The Briefcase Watch: Fed Watching at Its Finest?

Abstract

In the beginning, the Fed was relatively small, and its limited power was dispersed among a network of regional banks bound by regional interests. With different banks setting different rates, savvy investors played the arbitrage game, and the system started to suffer. The banks needed a united front, and they rallied behind the New York Reserve. But a unified system means unified mistakes. New York failed to interpret the market correctly, and their mistake was compounded across the entire system. The stock market crashed, banks failed, and the country fell into a Great Depression. With an economy collapsing around it, the Fed held steady, letting banks go under and sticking to gold. The strategy paid off in the long run, but the Fed paid for it in the meantime.