For the Love of Money

REVIEW: '21st Century Monetary Policy' by Ben S. Bernanke

'21st Century Monetary Policy' by Ben S. Bernanke / W.W. Norton
July 10, 2022

Former Federal Reserve chairman Ben Bernanke’s new book is probably the easiest-to-read 500-page book on monetary policy ever written.

That’s not meant as faint praise. 21st Century Monetary Policy is 100 percent white-meat prose and certified equation-free. Bernanke doesn’t assume you know what "quantitative easing" or "Phillips curve" actually mean and takes time to explain them in a way that’s neither overbearing nor belittling. He explains the basics of monetary policy much better than textbooks and keeps sentences short and simple.

One thing’s for sure: Bernanke did not learn his communication skills from Alan Greenspan.

But he did learn from Greenspan, and from all the Fed chairs who preceded him. Bernanke’s book may be titularly about the 21st century, but much of it is history. Therein lies the value of his outlook, which couldn’t come at a more crucial time.

George Will has said that if he were in charge, the only major anyone would be allowed to choose in college would be history. That may not work for everyone, but knowing the history of monetary policy is crucial to understanding its future, and Bernanke understands that on a deep level.

He tells the story of how the Fed responded to the Great Inflation of the late 1960s and ’70s—and how it failed. He writes about Paul Volcker’s victory over inflation, when the Fed became "the only game in town." He writes about the Great Moderation of the ’90s and early ’00s under Greenspan. And of course, he writes about his own tenure.

He does so in such a way that sometimes you forget he was there. The book is not a memoir (that came out in 2015). There are a few spots where he switches to first-person narration, and it can be a bit jarring as you remember: That’s right, this guy actually made these decisions. But overall, his approach to history is descriptive.

Bernanke’s tone is always sympathetic toward the Fed, and you can tell he takes great pride in the institution. That may lead him astray at times, but he does see defects. He famously confirmed Milton Friedman and Anna Schwartz’s thesis that the Fed deepened the Great Depression: "You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again."

That spirit of learning from mistakes and making incremental improvements embodies Bernanke’s approach to monetary policy. He doesn’t have any grand, sweeping pronouncements. He’s very hesitant about any major structural changes to the Fed’s independence or framework.

Bernanke evaluates a number of different approaches to monetary policy than the one the Fed has actually adopted. He looks at price-level targeting, nominal GDP targeting, and raising the inflation target, and considers pros and cons for each. He also discusses increasing coordination between monetary and fiscal policy as a possible new track for the Fed to follow. But he’s not particularly taken by any single new approach. Even in our current inflationary crisis, he doesn’t think regime change at the Fed is needed.

While his pride for the Fed is great, his pride for macroeconomics as a discipline is greater. He understands (better than just about anyone) how uncertain and complicated macroeconomics is.

Bernanke writes of quantitative easing, "We had a theory of how QE might work, but there was a lot we didn’t know. We didn’t know precisely how big our purchases needed to be to achieve a given reduction in longer-term interest rates." The point of QE is to reduce longer-term interest rates. The Fed has a whole staff of brilliant economists and is governed by people who know more about central banking than just about anyone in the world. And they didn’t really know how one of the most important policy changes the Fed has ever made would shake out.

It's important to keep that dynamic in mind when watching the Fed today. Nothing about monetary policy is easy, and there’s a lot we don’t know. That goes both ways: Fed critics should be patient, but the Fed should also be receptive to criticism.

For that reason, Bernanke values transparency at the Fed. He views that, not any particular policy decision, as his most important legacy as chairman. "The Fed now works harder to explain its actions to Americans broadly, not just financial market participants," he says. The power to control the money supply is no light thing, which is why we don’t entrust it to politicians. But since central bankers are removed from direct democratic accountability, they have an obligation to be straightforward with the public they serve.

What makes a good Fed chair to Bernanke? Definitely transparency, humility, and teamwork. But aside from those basic principles, it’s very case-by-case. Arthur Burns was hurt by his close relationship with Richard Nixon, but Greenspan’s close relationships with politicians of both parties in the ’90s and ’00s were helpful, Bernanke says. He even thinks simply acting independently isn’t always a good thing: William McChesney Martin, Fed chair when the Great Inflation began, actually stood up to politicians quite often.

Given that the individuals matter so much, it’s important that they continue to behave in such a way to earn our trust even after they leave the Fed. In this respect, Bernanke is far superior to his successor. Janet Yellen is a very smart economist who has a distinguished career in the field. She was 71 years old when her term as chairwoman expired. She could have gone into retirement and done exactly the sort of thing Bernanke has done: Write and speak about monetary policy, how it can be refined and adjusted to meet our current circumstances.

Instead, she has joined the Biden administration as Treasury secretary, where she acts in a partisan political role, pushing nonsensical tax narratives that she has to know are wrong and making grotesque defenses of abortion before the Senate. She’s not the first Fed chair to become Treasury secretary, but the only other one, G. William Miller under President Carter, wasn’t very impressive in either role, and we shouldn’t make it a trend.

It would be a far better tradition for each chair to use his or her post-Fed career writing a 500-page book about monetary policy. That way we might continue to build our knowledge of monetary policy from the people at the nexus of practice and theory who worked atop the most important central bank in the world.

21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19
by Ben S. Bernanke
W.W. Norton, 512 pp., $35

Dominic Pino is the Thomas L. Rhodes Journalism Fellow with the National Review Institute.