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

Jeffrey A. Miron

NBER Working Paper No. 2701 (Also Reprint No. r1343)
Issued in September 1988
NBER Program(s):Economic Fluctuations and Growth

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.

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Document Object Identifier (DOI): 10.3386/w2701


  • De Cecco, Marcello and Alberto Giovannini (eds.) A European Central Bank?: Perspectives on Monetary Unification after Ten Years of the EMS. Great Britain: Cambridge University Press, 1989.
  • Mankiw, N. Gregory & Miron, Jeffrey A. & Weil, David N., 1994. "The founding of the Fed and the behavior of interest rates : What can be learned from small samples?," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 555-559, December.

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