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21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19

Author(s):Bernanke, Ben S.
Reviewer(s):Ebenstein, Lanny

Published by EH.Net (July 2022).

Ben S. Bernanke. 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19. New York: W. W. Norton & Company, 2022. xxvi + 480 pp. $35.00 (hardcover), ISBN 978-1324020462.

Reviewed for EH.Net by Lanny Ebenstein, Department of Economics, University of California, Santa Barbara.

 

Ben Bernanke’s 21st Century Monetary Policy is sure to become a classic work on the history of the Federal Reserve System in the postwar era to the COVID-19 recession. It will be required reading for all future students of and officials at the Fed. Bernanke’s perspective is shaped by two fundamental virtues: his academic work as a scholar of the Fed and of monetary policy and his practical work as a member of the Federal Reserve’s Board of Governors and, from 2006 to 2014, its Chair. Both virtues are displayed in this excellent book.

Bernanke’s description of Fed policymaking will be enlightening to most. There has not really been a work on the history of the Fed that has captured the public or academic minds since Milton Friedman and Anna Schwartz’s A Monetary History of the United States, 1867-1960 (1963). Friedman’s mantra, “Inflation is always and everywhere a monetary phenomenon,” became implanted in popular consciousness, and his monetary interpretation of the Great Depression–that the primary source of the depression was a monetary collapse initiated by the Federal Reserve System or which, in any event, the Fed could largely have forestalled–became the conventional scholarly wisdom.

On the basis of favorable comments Bernanke made at Friedman’s 90th birthday party in 2002–“I would like to say to Milton …: Regarding the Great Depression. You’re right, we [the Fed] did it. We’re very sorry. But thanks to you, we won’t do it again” (p. xvii)–it is sometimes mistakenly thought that Bernanke is basically a Friedmanite monetarist. As he makes clear in 21st Century Monetary Policy, however, Bernanke is fundamentally a Keynesian in analytic apparatus and perspective: “So-called Keynesian economics, in a modernized form, remains the central paradigm at the Fed and other central banks” (p. vii). Friedman’s mantra is replaced by Bernanke’s dictum: “Although growth in the money supply and inflation bear some relation in the long run, at least in certain circumstances, in the short run the connection can be unstable and difficult to predict” (p. 35). For Bernanke–as with his predecessors and successors at the Fed–monetary policy, except in unusual circumstances, is basically interest rate policy.

The early chapters of 21st Century Monetary Policy on the Fed from the 1960s through the 1990s have many nuggets of information and provide great insight into theoretical analysis at the Fed to this day. William McChesney Martin, Chair of the Federal Reserve from 1951 to 1970, famously said that the Fed’s job is to “take away the punch bowl just as the party gets going,” that is, to raise interest rates in order to stem inflation as economic growth increases. This is the policy to which Martin and his successors have largely adhered. Bernanke’s outlook is that inflation is usually conditioned by “changes in economywide demand for goods and services [emphasis in original]” and “shocks to supply rather than demand” (p. 12), with significant emphasis on “expectations”: “Debates about the determinants of inflation expectations and about how central banks can affect those expectations have been central to the analysis and practice of monetary policy since at least the 1960s, if not earlier” (p. 13). Friedman’s focus on money supply is hardly a factor in the analysis.

The Fed Chair to whom Bernanke gives the most praise is Paul Volcker, who served from 1979 to 1987. Bernanke credits Volcker for having the wisdom and tenacity to initiate and maintain the high interest rates between 1979 and 1982, which, in the form of the federal funds rate, reached 20 percent in 1980–the highest ever, before or since. As a result of Volcker’s “war on inflation” (p. 36), as Bernanke and others have called it, inflation “dropped from about 13 percent in 1979 and 1980 to about 4 percent in 1982 … Thus, in only a few years, the Fed largely reversed the increase in inflation built up over a decade and a half” (p. 36).

Bernanke’s appraisal of Alan Greenspan’s long span as Fed Chair from 1987 to 2006 is somewhat more, at least to this reviewer, mixed. Though he gives Greenspan high marks for managing the domestic and, to a significant extent, world economies for most of his tenure in office, it cannot be gainsaid that the roots of the Global Financial Crisis and Great Recession emerged during Greenspan’s chairmanship. Bernanke sagely observes: “The extended rise in the Fed’s [interest] policy rate likely contributed to the decline in housing prices that began in the summer of 2006” (p. 106).

With respect to his own transformative chairmanship, Bernanke recounts the aggressive and unprecedented actions the Fed took to diminish the Global Financial Crisis and Great Recession. He persuasively argues these actions were necessary to prevent the meltdown of the American and world financial systems and thereby economies. About the only criticisms I would offer here of his presentation is that he does not adequately incorporate into his analysis the impact of nonfinancial factors, such as increasing energy prices and demographic changes, on economic activity, but this is perhaps not an entirely fair cavil to make against a work whose title states it concerns monetary policy.

21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19 extends to 2021 and includes thinking on the future of Federal Reserve and its policy, but it is probably best to defer discussion of these subjects as a result of their proximity to the present. Bernanke believes that a historical approach is the best way to understand “how the Fed’s tools, strategies, and communication have evolved to where they are today” (p. xi). All interested in the history of the Federal Reserve, Federal Reserve policy, and the theory underlying Fed policy will want to read this book.

 

Lanny Ebenstein is a Lecturer in the Department of Economics at the University of California, Santa Barbara. He is the author of ten books and many articles on economic and political history, history of economic thought, and public policy.

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Subject(s):Economic Planning and Policy
Financial Markets, Financial Institutions, and Monetary History
Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII
21st Century