What Should Guide the Fed? A new and improved Bretton Woods agreement.

• Author: Brenner, Reuven

I received some three hundred comments, both public and directly into my mailbox, about both my recent TIE article ("The Story of Risk," Winter 2022) and the illusion of the Federal Reserve's power to forever control rates, and by coincidence, my op-ed in the Wall Street Journal published at the same time ("Inflation and the Fog of War," April 15). The latter narrowly focused on the fact that during transitions from "war" or "war-like" times to "normal" ones, price indices are unreliable guides for Fed policies, whereas the TIE article, being broader in scope, suggested that even monetary experts either do not know the facts or are unaware of the limitations and grave mistakes of academic theories underlying policies--admissions that their own originators admitted, Milton Friedman prominent among them.

Allow me to state some facts first, about which there is no disagreement, and later quote Friedman himself being wrong about his rigid monetarism, and all the methodology he pursued in his academic writings to reach that rigid conclusion about quantity of money targeting being the solution for the Fed.

Start with reminders of the monetary and fiscal landscape of 1951, when U.S. President Harry Truman wanted to pay for the Korean War with the Fed continuing to accumulate Treasuries and keeping interest rates low as it did during World War II (and later following the 2008 crisis and the recent "Covid war"). The Federal Reserve chairman at the time, Marriner Eccles, during the Open Market Committee meeting February 6-8, 1951, objected to doing so and stated:

We are not in a war. We do not now have deficit financing. The situation is not comparable in any degree with the situation that confronted us in 1941... Under those conditions, it would have been impossible to finance the wartime deficits of that size under a restrictive and tight money policy ... The situation today is exactly the opposite. We have had for the last four or five years an aggregate budgetary surplus of nearly $13 billion. [Note: to put this number in perspective, during the five years after Pearl Harbor, the public debt went up from $50 to $280 billion]. You only protect the public credit by maintaining confidence in their Government and in its securities to the extent the public will buy and hold those securities. ...We have permitted an increase in the money supply of this country by more than 8 percent since Korea. That was not done ... for the purpose of carrying out our...