The Federal Reserve has been all over the news lately, and it has received special attention in the last few years as Congressman Ron Paul has campaigned heavily on auditing and eventually ending it.
One of the critiques of the Fed is that it is the causal factor or the enabler for the booms and busts in the economy, i.e. it creates the business cycle. F.A. Hayek won his Nobel Prize for his work in Business Cycle Theory and essentially posited that the Fed and its manipulation of prices, namely the interest rates, causes resources to be allocated in inefficient locations that lead to an inevitable recession and the economy trying to correct the poor placement of those resources.
But what about the business cycles that existed before the Federal Reserve was created in 1913? Doesn’t the existence of a business cycle in pre-Fed history nullify the above argument? Thomas Woods (Senior Fellow at the Mises Institute) answers these questions.