FEDERAL RESERVE: BEYOND MONETARY
POLICY
SOME ITEMS BROUGHT FORWARD
FROM LAST SESSION:
LIQUIDITY
A measure of the ability to turn an asset quickly
into cash, without significant penalty.
FED vs. TREASURY
The Fed is responsible for monetary policy.
Fiscal policy, such as changes in taxing and spending
that affect the economy, is the responsibility of
government policymakers (Congress).
INFLATION
Outcome:
Definitions:
When there is inflation in
the economy, you pay more
for the goods and services
you purchase.
A sustained increase in the
level of prices in the
economy.
The Fed uses monetary
policy to keep average
prices stable.
Inflation = too much money
chasing too few goods.
FEDERAL RESERVE’S
ENFORCEMENT ACTIONS:
Bernanke’s book tour interview
 The Federal Reserve has the authority to take
enforcement actions when violations of laws, unsafe or
unsound practices, breaches of fiduciary duty and
violations of final orders occur.
 Actions can be assessed against any entity the Fed has
authority to supervise including its officers, directors
and employees.
 Enforcement actions include: written agreements,
cease and desist orders, and civil money penalties.
FEDERAL RESERVE: BEYOND
MONETARY POLICY
Session IV.
A HISTORY OF THE FEDERAL RESERVE
Allan H. Meltzer
Volume 1: 1913-1951
“THE HISTORY OF THE FEDERAL RESERVE IS IN
PART THE STORY OF HOW SOCIAL, POLITICAL,
ECONOMIC AND TECHNOLOGICAL CHANGES
AFFECTED THE INSTITUTION.”
Fed Transitions Due to WWI
“…once the nation entered the war, the Fed dedicated
itself mainly to supporting the war effort…
“But the conflict accelerated the evolution of the
Federal Reserve into a true central bank by increasing
its financial resources and transforming the US dollar
into a major international currency. “The war reshaped
the Federal Reserve System in many ways,…”
Economist Allan Meltzer in his landmark work, A History of the Federal Reserve.
Fed leveraged its position as a lender to the
banking system to facilitate war bond sales.
 To purchase war bonds over $1,000, the Treasury urged
the public to “borrow and buy,” that is, to finance their
purchases at local banks.
 The Fed supported this policy by lending to member banks
at low interest rates when the proceeds were used to buy
bonds.
 Between bond drives, the Federal Reserve also lent at
preferential rates to banks purchasing Treasury certificates
–– short-term borrowings issued in anticipation of tax
receipts.
WWI Inflicts a Financial Crisis
The outbreak of war in Europe
in August 1914 touched off a
financial crisis.
A large inflow of European gold
to pay for US exports increased
the money supply.
The young Fed was powerless
to offset the gold inflow or halt
the resulting inflation.
Carter Glass Predicts Crash
During the 1920s, Virginia
Representative Carter Glass
warned that stock market
speculation would lead to
dire consequences.
In October 1929, his
predictions came true when
the stock market crashed,
and the nation fell into the
worst depression in its
history.
Aftermath of 1929 Stock Market Crash
From 1930 to 1933, nearly 10,000 banks failed, and by
March 1933, newly inaugurated President Franklin
Delano Roosevelt declared a bank holiday, while
government officials grappled with ways to remedy the
nation’s economic woes.
Many people blamed the Fed for failing to stem
speculative lending that led to the crash, and some also
argued that inadequate understanding of monetary
economics kept the Fed from pursuing policies that
could have lessened the depth of the Depression.
Crash/Depression Ushers in
Major Banking Law/Reform
 The flaws in the Federal Reserve’s structure became
apparent during the initial years of the Great
Depression.
 Congress responded by reforming the Federal
Reserve and the entire financial system.
 The reforms of the 1930s, ’40s, and ’50s turned the
Federal Reserve into a modern central bank.
 The creation of the modern intellectual framework
underlying economic policy took longer and continues
today.
In reaction to the Great Depression, Congress passed the
Banking Act of 1933 (better known as Glass-Steagall Act)
 Separated commercial and
investment banking.
 Required use of government
securities as collateral for
Federal Reserve notes.
 Placed open market
operations under the Fed.
 Required bank holding
companies to be examined
by the Fed [a practice that
was to have profound future
implications, as holding
companies became a
prevalent structure for
banks over time].
Bank Holding Company:
Any company that has control over or owns a bank.
Provisions of the Glass-Steagall Act
(also less known as the Banking Act of 1933)
 Required bank holding
 Required use of government
securities as collateral for
Federal Reserve notes.
 Roosevelt recalled all gold
and silver certificates,
effectively ending the gold
and any other metallic
standard.
companies to be examined
by the Fed. (This practice
was to have profound future
implications, as holding
companies became a
prevalent structure for
banks over time.)
 Placed open market
operations under the
Federal Reserve Board.
Roosevelt administration’s policies regarding gold and
dollars = controversial and consequential.
 During the financial crisis of 1933, large quantities of gold
flowed out from the Federal Reserve.
 The internal and external drains consumed the Federal
Reserve’s free gold.
 In March 1933, when the Federal Reserve Bank of New
York could no longer honor its commitment to convert
currency to gold, President Franklin Roosevelt declared a
national banking holiday.
Further Look at the Changes to the
Federal Reserve Since 1913
Mc Fadden Act had
changed the Fed’s longevity
to “perpetuity.”
Changed (bank)
membership to the Federal
Reserve System.
Now, that all of the changes to the original
Federal Reserve Act had been made…
What did the Board and the Reserve
Banks do for the nation?
Reserve Bank Services Performed for
U.S. Government
For the federal government,
the Reserve Banks:
 act as fiscal agents,
paying Treasury checks;
 processing electronic
payments; and
 issuing, transferring, and
redeeming U.S.
government securities.
Board and Reserve Banks Share Responsibilities:
 supervising and regulating certain financial institutions and
activities.
 providing banking services to depository institutions and
the federal government.
 ensuring that consumers receive adequate information and
fair treatment in their business with the banking system.
Federal Reserve Exercises Broad Responsibility
in the Nation’s Payments System
It oversees the policies and
operations of the Federal
Reserve Banks as providers
of financial services to
depository institutions and
as providers of fiscal
agency services to the U.S.
Treasury and other
government agencies.
Additional Payments-Related Responsibilities
 develops policies and regulations
to foster the integrity/efficiency of
the U.S. payment and financial
system;
 works closely with other
regulators, central banks, and
international organizations to
improve the payment and
financial system more broadly;
and
 conducts research on various
topics related to payment and
clearing issues and financial
market infrastructures.
Federal Reserve Board +
Reserve Banks
They provide financial services to
depository institutions including
banks, credit unions, and savings
and loans, much like those that
banks provide for their customers.
These services include collecting
checks, electronically transferring
funds, and distributing and
receiving currency and coin.
Joint Supervisory Responsibility
The Board and Federal
Reserve Banks supervise
approximately 900 state
member banks and 5,000
bank holding companies.
Some regulations issued by
the Board apply to the
entire banking industry,
whereas others apply only
to member banks.
Supervision and Regulation Responsibilities
The Board also plays a major role in
the supervision and regulation of the
U.S. banking system. It has
supervisory responsibilities for:
--state-chartered member banks
--bank holding companies
(companies that control banks)
--foreign activities of member banks
--U.S. activities of foreign banks
--Edge Act and agreement
corporations (limited-purpose
institutions that engage in a foreign
banking business).
Definition: Open Market Operations
Purchases and sales of securities, typically U.S. Treasury
securities, in the open market, by the Open Market
Trading Desk at the Federal Reserve Bank of New York
to influence interest rates.
Purchases increase the supply of Federal Reserve
balances to depository institutions; sales do the
opposite.
RESOURCES
Purposes and Functions Federal Reserve Board
The Federal Reserve Today FRB—Richmond
Centennial Historical
Federal Reserve System