by Mitch Kokai
Senior Political Analyst, John Locke Foundation
There’s plenty of debate about the Federal Reserve’s “dual mandate”: maximizing employment and minimizing inflation. In a column for the latest Barron’s, Alex Pollock of the American Enterprise Institute explains that discussion about the Fed’s success rate in addressing either of those two goals ignores an important point. The Fed actually has six mandates.
In addition to the two mentioned above, Pollock cites as additional mandates moderate long-term interest rates, an elastic currency, and management of “the banking club.”
Finally, we come to the most important and most basic Fed mandate of all: financing the government.
This is the longest tradition of central banking, found in pure form in the deal that created the Bank of England in 1694. The new bank got a monopoly to issue paper money; in exchange, it lent money to the government. Such central banks are exceptionally useful to governments. As economist Elga Bartsch has correctly written, “The feature that sets sovereign debt apart from other forms of debt is the unlimited recourse to the central bank.” This feature became evident very early in the history of the Fed. When the U.S. needed to finance its plunge into World War I, the Fed, as it reported about itself, “recognized its duty to cooperate unreservedly.” It did so again for World War II and for the undeclared wars that followed.
This sixth and greatest Fed mandate allows us to understand why the Fed, while not doing so well at stable prices, maximum employment, moderate long-term interest rates, or financial stability, nonetheless has gone on to ever-greater power and status.