history of federal reserve free...

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Assets { (billions) Liabilities { (billions) Chairmen of the Board Presidents of the Reserve Bank of New York U.S. Presidents Democrat Republican { { Risk Spreads, Reserve Requirements, and Inflation Interest Rates $4 $6 $8 $10 $12 $14 $16 $4 $6 $8 $10 $12 $14 $16 A B C E G D F 6 4 2 1 3 monthly $20 $30 $40 $50 $60 $70 $80 $20 $30 $40 $50 $60 $70 $80 E C G F A B H 6 3 4 2 1 monthly $100 $200 $300 $400 $500 $600 $100 $200 $300 $400 $500 $600 E C G F A B H I J 6 3 4 2 1 7 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 monthly $1,000 $1,500 $2,000 $1,000 $1,500 $2,000 E C G F A H I J K L 6 5 2 1 7 9 8 weekly $1,000 $1,500 $2,000 $2,500 Aug 07 Jan 08 Jan 09 Jul 09 A H I K M N Q P O V R S T U weekly WILSON HARDING COOLIDGE HOOVER ROOSEVELT ROOSEVELT TRUMAN KENNEDY JOHNSON EISENHOWER NIXON REAGAN FORD CARTER CLINTON BUSH CLINTON OBAMA BUSH } Credit Crisis Preparing for Y2K World Trade Towers 9/11 1933 Banking Crisis Gold Reserve Act: Gold revalued from $20.67/oz to $35 1929 Stock Market Crash Britain leaves the gold standard Plaza Accord G7 sign Louvre Accord US bonds sold and foreign bonds bought to weaken rising dollar Amendments of 1917 increase note issuing power of Fed 16 19 Bank of New England fails Run on American International Group, Fed begins to extend credit Fed lends to a failing Bear Stearns, then arranges its sale to to JP Morgan Chase Riefler Burgess Doctrine and an activist policy first articulated in Fed 10th Annual Report Discount loans support failing Texas banking industry Fed organizes private sector bailout of Long Term Capital Management Federal Reserve Reform Act enunciates the goal of maximum employment 2A Resolution Trust Corporation formed to bailout savings & loans Emergency Economic Stabilization Act permits Fed to pay interest on reserves Carter announces voluntary wage & price controls Smithsonian Agreement on fixed currency rates Death of Bretton Woods: the world’s currencies float FOMC targets M1, not interest rates Nixon closes the gold window Wage & price controls Depositary Institutions Deregulation and Monetary Control Act of 1980 10b 14b 19 13.8 The Fed gains power to make advances to member banks Federal Deposit Insurance Corporation Improvement Act 13.3 16.2 Amendments increase eligibility of certain collateral as backing for notes All FR assets can serve as backing 16.2 “Sweeps” programs introduced to reduce required reserves Central bankers meet in New York to deal with Britain’s overvalued pound and consequent gold outflow To support Britain’s return to the gold standard, Strong extends$200 million to the Bank of England Interest Equalization Tax instituted U.S. gold outflow begins Small Business Investment Act limits Fed lending power 13b “Bills only” buying policy Operation Twist begins, Fed commits to buying long term bonds in the open market Fed sets 2.5% ceiling on long term gov’t bonds Fed empowered to control consumer credit V-E Day Gold purchases crescendo. The London Gold Pool is disbanded & gold’s market price floats. Gold backing requirement for FR notes reduced from 25% to 0% Penn Central Railroad declares bankruptcy Penn Square Bank declares bankruptcy Discount window opened to support Continental Illinois Bank Federal Reserve lends $1.8 billion to support Franklin National Bank London Gold Pool formed by central banks to support the U.S. dollar at $35/oz Gold backing requirement for FR deposits reduced from 25% to 0% Fed fixes gov’t t-bill rate at 0.35% Gold backing requirement for Reserve notes and deposits reduced from 40% to 25% Bretton Woods Agreement signed, World Bank & International Monetary Fund created The Treasury - Federal Reserve Accord Exchange Stabilization Fund begins operations Lend-Lease Act passed World War II breaks out second Glass-Steagall Act establishes FOMC 12a Federal Deposit Insurance Corporation begins operations Domestic gold holdings forbidden, gold exports banned 1987 Stock Market Crash Banking Act of 1935 passed 10.1 12a 19 Fed can now adjust reserve requirements Agricultural Credits Act Passed 13a Industrial Advances Act Passed 13b Emergency Banking Act Passed 13.13 Glass-Steagall Act Passed 10a 10b 16.2 Emergency Construction and Relief Act of 1932 passed 13.3 Bank of the United States fails Stock market peaks American Recovery and Reinvestment Act of 2009 Economic Stimulus Act of 2008 passed With other central banks, the Fed’s inects liquidity in its first response to crisis Sub-prime mortgage lender New Century Financial declares bankruptcy Lehman Bros files for bankruptcy Federal takeover of Freddie Mac and Fannie Mae NASDAQ tech bubble pops The U.S. in World War I { { U.S. involvement in World War II { Korean War { U.S. in the Vietnam War Continuing but declining U.S. Prescence in Vietnam { { Gulf War U.S. occupation of Iraq and Afghanistan } } } } } { { { { } } } } } } 18% 16.25% 0% 2% 4% 6% 8% 10% 0% 2% 4% 6% 8% 10% 13% 18% 26% 20% 16.5% 18% 20% 24% 13% 22.75% D Allan Sproul Deputy Governor, New York Fed Director, Wells Fargo Bank Benjamin Strong Jr. President, Bankers Trust Co. of New York Willliam P. Harding Member, Federal Reserve Board Adviser to the Cuban government Charles S. Hamlin Assistant Secretary of the Treasury Member, Federal Reserve Board Daniel Crissinger Comptroller of the Currency Chairman, F.H. Smith Co. Roy A. Young President, Minneapolis Fed President, Boston Fed Eugene Meyer Federal Farm Loan Commissioner Publisher, Washington Post Eugene R. Black President, Atlanta Fed President, Atlanta Fed George L. Harrison Deputy Governor, New York Fed President, New York Life Insurance Co. Marriner S. Eccles Assistant to the Secretary of the Treausry Governor, Federal Reserve Board William McChesney Martin Jr. Assistant Secretary of the Treasury for Monetary Affairs Various directorships and trusteeships Thomas B. McCabe Federal Liquidation Commissioner CEO Scott Paper Co. Alfred Hayes Vice President New York Trust Co. Chairman, Morgan Stanley Arthur F. Burns Councillor to the President Scholar, American Enterprise Instititute G. William Miller CEO of Textron Inc. Secretary of the Treasury Paul Volcker Undersecretary of the Treasury for Monetary Affairs Chairman of J. Rothschild, Wolfensohn & Co. Alan Greenspan President of Townsend-Greenspan & Co Adviser to Pacific Investment Management (PIMCO) Anthony M. Solomon Undersecretary of the Treasury for Monetary Affairs Chairman, S.G. Warburg & Co. E. Gerald Corrigan President, Minneapolis Fed Chairman, Goldman Sachs, International Advisers Group William McDonough Executive VP, New York Fed Chairman, Public Company Accounting Oversight Board Ben Bernanke Chairman of the President's Council of Economic Advisors William C. Dudley Executive VP, New York Fed Timothy Geithner International Monetary Fund, Director of Policy Development Secretary of the Treasury Eccles Hayes Martin McDonough Greenspan Harrison 0% 2% 4% 6% 8% 19% 0% 2% 4% 6% 8% 0% 2% 4% 6% 8% 0% 2% 4% 6% 8% 0% 2% 4% 6% 8% Stock market decline ends Great Bear market Reconstruction Finance Corporation formed War-time price & wage controls in effect -16% -11% +23.5% 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 +19.5% -2.9% -4.1% +13.2% Interest Rates, Risk Spreads, Reserve Requirements, and Inflation Moody’s Baa Corporate Bond Yield Prime Commercial Paper Rate, 4-6 months Stock Exchange Time Loans, 90 days Federal Funds Rate Prime Banker’s Acceptance rate Original Discount Rate World War I Discount Rate Secured by Liberty Bonds Banker’s Acceptance buying rate Regular Advance Rate (Section 10b) Advances authorized under Section 13.13 of Act Rates on Industrial Loans (Section 13b) Primary Credit Rate Reserve Requirements Other Market Interest Rates Federal Reserve Rates Checking Accounts Saving Accounts Inflation rate, yearly Yield spread between Aaa and Baa Corporate Bonds World War II preferential discount rate Yield spread between Aaa Corporate and Long Term Government Bonds Long-term Government Bond Yield Government 3 month T-bill Yield 5. Rate on loans to members secured by short term government debt. In place from 1942-1946 8. New York rate. The 10b advance rate was merged with original discount rate (3) in 1980. 3. Federal Reserve Bank of New York rate. Prior to 1935, each Reserve Bank set its own rate. 10. New York rate, low end of range, to industrial/commercial organizations. 7. Minimum buying rate in New York on 60-90 day acceptances. 6. A modification of the discount rate, the primary credit rate is introduced in 2003 at a penalty above the federal funds rate. 2. Member banks faced different requirements. Till 1962, displayed are the Central Reserve city bank requirements. After 1962, rates are for largest bank category. 9. New York rate on advances to individual’s, partnerships, and corporations secured by government obligations. 1. From1939 to the early 50s, Fed did not hold acceptances, though it continued to post a buying rate till 1955. For simplicity’s sake, this chart ends the market acceptance rate in 1936 and the Fed’s acceptance rate in 1939. Acceptances bought after 1955 were at market rates. 4. New York rate on 15-90 day advances. In place from the beginning of WWI till 1921 9 2 6 1 1, 7 10 5 8 3 4 Federal Reserve Balance Sheet ASSETS LIABILITIES Treasury Cash Money in Circulation Treasury Deposits Other Deposits Total Reserves Other Liabilities and Capital US Teasury supplementary financing account Other Deposts + Treasury Cash Reverse Repos Discount Loans and Advances Bankers Acceptances purchased U.S. Government Bonds purchased outright Industrial Loans Gold & Gold Certificates Other Assets Treasury Currency Government Repos Agency Bonds purchased outright Special Depository Receipts (SDRs) MBS purchased outright Facilities created to address financial crisis (listed below) Term Auction Credit CP Funding Facility Maiden Lane III Maiden Lane II Maiden Lane Term ABS Loan Facility ABCP money market funding Credit extended to AIG Primary dealer broker credit Central Bank Liquidity Swaps 1 2 3 4 6 7 8 9 5 A B C D E F G H I M N O P Q R T U V S J K L 20 3 12 11 15 13 14 9 6 8 7 16 10 22 17 18 23 19 5 21 2 4 1 23. Prior to Dec 2002, matched sales were used instead of reverse repos. They are fundamentally similiar, but matched sales were deducted from outright purchases and therefore did not appear. 22. Funds raised by debt issued by the Treasury is placed in this account, with the goal of offsetting the effects of the facilities created due deal with the financial crisis. 21. Includes capital paid in, surplus, and accrued dividends. Also the liabilities due to entities other than the the FRBNY issued by the CPFF, the LLCs funded through the MMIFF, and Maiden Lane I-III. 20. Combined for convenience. This category for1999-2009 only. 19. Currency held in the vaults of the U.S. Treasury. 18. Deposits held at the Fed by foreign governments, non-member banks, and other. Also includes service related adjustments. 17. As the government’s fiscal agent, the Fed keeps on deposit funds for the U.S. Treasury 16. Member banks deposits with the Fed to comply with reserve requirements. 15. The Primary Dealer Credit Facility (PDCF) lends overnight funds to primary dealers. 14. The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) lends to non-member insititutions who wish to purchase ABCP from money market mutual funds. 13. The Term Asset-Backed Securities Loan Facility (TALF) issues loans with a term of up to five years to holders of eligible asset-backed securities. 12. Fed loans to Maiden Lane III fund purchases of collateralized debt obligations (CDOs) on which AIG had written credit default swap contracts. 11. Fed loans to Maiden Lane II fund purchases of residential mortgage-backed security (RMBS) assets from AIG subsidiaries. 10. Fed creates Maiden Lane, then lends it funds to purchase and manage the assets of a defunct Bear Stearns. Authorized under section 13.3. 9. The Fed lends money to the Commercial Paper Funding Facility (CPFF), which buys unsecured and asset-backed paper from the private sector. 8. Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. 7. Obligations of Fannie Mae, Freddie Mac, the Federal Home Loan Banks. 6. These are temporary open market operations in which the Fed agrees to purchase and resell government securities. 5. Consists of coins (1,5,10, 25¢), which are minted by the US Teasury and bought by the Fed to be put into circulation. In the early days of the Fed, most treasury currency consisted of private bank notes and notes issued by the Treasury. 4. Includes float, assets denominated in foreign currencies, accrued interest, land, and Reserve buildings. Due to delays in cheque processing, float is the amount the Fed has yet to collect on checks received. 3. Loans authorized to industrial and commerial enterprises with maturities as long as 5 years under Section 13b of the Act. 2. BAs were originally purchased by the Fed to help foster the growth of a domestic acceptances market. 1. While both advances and discounts are short term loans, since the 70s and until the recent credit crisis, most loans have been the former. According to Hackley and McKinley, advances are simpler to carry out, with the collateral for the loan staying at the member bank. 16.2 Major Changes to the Federal Reserve Act modified added dropped Section Affected Civil Service Prior Experience of Federal Reserve Chairmen/Presidents Banking Law Other Academia Other Federal Reserve } private sector } public sector Prior position Subsequent position Legend as measured and defined by the NBER Recessions A Visual History Federal Reserve System of the 1914 - 2009 IN ITS FIRST TWO YEARS, the Fed was a passive institution. It set its lending rate above the market rate, making it unprofit- able for banks to turn to it for loans. As a result, discounts were negligible. This changed in 1917 with the entrance of the US into World War I. The Fed, nowadays largely independent from other branches of the government, was then controlled by the Treasury Secretary. To help pay for looming war bills, the Fed was converted into a war-finance body. Amendments to the Federal Reserve Act paved the way. The original Federal Reserve Act emphasized that discounts were be made on “real bills” principles; only short term bills based on commercial transactions would be eligible for Fed loans. In 1916, authorities began to break with this principle when the Fed was given permission to lend to banks on the security of government debt. In 1917, these “Section 13.8” advances were made “eligible” as collateral for notes. The 1917 amendments also reduced the backing requirement for Federal Reserve notes. Prior to 1917, all notes had to be double-backed by 100% real bills, and 40% gold. After 1917, notes need only be backed by 60% bills and 40% gold. At the same time, reserve requirements were lowered by Congress from 18% to 13%, and a preferential lending rate introduced on all 13.8 advances secured by government Liberty Bonds. The effect of all these changes was to dramatically increase the Fed’s ability to issue notes. The private sector bought large quantities of government war bonds, then used these bonds as security to get Fed 13.8 advances at below-market rates. In effect, they profited every time they transacted with the Fed. As a result of the Fed’s subsidization of government bond purchases, the dollar’s purchasing power plummeted. Friedman & Schwartz estimate that 5% of the government’s war expenses were paid for by the Fed’s “inflation tax”. The events after the 1929 stock market crash brought many changes to the Fed’s balance sheet and operating procedures. The Emergency Construction, Emergency Banking, and Industrial Advances Acts granted the Fed power to extend loans to non-member individuals, partnerships, and corpora- tions under certain conditions by adding sections 13.3, 13.13, and 12b to the Federal Reserve Act. The First Glass-Steagall Act brought in even larger modifications, firstly by allowing the Fed to make advances on “any satisfactory collateral” to member banks through Section 10b advances, and secondly by allowing government securities purchased in the open market to stand as sufficient backing for Federal Reserve notes. The latter freed the Fed to monetize government debt via open market operations and not just discounts. Government debt on the Fed’s balance sheet would grow inexorably from then on, further moving the Fed away from its “real bills” origins. Also significant were legislative changes that began to de-link the dollar from the gold standard. In 1933, private holdings of gold were criminalized. Gold was brought to the Federal Reserve for notes, and on January 30, 1934 this gold was transferred to the US Treasury in return for certificates. The next day the dollar was devalued from $20.67/oz to $35/oz. The capital gain, therefore, was credited to the Treasury, not the Fed. The $2.3 billion rise in Treasury cash, a liability of the Fed, became the war-chest of the Treasury and its new Exchange Stabilization Fund, which would dominate monetary policy to 1951, rendering the Fed a passive partner. MUCH LIKE WWI, the Fed was harnessed to finance the Second World War. Reserve requirements were reduced to allow member banks to expand lending for the war effort, and a preferential discount rate of 0.5% was set for loans collateral- ized by government debt. Unlike WWI, the latter was hardly used. Far more attractive to member banks were the open market buying rates set by the Fed. By offering to buy all government t-bills at 0.35% and long term bonds at 2.5%, the Fed ensured that government debt prices would never fall. This price-fixing scheme allowed the government to issue huge amounts of Victory Loans to finance the war, and guaranteed the capital safety of the private sector’s investment. The result was one of the fastest increases in the government bond portion of the Federal Reserve’s balance sheet to date. At the same time, inflation jumped to its highest level since the early 20s. War-time wage and price controls succeeded in reducing overt inflation, but the effects manifested themselves as shortages and reductions in quality. The removal of price controls in 1946 resulted in a large spike in inflation rates. After the war’s end, Fed officials increasingly agitated for more independence from the Treasury in setting monetary policy. With the onset of the Korean War, it pressed for an end to the WWII-era 2.5% rate peg, which the Treasury expected it to maintain to help finance the newest war effort. The conflict between the two bodies culminated in the 1951 Accord, in which the Fed finally earned its independence and the 2.5% ceiling was discontinued. The Korean War would not be financed by the Fed. In 1959, the Fed agreed to one of the only reductions in its power to date. Section 13b of the Federal Reserve Act, passed in 1934 to allow the Fed to lend directly to businesses for working capital purposes, was removed. The dollar’s link to gold was an important issue after WWII. The war-time accumulation of government bonds on its balance sheet threatened the 40% gold backing requirement for Federal Reserve notes and deposits. Rather than sell government bonds to regain the 40% level, the requirement was legally reduced to 25% for notes and deposits in 1945. The post-war Bretton Woods agreement stipulated that the world’s currencies would be fixed to the dollar, and the dollar would be fixed and convertible at $35/oz. Large US foreign expenditures led to an accumulation of dollars overseas, and beginning in 1958 these were returned to the US at ever increasing amounts for gold. Attempts to stem the gold outflow, including the formation of the London Gold Pool and the Interest Equalization Tax, failed. In 1965 the Fed, lacking gold, further reduced gold backing for Fed deposits from 25% to 0%. Bretton Woods was collapsing. IN EARLY 1968, private sector purchases of gold in London exploded. The London Gold Pool, formed by the Fed and a number of European central banks to cap the London price at $35, was unable to suppress the buying. The pool was disbanded in early 1968 and the market price leaped above $40, the result being two prices for the dollar; the official one at $35, and a significantly higher market price. The Fed simultaneously reduced the 25% gold backing requirement to 0% as outflows of gold threatened to bring holdings below their legal limit. The dollar remained convertible into gold though, and central banks continued to bring their dollars to New York to claim the metal.Vietnam War expenses and setbacks further undermined confidence in the dollar, and in 1971 Nixon decided to solve the outflow problem by simply removing the dollar’s convertibility. With one pillar of Bretton Wood’s undermined – convertibility to gold – only one remained; fixed exchange rates to the dollar. The Smithsonian Agreement tried but failed to fix rates, and in 1973 all curren- cies were all allowed to float. Bretton Woods was dead. Gold would cease to be an important asset on the Fed’s balance sheet, replaced by government debt. On the domestic front, the Fed’s discount window was increasingly utilized to support insolvent institutions, breaking with prior central banking tradition of lending to illiquid but solvent banks only. Attempts failed to recruit the Fed to help bailout Penn Central, but in 1974 the discount window was crucial in supporting Franklin National, a failing bank. Continen- tal Illinois, crippled by the collapse of Penn Square two years before, was kept on life support by the Fed in 1984, and most of the large Texas banks found support from the Fed when they failed in 1988. All these actions gave the impression that the Fed had adopted a policy of “too big to fail”, in which large and politically connected institutions received favourable treatment from the Fed when they went bust, but smaller banks didn’t. Several major changes to the Federal Reserve Act modified the Fed’s mandate. A 1977 amendment added section 2A to the Act, stipulating for the first time the Fed’s dual role of promoting stable prices and maximum employment. The Monetary Control Act of 1980 allowed foreign government debt to serve as collateral for reserve notes, removed the penalty on 10b advances, and expanded the discount window to allow non-member banks to access it. Finally, a small change in 1991 to Section 13.3 - a dormant 1930s era power that allowed the Fed to lend to individuals, corporations, and businesses on limited collateral in emergencies – allowed for an almost unlimited range of collateral to be accepted by the Fed. This small but vital change would serve as the legal foundation for the Fed’s massive extension of loans during the 2007-09 credit crisis. MUCH OF THIS ERA’S HISTORY remains to be written, but it includes the largest expansion in the Fed’s balance sheet to date, dwarfing the WWI growth of discounts, the 1934 gold revaluation, and the WWII expansion. The expansion’s effect on employment, GDP, credit, and confidence in the dollar continue to play out. Several changes to the Federal Reserve Act are notable. In 1999, prior to the year 2000 date change, Section 10a and 10b advances were made eligible to serve as collateral for Federal Reserve notes, increasing the Fed’s ability to issue notes should the new century start in crisis. This was superseded in 2003 when any asset held by the Fed was made eligible as collateral for notes, removing from the Act the last vestiges of the “real bills” doctrine which originally limited eligibility to short term commercial bills. Finally, the Fed was given a new monetary tool in 2008 when it was authorized to pay interest on reserves for the first time. The cumulative changes to the Federal Reserve Act have given the Fed the ability to act in ways it never would have been capable of in times past. When solvent banks’ demand for liquidity exploded, it was able to create facilities like TAF to meet this demand. But loans to Maiden Lane I-III, authorized under Section 13.3, have supported the questionable assets of insolvent non-banks Bear Stearns and American International Group. Section 13.3 is also the legal basis for loans made by a myriad of facilities, including the CPFF, AMLF, PDCF, and TALF (see notes in legend for definitions). At the same time, Fed purchases of government debt have fallen. Not since the early 1920s has the Fed held such a large proportion of private sector debt on its balance sheet. On the liabilities side of the balance sheet, the low level of reserves encouraged by the 1994 introduction of sweeps, in which banks “swept” cash from checking accounts into savings accounts each night to take advantage of lower reserve requirements on the latter, has dramatically reversed. Uncer- tainty and a lack of confidence have led banks to accumulate huge quantities of excess reserves at the Fed rather than lending these funds out. This uncertainty has yet to be dispelled. FOR BETTER OR FOR WORSE, the Federal Reserve has been governing the monetary system of the United States since 1914. This chart maps the rise of the Fed from its origins as a relatively minor institution, often controlled by Presidents and the United States Department of the Treasury, into an independent and powerful body that rivals the Presidency in terms of prominence. Multiple data series including the Fed’s balance sheet, interest rates and spreads, reserve requirements, chairmen, inflation, recessions, and more help chronicle this rise. While this chart can only tell part of the complex story of the Fed, we trust it will be a valuable reference tool to anyone curious about the evolution of this very influential yet controversial institution. 1914-1936 1936-1968 1968-1999 1999-2009 Financial Graph & Art www.financialgraphart.com Free Digital Edition 2009 John Paul Koning This image is published under a Creative Commons Attribution-Noncommercial-No Derivative Works 2.5 License This is a free digital edition of a chart created by John Paul Koning. It has been designed to be ap- preciated on paper as a 24x36 inch display. If you enjoy this chart please consider buying the paper version at www.financialgraphart.com. Buyers of the chart will recieve a bonus chart “reimagin- ing” the history of the Fed’s balance sheet. The updated 2010 edition is also now available for pur- chase. Alternatively, if you have found this chart useful but don’t want to buy a paper edition, con- sider donating to me at www.financialgraphart.com/donate. It took me many months to compile the data and design it, any support would be much appreciated. John Paul Koning, 2010 Free Digital Edition 1914-1936 1936-1968 1968-1999 1999-2010 Start How to read this chart:

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Page 1: History of Federal Reserve Free Editionacikistihbarat.com/Dosyalar/federal-reserve-history-infographic-acikistihbarat.pdf2% {Risk Spreads, Reserve Requirements, and In˜ation Interest

Assets {(billions)

Liabilities{(billions)

Chairmen of the Board

Presidents of the ReserveBank of New York

U.S. Presidents DemocratRepublican{

{ Risk Spreads, ReserveRequirements, and In�ation

Interest Rates

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WILSON HARDING COOLIDGE HOOVER ROOSEVELT

ROOSEVELTTRUMANKENNEDYJOHNSON EISENHOWER

NIXON REAGANFORD CARTER CLINTONBUSH

CLINTONOBAMA BUSH}

Credit Crisis

Preparing for Y2KWorld Trade Towers 9/11

1933 Banking Crisis

Gold Reserve Act:Gold revalued from$20.67/oz to $35

1929 Stock Market Crash

Britain leaves the gold standard

Plaza Accord

G7 sign Louvre Accord

US bonds sold and foreign bonds bought to weaken rising dollar

Amendments of 1917 increasenote issuing power of Fed

16 19

Bank of New England fails

Run on American International Group,Fed begins to extend credit

Fed lends to a failing Bear Stearns, thenarranges its sale to to JP Morgan Chase

Rie�er Burgess Doctrine and an activistpolicy �rst articulated in Fed 10th Annual Report

Discount loans support failing Texas banking industry

Fed organizes private sector bailoutof Long Term Capital Management

Federal Reserve Reform Act enunciatesthe goal of maximum employment

2A

Resolution Trust Corporationformed to bailout savings & loans

Emergency Economic Stabilization Actpermits Fed to pay interest on reserves

Carter announces voluntary wage & price controls

Smithsonian Agreement on �xed currency ratesDeath of Bretton Woods: the world’s currencies �oat

FOMC targets M1, not interest rates

Nixon closes the gold windowWage & price controls

Depositary Institutions Deregulation and Monetary Control Act of 198010b 14b 19

13.8The Fed gains power to make advances to member banks

Federal Deposit Insurance Corporation Improvement Act 13.3

16.2 Amendments increase eligibilityof certain collateral as backing for notes

All FR assets can serve as backing

16.2

“Sweeps” programs introduced to reduce required reserves

Central bankers meet in New York to deal with Britain’s overvalued pound and consequent gold out�ow

To support Britain’s return to the gold standard, Strong extends$200 million to the Bank of England

Interest Equalization Tax instituted

U.S. gold out�ow begins

Small Business Investment Actlimits Fed lending power

13b

“Bills only” buying policy

Operation Twist begins, Fed commits to buying long term bonds in the open market

Fed sets 2.5% ceiling on long term gov’t bonds

Fed empowered to control consumer credit

V-E Day

Gold purchases crescendo. The London Gold Pool is disbanded & gold’s market price �oats.Gold backing requirement for FRnotes reduced from 25% to 0%

Penn Central Railroad declares bankruptcy

Penn Square Bankdeclares bankruptcy

Discount window opened to support Continental Illinois Bank

Federal Reserve lends $1.8 billion to support Franklin National Bank

London Gold Pool formed by centralbanks to support the U.S. dollar at $35/oz

Gold backing requirement for FR deposits reduced from 25% to 0%

Fed �xes gov’t t-bill rate at 0.35%

Gold backing requirement for Reserve notes and deposits reduced from 40% to 25%

Bretton Woods Agreement signed, World Bank & International Monetary Fund created

The Treasury - Federal Reserve Accord

Exchange Stabilization Fund begins operations

Lend-Lease Act passed

World War II breaks out

second Glass-Steagall Actestablishes FOMC

12a

Federal Deposit Insurance Corporation begins operations

Domestic gold holdings forbidden, gold exports banned

1987 Stock Market Crash

Banking Act of 1935 passed10.1 12a 19

Fed can now adjust reserve requirements

Agricultural Credits Act Passed13a

Industrial Advances Act Passed13b

Emergency Banking Act Passed13.13

Glass-Steagall Act Passed 10a 10b 16.2

Emergency Construction and Relief Act of 1932 passed

13.3

Bank of the United States fails

Stock market peaks

American Recovery and Reinvestment Act of 2009

Economic Stimulus Act of 2008 passed

With other central banks, the Fed’s inects liquidity inits �rst response to crisis

Sub-prime mortgage lenderNew Century Financial declares bankruptcy

Lehman Bros �les for bankruptcy

Federal takeover of Freddie Mac and Fannie Mae

NASDAQ tech bubble pops

The U.S. in World War I

{

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U.S. involvement in World War II{ Korean War{ U.S. in the Vietnam War

Continuing but decliningU.S. Prescence in Vietnam{ {

Gulf War

U.S. occupation of Iraqand Afghanistan

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D

Allan SproulDeputy Governor, New York FedDirector, Wells Fargo Bank

Benjamin Strong Jr.President, Bankers Trust Co. of New York

Willliam P. HardingMember, Federal Reserve BoardAdviser to the Cuban government

Charles S. HamlinAssistant Secretary of the TreasuryMember, Federal Reserve Board

Daniel CrissingerComptroller of the CurrencyChairman, F.H. Smith Co.

Roy A. YoungPresident, Minneapolis FedPresident, Boston Fed

Eugene MeyerFederal Farm Loan CommissionerPublisher, Washington Post

Eugene R. BlackPresident, Atlanta FedPresident, Atlanta Fed

George L. Harrison

Deputy Governor, New York FedPresident, New York Life Insurance Co.

Marriner S. Eccles

Assistant to the Secretary of the TreausryGovernor, Federal Reserve Board

William McChesney Martin Jr.Assistant Secretary of the Treasury for Monetary A�airsVarious directorships and trusteeships

Thomas B. McCabeFederal Liquidation CommissionerCEO Scott Paper Co.

Alfred HayesVice President New York Trust Co.Chairman, Morgan Stanley

Arthur F. BurnsCouncillor to the President Scholar, American Enterprise Instititute

G. William MillerCEO of Textron Inc.Secretary of the Treasury

Paul VolckerUndersecretary of the Treasury for Monetary A�airsChairman of J. Rothschild, Wolfensohn & Co.

Alan GreenspanPresident of Townsend-Greenspan & CoAdviser to Paci�c Investment Management (PIMCO)

Anthony M. SolomonUndersecretary of the Treasury for Monetary A�airsChairman, S.G. Warburg & Co.

E. Gerald CorriganPresident, Minneapolis FedChairman, Goldman Sachs, International Advisers Group

William McDonoughExecutive VP, New York FedChairman, Public Company Accounting Oversight Board

Ben BernankeChairman of the President's Council of Economic Advisors

William C. DudleyExecutive VP, New York Fed

Timothy GeithnerInternational Monetary Fund, Director of Policy DevelopmentSecretary of the Treasury

Eccles

HayesMartin

McDonoughGreenspan

Harrison

0%

2%

4%

6%

8%

19%

0%

2%

4%

6%

8%

0%

2%

4%

6%

8%

0%

2%

4%

6%

8%

0%

2%

4%

6%

8%

Stock market decline endsGreat Bear market

Reconstruction Finance Corporation formed

War-time price & wage controls in e�ect

-16%

-11%

+23.5%

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1915

1916

1917

1918

1919

1920

1921

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

+19.5%

-2.9% -4.1%

+13.2%

Interest Rates, Risk Spreads, Reserve Requirements, and Inflation

Moody’s Baa Corporate Bond Yield

Prime Commercial Paper Rate, 4-6 months

Stock Exchange Time Loans, 90 days

Federal Funds RatePrime Banker’s Acceptance rate

Original Discount RateWorld War I Discount Rate Secured by Liberty Bonds

Banker’s Acceptance buying rateRegular Advance Rate (Section 10b)Advances authorized under Section 13.13 of ActRates on Industrial Loans (Section 13b)

Primary Credit Rate

Reserve Requirements Other

Market Interest Rates Federal Reserve Rates

Checking AccountsSaving Accounts

Inflation rate, yearlyYield spread between Aaa and Baa Corporate Bonds

World War II preferential discount rate

Yield spread between Aaa Corporate and Long Term Government Bonds

Long-term Government Bond YieldGovernment 3 month T-bill Yield

5. Rate on loans to members secured by short term government debt. In place from 1942-1946

8. New York rate. The 10b advance rate was merged with original discount rate (3) in 1980.

3. Federal Reserve Bank of New York rate. Prior to 1935, each Reserve Bank set its own rate.

10. New York rate, low end of range, to industrial/commercial organizations.

7. Minimum buying rate in New York on 60-90 day acceptances.6. A modi�cation of the discount rate, the primary credit rate is introduced in 2003 at a penalty above the federal funds rate.

2. Member banks faced di�erent requirements. Till 1962, displayed are the Central Reserve city bank requirements. After 1962, rates are for largest bank category.

9. New York rate on advances to individual’s, partnerships, and corporations secured by government obligations.

1. From1939 to the early 50s, Fed did not hold acceptances, though it continued to post a buying rate till 1955. For simplicity’s sake, this chart ends the market acceptance rate in 1936 and the Fed’s acceptance rate in 1939. Acceptances bought after 1955 were at market rates.

4. New York rate on 15-90 day advances. In place from the beginning of WWI till 1921

9

2

6

1 1, 7

10

5

8

34

Federal Reserve Balance SheetASSETS LIABILITIES

Treasury Cash

Money in Circulation

Treasury Deposits

Other Deposits

Total Reserves

Other Liabilities and Capital

US Teasury supplementaryfinancing account

Other Deposts + Treasury Cash

Reverse Repos

Discount Loans and Advances

Bankers Acceptances purchased

U.S. Government Bonds purchased outright

Industrial Loans

Gold & Gold Certificates

Other Assets

Treasury Currency

Government Repos

Agency Bonds purchased outright

Special Depository Receipts (SDRs)

MBS purchased outright

Facilities created to address financial crisis (listed below)

Term Auction Credit

CP Funding Facility

Maiden Lane III

Maiden Lane II

Maiden Lane

Term ABS Loan Facility

ABCP money market funding

Credit extended to AIG

Primary dealer broker credit

Central Bank Liquidity Swaps

1

2

3

4

6

7

8

9

5

A

B

C

D

E

F

G

H

I

M

N

O

P

Q

R

T

U

V

S

J

K

L

20

3

12

11 15

13

14

9

6

8

7

16

10

22

17

18

23

19

5 21

2

4

1

23. Prior to Dec 2002, matched sales were used instead of reverse repos. They are fundamentally similiar, but matched sales were deducted from outright purchases and therefore did not appear.

22. Funds raised by debt issued by the Treasury is placed in this account, with the goal of o�setting the e�ects of the facilities created due deal with the �nancial crisis.

21. Includes capital paid in, surplus, and accrued dividends. Also the liabilities due to entities other than the the FRBNY issued by the CPFF, the LLCs funded through the MMIFF, and Maiden Lane I-III.

20. Combined for convenience. This category for1999-2009 only.19. Currency held in the vaults of the U.S. Treasury.

18. Deposits held at the Fed by foreign governments, non-member banks, and other. Also includes service related adjustments.

17. As the government’s �scal agent, the Fed keeps on deposit funds for the U.S. Treasury16. Member banks deposits with the Fed to comply with reserve requirements.15. The Primary Dealer Credit Facility (PDCF) lends overnight funds to primary dealers.

14. The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) lends to non-member insititutions who wish to purchase ABCP from money market mutual funds.

13. The Term Asset-Backed Securities Loan Facility (TALF) issues loans with a term of up to �ve years to holders of eligible asset-backed securities.

12. Fed loans to Maiden Lane III fund purchases of collateralized debt obligations (CDOs) on which AIG had written credit default swap contracts.

11. Fed loans to Maiden Lane II fund purchases of residential mortgage-backed security (RMBS) assets from AIG subsidiaries.

10. Fed creates Maiden Lane, then lends it funds to purchase and manage the assets of a defunct Bear Stearns. Authorized under section 13.3.

9. The Fed lends money to the Commercial Paper Funding Facility (CPFF), which buys unsecured and asset-backed paper from the private sector.

8. Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.7. Obligations of Fannie Mae, Freddie Mac, the Federal Home Loan Banks.

6. These are temporary open market operations in which the Fed agrees to purchase and resell government securities.

5. Consists of coins (1,5,10, 25¢), which are minted by the US Teasury and bought by the Fed to be put into circulation. In the early days of the Fed, most treasury currency consisted of private bank notes and notes issued by the Treasury.

4. Includes �oat, assets denominated in foreign currencies, accrued interest, land, and Reserve buildings. Due to delays in cheque processing, �oat is the amount the Fed has yet to collect on checks received.

3. Loans authorized to industrial and commerial enterprises with maturities as long as 5 years under Section 13b of the Act.

2. BAs were originally purchased by the Fed to help foster the growth of a domestic acceptances market.

1. While both advances and discounts are short term loans, since the 70s and until the recent credit crisis, most loans have been the former. According to Hackley and McKinley, advances are simpler to carry out, with the collateral for the loan staying at the member bank.

16.2

Major Changes to the Federal Reserve Act

modi�edaddeddropped

Section A�ected

Civil Service

Prior Experience of Federal Reserve Chairmen/Presidents

BankingLawOther

AcademiaOther Federal Reserve

} private sector

} public sector

Prior positionSubsequent position

Legend

as measured and de�ned by the NBER

Recessions

A Visual History Federal Reserve Systemof the

1914 - 2009

IN ITS FIRST TWO YEARS, the Fed was a passive institution. It set its lending rate above the market rate, making it unprofit-able for banks to turn to it for loans. As a result, discounts were negligible. This changed in 1917 with the entrance of the US into World War I. The Fed, nowadays largely independent from other branches of the government, was then controlled by the Treasury Secretary. To help pay for looming war bills, the Fed was converted into a war-finance body.

Amendments to the Federal Reserve Act paved the way. The original Federal Reserve Act emphasized that discounts were be made on “real bills” principles; only short term bills based on commercial transactions would be eligible for Fed loans. In 1916, authorities began to break with this principle when the Fed was given permission to lend to banks on the security of government debt. In 1917, these “Section 13.8” advances were made “eligible” as collateral for notes.

The 1917 amendments also reduced the backing requirement for Federal Reserve notes. Prior to 1917, all notes had to be double-backed by 100% real bills, and 40% gold. After 1917, notes need only be backed by 60% bills and 40% gold. At the same time, reserve requirements were lowered by Congress from 18% to 13%, and a preferential lending rate introduced on all 13.8 advances secured by government Liberty Bonds. The effect of all these changes was to dramatically increase the Fed’s ability to issue notes. The private sector bought large quantities of government war bonds, then used these bonds as security to get Fed 13.8 advances at below-market rates. In effect, they profited every time they transacted with the Fed.

As a result of the Fed’s subsidization of government bond

purchases, the dollar’s purchasing power plummeted. Friedman & Schwartz estimate that 5% of the government’s war expenses were paid for by the Fed’s “inflation tax”.

The events after the 1929 stock market crash brought many changes to the Fed’s balance sheet and operating procedures. The Emergency Construction, Emergency Banking, and Industrial Advances Acts granted the Fed power to extend loans to non-member individuals, partnerships, and corpora-tions under certain conditions by adding sections 13.3, 13.13, and 12b to the Federal Reserve Act. The First Glass-Steagall Act brought in even larger modifications, firstly by allowing the Fed to make advances on “any satisfactory collateral” to member banks through Section 10b advances, and secondly by allowing government securities purchased in the open market to stand as sufficient backing for Federal Reserve notes. The latter freed the Fed to monetize government debt via open market operations and not just discounts. Government debt on the Fed’s balance sheet would grow inexorably from then on, further moving the Fed away from its “real bills” origins.

Also significant were legislative changes that began to de-link the dollar from the gold standard. In 1933, private holdings of gold were criminalized. Gold was brought to the Federal Reserve for notes, and on January 30, 1934 this gold was transferred to the US Treasury in return for certificates. The next day the dollar was devalued from $20.67/oz to $35/oz. The capital gain, therefore, was credited to the Treasury, not the Fed. The $2.3 billion rise in Treasury cash, a liability of the Fed, became the war-chest of the Treasury and its new Exchange Stabilization Fund, which would dominate monetary policy to 1951, rendering the Fed a passive partner.

MUCH LIKE WWI, the Fed was harnessed to finance the Second World War. Reserve requirements were reduced to allow member banks to expand lending for the war effort, and a preferential discount rate of 0.5% was set for loans collateral-ized by government debt. Unlike WWI, the latter was hardly used. Far more attractive to member banks were the open market buying rates set by the Fed. By offering to buy all government t-bills at 0.35% and long term bonds at 2.5%, the Fed ensured that government debt prices would never fall. This price-fixing scheme allowed the government to issue huge amounts of Victory Loans to finance the war, and guaranteed the capital safety of the private sector’s investment.

The result was one of the fastest increases in the government bond portion of the Federal Reserve’s balance sheet to date. At the same time, inflation jumped to its highest level since the early 20s. War-time wage and price controls succeeded in reducing overt inflation, but the effects manifested themselves as shortages and reductions in quality. The removal of price controls in 1946 resulted in a large spike in inflation rates.

After the war’s end, Fed officials increasingly agitated for more independence from the Treasury in setting monetary policy. With the onset of the Korean War, it pressed for an end to the WWII-era 2.5% rate peg, which the Treasury expected it to maintain to help finance the newest war effort. The conflict

between the two bodies culminated in the 1951 Accord, in which the Fed finally earned its independence and the 2.5% ceiling was discontinued. The Korean War would not be financed by the Fed.

In 1959, the Fed agreed to one of the only reductions in its power to date. Section 13b of the Federal Reserve Act, passed in 1934 to allow the Fed to lend directly to businesses for working capital purposes, was removed.

The dollar’s link to gold was an important issue after WWII. The war-time accumulation of government bonds on its balance sheet threatened the 40% gold backing requirement for Federal Reserve notes and deposits. Rather than sell government bonds to regain the 40% level, the requirement was legally reduced to 25% for notes and deposits in 1945.

The post-war Bretton Woods agreement stipulated that the world’s currencies would be fixed to the dollar, and the dollar would be fixed and convertible at $35/oz. Large US foreign expenditures led to an accumulation of dollars overseas, and beginning in 1958 these were returned to the US at ever increasing amounts for gold. Attempts to stem the gold outflow, including the formation of the London Gold Pool and the Interest Equalization Tax, failed. In 1965 the Fed, lacking gold, further reduced gold backing for Fed deposits from 25% to 0%. Bretton Woods was collapsing.

IN EARLY 1968, private sector purchases of gold in London exploded. The London Gold Pool, formed by the Fed and a number of European central banks to cap the London price at $35, was unable to suppress the buying. The pool was disbanded in early 1968 and the market price leaped above $40, the result being two prices for the dollar; the official one at $35, and a significantly higher market price.

The Fed simultaneously reduced the 25% gold backing requirement to 0% as outflows of gold threatened to bring holdings below their legal limit. The dollar remained convertible into gold though, and central banks continued to bring their dollars to New York to claim the metal. Vietnam War expenses and setbacks further undermined confidence in the dollar, and in 1971 Nixon decided to solve the outflow problem by simply removing the dollar’s convertibility. With one pillar of Bretton Wood’s undermined – convertibility to gold – only one remained; fixed exchange rates to the dollar. The Smithsonian Agreement tried but failed to fix rates, and in 1973 all curren-cies were all allowed to float. Bretton Woods was dead. Gold would cease to be an important asset on the Fed’s balance sheet, replaced by government debt.

On the domestic front, the Fed’s discount window was increasingly utilized to support insolvent institutions, breaking with prior central banking tradition of lending to illiquid but

solvent banks only. Attempts failed to recruit the Fed to help bailout Penn Central, but in 1974 the discount window was crucial in supporting Franklin National, a failing bank. Continen-tal Illinois, crippled by the collapse of Penn Square two years before, was kept on life support by the Fed in 1984, and most of the large Texas banks found support from the Fed when they failed in 1988. All these actions gave the impression that the Fed had adopted a policy of “too big to fail”, in which large and politically connected institutions received favourable treatment from the Fed when they went bust, but smaller banks didn’t.

Several major changes to the Federal Reserve Act modified the Fed’s mandate. A 1977 amendment added section 2A to the Act, stipulating for the first time the Fed’s dual role of promoting stable prices and maximum employment. The Monetary Control Act of 1980 allowed foreign government debt to serve as collateral for reserve notes, removed the penalty on 10b advances, and expanded the discount window to allow non-member banks to access it. Finally, a small change in 1991 to Section 13.3 - a dormant 1930s era power that allowed the Fed to lend to individuals, corporations, and businesses on limited collateral in emergencies – allowed for an almost unlimited range of collateral to be accepted by the Fed. This small but vital change would serve as the legal foundation for the Fed’s massive extension of loans during the 2007-09 credit crisis.

MUCH OF THIS ERA’S HISTORY remains to be written, but it includes the largest expansion in the Fed’s balance sheet to date, dwarfing the WWI growth of discounts, the 1934 gold revaluation, and the WWII expansion. The expansion’s effect on employment, GDP, credit, and confidence in the dollar continue to play out.

Several changes to the Federal Reserve Act are notable. In 1999, prior to the year 2000 date change, Section 10a and 10b advances were made eligible to serve as collateral for Federal Reserve notes, increasing the Fed’s ability to issue notes should the new century start in crisis. This was superseded in 2003 when any asset held by the Fed was made eligible as collateral for notes, removing from the Act the last vestiges of the “real bills” doctrine which originally limited eligibility to short term commercial bills. Finally, the Fed was given a new monetary tool in 2008 when it was authorized to pay interest on reserves for the first time.

The cumulative changes to the Federal Reserve Act have given the Fed the ability to act in ways it never would have been

capable of in times past. When solvent banks’ demand for liquidity exploded, it was able to create facilities like TAF to meet this demand. But loans to Maiden Lane I-III, authorized under Section 13.3, have supported the questionable assets of insolvent non-banks Bear Stearns and American International Group. Section 13.3 is also the legal basis for loans made by a myriad of facilities, including the CPFF, AMLF, PDCF, and TALF (see notes in legend for definitions). At the same time, Fed purchases of government debt have fallen. Not since the early 1920s has the Fed held such a large proportion of private sector debt on its balance sheet.

On the liabilities side of the balance sheet, the low level of reserves encouraged by the 1994 introduction of sweeps, in which banks “swept” cash from checking accounts into savings accounts each night to take advantage of lower reserve requirements on the latter, has dramatically reversed. Uncer-tainty and a lack of confidence have led banks to accumulate huge quantities of excess reserves at the Fed rather than lending these funds out. This uncertainty has yet to be dispelled.

FOR BETTER OR FOR WORSE, the Federal Reserve has been governing the monetary system of the United States since 1914. This chart maps the rise of the Fed from its origins as a relatively minor institution, often controlled by Presidents and the United States Department of the Treasury, into an independent and powerful body that rivals the Presidency in terms of prominence.

Multiple data series including the Fed’s balance sheet, interest rates and spreads, reserve requirements, chairmen, inflation, recessions, and more help chronicle this rise. While this chart can only tell part of the complex story of the Fed, we trust it will be a valuable reference tool to anyone curious about the evolution of this very influential yet controversial institution.

1914-1936

1936-1968

1968-1999

1999-2009

Financial Graph & Artwww.financialgraphart.com

Free Digital Edition2009

John Paul Koning

This image is published under a Creative Commons Attribution-Noncommercial-No Derivative Works 2.5 License

This is a free digital edition of a chart created by John Paul Koning. It has been designed to be ap-preciated on paper as a 24x36 inch display. If you enjoy this chart please consider buying the paper version at www.financialgraphart.com. Buyers of the chart will recieve a bonus chart “reimagin-ing” the history of the Fed’s balance sheet. The updated 2010 edition is also now available for pur-

chase. Alternatively, if you have found this chart useful but don’t want to buy a paper edition, con-sider donating to me at www.financialgraphart.com/donate. It took me many months to compile the data and design it, any support would be much appreciated.

John Paul Koning, 2010

Free Digital Edition

1914-1936

1936-1968

1968-1999

1999-2010

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