Who needs the Fed?

As an economic historian, I am alternatively amused and saddened by a richly ironic fact. The Federal Reserve Act was in large part a consequence of concerns growing out of the 1907 banking crisis. In that crisis, bank runs in New York City imperiled major institutions at a time when many country banks kept enormous reserves in New York. An ad hoc group of private bank officials, dominated by J.P. Morgan, put together a fund that was used to head off runs on some key institutions, moderating the banking crisis. The feeling grew that it is not appropriate to have a single man, even one like J.P. Morgan, have so much discretionary power over the banking system and the economy. Yet today, a single man, Ben Bernanke, backed by a small number of others, makes huge decisions about responding to the current crisis. Ben Bernanke is the new J.P. Morgan, but at least Morgan’s behavior was constrained by the fact that he, personally, had a good deal of wealth at stake as a consequence of his actions, whereas Bernanke gets paid the same whether he succeeds or fails.
–Richard K. Vedder, in testimony before the House Domestic Monetary Policy Subcommittee, February 9, 2011