THE SINKING OF THE TITANIC

(April 14-15, 1912 – North Atlantic Ocean)

Federal Reserve

(Board of Governors Meeting, 1922)

The Official Story

FEDERAL RESERVE BOARD OF GOVERNORS

The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the monetary policy of the United States. Governors are appointed by the president of the United States and confirmed by the Senate for staggered 14-year terms.

History (The Federal Reserve Act, 1913)

Operations, 1915-1951

Wilson named Warburg and other prominent experts to direct the new system, which began operations in 1915 and played a major role in financing the Allied and American war efforts. Warburg at first refused the appointment, citing America’s opposition to a “Wall Street man”, but when World War I broke out he accepted. He was the only appointee asked to appear before the Senate, whose members questioned him about his interests in the central bank and his ties to Kuhn, Loeb, & Co.’s “money trusts”.

WWI broke out just before the Federal Reserve had finished setting up its 12 Reserve Banks, which opened for business in mid November 1914. The markets crashed in a short financial crisis as the war broke out before the Federal Reserve was in a position to do anything about it. $385.6 million in emergency banknotes and $211.8 million clearinghouse loan certificates were issued under the Aldrich-Vreeland Act briefly, allowing banks to continue serving withdrawal requests. All of these funds were eventually recinded.

US spending on WWI was massive even before the US officially entered the war. Federal spending increased fifteen-fold from 1916 to 1918 as the US lent an enormous amount of funds to US allies and as the military mobilized. The Federal Reserve offered below-market-rate interest rates to banks who used the funds to buy government bonds and treasury certificates. This “discount rate” was the primary tool the Fed used during this time. Because of these actions, the money supply increased and consenquently prices inflated.

Federal Reserve leaders did not take steps to reduce inflation, however. While the institution was ostensibly created as an independent organization from the government to remove it from political pressures, the political pressure of war nonetheless pressured the Fed to cater to the Treasury’s appetite for low-cost war debt financing. At the same time, European gold flowed into the vaults of reserve banks and allowed the dollar to remain backed by gold despite massive monetary expansion, while European countries suspended their gold standards temporarily during the war. The US economy boomed post war as Europe was reliant on US goods their damaged and rebuilding industries couldn’t supply for themselves.

In 1923, a recession prompted the head of the New York Fed, Benjamin Strong, to aggressively use open market operations in purchasing government securities to stem the downturn. The Fed made substantial open-market purchases in 1924 and 1927. In 1928 as it became more apparent that a stock market bubble was forming, the Federal Reserve increased discount rates, sold securities, and set guidelines prohibitting banks that made stock market loans from borrowing from the Fed. Sharp disagreements arose within the Federal Reserve System over its levers on the economy and how to use them appropriately. The federal reserve took basically no action during the great depression and, according to David Wheelock of the St Louis Federal Reserve, “more or less let the banking system collapse, allowed the money supply to collapse, and allowed the price level to fall.”

In reaction to the Great Depression, Congress passed the Glass-Steagall Act, established the FDIC, and required bank holding companies to be examined by the Fed. Roosevelt also issued Executive Order 6102 which outlawed the holding of more than $100 of gold or gold certificates, among other related decrees. The Banking Act of 1935 created the Federal Open Market Committee, along with making other changes to the Federal Reserve.

After WWII, the Employment Act added the goal of maximum employment as a responsibility of the Fed.

Source: Wikipedia