1 MGMT-121: Federal Reserve Historical Analysis Eugene Meyer & Eugene Black 2 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). Eugene Meyer 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 Great Depression 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 World Bank. Following Meyer, Eugene Black became a chairman for the Federal Reserve. Eugene Robert Black was born in 1873 in Atlanta, Georgia. He came from a wealthy family, and his father was the governor of the Federal Reserve Bank of Atlanta. He received his undergraduate degree from the University of Georgia 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.