by Thomas F. Cargill, Gerald P. O'Driscoll
September 16, 2013
The conventional wisdom holds that the Fed is independent, and that independence is important for price stability. It is not convincing. First, the Federal Reserve, considered to be one of the world’s more de jure independent central banks, played a key causative role in the Great Inflation from 1965 to 1985. Allan H. Meltzer’s history of the Federal Reserve demonstrates the sensitivity of the Fed to political institutions despite its de jure independent status. Federal Reserve de jure independence is far too uncritically accepted as a foundation for a stable financial and monetary environment. Not only is the foundation weak but its widespread acceptance permits central banks like the Fed to engage in suboptimal policy with political undertones. Independence is more myth than reality.