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Home » Meltzer, 'A History of the Federal Reserve Volume 1: 1913-1951'
FOREWORD
 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.
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