to the Great Depression or to the deep recession of 1937-38.
  • In the early days of the Great Depression, Fed officials noted an economic contraction, but did nothing to pump money into the system in response.
  • The Fed stimulated the economy when it was rapidly expanding and did nothing to prime the pump when demand was low.
  • Meltzer suggest that the Fed should have pursued price stability as a priority -- which would significantly altered the history of the 20th century.

The Fed was hobbled by a limited sense of how money, international gold flows and credit worked -- and how they affected economies.

Source: Mary Anastasia O'Grady, "A Fed Without Reserve," Wall Street Journal, February 20, 2002.

For text,,SB1045705443586586063-search,00.html


Browse more articles on Economic Issues