On 1/5/2013 11:35 PM, flipper wrote:

Despite the seeming simplicity that's a complex question.

First, one needs to look at the preceding history, which is rather
long, but, to summarize, the nation had no 'central bank' and
experienced numerous economic 'crashes' with the 'final straw' being
the panic of 1907. J.P Morgan pledged large sums of his own money to
shore up the banking system (for the second time after saving the US
Treasury in 1895). The Fed was established in 1913 with the bill
stating it was:

"An Act To provide for the establishment of Federal reserve banks, to
furnish an elastic currency, to afford means of rediscounting
commercial paper, to establish a more effective supervision of banking
in the United States, and for other purposes."

For our purposes the salient point is "to furnish an elastic
currency." In simplistic terms the idea was to stabilize the economy
by making 'credit' available to banks during a run (as J.P. Morgan
had), or other economic crisis, and then, ostensibly, shrink the money
supply back to 'normal' once the crisis had passed (the 'elasticity').
This also includes 'regulating' the banks for the obvious reason you
don't want them being 'irresponsible' and then coming to you for a
bailout. (sound familiar?)

Well, then there was 1929, arguably a rather bad thing since we call
it "The Great Depression," and, nostalgia notwithstanding, the post
war period wasn't exactly 'ideal' either. In the early 70s things got
SO bad that both inflation and unemployment hit, hold onto your hat,
6% or so (and you think 8% is bad). This was so catastrophic, on a
plagues of locusts biblical scale, that President Nixon instituted
wage and price controls in "the land of the free." Clearly, something
needed to be done.

At any rate, since 1977 the Fed has had a, so called, "dual mandate,"
which is actually a triple mandate as written in the act: "The Board
of Governors of the Federal Reserve System and the Federal Open Market
Committee shall maintain long run growth of the monetary and credit
aggregates commensurate with the economy's long run potential to
increase production, so as to promote effectively the goals of
---------------- maximum employment, stable prices and moderate
long-term interest rates.----------------" (emphasis added).

No matter how one would like to 'interpret' those goals they can only
be done by 'manipulating the economy' and the Fed's mechanisms for
doing so are various manipulations of the money supply.

Fortunately this 'solved' everything except for, well, the savings and
loan crisis of the 1980s the dot-com bubble and, of course, the
Subprime mortgage crisis with the current 7.8% unemployment rate (not
counting those who've given up but, if you did, it's upwards to 14%),
to name a few.

Since you brought up the 'gold standard' we should observe it's no
panacea either and the reason we 'went off' the gold standard was
simply that it crashed. In fact, just about everyone else had already
left it and we were 'last' but there simply wasn't enough gold to do
the job. FDR took 'circulating money' off gold because the treasury
couldn't back it all up and Nixon took the 'country', I.E.
international transactions, off it for the same reason. (France did a
'run' on treasury gold reserves)

The problem with gold (or any other 'commodity' currency) is that
you're at the mercy of whoever finds however much of it, but the
economy is not so constrained. By that I mean people build houses and
not necessarily at the same rate someone just 'happens' to mine gold.
So, lets say the gold supply is increasing 2% a year but houses are
increasing at 5% a year (I mean 'real' increase in that there are 5%
more physical structure representing 'real' property and, so, 'real'
value). Your house prices are deflating because you have more and more
real property being 'bought' by less gold (per house). This may not
seem like a 'bad thing' but what happens is people 'defer' buying
because it will be 'cheaper' later (since 'house per gold' is
dropping) and that stifles the economy.

I didn't write I wanted the gold standard back, only that the value of
the $ for noticeably worse since then. The Germans were not on the gold
standard, either, yet they were able to maintain the value of their DM
much better than we do with the $. They pretty much keep the value of
the Euro, too, despite the unique problems of the Euro zone. Our
politicians keep clamoring for ever cheaper $ to help our exports, yet
the Germans don't have export problems with their stronger currency. I
would settle for a Fed policy similar to the German central Bank.