The Origins, History, and Future of the Federal Reserve: a Return to Jekyll Island Edited by Michael D

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Cambridge University Press 978-1-107-01372-8 - The Origins, History, and Future of the Federal Reserve: A Return to Jekyll Island Edited by Michael D. Bordo and William Roberds Index More information

Index

acceptance deposit, 65 bankers, 59, 67, 69, 85–86, 89, 107, 113 real currency, 361 defined, 118 reserve, 72 European money markets and, 114 seasonally-fluctuating, 32 trade, 118 Bank Acts types of European, 67 1933 (Emergency Banking Act), 182 Act of November 7, 1918, 43 1935, 183 advances, 119 Bank Charter Act of 1844, 114 Aldrich Plan, 1, 2, 107 Bank of England, 4, 67, 114 Aldrich, Nelson, 1, 59, 60, 66 monitoring during Overend, Gurney Aldrich-Vreeland Act of 1908, 1, 59, 66, 75, Panic of 1866, 153 173 acceptances, 143, 149 Alexanders Cunliffes & Company (bill discounting, 124, 140: splits, 143 brokers), 126, 138 last resort lending, 151 allocations, efficient, 277–281 supervision, 151 American Bankers Association’s Baltimore Bank of the United States, 218, 221 Plan of 1894, 66 First, 62 American Recovery and Reinvestment Act Second, 62 of 2009, 227 Bank of United States, 80, 193 Andrew, A. Piatt, 2 banking arbitrage, regulatory, 7, 11, 34, 45 branch, 7, 11, 32, 43, 54, 56, 58, 101, 168 assets, 218, 224 correspondent, 13, 32, 62, 64–65 equity, and 2007 housing collapse, 226 dual chartering, 101 fundamental, 375 era of free (1836-63), 62 purchase of, 2008, 226 shadow, 4, 14, 90, 113, 115, 149, 152, 406 swapping (monetary policy), 409 unit, 61, 101, 169 typical bank, 169 wildcat, 62 valuing, 46 Banking Acts 1933 (Emergency Banking Act), 87, 89, Babcock, Joseph W., 18 91 Bagehot, Walter, 36, 68, 70, 127, 218, 221, 1935, 87, 89, 92, 199 408 banking, free, key characteristics of, 8 Baker, Howard, 404 banknotes balances Civil War tax on state, 33 bankers, 32, 54, 56 deposit banking and, 12 correspondent, 13, 65, 66 inelasticity of, 14, 54, 56

423

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424 Index

banknotes (cont.) Bentsen, Lloyd, 345 insured, 12 Bernanke, Ben, 6, 218, 224, 229, 270, 399, national, 63, 66 405–409, 410–411, 415, 417–418, pre–Civil War role of, 12 421 banks Bernstein, Asaf, 205 categories of, 202 Biddle, Nicholas, 62 central, 54, 56, 60, 69 Bignon, Vincent, 68, 149 absence of a U.S., 14, 33, 45 bills and Federal Reserve Act of 1913, Connie Mack, 351 33 finance or accommodation, 128 as lenders of last resort, 59, 60, 114 Neal, 350, 351 discount market and, 70, 88, 101 real, doctrine of, 103, 107, 174–178, 187, European, 67, 70, 101 197, 207, 218, 220, 223 gold reserve requirements and, pro-cyclical bias in monetary policy 191 and, 177 in the late 1700s, 400 trade, 144, 150, 163 monetary policy and, 342 Bordo, Michael, 3, 99, 189 qualitative monetary policy and, Bresnehan, Timothy F., 180 363 Broaddus, J. Alfred, 5, 332, 339, 341, 344, rediscounting and, 88, 113 345, 346, 360–362 responsive role in a panic, 408 brokers, bill, 4, 113, 115, 119, 125–127, 131, closures, summary of, 1921–29, 44 144, 152, 153, 164 country national, 64 Brunner, Karl, 218, 220, 224 failures of bubble, 375–377, 405 1890s, 26 2002-03, 419 1921–29, 41 asaformofcollectivetrust,383 1929–33, 34, 182 asset, defined, 5 1930s, 81, 182 credit, 415 costs, 29–32, 43–45 defined, 375, 381 local, 218, 221 equilibrium, 392–394 prior to 1933, 195 equity, 415 national, 64 land price, 6 regulation of microeconomics of, 384–387 double liability and, 24 rational, 6, 381–388 under the Federal Reserve Act, 91 defined, 375 under the National Banking Era, 3 bubble, collapse, problems of, 6, 376, reserve, 69, 71, 218, 223 385–387, 395, 396 single-office, weakness of, 12 Burgess, W. Randolph, 35, 43 state-chartered, 11–13, 72 Burns, Arthur, 404 Banque de France, 67 Barclay & Company (commercial bank), Calomiris, Charles, 4, 176, 184, 187, 194, 138, 147 202, 204, 218, 219 Barings, 147 Capie, Forrest, 68, 116 Barnett, George E., 31 capital, equity (net worth), 169, 230–234, Barro, Robert J., 235, 250 235, 241, 245–246, 247, 248–249, Barro-Wallace Irrelevance Proposition, 250, 262–264, 266, 270, 284, 296, 234–235, 236, 237, 239, 259, 262, 297–299 270, 277, 285, 291, 297 Carlson, Mark, 87 defined, 235 Carter, Jimmy, 401 Basile, Peter F., 198 certificates, clearing-house loan, 14, 63, 64, Beebe, Jack, 357 108

Index 425

Chapman, Stanley, 139 reserve requirements on, 54, 56, 73, 201 Chaudri, Ehsan U., 189 reserves and, 64 Christiano, Lawrence, 5 supply and demand of, by banks, 244 collateral uninsured, 12 currency, 108 Dice, Charles, 186 good, defining, 103, 107, 149–150 discount requirements, 107 houses, 68, 115 Collins, Michael, 144, 163 market, central bank and, 70 Commercial and Financial Chronicle,15 policies, and the Federal Reserve, 43, 61 Consolidated Discount Company, 128 rates, 70, 89, 173 Corrigan, Gerald, 6, 399, 401–403, 410, Federal Reserve Banks and, 71 413–414, 415–416, 418–419, window, 8, 36, 43, 79 421–422 and the Federal Reserve, 59, 74, 80, Crash 83–85, 88: alternative to, 86 1929 stock market, 186–188, 218, Bank of England and, 68 219–220 frosted glass metaphor, 68, 89, 116, 150 1987 stock market, 403, 414 limited access to, 89 credit, elastic, 173 monitoring, 151 crisis moral problems of, 54, 56 1825, 125 reluctance to borrow from, 104–105 1866, 125–129 restricted eligibility of collateral, 108 1914, 66 savannah pond analogy, 119 1930s, 82–86 Discount Corporation, 128 2007–08, 59, 90, 110 Discount System in Europe, The (Warburg), defined, 250 144, 162 Hunt (Brothers) silver market, 403, 404 discounts, 119 Cummings, Chris, 357 daily, 120 currency disinflation, 411 asset-backed, 66, 70 Volcker, 218, 224, 401 associations, 66 Dodd-Frank Wall Street Reform and bond-backed, 66 Consumer Protection Act of 2012, elastic, 41, 173 92, 408 and bank panics, 169 down payments, 380 real bills doctrine and, 175 inelastic, 59, 63–64, 72, 168 Eccles, Marriner, 199, 200, 218, 222 uniform national, 62, 63 Eichengreen, Barry, 184, 188, 190 Emergency Relief and Construction Act, 91 Davis, Joseph, 204 equilibrium, benchmark, versus financial, Davison, Henry, 2 240 debt, short-term, 366 Euler equation, 251 deflation, 15, 42, 44, 45, 81, 83, 176, 218, examiners 222, 225, 354, 419 bank, 17, 38, 46 shock of unexpected, 40–41 National Bank, 10, 17 deposits Exchange Stabilization Fund, 183, 200, 201, converting, 65 342 equity and, 170 exchange, stock, 88, 113, 405 evaluating riskiness of, 204 household, 235, 236, 250 Federal Deposit Insurance Corporation interest on interbank, 66, 172 (FDIC), 46 on-call, 126 Federal Deposit Insurance Corporation pre–Civil War role of, 12 Improvement Act of 1991, 92

426 Index

Federal Home Loan Bank Board, 46 egregious alleged errors of (Calomiris), Federal Open Market Committee (FOMC), 218, 219 332–369 1929–33 failure of the, 109–110 asset acquisition, 362 lessons learned, 111 foreign exchange operations, 349 1930s, 206–207 inflation targeting, 355 as lender of last resort, 59, 60, 75–91, 103, lending to Mexico (1994–95), 345 106 memorandum of Discussion during the Depression, 83 discontinuance, 334 to 1933, 76 monetary policy at the zero interest board examiners and member banks bound, 368 (1915–29), 40 presumptive interest rate policy of conflict with the OCC, 34–38 (1994), 341 decentralized structure of, 88 transparency and communication, 337 early years of, 38–39 Federal Open Market Committee (FOMC), Great Depression and, 77 primary responsibilities of, 332 incomplete regulation and supervision Federal Reserve Act of 1913, 3, 37, 38, 60, andthe,34 71, 86 lending authority of amendments to, 37, 90 legislated changes to, 92 1917, 37 limited membership in, 105–106 1933, 199 main flaws of, 103–108 collateral quality requirements under, original mission of, 168–173, 185, 207 108–109 policy of, 1929-34, 77–82 failures of, during Great Depression, politicization of, 172 60 purpose of, 59, 342 LLR provisions of the, 71–75 reorganization of (1935), 199 purposes of, 7 stabilizing seasonal interest rate swings, regulation under the, 71–91 76, 206 Section 10(a), 91 structural changes under the, 54, 57, Section 10(b), 91, 92 208 Section 13(13), 92 U.S. Treasury and the, 206, 416, 418 Section 13(3), 89, 90, 91, 92 Federal Savings and Loan Insurance Section 13(b), 92 Corporation, 46 Federal Reserve Banks Fetter, Frank, 114 Atlanta, 87, 196 Financial Crisis Inquiry Commission, 406 Boston, 353 Financial Discount Company, 128 Chicago, 87 Financial Stability Council, 90 Cleveland, 368 Financial Stability Oversight Council, 418 Kansas City, 353 First National Bank Minneapolis, 80 Chicago, 21 mission of, 172 Crestland, 36 New York, 76, 342, 345, 355 Fisher, Irving, 175, 186, 218, 221 Crash of 1929 and the, 77, 87 Fisher, Peter, 345, 346, 348, 355 operational structure of, 172 Flandreau, Marc, 4, 69, 149 Philadelphia, 80, 218, 220 Forgan, James B., 20 Richmond, 5, 332 Formative Period of the Federal Reserve San Francisco, 80, 352 System (Harding), 34 St. Louis, 87, 196, 343, 348, 351 Friedman, Milton, 7, 30, 61, 84, 168, 175, Federal Reserve Board, 71 184, 188, 192–197, 202, 419, Federal Reserve System, 33–39 420–421 1914–51, 166–208 Fruhling & Goschen, 147

Index 427

Gaines, Tilford, 403 Hawtrey, Ralph, 218, 222 Galbraith, Kenneth, 218, 220 hazards, moral Gertler, Mark, 229, 236, 239, 270 adverse selection, 232–233, 269–283 Gilchrist, Simon, 229 asymmetric information, 233–234, Gilletts (bill brokers), 139 283–301 Glass, Carter, 2, 71, 73, 103, 171, 179, 187, running away, 230–231, 235–236 188, 199, 218, 220 unobserved banker effort, 231–232, Glass-Owen Bill of 1913, 2, 71 247–269 Glass-Steagall Act of 1932, 74, 89, 90, 91, History of the Federal Reserve (Meltzer), 7 108, 173, 189, 190, 192 Hoenig, Tom, 353 Glyn Mills Currie & Company, 125 Hoover, Herbert, 82, 218, 221 gold Hsieh, Chang-Tai, 189, 192 free, 188, 189, 191, 218, 220–221 Hughson, Eric, 205 standard, 40, 70, 85, 100, 109, 175, 179, Humphrey-Hawkins statute, 351, 354 183, 184, 188–192, 195, 208, 218, 223, 338 Ikeda, Daisuke, 5 and the Federal Reserve System, 60 Imperial Ottoman Bank, 125 and the National Banking System, 9 Indiana, State Bank of, 54, 58 central bank and, 61 Indianapolis Monetary Convention (1897), fundamental to U. S. monetary policy, 66 83 inflation, 197, 337, 421 limit, 168 1865-1929, 40 panicsandthe,88 1980s, 333 U.K.’s abandonment of, 78, 81, 193 operationally meaningful, 350 Gold Reserve Act of 1934, 200 injection, equity, 245, 250 Gold Standard Act of 1900, 18 defined, 229 Goldsborough, T. Alan, 199 into banks, 260–262 Gonzales,Henry, 333–334 mutual funds and, 259–260 Goodfriend, Marvin, 5, 361, 362, 366–367, insolvency, bank 368, 406, 412, 416 1838–60, 30 Goodhart, Charles, 103, 116 1865–1913, 29 Gorton, Gary, 406 1929–33, 30 Great Depression, 45, 60, 184, 207, 417 2008–09, 30 bank panics and the, 192–197 insurance, deposit, 89, 90, 182 Federal Reserve System and, 77, 86 interventions, policy, four types of, 5 Greenspan put, 411, 415 investment defined, 412 call loans as liquid, 65, 107 Greenspan, Alan, 6, 218, 219, 332, 334–336, public, 395 337–341, 342, 343, 344–345, versus commercial banking, 90, 103, 182, 346–347, 349–355, 360–362, 363, 188 366, 369, 399, 403–405, 411–413, 414–415, 416–417, 419–421 Jackson, Andrew, 62 Grossman, Richard, 32 Jacobs, Lawrence M., 115 Jalil, Andrew J., 15 Hakkio, Craig, 358 Jekyll Island Club, 1910 meeting at, 1–3 Hamilton, Alexander, 62 Joint Stock Discount Company, 128 Hamlin, Charles, 191 Jordan, Jerry, 368 Hanes, Christopher, 198, 202, 204 Harding, W.P. G., 34 Kabiri, Ali, 186 Harrison, George, 175, 176, 190, 191, 192, Karadi, Peter, 236, 239 198 Karadi,Peter,229

428 Index

Kemmerer, Edwin W., 15 call loan, 65, 70, 417 Keynes, John Maynard, 218, 222 money King, Robert G., 5, 125, 127, 128 American, 113 Kiyotaki, Nobuhiro, 229, 236, 239 London, 118–125 Knickerbocker Trust Company, 14 versus capital, 102–103 Knox,JohnJay,18 Mason, Joseph R., 176, 184, 194, 202 Kocherlakota, Narayana, 5, 381 McDonough, William, 342, 344 Kohn, Don, 355 Meltzer, Allan H., 7, 15, 79, 107, 174, 175, Kuhn Loeb, 67 176, 183, 189, 190, 191, 198, 202, 419, 421 land Melzer, Tom, 343, 344, 351 overvaluation Mercantile Discount Company, 128 consequences of, 374–388 Meyer, Eugene, 82 debt guarantees and, 377–381 Meyer, Larry, 353, 355, 361 Landon-Lane, John, 198 Minehan, Cathy, 353 Lang, Rick, 358 Mints, Lloyd, 218, 223 Laughlin, J. Laurence, 66, 101, 102 Miron, Jeffrey, 15, 42, 204 leverage, 379–380 Mitchener, Chris James, 87 liabilities, 169 model, two period, described, 388–392 liability monetarism, pragmatic, 401, 402 double, 7, 24–25, 43, 46 Monetary Control Act of 1980, 92, 403 defined, 24 Monetary History (Friedman and Schwartz), shareholder, 25 7 single, 25 monetary policies Lindsey, Larry, 343, 346 American, 1914-51, 166–208 liquidation, 36, 84, 170 unconventional voluntary, 8, 25–29 creditor bailouts, 266 liquidity equity injections into banks, 244, 250 acceptance, 114 four kinds of, 242 broad, 363 government deposits in banks and implicit marginal, 364 loans to firms, 245 panics and, 7, 15, 16, 33 interest rate subsidies and new worth provision, 108 transfers to banks, 246 risks, reducing, 205 leverage restrictions, 269 solvency and, 192 observable effort benchmark, 255 traps, 190, 197–199, 203, 208, 218, 219, unobservable effort, 259 221–222 unobserved banker effort, 251 versions of, 197–199 Moret, Clement, 192 loans Morgan, J. P., 14 call, 65, 102, 119 Morgenthau, Henry, 200, 201, 207 government bank defined, 229 National Bank Acts restrictions on, by Federal Reserve Act, 1864, 9, 36 73, 84 amendment to (1875), 17 supply, 176 1933, 188 Lombard Street (Bagehot), 36, 116, 144, 162 National Banking Acts London Discount Company, 128 1863, 63 London Joint-Stock Bank, 125 1865, 63 National Banking Era (1863–1914) Mankiw, N. Gregory, 229, 270 call loans and, 102 markets clearing house loans and, 108

Index 429

cylindrical panics in the, 205 1873, 63, 66, 171 liquidity panics in the, 16 1893, 64, 66 shortcomings during, 100 1907, 8, 14, 21, 59, 64, 102, 171, 412 National Banking System 1929, 196 assessing the, 32–33 1932, 194, 196 defects of, 61–63 2008, 15, 405–409 depositor losses under the, 7 American propensity for, 168, 171 organization of, 9–10 cyclical and seasonal, 169, 205 problems (1864–1913), 15–16 events precipitating, 64 origins of, 8–10 Federal Reserve System and, 60 rise of trust companies, 14 Great Depression, 192–197 state bank re-emergence, 13 incipient, 15 regulation and supervision under the, 54, National Banking System and, 7, 15–16, 56 63, 218, 221 supervision (1864–1913) Parry, Robert, 352, 367 bank failures and, 32 Peel Act of 1844, 126, 129, 191 Comptroller of Currency and, 22 Phelan, John, 405 consequences of, 33 Philadelphia National Bank, 21 disclosure and, 17 Phillippovich, Eugen Von, 115 double liability and, 25 Phillips curve, 218, 225 state banks and, 24 Poole, William, 348, 367 voluntary liquidations and, 29 National Credit Union Administration, 46 Raff, Daniel M. G., 180 National Currency Act of 1863, 9 Rajan, Raghuram, 6, 401 National Discount Company, 128, 138 rate National Monetary Commission, 1, 15, 31, bill-buying, 74 59, 113, 144, 149, 153, 162, 174, 178, Federal Funds, 226, 337–341, 409 218, 221 inﬂation, 410 mission of, 114, 115 interest reports of, 115 nominal, 5, 18, 83, 88, 100, 174, 175, National Reserve Association, 2, 60, 70, 71 176, 177, 183, 207, 218, 220, 222, Nebraska State Banking Board, 31 223: short-term, 197, 363 New Deal, 45–47 real, 376, 385 New York Clearing House, 14, 63, 106 seasonal, 41–43 Nicholas, Tom, 186 spread, 249–250 Norris, Frank L., 21, 218, 220 subsidies, 281–282 Nowobilski, Andrew, 229 recessions, 218, 220 1907–08, 8 O’Neill, James, 406 1920–21, 40, 42, 60 OfﬁceoftheComptrolleroftheCurrency 1937–38, 199–204, 218, 222 (OCC), 8, 9 1990–91, 341 bank supervision (1914–29), 39 2007–09, 15, 227 examination requirements of, 17 between 1895 and 1912, 15 operation (1884–1913), 19 panics and, 7 operation of, 22 Reconstruction Finance Corporation, 182, purpose of, 16 218, 221 Owen, Senator Robert L., 2 rediscounting, 35, 36, 60, 68, 69, 70, 72, 84, 88, 91, 101, 103, 113, 119, 127, 144, panics, 218, 219 162 1857, 63, 171 under the Aldrich Plan, 107 1866, 125–129 reform, 66–69, 71

430 Index

Regulation Q, 89, 403 1930s, 181–185, 206–207 Reichsbank, 67, 69, 83 solvency,panicsand,7,16,33 Reifschnieder, David, 362 Special System Investment Account, 76 rents, 380 Sprague, O. M. W., 15, 178, 190 Reserve Banks and the Money Market, The stability, price versus financial, 40–45 (Burgess), 35 stringency, seasonal, 64 reserves Strong, Benjamin, 76, 79, 88, 175, 218, 223 gold, 75 Suffolk Bank, 54, 57–58 reserve banks and, 73 Suffolk Banking System, 54, 57 inverted pyramid of, 64–66 supervision pyramiding, 171 bank, 7 requirement, 201, 203, 218, 219, 222–223 before 1913, 7 Responsibility Doctrine (Bagehot), 68 components of, 16: discipline, 18; Rhode, Paul, 204 disclosure, 16–17; examination, Richardson, Gary, 87 17–18 Ridgely, William, 18 consequences of, 24–33 Riefler-Burgess doctrine, 174, 176, 177, 178, during Overend, Gurney Panic of 1866, 190, 192, 197, 198, 203, 206, 207 151 Rockoff, Hugh, 30, 198 prudential, 18 Romer, Christina, 15, 189, 192 state banks and, 22–24 Roosevelt, Franklin Delano, 183, 195 under the Federal Reserve Act, 91 Roosevelt, Theodore, 179 Rothschilds, 147 Taylor rule, 218, 224, 333 Royal Bank of Liverpool, 125 Taylor, John, 333 RPs (repurchase agreements), 357–360 Temin, Peter, 184, 193 Thornton, Henry, 218, 221, 408 Samuelson, Paul A., 375 Tirole, Jean, 381 Santos, Manuel S., 381 Tobin, James, 218, 224 Sayers, Richard S., 116, 126, 139 transfers Schwartz, Anna J., 7, 30, 61, 84, 168, 175, directed, 396 184, 188, 189, 192–197, 202 tax-financed, 283 Second Bank of the United States, 8 uniform, 395–396 Securities Exchange Corporation (SEC), 46 Treasury-Federal Accord of 1951, 166 seigniorage, 361 Treasury-Federal Reserve Accord of 1951, Shafroth, Senator John F., 73 173, 207, 208, 218, 223, 341 Shelton, Arthur, 2 Truman, Ted, 343 Sherman, John, 24 shocks Ugolini, Stefano, 4, 68, 149 balance-of-payment, 113 Unified Budget Procedure (1960), 417 deflationary, 3, 40–41, 45 Union Bank of Australia, 125 demand for reserves, 176 United Reserve Bank, 69 inflationary, 47 seasonal, 42 Vanderlip, Frank, 2, 105 supply and demand, 4, 207 Volcker, Paul, 399–400, 401–402 supply-side, 176 Silver Purchase Act of 1934, 200 Wagner Act of 1935, 182 Small Business Investment Company Act of Wallace, Neil, 235, 250 1958, 92 Warburg, Paul, 2, 4, 59, 60, 67, 90, 102, 107, Smith Fleming & Company, 140 113, 144, 162 society, American, changes to Warburg-Aldrich Plan, 69–71, 101 1920s, 179–181 Weidenmier, Marc D., 205

Index 431

Wheelock, David, 3, 99, 175, 184, 202 Wilson, Woodrow, 35, 71, 218, 223, 400 White, Eugene, 3 Withers, Hartley, 125, 150 Wicker, Elmus, 179, 184, 189, 194 Woodford model, 218, 223 Wicksell, Knut, 218, 221 Woodford, Michael, 381 Williams, John, 362 Williams, John Skelton, 37 Yellen, Janet, 350, 352 Willis, H. Parker, 71, 73, 103 Wilson, Barry, 187, 195, 204 zero bound, 409