I've been hard on those on the Right that have been insisting that the Fed is creating inflation and that the Fed will be responsible for a crash of the dollar and another disastrous downturn in the economy.  They have been wrong, and I've tried to point out why they've been wrong in many articles posted on this site. But let's now turn to the Left, who have their own set of misconceptions of the Fed which, if not corrected, could lead to an array of damaging economic and monetary results.

President Obama summed it up best in his recent news conference. He said, and I paraphrase, that he completely understands and supports the mandate of the Fed to keep inflation under control and maintain a stable dollar; but that we also must pay equal attention to the Fed's mandate to keep unemployment low and institute policies that foster growth.

The problem is, there is absolutely no evidence that any central bank in the world has or can fulfill that mandate. Central banks have never created meaningful sustained employment or growth. If they could they would, but they can't.  Show me one nation that can show sustained prosperity, high employment, and low inflation due to an expansive monetary policy. If it could be achieved, every central bank in the world would be employing such policies today. Yet every central bank's monetary policy has failed to achieve such results. Certainly the great nations of Europe would have low unemployment rather than rates in excess of 25%. And Japan would never have allowed itself to endure a deflationary recession for 25 years. But they did.

Neither can central banks control the longer end of the interest rate curve. While they have direct control over the very shortest end of interest rates, longer rates are controlled by investors and their assessment of the future rate of inflation and the risks of holding government paper. We have seen the evidence of higher interest rates recently in the eurozone threatening default and chaos without one iota of evidence that any central bank could stop or prevent the spike from happening. In this country we have seen the 10-year rate soar from 1.6% to just under 3% at a time when the Fed is pumping in record amounts of money. Are they really able to control interest rates? I think not.

A central bank can do certain things, however.  It can be a lender of last resort; it can create inflation and deflation; and it can prevent inflation and deflation. But it cannot create prosperity; it cannot create employment; and it cannot prevent interest rates from rising. The mere suggestion, indeed insistence by many, that it can and must, has the potential to create havoc in markets and be counter-productive rather than stabilizing. Such attempts will lead to either stagflation, as we endured during the 70's, or hyper-inflation, as occurred at various times in Germany and Zimbabwe. And if a central bank makes the reverse mistake of total benign neglect as they did in the thirties and Japan in the last few decades, they can bring on a deflationary depression.

Perpetuating the myth that the Fed has the power to create employment and growth only encourages the kind of policies that can damage a nation rather than heal it. The Fed can and has made bridge loans that have prevented a monetary crisis and credit implosion. And it has increased the money supply to provide liquidity at time of great financial stress. And it has contracted the money supply to decrease inflation.  But in all our history, the Fed has never provided greater employment, or increased the GDP in real terms.

This can only be done by a free market at play, and a free people at work. The best thing the government can do is to eliminate the mandate to provide maximum employment. The single mandate to provide a dollar with stable purchasing power is all that is necessary. Ironically such stability leads to an environment that fosters growth and employment. No other mandate is necessary than to preserve the value of the dollar.

The gold standard and the practice of sound fiscal policies provided the economic background for the Industrial Revolution which saw the standard of living of mankind rise beyond anyone's imagination. The 19th century saw a dollar that bought at the end of that century the same as it bought at its beginning. And the world spent its time creating, producing, and trading.  During the 19th century there was no world war -- people were too busy. It was one of the rare times in mankind's history that people and governments stopped conquering nations to acquire wealth and instead spent their time producing wealth.

It may be premature to expect a return to fiscal responsibility and a monetary system as good as gold, but it's not too soon to begin moving toward it. Redefining the powers of the Fed would be a good start.

Paul Nathan