Published

Richard Timberlake, emeritus professor of economics at Terry, sat down for a long-form interview with The Federal Bank of Richmond's Econ Focus magazine

Timberlake, an expert on monetary history and author of several books, answered several questions for Econ Focus. Here is an excerpt. The full interview is available free online. 

Econ Focus: When, if ever, has the Fed followed a good rules-based policy in your view?

Timberlake: The first -- and only -- stable price level policy followed by the Fed was initiated by Benjamin Strong, president of the New York Fed in 1922, who showed how it would work. He initiated this policy as a temporary action until international agreements could re-establish the gold standard. The policy ended in 1929 due to his death the previous October.

"The New York Fed was the largest Reserve Bank by far and was in the center of the financial district. Strong realized that the Fed System could promote financial stability because of his banking experiences in the panic of 1907, when privately owned and operated commercial bank clearinghouses extended their credit facilities to fulfill the extraordinary demand for money that had developed in financial markets. Strong thought he could promote a stable price level and then reconstitute the gold standard when prospects seemed favorable. During that period, 1922 through 1929, the price level (CPI) rose a total of 2.3 percent, and the wholesale price index actually fell. Prices were essentially stable and enterprise flourished. "

EF: What should the Fed do about asset bubbles?

Timberlake: The Fed shouldn't pay any heed at all to asset bubbles. If it followed rigorously a constrained price level, or quantity-money rule, I don't think there would be bubbles. Markets would anticipate stability. Markets today, however, anticipate, with good reason, all the government interventions that lead to bubbles. If we had a stable price level policy and everybody understood it and believe it would continue, there wouldn't be any serious bubbles.We don't even know whether the 1929 "bubble" was even a bubble, because after the Fed's unwitting destruction of bank credit, no one could distinguish in the rubble what was sound from what might have been unsound.