Citations and References for
A History of the Federal Reserve: Volume 1: 1913-1951

Foreword

Photo of the cover of A History of the Federal Reserve

Allan Meltzer, who undertakes projects that to most appear daunting, has delved deeply into the history of the Federal Reserve System, with a result that will add substantially to the discourse on the institution's role and development. He has reviewed the records of policy discussion at an extraordinary level of detail, and his analysis illuminates the contributions of the many fascinating individuals who shaped the Federal Reserve System we know today. Beginning with a history of developments that underlay the initiation of America's most recent experiment in central banking, Meltzer carries the reader through the challenges of a developing institution faced with enormous economic upheaval, aptly describing the strong personalities that influenced both policy and culture in the System. His work explores the Federal Reserve's inadequate response to the Great Depression and the struggle for dominance in the System. According to Meltzer, the struggle did not wholly preclude agreement in times of crisis; nevertheless, the well-known exhortations of Bagehot and Thornton that a central bank must act to counter a banking crisis and currency drain without regard for the gold reserve were ignored. In Meltzer's view, the System's adherence to the real bills doctrine, combined with a belief that the purging of speculative excess was necessary to set the stage for price stability, led to the failure of monetary policy to lessen the decline. The book describes in detail the roles played by Federal Reserve bank presidents, which have evolved substantially over the years, as has the relationship between the reserve banks and the Board of Governors. The early dominance of the Federal Reserve System by Benjamin Strong, governor of the Federal Reserve Bank of New York, is an interesting episode.

Strong was credited more than anyone else with recognizing in the years after World War I the financial and economic impact of reserve bank purchases and sales of Treasury debt and the need to coordinate those transactions. Meltzer depicts Governor Strong's opposition to a 1926-27 congressional proposal to amend the Federal Reserve Act to make price stability an explicit policy goal. He describes Governor Strong's concern that the bill offered by another Mr. Strong—Kansas Republican congressman James A. Strong—would be interpreted to mandate the stability of individual prices, particularly of agricultural products. In a clear example of his willingness to take sides, Meltzer says here that had a mandate for price stability been approved, the Fed "could not have permitted the Great Depression of 1929-33 or the Great Inflation of 1965-80." Ultimately the Banking Act of 1935, largely adopting reforms proposed by Marriner Eccles, resulted with some subsequent refinement in the structure of the Federal Open Market Committee. Eccles had sought an FOMC wholly controlled by the Board rather than so-called private interests. However, Senator Carter Glass of Virginia and others were leery of monetary policy dominated by what they saw as "political interests." The compromise that emerged mandated that monetary policy be conducted with a broader vision than if either Eccles or Glass had prevailed. Meltzer's book covers with the same methodical illumination the events of more recent years, completing a work both stimulating and provocative. Readers will have substantial material for continued reflection and discussion. Allan Meltzer has spent a lifetime inquiring into monetary economics, and he calls the evidence as he sees it. His combination of interests and experience makes him most qualified for this undertaking, and he brings to the endeavor a closeness of analysis that makes his conclusions both fascinating and valuable. Those of us who enjoy the debates he inspires will find much satisfaction in this book, as in his other important works.

Alan Greenspan

Reprinted with permission of The University of Chicago Press, copyright 2003. All rights reserved.