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The first 15 years starts with the creation of the Federal Reserve Act in 1913, which established theFed with a Reserve board in D.C. and 12 regional banks. The Fed is a lender of last resort. Its jobwas to maintain an elastic currency by alleviating banks and establishing decentralized systems.The creation of the Fed coincided with WWI from 1914 to 1917. Gold flowed into country fromEurope to purchase war materials until U.S. entered in 1917. Could not control inflation at this timebecause they couldnt raise the required reserve rate; could only control by the discount rate butdidnt do it to keep banks encourages. In 1917, the Reserve Banks develop rate structureclassifying paper according to risk/maturity. U.S. entered WWII: inflow of gold disappeared; madeloans to allies; restricted export of gold. The Liberty Loans Act to finance the war effort. In 1920,Treasury raised discount rates, which reversed gold outflows but dramatic decrease in money andprices and short-severe economic contraction. They made heavy use of discount window (changedabout twice a year). The Real Bills Doctrine influenced Fed thinking and its strongest advocate wasAdolph Miller. Adolph Miller was strongest advocate. Credit used to finance commercial activityshould expand/contract in line with the needs of trade. Encourage financing thru commercial billsand discouraged speculation. From 1922-1929 the United States experienced good times withstable prices and high economic growth. Inflation was 0% while interest rates were low.

The absence of responding to cyclical forces proved a major handicap in 1929. Governor Harrisontold the Fed to increase the discount rate in 1928 but was not done until August 1929 (probably tolate at this point). When the stock market crashed in October 1929, the Fed bought $125 millionTreasury securities that week (about doubled the treasury holdings of securities). They did notallow more purchases until the next meeting and only allowed enough for normal seasonal increasein currency in fear of inflation. In 1930, OMIC became OMPC and a transfer of power from the NYFed governor to the board of governors. The decline in the economy led to a decline in tradingwhich told governors that a contraction in money and credit was appropriate so denied GovernorHarrison of the NY Fed to buy more Treasuries. Between December 1930 and March 1931 therewere many bank runs and failures, which put a high demand on the money supply (currencydrains). The OPMC did not change the amount of treasuries purchases (about $100 millionbetween meetings). In October 1931 the Fed raised the discount rate from 1.5% to 3.5% because of

the gold outflow due to Great Britain going off of the gold standard. This action severely strained analready weak economy. It did help with the gold outflow but also renewed the increase of bankfailures and currency demand. In April 1932, Congress and the Hoover Administration pressuredthe OPMC to purchase $500 million treasuries. This was partially offset by gold outflows buteventually gold flowed back and people began to return money to banks. Banks then used thereserves instead of the discount window to increase their excess reserves holding. For a whilethere was a recovery in 1932. The Fed did not buy anymore securities in 1932 or the beginning of1933 even though there was a third severe banking crisis that began in January and lasted untilMarch. Roosevelt came into office in March 1933 and issued a bank holiday. Federal DepositInsurance Cooperation established in January 1934. The Banking Act of 1935 restructured theFederal Reserve into a Board of 7 Governors (one Chairman). The FOMC was created andindividual reserve banks could not purchase or sell securities without FOMC approval (ending

1920s controversy). The establishment of deposit insurance told Americans it was okay to put yourmoney back into the banking system (restored confidence). In April 1933, the Administration tookthe country off the gold standard and the price of gold rose from $20.67 to $35/ounce. Even thoughthe reserve took no action between 1934 and 1937 the economic activity expanded because ofmoney growth. Excess reserves built up fast in the banks. Worried about inflation in the future, theFed needed to do something about the excess reserves but did not want to change the interest rates.In late 1936 and early 1937 the Fed raised the reserve requirements in several stages. Did not useOMO until April 1937 where they bought $96 million Treasury bonds. In 1939 and 1940 the goldinflows in the U.S. were at unprecedented levels because of the need for war materials.

8/7/2019 Federal Reserve Policy History

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Federal Reserve Policy

Federal Reserve Chairman:

William Martin: April 4, 1951- January 31, 1970Arthur Burns: February 1, 1970- March 8, 1978G. William Miller: March 8, 1978- August 6, 1979Paul Volcker: August 6, 1979- August 11, 1987Alan Greenspan: August 11, 1987- January 31, 2006Ben Bernake: February 1, 2006-Present