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MGMT-121: Historical Analysis

Eugene Meyer & Eugene Black

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The Federal Reserve System was created in 1913 in order to strengthen the economy of the United States. Prior to the organization of =the Federal Reserve

System banking power was centralized in New York or Washington D.C. but the creation of the Federal Reserve helped to spread the power among twelve federal banks. The Federal Reserve currently has 7 members appointed by the President and confirmed by the Senate and each serves a 14-year term (Education). and Eugene Black where some of the first people to serve as a Federal Reserve chairmen.

Eugene Meyer worked as a Federal Reserve chairman for three years, serving from September, 1930 until May of 1933. In 1901 at age 26 Meyer created the brokerage firm, Eugene Meyer Jr. and Co. that focused primarily on investment banking but also included railroad, oil, and automotive industries (Eugene I). Meyer began serving the government in 1917 as a member of the Committee of Raw materials and then the following year, Meyer served as the Director of War Finance

Corporation. In 1927 Meyer was chosen to become a member of the Federal Farm

Loan Board, but two years later he resigned and was appointed by President Hoover to lead the Federal Reserve Board. 3

While serving as a chairman for the Federal Reserve, Meyer wanted reform in the banking system by creating a commercial banking system that only allowed nationally chartered banks and was a chairman who preferred government intervention for financial problems. While serving as chairman, he was successful in accomplishing his goals and he did use the government to help create a new commercial banking system. A well-known act that was passed under Meyer’s term was the Glass-Steagall Act of 1933, which separated investment and commercial banks.

In 1933 the chairmen saw the need for the banking system to be reformed and so they created the Glass-Steagall Act of 1933. The act was intended to generate a safer use of assets of banks following the 1929 stock market crash and Great

Depression (Banking Act of 1933). The act separated commercial banking from investment banking since Congress was concerned that commercial banking could lead to losses due to the volatile equity markets. The act helped to limit the bank’s use of credit for speculation and instead channeled that money into more secure uses like agriculture and the industry markets. Glass-Steagall seemed to stop the conflict of 4 interest that happened when a bank takes on risk from a depositors and when they promoted the securities they underwrote to other customers. Meyer’s actions were successful in helping to strengthen the commercial banking system since he helped to limit commercial banks to only take deposits or make loans instead of also underwriting and dealing with securities like they had done in the past. It is good that

Meyer wanted the government to become more involved in economy in order to help prevent crashes like the from occurring again and in order to do so they needed new regulations.

Originally when Glass-Steagall Act was introduced it was widely discussed and seen as one of the more widely debated legislative proposals in 1932. Once the act was passed banks were given a one year period to decide if they wanted to be primarily commercial, or primarily investment banking. At the time this act was thought to be what was best for the entire financial system but over time many saw the act as a something that may be hurting the U.S. economy and could be potentially giving foreign countries that do not have the separation the upper hand. Finally in

1999 the Gramm-Leach-Bliley Act overturned Glass-Steagall and it allowed banks to once again perform commercial banking and investment banking.

Other important economic breakthroughs that occurred under Meyer include the creation of the Federal Deposit Insurance Corporation (FDIC). The FDIC also helped deal with the fallout of the Great Depression by helping to insure depositors up to a certain amount of money in an attempt to stop runs on the banks. The creation of the FDIC has increased consumer trusts in the banking system since they are insured and has also helped to limit banking failures. Meyer’s use of Keynesian 5 economics helped to expand the money supply and also created more consumer trusts

(Keynesian). Once Eugene Meyer left the Federal Reserve he was appointed by

President Truman to become the first president of the . Following Meyer,

Eugene Black became a chairman for the Federal Reserve.

Eugene Robert Black was born in 1873 in , . He came from a wealthy family, and his father was the governor of the of

Atlanta. He received his undergraduate degree from the and his law degree from Atlanta Law School. After he graduated from the University of

Georgia, he was enlisted in the U.S navy, where he served in the North Atlantic during

WWI. Later on, he joined the investment firm of Harris Forbes & Co. While being an employee, he expanded the firm, by opening an office in Atlanta. His duty was to sell bonds and meet with bankers as well as investors. Which all led him to the position of becoming a partner. In the year of 1921, he was elected as president of the Atlanta

Trust Company. After serving this company he held various positions within the

Federal Reserve System. He specifically held a position that was considered to be

Class A of the Federal Reserve Bank of Atlanta. He was the governor of this bank, until he was appointed to the Federal Reserve Board.

In 1933, he was the vice president of Chase National Bank, where he had the responsibility for their large investment portfolio. After, President Roosevelt realized

Black’s reputation in the Atlanta Reserve Bank; he decided to appoint him as chairman in May 1933. Another major reason that led President Roosevelt take this decision, was due to the advocacy that Black had for expansionary policy. Therefore,

Eugene R. Black was perfect for the position, since the U.S was experiencing the 6

Great Depression at that time, so it was crucial to practice expansionary policy within the Federal Reserve Bank. As a result, after Eugene Meyer resigned in May 10, 1933

Eugene Black took over his position.

While being chairman of the Federal Reserve Bank, he held a primary goal to restore confidence in the banking system, since the economy was experiencing a financial crisis due to the Great Depression. Therefore, during his tenure he set policies that led the bank towards this goal. One of the major policies was the open market operations policy, which is where the Federal Reserve buys and sells old securities in the open market. This leads to an increase in the flow of money and credit in the banking system. Therefore, through this policy there was an increase in the money supply, leading to an increase in the economic health. Eugene R. Black also worked with the governor of New York, to support expansionary policies. They mainly worked on increasing the money supply, in order to help avoid defaults within the economy. As a result, “Black’s insistent advocacy of expansionary initiatives eventually won the ear of Congress and the President, who appointed Black chairman of the Federal Reserve Board of Governors in 1933”(Gary Richardson and William

Troost). Therefore, this demonstrates that the support of the monetary policy Black was advocating was a success. Since the policy demonstrated that it will help restore the economy as well as the confidence of the banking system.

Moreover, another success that was achieved by Black was that while he was in tenure, the Federal Reserve Bank provided more liquidity during bank runs than most other Feds. In addition, Black also played important roles in the reconstruction of the banking system, the Bank Holiday, the Securities Act of 1933, the Banking Act of 1933 7 and broadened the powers of the Reconstruction Finance Corporation (RFC). The Bank

Holiday of 1933 was mainly led by President Roosevelt and was a response to the crises that was going on. During this holiday, people were not allowed to make any transactions within their bank. As defined by the U.S Securities and Exchange

Commission, the Securities Act of 1933, focuses on the truth. It “required that investors receive financial and other significant information concerning securities being offered in public sale.” In addition, it was also against deceit, misrepresentations and other fraud in the sale of securities. As discussed in the paper, “The end of one big deflation,” the RFC was an expansionary policy that helped the relief of financial institutions during the crises. This relief occurred since the government provided financial aid to railroads, financial institutions and business corporations. He also played an important role in the Banking Act of 1933, which was known as the Glass-Steagall Act. Furthermore, Black also believed that the Federal

Reserve Bank should act as a lender of last resort, in order to restore confidence in the banking system. This will help the banks financially, when they encounter stressful times.

According to the policies, goals and successes that Black received before and while he was in tenure, provides various reasons of why he was employed. He has demonstrated his tremendous skills as a negotiator and banker, which qualified him as a chairman. In addition, Black was also known for his leadership skills and his ability of supporting policies that will better the economy. After leaving the Federal Reserve

Board in August 1934, he returned to his position as a governor in the Federal Reserve 8 of Atlanta. Where he took a strong leadership role as the president. He led the Fed towards success.

In brief, both Eugene Meyer and Eugene Black decided to practice expansionary policy while they were in tenure. As shown in Figure 1, we could see the effects of the bond market and the money market, while they were both in tenure. Through this illustration, we see that due to the expansionary policies, the money supply shifted to the right. Which caused the bond supply to shift left.

Therefore, it can be concluded that during this time, the economy had more money available, which then decreases the amount of bonds sold. As a result, of this effects, causes a decrease in the interest rates.

Alan Greenspan was born in New York City on March 6, 1926. He first attended

Juilliard to study the clarinet before transferring to NYU and received undergraduate and graduate degrees in Economics. He later on earned a doctoral degree in 1977.

During much of his time as a student, Greenspan worked on Wall Street, more specifically a position at the Brown Brothers Harriman firm in the equity research department. In 1955, he then assumed leadership of a consulting firm, Townsend-

Greenspan & Co. Along with his high powered financial position, he was a member of several corporate boards and was responsible for the creation Richard Nixon's domestic-policy position during his presidential campaign in 1968.

After Richard Nixon won the presidential election, Greenspan stayed in the world of politics. He took the role of the chairmen of the president’s Council of

Economic Advisers under Gerald Ford. From 1981 to 1983, Greenspan was also chairman for the bipartisan National Commission on Social Security Reform during 9

Jimmy Carter’s presidency. He also served as director of the Council on Foreign

Relations foreign policy organization from 1982 to 1988. Additionally, he was a member of the Washington-based financial advisory group, the Group of Thirty during the mid 1980’s.

In 1987, the president at the time, Ronald Reagan nominated Greenspan to follow as the chairman of the Board of Governors of the Federal Reserve.

The Senate later confirmed him later that year. Two months after his appointment, the stock market crash of 1987 occurred. After Bill Clinton was elected president taking George H. W. Bush’s place, he reappointed Greenspan. He aided Clinton in the creation of his deficit reduction program in 1993.

In 2000, Greenspan raised interest rate multiple times, which is believed to be the cause of the dot com collapse. Following this, Greenspan supported President

Bush’s proposed a tax decrease, and predicted that the federal surplus could tolerate a large tax cut while paying down the national debt. After the terrorist attacks on

September 11, 2001, the Federal Reserve (led by Greenspan) put into place a series of cuts to interest rates. By 2004, interest rates had reached a low of 1%. Critics believed that Greenspan was responsible for the cause of inflation and the weakening of the U.S. dollar, as well as the mortgage crisis.

In mid 2004, President George W. Bush nominated to serve as chairman of the Federal Reserve for the fifth time. Bush was the fourth president to appoint Greenspan. One of his last legislative actions was his opposement of the tariffs against Peoples Republic of China. China was refusing to allow their currency, the Yuan to gain value. The alternative was for American workers that were displaced 10 by the Chinese would be compensated with programs for retraining and unemployment insurance. As of 2006, Greenspan’s membership of the Board of

Governors was over and replaced him.

After Greenspan left the Fed, he established his own consulting firm,

Greenspan Associates LLC. In 2007, he predicted a recession in America to occur in the immediate future. The day after his prediction, the Dow Jones lost 3% of its value

(416 points) proving Greenspan is a very influential figure in the world of finance and economics.

By maintaining the goal of increasing interest rates as a response to the financial crisis, developed into a contractionary policy as shown in Figure 2.

According to this illustration, we could see that this policy lead to a decrease in the money supply. Which then caused a leftward shift of the bond demand. Therefore, caused an increase in the interest rates. Hence, while Greenspan was in tenure the economy had less money to loan out bonds to the public.

In October 2013 President Barack Obama nominated as the 15th

Chair of the United States Federal Reserve Board of Governors and as of February 3rd,

2014 she was sworn in, making her the first woman to hold the position. She is also the first Democrat to hold the position in nearly three decades. With an extensive educational background with a graduate degree from Brown University and following thereafter receiving her PhD from Yale, she became a key role in monetary policy in the United States due to the various positions she held. She worked under the Clinton administration as council of economic advisers, prior to her Chair position she was

Vice-Chair and president of the Federal Reserve Board. She also has taught at the 11

Haas School of Business at UC Berkeley, an assistant professor at Harvard University and served as a lecturer at The London School of Economics and Political Science.

Prior to Yellen’s tenure because of the economic downturn some issues that arouse which have negatively impacted the economy are discussed in the article

“Economic Problems Facing the U.S.” by Thomas Heffner. He mentions, “we no longer produce what we need to sustain ourselves, we import much more than we export, and we are selling off our assets and taking on debts to sustain a standard of living we can no longer afford.” Yellen mentions a primarily solution to solve the economic issues that we are facing is be using a monetary policy. Her main goal in her tenure is to create credit always available to those that are living in middle classes families that were directly affected by the recession and still have not recovered. She intends to be able to create more businesses and/or expand current ones, by creating enough credit to buy homes and/or cars. Yellen is determined to keep interest rates low as long as possible in order to support a strong economic recovery.

Overall, the Federal Reserve of the United States has been governed by a variety of chairmen. According to the actions that each chairman has done, the economy has been impacted in various ways. Under Eugene Meyer, Glass-Steagall caused a separation of investment and commercial banks, this was controversial but overall it was intended to help strengthen the banking system that in recent years failed due to the stock market crash. The creation of the FDIC under Meyer was another way to help strengthen consumer trust in the banking system. After Meyer resigned, Eugene Black was appointed as the chairmen due to his experience and skills. The policies and actions that Black took while he was in tenure, all targeted an 12 increase in efficiency, solvency and stability within the banking system. This was his major concern, since the Great Depression led to a decrease in confidence that individuals had with the baking system. Major tools that he used in order to achieve this goal, was open market operations and increasing the amount of liquidity. Alan

Greenspan was appointed chairman after Paul Volcker’s resignation due to his overwhelming amount of management experience in the finance sector. He is the first person to be appointed five times consecutively as chairman of the Fed. Greenspan is mostly recognized for his perceptive inferences that greatly affected the direction of our financial markets. Keynesian economic framework involves a lot of government regulations to help lower the interest rates to support economic expansion. As a result of Meyer and Black’s policies, highly relates to this economic framework since the interests rates fell under both of their terms. Moreover, in the article, “Visions and Frameworks in Macroeconomics,” explains the Hayek economic framework. The authors discuss that Hayek believed that, “the market rate of interests keeps production in line with people’s willingness to save and allows for sustainable economic growth”. Therefore, the main goal that Hayek focused on was to increase the interest rates in order to stabilize the economy. Greenspan’s actions while in chair, highly relates to the Hayek economic framework, since he increased the interest rates as a result of the Great Depression.

The current U.S economic problem is that the government has a large amount of debt with other countries, due to the high levels of imports. Therefore, based upon our new findings of the U.S Federal Reserve, we believe that over the next 36 months the Fed should take specific actions in order to mitigate the amount of debt. 13

Therefore, Yellen should implement expansionary policies, such as monetary policy, just like Meyer and Black did. This leads to an increase in the amount of money, which then allows the Fed to gain enough money in order to pay off their debts.

Hence, by alleviating our debt, it will make the U.S economy stronger in both the short and long run. However, although this may be a great solution, we need to keep in mind that by taking on this approach, it might lead the economy into a liquidity trap. By definition, a liquidity trap happens when the nominal interest rates for the banks hit zero, due to the approach of the zero lower bound it holds. Therefore, this reduces the incentives of firms to lend, since they won’t be receiving any interest in return. As a result, this issue leads monetary policy to be ineffective. As shown in

Figure 3, the Real Gross Domestic Product of the U.S. has been more positive than negative due to the efforts of economics that work for the Federal Reserve. The creation of the Federal Reserve has been overall beneficial for the economy.

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Appendix