Abstract
The Federal Reserve Act created a quasi-public entity that would establish an “elastic currency,” serve as the lender of last resort, mute the seasonal movements in interest rates, supervise member banks, manage the payments system, and encourage check clearing at par without charge.1 The law intended the new agency to foster much greater financial stability. This second chapter traces out the patterns of monetary policy during the first 22 years of the Fed’s existence.
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Notes
The discussion of the founding and early years of the Federal Reserve System draws on Michael D. Bordo, “Review of A History of the Federal Reserve Volume 1 (2003) by Allan H. Meltzer,” Journal of Monetary Economics 53, no. 3, April 2006;
Sayre Ellen Dykes and Michael A. Whitehouse, “The Establishment and Evolution of the Federal Reserve Board: 1913–23,” The Federal Reserve Bulletin, April 1989;
Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States: 1867–1960, A Study by the National Bureau of Economic Research, Princeton University Press, 1963, pp. 189–239;
Roger T. Johnson, Historical Beginnings … The Federal Reserve, The Federal Reserve Bank of Boston, 1977, reprinted 1988;
Donald F. Kettl, Leadership at the Fed, Yale University Press, 1986, pp. 18–36;
Richard H. Timberlake, Monetary Policy in the United States: An Intellectual and Institutional History, The University of Chicago Press, 1978, 1993, pp. 214–234;
and Allan H. Meltzer, A History of the Federal Reserve: Volume 1, 1913–1951, The University of Chicago Press, 2003, pp. 65–135.
J. Alfred Broadus, “Central Banking—Then and Now,” Federal Reserve Bank of Richmond, Economic Quarterly 79, no. 2, Spring 1993, pp. 4–5.
Abbreviated minutes of the open market committee were maintained, but only for internal use. (Robert D. Auerbach, Deception and Abuse at the Fed: Henry B. Gonzales Battles Greenspan’s Bank, 2008, Amazonkindle, Location 2756.)
Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States: 1867–1960, A Study by the National Bureau of Economic Research, Princeton University Press, 1963, p. 240.
Liaquat Ahamed, Lords of Finance: The Bankers Who Broke the World, Penguin Books, 2009, pp. 170–171.
Robert L. Hetzel, The Monetary Policy of the Federal Reserve: A History, Cambridge University Press, 2008, p. 16.
Barry Eichengreen, Hall of Mirrors: The Great Depression, the Great Recession, and the Uses—and Misuses—of History, Oxford University Press, 2015, p. 33.
John Maynard Keynes, The General Theory of Employment, Interest and Money, 1936, chapter 24 “Concluding Notes,” pp. 383–384.
Milton Friedman, A Program for Monetary Stability, Fordham University Press, 1959.
Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States: 1867–1960, A Study by the National Bureau of Economic Research, Princeton University Press, 1963, p. 419.
Robert Nozick, Anarchy, State, and Utopia, New York: Basic Books, Inc., 1974, pp. 18–24.
Leda Cosmides and John Tooby, “Better than Rational: Evolutionary Psychology and the Invisible Hand,” pp. 327–332, in The American Economic Review: Papers and Proceedings, May 1994.
Peter Temin, Did Monetary Forces Cause the Great Depression? W.W. Norton & Company, 1976.
Christina D. Romer, “A Financial Crisis Needn’t Be a Noose,” New York Times, December 17, 2011.
Allan H. Meltzer, A History of the Federal Reserve: Volume 1, 1913–1951, The University of Chicago Press, 2003, p. 390.
W. Randolph Burgess, The Reserve Banks and the Money Market, Harper, 1927;
Winfield Riefler, Money Rates and Money Markets in the United States, Harper, 1930.
Ben S. Bernanke, Vincent R. Reinhart, and Brian P. Sack, “Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment,” Finance and Economics Discussion Series, 2004–48, presented at the Brookings Panel on Economic Activity, September 9, 2004.
Allan H. Meltzer, A History of the Federal Reserve: Volume 1: 1913–1951, The University of Chicago Press, 2003, p. 167.
These measures by themselves warrant Barry Eichen-green’s earlier assessment, “The tightening of Federal Reserve policy in 1928–29 seems too modest to explain a drop in U.S. GNP between 1929 and 1930 at a rate twice as fast as typical for the first year of recession.” (Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression 1919–1939, Oxford University Press, 1995, p. 14.)
Treasury bill rates in real terms similarly ramped up, since on balance actual and predicted quarterly inflation both stayed near zero over this interval. (Allan H. Meltzer, A History of the Federal Reserve: Volume 1, 1913–1951, The University of Chicago Press, 2003, p. 258.)
On the gold standard’s constraint on monetary policy, see Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression 1919–1939, Oxford University Press, 1995, and, for a convincing contrary view, Charles W. Calomiris, “Volatile Times and Persistent Conceptual Errors: U.S. Monetary Policy 1914–1951,” Federal Reserve Bank of Atlanta and Rutgers University, a paper prepared for the Federal Reserve Bank of Atlanta Conference Commemorating the 100th anniversary of the Jekyll Island Conference, Jekyll Island, Georgia, November 5–6, 2010, pp. 29–35,
Michael D. Bordo and William Roberds, eds., The Origins, History, and Future of the Federal Reserve: A Return to Jekyll Island, Cambridge University Press, 2013, pp. 166–218.
Ben S. Bernanke, Essays on the Great Depression, Princeton University Press, 2000.
Allan H. Meltzer, A History of the Federal Reserve: Volume 1, 1913–1951, The University of Chicago Press, 2003, p. 388.
Stephen M. Davidoff, “The End of the Beginning for Financial Reform,” New York Times DealBook, May 21, 2010; “Not All on the Same Page,” The Economist, July 1, 2010.
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© 2016 David E. Lindsey
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Lindsey, D.E. (2016). Growing Pains: Being Born after Panic and Experiencing Childhood in the Great Depression—December 1913–August 1935. In: A Century of Monetary Policy at the Fed. Palgrave Studies in American Economic History. Palgrave Macmillan, New York. https://doi.org/10.1007/978-1-137-57859-4_2
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