Instead of endeavoring to influence a market-determined federal funds rate by reducing or increasing the supply of bank reserves, the Fed now adjusts a pair of rates determined solely by its own administrative decrees, while conducting open-market operations without any particular reference to these rate adjustments.
A stable inflation rate is no guarantee of overall economic stability.
Free banking money guru George Selgin opines.
This talk examines the development, operation and performance of monetary systems in the absence of government intervention.
How currency monopolies promote booms and busts, and having a lender of last resort leads to moral hazard and financial instability.
“Monetary control” refers to the various procedures and devices the Fed and other central banks employ in their attempts to regulate the overall availability of liquid assets, and through it the general course of spending, prices, and employment, in the economies they oversee.
I regard any need for last-resort lending as reflecting, not the inherent shortcomings of private financial markets, but the debilitating effects of misguided regulatory interference with the free development of those markets.
The sad reality is that the battle for monetary freedom has for some time now taken the form of a rearguard action, aimed at resisting as much as possible ever-increasing government incursions into an ever-shrinking realm of financial choice.
Financial systems, like economies generally, are organic entities. They must be allowed to flourish in a natural way.
The multiplier’s significance to monetary policy is, or used to be, straightforward: it indicated the quantity of additional bank deposits that monetary authorities could expect to see banks produce in response to any increment of new bank reserves supplied them by means of either open-market operations or direct central bank loans.
There is, after all, at least one impulse among humans that’s more deep-seated than their “propensity to truck, barter, and exchange.” I mean, of course, their propensity to let themselves be thoroughly bamboozled.
Free banking and monetary rules were rival ideas for guarding against abuses of discretionary monetary policy, today they are properly seen as complementary schemes, one for improving the performance of the banking system, the other for reforming the base-money regime.
On the Fed’s “instruments of monetary control,” which include devices for regulating the total quantity of bank reserves and circulating Federal Reserve notes, and also for regulating the quantity of bank deposits and other forms of privately-created money that will be supported by any given quantity of bank reserves.
A better alternative, if only it can somehow be achieved, or at least approximated, is a monetary system that adjusts the stock of money in response to changes in the demand for money balances, thereby reducing the need for changes in the general level of prices.