IMAGINING THE FED: CENTRAL BANK STRUCTURE AND UNITED STATES MONETARY GOVERNANCE (1913-1968) by NICOLAS WAYNE THOMPSON A DISSERTATION Presented to the Department of Political Science and the Graduate School of the University of Oregon in partial fulfillment of the requirements for the degree of Doctor of Philosophy June 2015 DISSERTATION APPROVAL PAGE Student: Nicolas Wayne Thompson Title: Imagining the Fed: Central Bank Structure and United States Monetary Governance (1913-1968) This dissertation has been accepted and approved in partial fulfillment of the requirements for the Doctor of Philosophy degree in the Department of Political Science by: Gerald Berk Chairperson David Steinberg Core Member Lars Skalnes Core Member Mark Thoma Institutional Representative and Scott L. Pratt Dean of the Graduate School Original approval signatures are on file with the University of Oregon Graduate School. Degree awarded June 2015 ii © 2015 Nicolas Wayne Thompson iii DISSERTATION ABSTRACT Nicolas Wayne Thompson Doctor of Philosophy Department of Political Science June 2015 Title: Imagining the Fed: Central Bank Structure and United States Monetary Governance (1913-1968) This dissertation analyzes the institutional development and policy performance of the Federal Reserve System from 1913-1968. Whereas existing scholarship assumes Federal Reserve institutions have remained static since 1913, this project demonstrates that the Federal Reserve was a site of extensive institutional experimentation across its first half century of operations. The 1913 Federal Reserve Act created thirteen autonomous agencies without offering guidance regarding how these units should function as a coherent system. The extent to which this institutional jumble congealed into a central bank-like organization has fluctuated over time. Institutional changes were driven by external shocks and shaped by an ongoing internal debate about normative systemic governance. Some agents called for greater institutional centralization to increase the system’s strategic capacity. Others drew upon shared liberal ideals to defend the system’s decentralized governance traditions. These debates resulted in frequent reconstitutions of the policymaking regime. This dissertation argues the Fed’s temporally-specific institutional configurations were consequential for United States monetary and exchange rate policies. During periods of relatively centralized Federal Reserve governance, internationally-oriented agents wielded control over the system’s iv policymaking levers to help stabilize the dollar’s exchange rate. During periods of institutional fragmentation, by contrast, monetary policies grew increasingly rigid, promoting dollar instability. Consequently, the structure of American central banking institutions has important implications for both the domestic and international political economies. This project suggests that insights from the positive study of institutions should be applied to the design of central banking institutions. Although institutional fragmentation can check arbitrary power, it likewise can paralyze the policymaking process and undermine the formation and steady pursuit of long-term strategic goals. v CURRICULUM VITAE NAME OF AUTHOR: Nicolas Wayne Thompson GRADUATE AND UNDERGRADUATE SCHOOLS ATTENDED: University of Oregon, Eugene University of California, Santa Cruz DEGREES AWARDED: Doctor of Philosophy, Political Science, 2015, University of Oregon Bachelor of Arts, Politics, 2007, University of California, Santa Cruz AREAS OF SPECIAL INTEREST: American Politics International Political Economy PROFESSIONAL EXPERIENCE: Graduate Teaching Fellow, University of Oregon, September 2008 – June 2015 GRANTS, AWARDS, AND HONORS: Travel Grant, American Political Science Association, 2014 William C. Mitchell Summer Research Award, University of Oregon, 2013, 2014 vi ACKNOWLEDGMENTS I wish to express appreciation to all of those who have played key roles in the production of this manuscript. My deepest gratitude is reserved for the members of my dissertation committee who supported my choice to carry out an unorthodox project which challenged prevailing disciplinary boundaries. Professors Gerald Berk, David Steinberg, and Lars Skalnes dedicated countless hours helping sharpen my theoretical arguments and improve my analysis. I am also indebted to the broader Political Science Department faculty and graduate student body who have shaped my intellectual development and honed my research interests. I would also like to thank previous generations of Federal Reserve scholars and policymakers who laid the empirical foundations for this study. Similarly, I would like to thank the archivists at the Federal Reserve Bank of St. Louis who maintain the FRASER digital archive. Much of the primary research in this project would have been infeasible without their painstaking efforts of publishing the system’s historical records online. A special thanks is reserved for my family members and my partner’s family who have supported me throughout my academic journey. Finally, I would like to thank my partner, Reid Lesperance, for her support of my scholarly endeavors, willingness to relocate for my academic career needs, and faith in my ability to succeed within the academe. vii TABLE OF CONTENTS Chapter Page I. INTRODUCTION: POWER, DOMESTIC INSTITUTIONS, AND CURRENCY LEADERSHIP ............................................................................................................. 1 The Institutional Sources of Currency Leadership ................................................ 8 Research Design and Chapter Outline ................................................................... 13 II. AN INSTITUTIONAL THEORY OF U.S. MONETARY GOVERNANCE ........ 18 Central Bank Architecture and Monetary Governance .......................................... 19 Cycles of Central Bank Fragmentation in the United States ................................. 24 War as a Universal Central Bank Builder ........................................................ 24 Central Banks as Illiberal Institutions .............................................................. 25 III. ESCAPE FROM JEKYLL ISLAND: THE PARTISAN ROOTS OF FEDERAL RESERVE FRAGMENTATION (1913-1916) ........................................................... 30 Explaining the Federal Reserve System’s Origin and Design ............................... 30 Reforming American Financial Institutions..................................................... 36 The Financial Elite-led Explanation of the Federal Reserve Act .................... 39 The Agrarian-led Explanation of the Federal Reserve Act .............................. 42 The Partisan Roots of Federal Reserve Fragmentation.................................... 44 The Fall of the Old Guard Republicans ........................................................... 47 The Money Trust Investigation and the 1912 Election .................................... 49 The Partisan Construction of the Federal Reserve Act .................................... 51 Subversive Agents: Formative Politics in the Federal Reserve (1914-1916) ....... 58 viii Chapter Page McAdoo’s Populist Bid for Supremacy ........................................................... 61 Warburg’s Progressive Vision ......................................................................... 68 Strong’s Hegemonic Ambition ........................................................................ 70 Collaborating to Reform the Federal Reserve Act ........................................... 73 Conclusion: Assessing Federal Reserve System Development (1913-1916) ........ 75 IV. THE FED’S STRUGGLE FOR POWER AND THE INTERWAR GOLD EXCHANGE STANDARD ......................................................................................... 79 The Friedman and Schwartz Hypothesis Revisited ............................................... 80 U.S. Mercantilism and the Post-WWI International Political Economy ............... 85 Economic Geography and the Limits of Federal Reserve Internationalism .......... 89 The Fed’s Struggle and the Interwar Gold Exchange Standard ............................. 94 The Discovery and Politicization of Open Market Operations ........................ 98 Orchestrating Great Britain’s Return to Gold .................................................. 102 Managing the Interwar Gold Exchange Standard (1925-1927) ....................... 109 The Chicago Discount Rate Controversy ........................................................ 118 The New York Stock Market Boom and Wall Street’s Capital Vortex ........... 122 The New York Fed’s Swift Response to the Stock Market Crash ................... 128 Central Bank Fragmentation in the Gold Exchange Standard’s Twilight ....... 131 The 1931 Global Crisis and Sterling’s Collapse .............................................. 141 Conclusion: Ideas, Interests, and Institutions ........................................................ 150 ix Chapter Page V. CENTRAL BANKERS AND THE FIGHT TO SAVE BRETTON WOODS ...... 161 How Federal Reserve Institutions Hastened Bretton Woods’ Collapse ................ 162 The Fed’s Rationalization, Capture, and Wartime Development .......................... 166 The Battle for the Heart of the Federal Reserve (1951-1955) ............................... 175 The House that Martin Built: Policymaking on the Consensual FOMC ......... 186 Economists at the Gates: Central Bankers in Bretton Woods’ Heyday ................ 188 The Battle to Shape Currency Policy inside