If those who do not learn from the past are doomed to repeat it, then Allan H. Meltzer, a visiting scholar at AEI and a professor at Carnegie Mellon University, has left the Federal Reserve no excuse. Meltzer’s book, A History of the Federal Reserve, 1913-1986, tells the story of one of America’s most important and least understood institutions. At an event Friday to discuss the second volume of his work, Meltzer was joined by Paul Volker, who lived the history Meltzer’s book documents. Volker joined the Federal Reserve Bank of New York in the 1950s, later serving in the Treasury as undersecretary for Monetary Policy before becoming head of the New York Fed and finally chairman of the Federal Reserve. The event was moderated by AEI Resident Scholar Vincent Reinhart, who is himself a veteran of the Federal Reserve.
Meltzer and Volker went back and forth as they discussed the lessons today’s policy makers should learn from yesterday’s Fed. Volker noted with humor that the much-discussed current efforts at quantitative easing-popularly referred to as “QE2″ are nothing particularly new, as the purchasing of Treasury bonds by the Federal Reserve was common practice and uncontroversial in the 1950s. Meltzer differentiated the current debt from the one faced after World War II, noting that the structure of the debt and the relative strength of the economy makes the debt much more difficult to outgrow. Volker countered that the debt was not a primary cause for concern in the postwar period, and that the Fed’s efforts during that time were mostly countercyclical and only a complement to dominant fiscal efforts to regulate the economy.
In particular, the two economists disagreed on exchange rates and the regulatory role of the Fed. Meltzer advocated an alignment of inflation goals by the Eurozone, the United States, and Japan, which would allow other nations to peg their currencies and achieve a level of currency stability. Volker argued that this policy was advisable, but not sufficient. He predicted that attempts to create a new international monetary system would begin to surface in the coming months, perhaps originating at the G-20. Volker also countered Meltzer’s claim that regulatory authority was outside the role of the central bank and applauded the Dodd-Frank bill’s appointment of a vice chairman with explicit oversight responsibility for the Fed’s new regulatory duties.
Both agreed, however, that efforts by Representative Ron Paul (R-Texas), the monetary iconoclast and incoming chairman of the House Financial Services Subcommittee on Domestic Monetary Policy and Technology, to audit the Federal Reserve were generally misplaced. Meltzer especially stressed that the public interest lay not in short-term process, but in long-term outcomes, and that a lack of congressional attention to such outcomes has done a disservice to the nation’s economy, and even to the Fed itself.
Rohan Poojara is a research assistant in economic policy at AEI, where Oliver Sherouse is an intern.