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The Fed's Year of Transition Social Education 70(2), pg 62–68 ©2006 National Council for the Social Studies The Fed’s Year of Transition Mark C. Schug Scott Niederjohn Many Americans regard the chair- He served for more than 18 years. He time, there were serious concerns about man of the Federal Reserve System as was originally appointed to the office how well a job Greenspan would do holding one of the nation’s most powerful as chairman on August 11, 1987 by following Volcker’s success in fighting jobs, second only to the president’s. The President Reagan. Greenspan was inflation. Today, it is Greenspan many influence of the Fed chairman stretches reappointed to the board to serve a consider the difficult act to follow. He beyond the borders of the United States full 14-year term that began February has earned widespread confidence for and effects monetary policy and market 1, 1992; he was appointed chairman by his ability to handle monetary policy. conditions of nations throughout the Presidents Reagan, Bush, Clinton, and He faced several challenges while in world. Yet, to many Americans—peo- Bush, and served the second-longest office: ple not known for their high levels of term in the history of the Fed. (Only economic literacy—the workings of the William McChesney served longer.) • Ten weeks into his term, the stock Federal Reserve System and the duties Table 1 shows a list of past chairmen. market crashed—the Dow Jones of the chairman are a mystery.1 The pur- Greenspan succeeded Paul A. Average dropped 508 points on pose of this article is to: Volcker as Fed chairman in 1987. At the October 19, 1987. Having learned • Examine the historical develop- ment of the Federal Reserve Table 1. Past Chairmen of the Board of Governors2 System; Chairmen Date of term Charles S. Hamlin Aug. 10, 1914-Aug. 9, 1916 • Provide background on Ben William P.G. Harding Aug. 10, 1916-Aug. 9, 1922 Bernanke, the new Fed chairman; Daniel R. Crissinger May 1, 1923-Sept. 15, 1927 • Explain the basic tools of mon- Roy A. Young Oct. 4, 1927-Aug. 31, 1930 etary policy used by the Fed; Eugene Meyer Sept. 16, 1930-May 10, 1933 Eugene R. Black May 19, 1933-Aug. 15, 1934 • Examine the causes of the Great Marriner S. Eccles* Nov. 15, 1934-Jan. 31, 1948 Depression, a topic of special interest to Bernanke; and, Thomas B. McCabe April 15, 1948-March 31, 1951 William McChesney Martin, Jr April 2, 1951-Jan. 31, 1970 • Provide some key resources for Arthur F. Burns Feb. 1, 1970-Jan. 31, 1978 social studies teachers who wish G. William Miller March 8, 1978-Aug. 6, 1979 to teach about the Fed and mon- Paul A. Volcker Aug. 6, 1979-Aug. 11, 1987 etary policy in their classrooms. Alan Greenspan** Aug. 11, 1987-Jan. 31, 2006 The Fed’s Year of Transition Ben S. Bernanke Jan. 31, 2006-present Alan Greenspan retired as chairman of * Served as Chairman Pro Tempore from February 3, 1948, to April 15, 1948. the Board of Governors of the Federal ** Served as Chairman Pro Tempore from March 3, 1996, to June 20, 1996. Reserve System on January 31, 2006. S OCIAL E DUCATION 62 lessons from the actions taken Ben Bernanke testifies by the Fed in 1929, Greenspan before the Senate Banking took steps to keep liquidity in the Committee on Capitol system to prevent this crash from Hill, Nov. 15, 2005, during spreading beyond the financial a confirmation hearing on markets. his nomination to be the next Federal Reserve Board Chairman. • In the late 1990s, Greenspan faced the financial collapse in Asia. He (AP Photo/Dennis Cook) was able to soften the impact of this crisis on the U.S. economy. • He presided over the boom in technology stocks during the 1990s and warned that the rapid growth may have been unwar- ranted. On December 5, 1996, he used the term “irrational exuber- ance” to express his concern that the bubble would burst. • Greenspan may be best remem- bered for monitoring the economy in the 1990s (He presided over the longest economic expan- sion in U.S. history: March embarked on a new and, at the time, confirmed by the Senate. A governor’s 1991–February 2000), and for his controversial direction for managing the term is 14 years. The terms are staggered handling of the economy after the banking system. The structure of the with one term expiring every two years. terrorist attacks on September 11, Fed was uniquely designed to reflect The idea of the terms is twofold. First, 2001. both the national and regional interests the staggered terms provide for continu- of the nation. ity in making policy decisions. Second, Why Social Studies Teachers Should the length of the term is deliberately Care about the Fed Board of Governors intended to insulate the governors The same day that Alan Greenspan National monetary concerns are the from the day-to-day political concerns stepped down, January 31, 2006, Ben S. purview of the Board of Governors regarding monetary policy. The idea is Bernanke was confirmed by the Senate located in Washington, D.C. The Board that the Board of Governors has enough as the new Fed chairman. Bernanke was of Governors guides the Fed’s policy independence to regulate the nation’s sworn in on February 1. Why should actions. The board has regulatory pow- money supply without undue political we care about the Fed and who leads ers over certain state-chartered banks pressure. it? Perhaps a little background on the as well as bank holding companies. It Federal Reserve will clarify. The Fed handles the nation’s checkbook and acts Twelve Regional Banks is the nation’s central bank. It is the pri- as the nation’s fiscal agent. It oversees the The regional monetary interests of the mary institution influencing our nation’s activities of the regional banks, approv- nation are reflected by the reserve banks. money supply. The Fed was established ing appointments of their presidents and The Federal Reserve System is divided as a result of some painful monetary three members of the reserve banks’ into 12 districts. Each district is served experiences—a series of financial pan- board of directors. Probably the most by a regional reserve bank and most have ics. In 1893, a financial panic drove the important responsibility of the Board one or more branches. These banks are nation into a deep depression. Again in of Governors is participating on the designed to have some independence 1907, a severe panic forced several banks Federal Open Market Committee. This from the Board of Governors. The into failure. While the 1907 panic did committee directs the nation’s monetary presidents are chosen by each bank’s not trigger a depression, it highlighted policy. board of directors. The board itself is serious flaws in the banking system. The Board of Governors consists of made up of members typically drawn With the passage of the Federal seven members, referred to as governors, from the region’s banking and business Reserve Act in 1913, the United States who are appointed by the president and community. M ARCH 2 0 0 6 63 The regional banks make impor- Bernanke was a professor of eco- tant contributions to policy discus- As George arrives and nomics at Princeton University. sions, providing regional banking per- opens the bank’s iron spective to national economic issues. 4. Is Bernanke regarded as a For example, a major restructuring is gates, the bank lobby is scholar? Yes. Bernanke has taking place among U.S. domestic auto- inundated with citizens published many articles on a makers Ford and General Motors. The demanding to withdraw wide variety of economic issues, Federal Reserve Bank of Chicago, with all of their funds…Uncle including monetary policy and help from its branch in Detroit, takes macroeconomics; he is also the special interest in the auto industry. The Billy proclaims, “This is author of several scholarly books Federal Reserve Bank of Chicago is also a pickle, George. This is and two textbooks. He has held located in a major agricultural center. a pickle.” a Guggenheim Fellowship and a This Chicago Fed pays special attention Sloan Fellowship, and he was a to how monetary policy might influence Fellow of the Econometric Society the agricultural markets. and of the American Academy of Arts and Sciences. Bernanke How Is the Chairman Appointed? served as the director of the Ben Bernanke was appointed Fed Monetary Economics Program of chairman through a process similar to the National Bureau of Economic other high level federal appointments. Research (NBER) and as a mem- The Federal Reserve Act (FRA) of ber of the NBER’s Business Cycle 1913 established the Federal Reserve Dating Committee. System. The FRA explains who is eli- gible to serve on the Board of Governors, 5. Does Bernanke have any who may serve as chairman, and it sets background as a leader in k-12 the term limits. The FRA states that to Bernanke was sworn-in on June 21, education? Yes. Bernanke served become chairman a person must be a 2005 as chairman of the president’s two terms as a member of the member of the board. This might sug- Council of Economic Advisers. Montgomery Township Board of gest that only current governors can Education in New Jersey. serve as chairman but, as explained by 2. What position did he hold Andrew Foerster of the Federal Reserve before being appointed as chair- The Business of Banking— Bank of Richmond, a candidate can be man of the president’s Council It’s a Not so Wonderful Life simultaneously appointed governor of Economic Advisers? Prior To understand the importance of the and chairman.3 The president has the to his appointment to the council, role of the Fed and its new chairman, responsibility of nominating governors Bernanke served as a member of it is important to understand the basics to the Federal Reserve.
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