The Evolution of US Finance: v. 1: Federal Reserve Monetary Policy, 1915-35

270 Pages·1994·21.882 MB·English

by  Jane W. D'Arista

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THE
EVOLUTION
OF
U.S. FINANCE
Volutne I
COLUMBIA UNIVERSITY SEMINAR SERIES
THE FUTURE OF AMERICAN BANKING
JamesR . Barth, R. Dan Brumbaugh,J r., and
RobertE . Litan
THE EVOLUTION OF U.S. FINANCE, VOLUME I
FEDERAL RESERVEM ONETARY POLICY: 1915-1935
JaneD 'Arista
THE EVOLUTION OF U.S. FINANCE, VOLUME II
RESTRUCTURINGI NSTITUTIONS AND MARKETS
JaneD 'Arista
THE
EVOLUTION
OF
U.S. FINANCE
Volutne I
FederalR eserve
MonetaryP olicy:
1915-1935
JaneW . D'Arista
~~ ~~o~~!~n~~~~u~po ~~!~n~~~up
LONDON AND NEW YORK
First published1 994 by M.E. Sharpe
Published2 015 by Routledge
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Library of CongressC ataloging-in-Publication Data
The evolution of U.S. financeI by JaneW . D' Arista
p. cm.-(ColumbiaU niversity seminars)
Includesi ndexes.
Contents:v . 1. FederalR eservem onetaryp olicy, 1915-1935- v.
2. Restructuringi nstitutionsa nd markets.
ISBN 1-56324-396-2( set).-ISBN 1-56324-230-3( v. 1)-
ISBN 1-56324-232-X( v. 2).-ISBN 1-56324-397-0( pbk.: set).-
ISBN 1-56324-231-1( pbk.: v.l).-ISBN 1-56324-233-8( pbk.: v. 2)
1. Finance-UnitedS tates. 2. Monetary policy-United States.
3. Board of Governorso f the FederalR eserveS ystem( U.S.)
4. Financiali nstitutions-UnitedS tates.
I. D' Arista, JaneW . II. Series:C olumbiaU niversity seminarss eries.
HG18l.E87 1993
332'. 0973--dc20
93-36837
CIP
ISBN 13: 9781563242311( pbk)
ISBN 13: 9781563242304(h bk)
For
Robert D 'Arista
This pagei ntentionallyl eft blank
LETTER OF TRANSMITTAL
To Memberso f the DomesticF inance Subcommittee:
Transmittedh erewith for the considerationo f the Subcommitteeo n
DomesticF inancei s a staff studye ntitled Federal ReserveS tructurea nd the
Developmenot f MonetaryP olicy: 1915-1935.
This study grew out of an effort to examinet he origins of the Federal
OpenM arket Committee.A n examinationo f the materialsi n the archives
of the board of governorso f the FederalR eserveS ystem-stenographic
records of meetingsa nd conferences-indicatetdh at the record of the
system'sd ecision-makingp rocessd uring the first two decadeso f its exis-
tencei s probablym ore completet hant hat of any othera gencyo f govern-
ment. Yet, theser ecordsw ere difficult to obtaina nd it would appeart hat
heretoforet hey have not beena vailable in their entirety for researchi n
the field. The materialp rovidesa n incredibly rich sourceo f information
about the systemd uring this period-its goals and conflicts, the limita-
tions of its powers,a nd the meansi t found to transcendt hem. Someo f
the views put forward in thesec onferencesw ere perhapsn aive and oth-
ers havec easedt o be relevant.M any, however,a re currenta nd relevant
to an amazingd egree,a s are the eventsw hich providedt he stimulusf or
actions. Discussionso f interest rates, the reservep ositions of member
banks, and prices as target variablesf or monetaryp olicy contribute to
our understandingo f thesef actors in currentp olicy. Onen otesw ith par-
ticular interests imilarities betweend evelopmentsin 1920 and in 1970-a
decline in productiona nd employment,c oupled with rising prices and
high interestr ates.
The presents tudy focuseso n the structureo f the FederalR eserveS ys-
tem. It makes clear that the system evolved in ways which were not
foreseeni n enactmenot f the original FederalR eservel egislationa nd that
this evolution was in two importantr espectsc ontraryt o the intention of
that legislation. Officers who were not providedf or by law-the gover-
nors of the FederalR eserveb anks-createdn ew and extra-legali nstitu-
tions-the Conferenceo f Governors and the several open market
committees-whichtr ansformedt he FederalR eservef rom the intended
vii
viii
regionals ystemi nto a centralb ank. The creationo f thesei nstitutionsa lso
meantt hat the powerso f the systemw ere shifted from the FederalR e-
serveB oard to groupsm ore closely allied with privateb ankingi nterests,
and that thus the intendedp ublic control of the bankings ystemw asl ost.
The FederalR eserveg rew to resemblet he Aldrich central bank plan of
1912, which had been firmly repudiatedi n a presidentiale lection in
which the creationo f a reserveb ankings ystemw as the most important
issue.
The alterationi n the FederalR eserve'ss tructurew as largely the work
of GovernorB enjamin Strongo f the FederalR eserveB ank of New York
and Secretaryo f the Treasury Andrew Mellon. During the 1920s, the
systema s they had shapedi t worked well enough,b ut in the 1930s it
proved to be disastrousa nd requirede xtensivel egislative revision. The
Banking Act of 1933 attemptedt o reinstatet he regional structureo f the
system while permitting the influence of private banking interestso n
policy to be perpetuated.T he 1935 act, reflecting more advancede co-
nomic theories, sanctionedt he centralizationo f system operations
throught he openm arketa uthority, but attemptedt o reinstatet he origi-
nal FederalR eserves tructuret o ensuret hat all its powersw ould be con-
trolled by officers directly appointedb y the presidenta nd confirmedb y
the Senate.W ith respectt o this latter intention, the legislationa s enacted
wasa failure.
Thosew ith the interesta nd patiencet o examinea detaileda ccounto f
paste ventsm ay find this studyi nstructive.I t is not alwayse asyt o deter-
mine the structurals trengtho f the FederalR eserveS ystemd ivorcedf rom
the men who administer it. The following analysis makes such an at-
tempt.
The views and conclusionsf ound in this study do not necessarilye x-
presst he views of the committeeo r any of its individual members.
This study was preparedb y JaneW . D'A rista, Staff Member, House
Committeeo n Bankinga ndC urrency.
Sincerely,
Wright Patman,C hairman
December1 971
CONTENTS
Letter of Transmittalb y Wright Patman vii
Preface xiii
Introductionb y RobertW eintraub 3
Part 1: Evolution of the Locus of Power and the
Methods and Baseso f Policy: 1915-23
1 The PrewarY ears: 1915-16 15
Organizationo f the FederalR eserveS ystem
andt he Impetust owardC entralization 15
The Developmenot f OpenM arket Operations 20
The System'sIm pacto n the GovernmentB ond Market 25
2 The Attempt to Financet he War Through
NonbankI nvestors:1 917-18 31
3 PostwarA djustment:1 919-20 39
The 1920 Fed-Treasury"A ccord" 39
RateT heorya ndM oral Suasion 44
Postscript:V iews on the System'sR ole andF unction 48
4 The Depressiono f 1920-21 54
"We Must Havea Definite Policy" 54
The Behavioro f InterestR atesa ndP rices 59
RateT heorya nd the Political Repercussionosf Deflation 63
ReserveR atios,G old, andF oreignE xchange 73
ix