Professor Richard Timberlake, an Independent Institute research fellow and an economist who has written several books and dozens of journal articles about Federal Reserve monetary policies, sent us the following note today regarding my Lighthouse write-up of “Central Banks as Sources of Financial Instability,” George Selgin‘s superb article in the Spring 2010 issue of The Independent Review. Here, with Prof. Timberlake’s permission, is the note.

I have just read this issue of “The Lighthouse,” and have also read George Selgin’s article about central bank instability in The Independent Review.

I feel obliged to point out that my book, Monetary Policy in the United States, (Univ. of Chicago Press, 1993) treats the instability of central banking at length. Chapter XVI, especially reviews and summarizes the development of central banking up to WW I, both in England in the United States.

I stress particularly that no central bank should be allowed any discretion. Congress should give the Fed a MANDATE to maintain absolute stability in the price level, and, perforce, in the value of the money unit. The precedent for this action is the policy initiated by Benjamin Strong, President of the NY Fed between 1922 and 1929 (see my article in the TIR, Winter 2007). Fed bureaucrats could perhaps squirm around this Rule, but would have to follow it generally because it is so easily verified—just look at a CPI. This rule would force them to abolish their “bailouts,” “stimulus” and “too big to fail” activities, and anything else that tended to involve them in real variables, such as “employment” or “growth,” about which they can do nothing.

The Stable Price Level Rule (SPLR) is the only way to harness a central bank. If we could get rid of the Fed, say, by a law that freezes the Monetary Base, we could provide a free market monetary system, perhaps with a gold standard as an option. (I cover this possibility in my book, too. See the last Chapter, Ch. 27, “What the Fed Cannot Do; What the Fed Can Do; What the Fed Should Do.”) Given political realities, however, Congress can force a SPRL Rule on the Fed. Alan Greenspan approved the idea while he was Chairman of the Fed Board, when it was initiated in Congress by Rep. Stephen Neal (DEM. N.C.). Several Fed Bank Presidents did, too. So it is politically possible.

I hope you will put this note where it can be read. I think it is important for a general understanding of the Fed, that someone treated these issues professionally. Let me know if you would like more.