Editor's note.

• Author: Dorn, J.A.
• Position: Federal Reserve Act - Editorial

The Federal Reserve Act was passed on December 23, 1913. It was designed to provide an elastic currency that would respond to the needs of trade. There was nothing in the Act about price stability, interest rates, or full employment. The expectation was that the United States would continue to define the dollar in terms of gold, and that the operation of the international gold standard would ensure long-run price stability.

It was widely accepted that "the highest moral, intellectual, and material development of nations is promoted by the use of money unchanging in its value," as declared by the U.S. Monetary Commission of 1876. The classical gold standard ended with the First World War, and, in August 1971, the dollar became a pure fiat money when President Richard Nixon closed the gold window.

Today the Federal Reserve System is much different than a century ago. How well has the Fed performed? Was the Fed a good idea? Can we do better? To address those and related questions, the Cato Institute brought together some of the most respected monetary scholars and policymakers at its 31st Annual Monetary Conference in Washington, D.C., on November 14, 2013. The papers from that conference are featured in this volume.

In the lead article, Charles I. Plosser argues for a rules-based monetary policy and a "limited central bank" devoted to the primary task of safeguarding the dollar's long-run purchasing power. Jerry L. Jordan considers the lessons learned from a century of U.S. central banking, while George A. Selgin provides a detailed account of how the Fed has twisted its true record. Athanasios Orphanides, like Plosser, makes a strong case for a "price stability mandate."

Lawrence H. White examines the Fed's "troubling suppression of competition from alternative monies" using the examples of the liberty dollar and e-gold. Legal restrictions are also noted by Richard H. Timberlake in his article on "clearing house currency." Scott B. Sumner advocates rules rather than discretion in the conduct of monetary policy. His preferred rule is to target nominal GDP rather than inflation or the price level.

Since the Panic of 2007, the Fed's balance sheet and power have expanded dramatically. The Fed's ultra-low interest rates and quantitative easing have distorted capital markets, increased risk taking, politicized credit allocation, monetized government debt, and allowed the government to expand its size and scope. Moreover, the Fed's regulatory...