Current Federal Reserve Policy Under the Lens of Economic History: Essays to Commemorate the Federal Reserve System's Centennial (Studies in Macroeconomic History)

In December 2012, As A Kickoff To The Federal Reserve System's Centennial, The Federal Reserve Bank Of Cleveland Asked Leading Monetary Historians And Macroeconomic Economists To Address Current And Recurring Economic Concerns That Confront Central Banks From A Historical Perspective. The Resulting Papers, Published In This Volume, Cover A Wide Range Of Issues, Including The Meaning Of Central-bank Independence, The Role Of Communications And Rules In Fostering Credibility, The Evolution Of The Lender-of-last-resort Function, The Mechanism Through Which Banks Transmit Economic Shocks, And Prospects For A European Monetary Union. A Retrospective On The Federal Reserve, This Book Contains Essays By Some Of The World's Most Prominent Financial Historians And Provides A Thorough Overview Of The Evolution Of The Monetary Standard Over The Past Two Centuries. Offering Historical Context As A Complement To Economic Theory And Empiricism, These Papers Investigate How Financial Infrastructure Shapes Economic Outcomes Through Comparisons Of Canada And The United States.-- Introduction : Context And Content / Owen F. Humpage -- The Uses And Misuses Of Economic History / Barry Eichengreen -- Federal Reserve Policy Today In Historical Perspective / Marvin Goodfriend -- How And Why The Fed Must Change In Its Second Century / Allan H. Meltzer -- The Lender Of Last Resort : Lessons From The Fed's First 100 Years / Mark A. Carlson And David C. Wheelock -- Close But Not A Central Bank : The New York Clearing House And Issues Of Clearing House Loan Certificates / Jon Moen And Ellis Tallman -- Central Bank Independence : Can It Survive A Crisis? / Forrest Capie And Geoffrey Wood -- Politics On The Road To The U.s. Monetary Union / Peter L. Rousseau -- U.s. Precedents For Europe / Harold James -- The Limits Of Bimetallism / Christopher M. Meissner -- The Reserve Pyramid And Interbank Contagion During The Great Depression / Kris James Mitchener And Gary Richardson -- Would Large-scale Asset Purchases Have Helped In The 1930s? An Investigation Of The Responsiveness Of Bond Yields From The 1930s To Changes In Debt Levels / John Landon-lane -- A Tale Of Two Countries And Two Booms, Canada And The United States In The 1920s And 2000s : The Roles Of Monetary And Financial Stability Policies / Ehsan U. Choudhri And Lawrence L. Schembri -- It Is History But It's No Accident : Differences In Residential Mortgage Markets In Canada And The United States / Angela Redish -- Monetary Regimes And Policy On A Global Scale : The Oeuvre Of Michael D. Bordo / Hugh Rockoff And Eugene N. White -- Reflections On The History And Future Of Central Banking / Michael D. Bordo. Edited By Owen Humpage. Includes Bibliographical References And Index. Cover 1 Half-title 3 Series information 5 Title page 7 Copyright information 8 Dedication 9 Table of contents 11 List of contributors 13 Discussants at the Conference 21 Preface 23 Introduction 25 1 The Uses and Misuses of Economic History 33 References 41 2 Federal Reserve Policy Today in Historical Perspective 44 Transparency 46 The Deliberative Process 46 Statement of Policy Actions 47 Responsibility for Inflation 48 Anchoring Inflation Expectations against Inflation Scares 50 December 1979 to February 1980 51 January 1981 to October 1981 51 May 1983 to June 1984 52 March 1987 to October 1987 52 October 1993 to November 1994 53 The Fed Must Credibly Incorporate the 2 Percent Inflation Goal into Its Policy Statements 53 The Fed Should Distinguish Monetary Policy (Narrowly Defined) from Credit Policy in Its Balance Sheet Operations for the Purpose... 55 References 57 3 How and Why the Fed Must Change in Its Second Century 59 Evolution at the Federal Reserve 59 Why Independence Declined 61 The Fed’s Principal Errors 63 The Federal Reserve’s Response to Current Criticisms 69 Conclusion 71 References 71 4 The Lender of Last Resort 73 The Fed’s First Twenty Years 75 Lender of Last Resort during the Great Depression 77 Reasons for a Lack of Action during the Great Depression 78 Creating a New Regime: Depression Era Reforms to the Banking System and Lender of Last Resort 83 Federal Reserve Credit Programs 83 The Gold Standard 85 Other Significant Legislation 86 Financial Instability Returns 88 Response by the Federal Reserve to Financial Crises, 1970–2000 91 Penn Central 91 Franklin National 95 Continental Illinois National Bank 98 The 1987 Stock Market Crash 100 Monday, October 19, 1987 101 Tuesday, October 20, 1987 102 Federal Reserve Response 102 Long-Term Capital Management 104 Response to the Financial Crisis of 2007–2009 107 Brief Review of Actions Taken during the Recent Crisis 107 Relation to Federal Reserve Responses to Preceding Crises 110 Observations and Lessons from the Historical Episodes 111 How Should a Central Bank Provide Liquidity? 112 Conclusion 116 References 119 5 Close but Not a Central Bank 126 Central Bank-Like Tools and Some History 128 Clearing House Loan Certificates 128 Other Tools 130 CHLCs and Big New York Banks 131 Evidence of Central Bank Behavior in a Counterfactual World 132 Aggregate Measures 133 Who Issued Loan Certificates – the Larger Panics: 1873, 1893, and 1907 136 The Panic of 1873 137 The Panic of 1893 139 The Panic of 1907 141 Comparing 1893 and 1907 143 Who Issued Loan Certificates – the Lesser Panics: 1884 and 1890 144 Clearing House Loan Certificates and Liquidity Needs 146 Discussion 147 Conclusion 148 References 149 6 Central Bank Independence 150 Economists on Independence 151 What Instructions? 153 The Reserve Bank of New Zealand 154 Lessons from New Zealand 158 International Complications 159 Historical Experience 161 The Nineteenth Century 162 Post–World War II 163 The Exchange-Rate Target 164 The United States 165 The Bank of England and the Recent Crisis 167 Conclusion 171 References 172 7 Politics on the Road to the U.S. Monetary Union 175 The Colonial Period 177 The Revolutionary War and Articles of Confederation 180 The Federalist Era 182 Jackson and His Legacy 185 The Return of the Whigs and Free Banking 188 The Civil War and National Banking System 192 Conclusion 194 References 195 8 U.S. Precedents for Europe 198 Assumption of State Debts 199 Conclusions from this Section 202 Problems of State Debt 202 Conclusions from this Section 207 Federal Central Banking 207 The Federal Reserve System 209 Conclusions from this Section 214 Reform of the Federal Reserve System 214 Conclusion from this Section 215 Summary 215 References 216 9 The Limits of Bimetallism 218 Bimetallism in the Long and Short Run 220 A Current of Change 222 The End of Bimetallism as a Case Study in Institutional Change 224 A Model of the Bimetallic System 225 Comparative Statics for a Shift to Gold from Silver 228 Comparative Statics for a Shift to Gold from a Fiat Currency 229 The Rise of Gold and the Demise of Bimetallism 231 The Resuscitation of Bimetallism? 233 Conclusions and “Lessons” from History 236 References 239 10 The Reserve Pyramid and Interbank Contagion during the Great Depression 241 Background 244 Literature on Contagion and Regional Banking Crises during the Great Depression 244 Interbank Deposits and the Reserve Pyramid 245 Data 247 Results 251 Discussion 261 References 262 11 Would Large-Scale Asset Purchases Have Helped in the 1930s? 265 The Impact of Large-Scale Asset Purchases on Long-Term Yields 266 U.S. Quantitative Easing from November 2008 to March 2009 (QE I) 267 U.K. Quantitative Easing from January 2009 to November 2009 (AFP I) 267 U.S. Quantitative Easing from November 2010 to Mid-2011 (QE II) 268 U.S. Operation Twist, 1961 268 Interest Rates in the 1930s 269 Analyzing the Impact of Net Sales of Debt on Yields during the 1930s 274 Data 275 Empirical Results 276 Treasury Bills 277 Medium-Term Treasury Notes 278 Long-Term U.S. Government Bonds 281 Impacts on Corporate Bonds 282 Conclusion and Discussion 286 References 289 12 A Tale of Two Countries and Two Booms, Canada and the United States in the 1920s and the 2000s 291 Recent Financial Crisis: Why Canada Fared Better than the United States 294 Roaring Twenties and the Great Depression: The Canadian and U.S. Experiences 302 Concluding Remarks 314 References 316 13 It Is History but It’s No Accident 320 Residential Mortgage Lending in Canada from 1900 to the 1930s 322 The Impact of the Depression and Postwar Housing Boom 327 Canada in the Postwar Era 330 The Impact of the Great Inflation 332 Inflation and Deregulation in the United States 336 Conclusion 337 References 340 14 Monetary Regimes and Policy on a Global Scale 342 The Great Depression 343 Canadian Exceptionalism and a Lesson from Argentina 347 Money and the Economy in Historical Perspective 351 The Gold Standard 354 Bretton Woods, the European Monetary Union, and Other Regimes 361 Globalization 363 Financial Crises 365 Historical Guidance for Monetary Policy 369 I Want to Be Like Mike 375 References 376 15 Reflections on the History and Future of Central Banking 388 Index 393 To celebrate the Federal Reserve System's centennial, the Federal Reserve Bank of Cleveland asked leading monetary historians and macroeconomic economists to address current and recurring economic concerns that confront central banks. The resulting papers cover a wide range of issues and investigate how financial infrastructure shapes economic outcomes.