Bordo wynne (eds ) the federal reserve’s role in the global economy a historical perspective (2016)

The Federal Reserve’s Role in the Global Economy The importance of international considerations in the US Federal Reserve System’s deliberations has grown over time as global financial crises and events create ever stronger repercussions in the US economy This book critically evaluates the role of the Federal Reserve System as a player in the international monetary system over the past 100  years, starting with its initial responsibility under the gold standard and looking ahead to the challenges it will face in the twenty-first century under the fiat standard The book is based on a conference of the same name held at the Federal Reserve Bank of Dallas in September 2014, as part of the Federal Reserve System’s centennial, and contributors include many of the most highly regarded financial historians and policymakers Michael D. Bordo is Board of Governors Professor of Economics at Rutgers University He is also a research associate of the NBER and a distinguished visiting fellow at the Hoover Institution, Stanford University He has published widely in monetary economics and economic history with 15 books and over 200 journal articles and chapter contributions Mark A.  Wynne is a vice president at the Federal Reserve Bank of Dallas, Associate Director of Research for International Economics, and the founding Director of the Bank’s Globalization and Monetary Policy Institute In the latter role, Wynne is responsible for developing and leading the Bank’s research program on globalization and understanding its implications for the conduct of US monetary policy Studies in Macroeconomic History Series Editor: Michael D. Bordo, Rutgers University Editors Owen F Humpage, Federal Reserve Bank of Cleveland Chris Meissner, University of California, Davis Kris James Mitchener, Santa Clara University David C. Wheelock, Federal Reserve Bank of St Louis The titles in this series investigate themes of interest to economists and economic historians in the rapidly developing field of macroeconomic history The four areas covered include the application of monetary and finance theory, international economics, and quantitative methods to historical problems; the historical application of growth and development theory and theories of business fluctuations; the history of domestic and international monetary, financial, and other macroeconomic institutions; and the history of international monetary and financial systems The series amalgamates the former Cambridge University Press series Studies in Monetary and Financial History and Studies in Quantitative Economic History Other books in the series Owen Humpage, Editor, Current Federal Reserve Policy Under the Lens of Economic History, 2015 Michael D Bordo and William Roberds, Editors, The Origins, History, and Future of the Federal Reserve, 2013 Michael D Bordo and Ronald MacDonald, Editors, Credibility and the International Monetary Regime, 2012 Robert L Hetzel, The Great Recession, 2012 Tobias Straumann, Fixed Ideas of Money, Small States and Exchange Rate Regimes in Twentieth-Century Europe, 2010 Forrest Capie, The Bank of England: 1950s to 1979, 2010 Aldo Musacchio, Experiments in Financial Democracy:  Corporate Governance and Financial Development in Brazil, 1882–1950, 2009 Claudio Borio, Gianni Toniolo, and Piet Clement, Editors, The Past and Future of Central Bank Cooperation, 2008 Robert L Hetzel, The Monetary Policy of the Federal Reserve: A History, 2008 Caroline Fohlin, Finance Capitalism and Germany’s Rise to Industrial Power, 2007 John H Wood, A History of Central Banking in Great Britain and the United States, 2005 Gianni Toniolo (with the assistance of Piet Clement), Central Bank Cooperation at the Bank for International Settlements, 1930–1973, 2005 Richard Burdekin and Pierre Siklos, Editors, Deflation:  Current and Historical Perspectives, 2004 Pierre Siklos, The Changing Face of Central Banking: Evolutionary Trends since World War II, 2002 (continued after index) The Federal Reserve’s Role in the Global Economy A Historical Perspective Edited by MICHAEL D. BORDO Rutgers University, New Jersey MARK A. WYNNE Federal Reserve Bank of Dallas 32 Avenue of the Americas, New York, NY 10013 Cambridge University Press is part of the University of Cambridge It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning, and research at the highest international levels of excellence www.cambridge.org Information on this title: www.cambridge.org/9781107141445 © Federal Reserve Bank of Dallas 2016 This publication is in copyright Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published 2016 A catalog record for this publication is available from the British Library Library of Congress Cataloging in Publication Data Names: Bordo, Michael D., editor | Wynne, Mark A., editor Title: The Federal Reserve’s role in the global economy : a historical perspective / edited by Michael D Bordo, Mark A Wynne Description: New York : Cambridge University Press, 2016 | Series: Studies in macroeconomic history | Includes bibliographical references and index Identifiers: LCCN 2015043517 | ISBN 9781107141445 (hardback) Subjects: LCSH: Federal Reserve Banks | Monetary policy – United States | Financial crises – United States | United States – Economic policy – 2009– | BISAC: BUSINESS & ECONOMICS / Economics / Macroeconomics Classification: LCC HG2563.F463 2016 | DDC 332/.042–dc23 LC record available at http://lccn.loc.gov/2015043517 ISBN 978-1-107-14144-5 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party Internet Web sites referred to in this publication and does not guarantee that any content on such Web sites is, or will remain, accurate or appropriate Contents Contributor Biographies page ix Acknowledgments xix Introduction Michael D. Bordo and Mark A. Wynne Doctrinal Determinants, Domestic and International, of Federal Reserve Policy 1914–1933 Barry Eichengreen Harold James Navigating Constraints: The Evolution of Federal Reserve Monetary Policy, 1935–1959 Mark A. Carlson and David C. Wheelock Comments on Carlson and Wheelock by Gary Richardson Federal Reserve Policy and Bretton Woods Michael D. Bordo and Owen F. Humpage Comments on Bordo and Humpage by James M. Boughton 14 46 Comments on Eichengreen by The Federal Reserve Engages the World (1970–2000): An Insider’s Narrative of the Transition to Managed Floating and Financial Turbulence Edwin M. Truman 50 84 89 121 128 191 Comments on Truman by Michael P. Dooley vii Contents viii The Federal Reserve in a Globalized World Economy John B. Taylor Comments on Taylor by Richard H. Clarida Unprecedented Actions: The Federal Reserve’s Response to the Global Financial Crisis in Historical Perspective Frederic S. Mishkin and Eugene N. White Comments on Mishkin and White by Steven B. Kamin Panel Discussion on the Federal Reserve’s Role in International Financial Crises The Fed’s Role in International Crises by Donald Kohn The Fed in International Crises by Charles Bean The Global Dollar System by Stephen G. Cecchetti Perspectives of the Fed’s Role in International Crises by Guillermo Ortiz The Robert V. Roosa Lecture: Excerpts from a Conversation between Richard W. Fisher and Paul A. Volcker Index 195 218 220 259 266 274 278 285 292 301 310 Index France dollar conversion into gold by, 97–98 financial crises in, 36–39, 220–22, 230–36, 260–61 international monetary system reform and, 142–43 Freddie Mac, 228 Freedman, Charles, 198n5, 203–7 free reserves “backseat” era constraints on, 64–66 Fed policy rates and, 107–8 macroeconomic policies and, 58–62 Freund, Caroline, 169–70 Friedman, Milton, 38n55, 68n18, 213–14, 241 Harrison Doctrine and, 24–25 Strong Doctrine and, 23–24 full employment Bretton Woods and, 125–26 Fed monetary policy and, 103–4, 117–18 financial stability and, 285–91 fixed exchange rates and, 90–92 G20 Framework for Strong, Sustainable, and Balanced Growth, 274–77 Gagnon, Joseph E., 175–78, 207 Gali, Jordi, 198–202 Gali and Gertler (Clarida), 57–58, 198n5, 202–3 game-theory equilibrium global economy and, 195–98 multicountry modeling and, 200–1 Garber, Peter M., 71 Garcia-Saltos, Roberto, 198n5, 203–7 Geithner, Timothy, 173–75, 177n61 General Arrangements to Borrow (GAB), 117–18, 123–24, 172–73 initiation of, 97–98 third world debt crises and, 151–53 geopolitics, gold standard and, 46–49 Germany crisis of 1931 and, 36–39 unification of, 175–78 Glass, Carter, 25–26 Glass–Steagall Act, 25–26 banking panics of 1930–33 and, 241–43 doctrinal effects of, 39–41, 46–49 global economy capital constraints and balance of payments, 98–99 consequences of Bretton Woods and, 95–102 contagion of policy deviations and, 207–10 crisis management by Federal Reserve and, 286–89 crisis of 1931 and, 36–39 deviations from monetary policy and, 203–7 dollar and current account deficits and, 153–59 easing policies of Federal Reserve and, 147–49 expansionary policies in 1924–27 and, 31–34 Federal Reserve and, 1–2, 7–9, 11, 128–29, 162–81 financial crisis of 2008 and, 220–22, 285–91 global dollar system and, 278–84 historical interpretations of, 202–3 inflationary crises, 5 international financial crises and Fed policies, 266–73, 274–77, 285–91 monetary policy and, 14–15, 41–43, 117–18, 129–35, 195–214 in post-Bretton Woods era, 125–26 in postwar monetary policies, 72–75, 79–80 recession of 1970s and, 140–41 sovereign debt, external deficits, and exchange rates and, 147–62 tradeoffs in monetary policy and, 198–202 US integration into, 5, 129–35, 266–73 global financial crisis See Crisis of 2008 global GDP, Bretton Woods and, 121–26 “Global Great Deviation” concept, 195–98 Goldman Sachs, 247–48 gold market “backseat” era constraints on Fed and, 62–68, 84–88 benign neglect paradigm and, 113–17 crisis of 1907 and, 236–38 dollar price delinked from, 135–38 dollar shortage and Triffin’s paradox, 92–95 domestic price stability and, 103–4 Fed monetary policy 1951–72 and, 103–17 Federal Reserve foreign exchange intervention and, 99–102 postwar changes in, 70–75, 79–80 swap transactions and, 99–102 Treasury Department policies and, 66–68 during World War II, 69–70 gold pool, 97–98, 109–13, 117–18 Gold Reserve Act of 1934, 3, 50–53 Index gold reserves banking panics of 1930–33 and, 239–43 history of financial crises and, 230–36, 253 official settlements deficits and reductions in, 135–38 Goldsborough, Thomas, 39–41 gold standard banking panics of 1930–33 and, 239–43 Bretton Woods system and, 89–90 central banks and, 222–23 constraints on, 46–49 as contingent rule, 222 crash of 1929 and, 34–36 crisis of 1931 and, 36–39 doctrinal foundations of, 17–18, 41–43, 46–49 expansionary policies in 1924–27 and, 31–34 Federal Reserve policy and, 1–2, 9–10 Glass–Steagall Act and, 25–26, 39–41 historical financial crises and, 230–36 instrument rules and, 224–25, 261–62 international monetary system reform and, 142–43 ratio of reserves to liabilities and, 17, 36n50 recession of 1920–21 and, 28–31 Roosevelt Doctrine and, 27–28 Strong Doctrine and, 23–24 suspension of, 3 Gold Standard Act of 1900, 2, 17–18 gold window, closing in 1971 of, 99–102, 116, 138–40 good will, Mexican financial crisis and, 286–89 Gorbachev, Mikhail, 175–78 government-chartered joint stock companies, 222–23 government debt commercial bank ownership of, 70–75 Fed-Treasury Accord of 1951 and, 75–78 third world debt crises, 149–54 government debt-to-GDP ratio, bond yields and, 70–75 government securities Crisis of 2008 and, 228 Fed-Treasury Accord of 1951 and, 75–78 Operation Twist and yields on, 104–9 in postwar era, 70–75 required reserve ratios and, 66–68 World War II holdings, 69–70 Government Sponsored Entities Purchase Program, 228 311 GPM6 model, deviations from monetary policy and, 203–7 Great Britain See United Kingdom Great Depression banking panics of 1930–33 and, 239–43 Fed monetary policy during, 50–53, 62–68 instrument rules during, 225 suspension of gold standard in, 3 Great Inflation crisis, 5, 11 central banks and, 220–22 Fed monetary policy and, 109–13, 117–18 global economy and, 128–29 international monetary system and, 142–45 “Great Inflation” of 1960s and 1970s, Fed monetary policy and, 50–53 Great Moderation period monetary policies and, 195–98 rules-based policy and, 220–22 Great Recession Federal Reserve policies and, 285–91 global economy and, 195–98, 274–77 Greenbook reports, 135–38, 173–75 Greene, Margaret, 144–46 Greenspan, Alan, 159–62, 163–67, 172–78 China delegations and, 175–78 Continental Illinois bank crisis and Greenspan “put”, 245–46, 250–53, 260–61 Crash of 1987 and, 247–48 LTCM crisis and, 248–50, 253 gross domestic product (GDP) Bretton Woods and global GDP, 121–26 global dollar system and, 282–84 in US, exports and imports as percentage of, 129–35 Group of Six (G-6) Economic Summit, 142–43 Group of Ten (G10) countries foreign exchange markets and, 138–40 General Arrangements to Borrow and, 97–98 inflationary pressures in, 116–17 third world debt crises and, 149–54 Guarantee Trust Company, 21–23 Guffey, Roger, 148n20 Gulf War, 148n21 hard-stop monetary policy, 113–17 Hardy, Charles, 18, 34–36 Harrison, George crisis of 1931 and, 36–39 Glass–Steagall and, 25–26 Harrison Doctrine and, 24–25 312 Index Harrison Doctrine, 24–25, 46–49 Crash of 1929 and, 34–36 Haslag, Joseph H., 57–58 Hatry Scandal, 34–36 Hayes, Alfred, 103–4 He, Dong, 207–10 hedge funds, Long-Term Capital Management (LTCM) crisis and, 248–50 Hein, Scott H., 57–58 Helkie, William, 169–70 Henderson, Dale, 154–56 Henning, Randal, 159n43 Henry, George, 144–46 Hetzel, Robert L., 50–53 high-frequency, event-study techniques, of Operation Twist, 106n23 Hodrick-Prescott filter, 53n5 Hofmann, Boris, 195–98 Hooper, Peter, 139n9, 154–59, 198n5 Hoover, Herbert, 25–26, 241–43 Hoskins, Lee, 159–62 Houthakker, Hendrik, 169–70 Hsieh and Romer, 39–41 Humpage, Owen, 10–11, 89–118, 121–26 limits of intervention and, 166–67 Humphrey, Thomas, 19–20, 232 IMF Articles of Agreement, 142–43 immigration, Mexican economic crises and, 286–89 imports external accounts and, 135–38 multicountry modeling and, 198–202 as percentage of US GDP, 129–35 index of industrial production, empirical analysis 1935–59, 53–58 individual reserve banks, establishment of, 1–2 inflation rate “backseat” era constraints on Fed and, 62–68 benign neglect paradigm and, 113–17 Bretton Woods and, 95–97, 125–26 central bank targeting of, 195–98 deviation from monetary policies and, 213–14 external accounts and, 134–37 Fed monetary policy 1951–72 and, 103–4 federal funds rate and, 148–49 FOMC actions concerning, 109–13 free reserves level and, 58–62 LTCM crisis and, 248–50 macroprudential policies and, 212–13 metallic standard and, 222–23 monetary freedom and, 135–46 output gap and measures of, 57–58 in postwar era, 70–75, 79–80 required reserve ratios and, 53–58 targeting of, 223n5, 248–50, 261 during World War II, 69–70 inflationary crises of 1970s, 142–45 Fed monetary policy and, 50–53 Great Inflation and, 5, 11 installment credit, postwar regulation of, 72–75 Institute for Globalization and Monetary Policy, 195–98 instrument rules Bagehot’s rule as, 230–36 banking panics of 1930–33 and, 239–43 central banks and, 222–26, 259–65 Crash of 1929 and departure from, 238–39 historical overview of, 250–53, 259–65 success of deviation from, 253–54, 259–65 insurance companies, Federal Reserve bailout of, 228–29 Interagency Country Exposure Review Committee (ICERC), 140–41, 152–54 interbank market crisis of 1907 and, 236–38 Crisis of 2008 and, 226–27 Riefler–Burgess Doctrine and, 20–21 Interdistrict Settlement Fund, 17–18 Interest Equalization Tax (IET), 98–99, 123–24 interest rates See also short-term interest rates central banks and, 5–7 commercial paper loans, 58–62, 243–45 contagion of policy deviations and, 207–10 currency intervention and, 211–12 dollar depreciation and, 159 Fed-Treasury Accord of 1951 and, 75–78 government security yields and, 66–68 historical financial crises and, 230–36 inflation crises and, 143–46 international differentials in, 95–97 macroprudential policies and, 212–13 Mexican exonomic crisis and, 286–89 monetary policy compatibility with, 10, 109–13 multicountry modeling and, 198–202 multiplier effect of deviations and, 210–11 Operation Twist and, 104–9 policy rule deviation effects on, 203–7 on portfolio outflows, 98–99 Index in postwar era, 70–75 real bills doctrine and, 19–20 on residential mortgages, Crisis of 2008 and, 228 Riefler–Burgess Doctrine and, 20–21 targeting of, 58–62 international economic conditions See global economy International Finance Discussion Papers (IFDPs), 133–35, 152–54, 175n58 International Lending Supervision Act (ILSA), 152–54 International Monetary Fund (IMF), 90–92 Asian financial crisis and, 173–75 borrowing facilities of, 97–98 Bretton Woods and, 121–26 capital controls and, 210–11 economic stabilization and reform programs and, 140–41 external accounts and, 169–70 Flexible Credit Line of, 280, 281 global dollar system and, 278–84 GPM6 global model of, 203–7 Mexican financial crisis and, 286–91 reform of, 142–42 swap transactions and, 271–73 third world debt crises and, 149–54 US reserve assets in, 124 international monetary system contagion of policy deviations in, 207–10 currency intervention and, 211–12 deviations from policy rules, global impact of, 195–214, 218–19 dismantling of swap network and, 167–69 emerging markets and, 195–98 global recession of 1970s and, 140–41 Great Depression impact on, 50–53 historical analysis of, 202–3 macroprudential policies and, 212–13 policy cooperation and, 218–19 reform of, 142–43 tradeoffs in global economy and, 198–202 US external accounts and, 135–38 international relations, external financial crises and, 170–78 International Trust, 241 intertemporal maximization models, 193 intervention strategies Continental Illinois bank crisis and, 245–46 crisis of 1907 and, 236–38 currency intervention, 211–12 Federal Reserve role in, 159–62 313 in floating currency rates, 163–67 foreign exchange interventions, 4–5, 99–102, 142–43, 266 global financial crisis and, 220–22 history of financial crises and, 230–36 quantitative easing and, 191–94 sterilized vs unsterilized interventions, 153–59 Isard, Peter, 154–56 Italy central bank, swap transactions with, 140–41 James, Harold, 46–49 Japan currency devaluation by, 191–94 dismantling of swap network and, 167–69 liquidity swaps and, 7–9 policy deviation effects in, 203–10 third world debt crises and, 149–54 Johnson, Karen, 167–70, 175–78 Johnson, Manuel, 156–59 Johnson administration, 98–99, 103–4, 109–13 Jordan, Jerry, 163–67 JP Morgan/Chase, Bear Stearns purchase by, 228–29 Jurgensen, Philippe, 154–56 Kamenik, Petar, 198n5, 203–7 Kamin, Steven, 172–73, 259–65 Kennedy administration, 92–95, 98–99, 103–4 Keynes, John Maynard, 17, 276 gold standard and, 27–28 models based on theories of, 203–7 Kidder, Peabody, 247–48 King, Mervyn, 195–98, 202–3 Knickerbocker Trust, 236–38 Kohn, Donald, 13, 167–69, 175–78, 266–73, 274 Kole, Linda S., 175–78 Korean financial crisis, 173–75 Korean War, Fed policies and, 72–75 Kuehn, Daniel, 29 Kuwait, Iraq invasion of, 148n21 Kydland, F E., 222–23, 224–25 Lane, John Landon, 200–1 large-scale asset purchases (LSAPs) Crisis of 2008 and, 228 Laughlin, J Laurence, 18–20 Law, John, 18–20 314 Index LaWare, John, 159–62 Laxton, Douglas, 198n5, 203–7 Laxton, Kamenik and Manchev, 198n5, 203–7 leader-follower relationship, central banks and, 5–7 Lehman Brothers collapse, 226–27, 228–29, 270 lender of last resort (LOLR) policy Bagehot’s development of, 12 banking panics of 1930–33 and, 239–43 crisis of 1907 and, 236–38 dollar reserves and, 271–73 Fed monetary policy and, 261–62 global dollar system and, 278–84 global financial crisis of 2007–08 and, 220–22 historical crises and, 230–36 Kamin’s commentary on, 259–65 Mexican financial crisis and, 286–89 Liberty Loans, 28–31 LIBOR (London Interbank Offered Rate) Crisis of 2008 and, 226–27 third world debt crises and, 149–54 lifeboat rescues central banks and history of, 230–36 historical analysis of, 250–53 LTCM crisis and, 248–50 Lindsey, Lawrence, 163–67, 172–73 liquidity facilities banking panics of 1930–33 and, 239–43 Bretton Woods policy and, 95–97 Continental Illinois bank crisis and, 245–46 Crisis of 1907 and, 236–38 Crisis of 2008 and, 260–61, 262–64 dollar reserves and, 266–73 financial crisis and, 7–9 General Arrangements to Borrow and, 97–98 global dollar system and, 282–84 Harrison Doctrine and, 24–25 LTCM crisis and, 248–50 Lombard Street, 236 London gold market dollar shortage and, 92–97 Operation Twist and, 104–9 Long-Term Capital Management (LTCM) crisis, 241, 248–50, 263–64 historical framework for, 12, 220–22, 250–53 long-term interest rates, postwar policies concerning, 3–4 Louvre Accord, 5, 156–59 Luther, Hans, 24–25 macroeconomic policies Bagehot’s rule and, 261–62 bank reserves and credit conditions and, 58–62 Fed focus on, 52 financial stability and, 259–65 international financial crises and, 274–77 in Kennedy administration, 103–4 mistakes in, 135 required reserve ratios and, 57–58, 84–88 macroprudential policies, 175–78, 212–13, 264–65, 277, 285–91 global dollar system and, 278–84 Madigan, B F., 220–22 Magee, Stephen, 169–70 Manager of the Open Market Account, Operation Twist and, 104–9 Mancera, Miguel, 149–54 Mann, Catherine L., 198n5 Mantega, Guido, 274 Manufacturers Trust, 241 margin requirements Crash of October 1929 and, 238–39 establishment of, 50–53 postwar regulation of, 72–75 market conditions capital control and distortions in, 210–11 Crash of 1929 and, 238–39 Crash of 1987 and, 247–48 dollar declines and, 156–59 Warburg Doctrine and Fed role in, 21–23 market-neutral arbitrage, LTCM crisis and, 248–50 Marshall Plan, 92–95 Martin, Preston, 156–59 Martin, William McChesney Jr., 50–53, 103–9 Mason, W., 68n18 Masson, E Paul, 175–78 McDonough, William, 163–69, 175–78, 177n61, 248–50 McDougal, James, 19–20 McGuire, Patrick M., 278–84 McKibbin, Warwick J., 175–78 McKinnon, R J., 92–95 Meese, Richard, 138–40 Meltzer, Allan on excess reserves, 69–70 on failures of Fed, 135 Index on Fed operating procedures, 78n24 on Glass–Steagall, 39–41 on global financial crisis, 220–22 on Harrison Doctrine, 24–25 history of Federal Reserve and, 18, 20–21 Melzer, Tom, 172–73 metallic standard, central banks and, 222–26 Meulendyke, Ann-Marie, 75–78 Mexican economic crises Fed involvement in, 170–73, 286–89 foreign exchange market and, 149–54 US economic integration and, 289–91 Miller, Adolph, 19–20, 32–34 Miller, G William, 144 Mills, Ogden, 25–26, 32–34 Minsky-Taylor curve, 202–3 Mishkin, Frederic S., 12, 220–54 Kamin’s comments on, 259–65 Moessner, Richhild, 270–71 monetary freedom, inflation controls and, 135–46 monetary gold stock, “backseat” era constraints on Fed and, 64–66 monetary policy of Federal Reserve from 1914 to 1933, 41–43 from 1924 to 1927, 31–34 from 1935 to 1959, 50–58, 84–88 from 1935 to 1939, 50–80 from 1951 to 1972, 103–17 “backseat” era constraints on, 62–68 Bagehot’s rule and, 261–62 banking panics of 1930–33 and, 239–43 benign neglect in, 113–17 Bretton Woods system and, 1–2, 9–11, 89–118 compatible objectives in, 109–13 Continental Illinois bank crisis and, 245–46 cooperation on, 218–19 Crash of 1929 and, 238–39 Crash of 1987 and, 247–48 Crisis of 2008 and departures from, 226–30, 262–64 deviations from, global impact of, 195–214 doctrinal foundations of, 15–16 early policies, 1–2, 10 Fed-Treasury Accord of 1951 and, 75–78 financial stability and, 1–2, 220–54, 264–65 Glass–Steagall Doctrine, 25–26 global economy and, 1, 41–43, 117–18, 129–35 global financial crisis and, 220–54 315 gold standard doctrine, 17–18 Harrison Doctrine, 24–25 historical legacy of, 253–54 international financial crises and role of, 266–73, 274–77, 285–91 LTCM crisis and changes to, 248–50 Operation Twist and, 104–9 postwar changes in, 70–75 real bills doctrine and, 18–20, 46–49 recession of 1920–21 and, 28–31 Riefler–Burgess Doctrine, 20–21 Roosevelt Doctrine and, 27–28 Strong Doctrine, 23–24 Warburg Doctrine, 21–23 monetary shocks, policy rule deviations and, 203–7 monetary targeting, instrument rules and, 223–24 money market funds, 229–30 banking panics of 1930–33 and, 239–43 Penn Central bankruptcy and, 243–45 money pool, Crisis of 1907 and, 236–38 money supply “backseat” era constraints on Fed and, 62–68 benign neglect paradigm and, 113–17 Glass–Steagall and, 25–26 global dollar system and, 278–84 inflation pressures and tightening of, 109–13 Moore, Jeffrey, 275 moral hazard Bagehot’s rule and, 230–36, 261–62 banking panics of 1930–33 and, 241–43 Continental Illinois bank crisis and, 245–46 Crash of 1987 and, 247–48 crisis of 1907 and, 236–38 financial crises and, 220–22, 260–61 global dollar system and, 282–84 history of financial crises and risk of, 230–36, 250–53, 261 LTCM crisis and, 248–50 Penn Central bankruptcy and, 243–45 sources of, 263–64 target and contingent rules and, 225–26 Morgan, J P., 38, 46–49, 236–38 Morgenthau, Robert, 66–68 Morris, Frank, 148n20 mortgage-backed securities (MBS) markets, 278–84 banking panics of 1930–33 and, 241–43 Crisis of 2008 and, 228 316 Index Morton, John, 139n9 multicountry modeling (MCM), 134n6 deviations from monetary policy and, 203–7 monetary policy tradeoffs in, 198–202 multiplier effect central banks and, 5–7 deviations in monetary policy, 210–11 Munich Economic Summit, 163–67 Nam, Sunwoo, 275 Nash equilibrium, multicountry modeling and, 200–1 National Bank Act of 1863, 54n7 National City Bank, 21–23 National Monetary Commission, Warburg Doctrine and, 21–23 near international cooperative equilibrium (NICE) policy, 195–98 multicountry modeling and, 198–202 “Need for Order in International Finance” (Burns), 140–41 net free reserves “backseat” era constraints on, 64–66 Fed policy rates and, 107–8 inflation pressures and, 109–13 macroeconomic policies and, 58–62 New Anglo-Saxon Consensus, 125–26 New Area Wide Model (NAWM), policy rule deviations and, 203–7 new arrangements to borrow (NAB), 172–73 New Deal legislation, impact on Fed monetary policy of, 84–88 New York Clearing House, 236–38, 241, 250–53 New York Stock Exchange, crisis of 1907 and, 236–38 Nikolsko-Rzhevsky, Alex, 202–3 Nixon administration, 99n13, 116, 135–38, 140n11, 243–45 non-inflationary and consistently expansionary (NICE-Squared) period, 195–98, 202–3, 218–19 noninterest bearing transaction accounts, 229–30 Norges Bank, 207–10 Norman, Montagu, 23–24, 32–34 Norris, George, 19–20 North American Financial Group (NAFG), 170–73 North American Framework Agreement (NAFA), 170–73 North American Free Trade Agreement (NAFTA), 170–73, 286–89 Not-So-Great-Recovery, global economy and, 195–98 Obstfeld, Maurice, 198n5 Office of the Comptroller of the Currency (OCC), 230, 245–46 official settlements deficits, 135–38 off-market transactions, exchange market intervention and, 138–40 oil embargo of 1973, US current account balance and, 135–38 oil price shocks global recession of 1970s and, 140–41 US current account balance and, 135–38 Open Market Desk, foreign exchange markets and, 138–40 Open Market Investment Committee, 2–3 Crash of 1929 and, 238–39 expansionary policies in 1924–27 and, 31–34 open market operations “backseat” era constraints on Fed and, 64–66 benign neglect paradigm and, 113–17 Crisis of 2008 and, 228 Fed-Treasury Accord of 1951 and, 75–78 financial crises and history of, 250–53 Glass–Steagall Act and, 39–41 government securities and, 66–68 macroeconomic conditions and, 57 in postwar era, 70–71 Riefler–Burgess Doctrine and, 20–21 during World War II, 50–53, 69–70 Operation Twist (1960–64), 104–9 ordered-logit regression, required reserve ratios and, 57–58 Orderly Liquidation Authority, 264–65 Ortiz, Guillermo, 13, 170–73, 285–91 output gaps in 1961 recession, 103–4 free reserves level and, 58–62 global impact of US gaps, 129–35 monetary policy and, 109–13 multicountry modeling and, 198–202 policy rule deviations and, 203–7 required reserve ratios and, 53–58, 84–88 Overend-Gurney panic of 1866, 12, 220–22, 230–36, 250–53 overnight index swap (OIS), 226–27 Index Papell, David H., 202–3 Partee, Charles, 156–59 par value system, 125–26 Peel’s Act, 224–25 Penn Central bankruptcy, 243–45, 250–53 Pereira da Silva, F., 277 Phillips Curve tradeoff, 117–18 Plaza Accord of 1985, 5 Polanyi, Karl, 46–49 portfolio balancing current account deficits and, 152–59 LTCM crisis and, 248–50 quantitative easing and, 191–94 restraints on, 98–99 pound sterling devaluation of, 97–98, 109–13 international financial crises and, 274–77 unwinding of reserves of, 141n13 Prescott, E C., 222–23 price controls postwar lifting of, 70–71, 84–88 wage and price freezes of 1971, 116 during World War II, 69–70 price fluctuations and stability Bagehot’s rule and, 230–36 banking panics of 1930–33 and, 239–43 central bank strategies for, 220–22, 259–65 Crash of 1929 and, 34–36 dollar shortage and, 92–95 Fed monetary policy 1951–72 and, 103–18 financial crises and rules for, 225–26, 259–65, 285–91 fixed exchange rate and, 90–92 intertemporal pricing and, 193 multicountry modeling and, 198–202 policy rule deviations and, 203–7 recession of 1920–21 and, 28–31 price-level targeting, Strong Doctrine and, 23–24 price stability rule, 12 Primary Dealer Credit Facility (PDCF), 227 private credit, postwar controls on, 71–72 Prodan, Ruxandra, 202–3 Promisel, Larry, 154–56 protectionist policies, dollar declines and, 156–59 Public National Bank, 241 purchasing power parity (PPP) global growth and, 147n18 monetary policy cooperation and, 218–19 317 QE1, QE2 and QE3 asset purchase programs, 228 quantitative easing Crash of 1929 and, 36, 238–39 Crisis of 2008 and, 228, 260–61, 262–64 dollar depreciation and, 159 global economy and, 147–49, 271–73 international financial crises and, 274–77 LTCM crisis and, 248–50 policy deviations and, 207–10 sterilized intervention and, 191–94 US current account balance and, 135–38 rationing postwar lifting of, 70–75 during World War II, 69–70 Reagan administration, 152–54, 154 real bills doctrine, 18–20, 46–49 banking panics of 1930–33 and, 239–43 Crash of 1929 and, 34–36 Glass–Steagall Act and, 25–26, 39–41 recession of 1920–21 and, 30–31 real federal funds rate, 113, 144n16 benign neglect paradigm and, 113–17 dollar depreciation and, 135–38 managed floating vs intervention and, 163–67 recession of 1980–82 and, 146–48 real-time Taylor rules, 107–8 recessions, Federal Reserve policy in 1920–21 recession, 28–31 1923–24 recession, 31–34 1931 recession, 36–39 1949 recession, 72–75 1958 recession, 78–79, 103–4 1961 recession, 103–4 easing policies and, 147–49 expansionary policies, 31–34 global recession of 1970s and, 135, 140–41 Reciprocal Currency Arrangements, 99–102 Reconstruction Finance Corporation (RFC), 241–43 Record of Policy Actions, 159–62 reference rates, dollar depreciation and, 156–59 regional reserve-pooling arrangements, 281 regression coefficients, required reserve ratios and, 84–88 Regulation Q inflation pressures and, 109–13 Operation Twist effects and, 106n23, 107–8 Penn Central bankruptcy and, 243–45 318 Reichsbank, 24–25 crisis of 1931 and, 36–39 expansionary policies in 1924–27 and, 32–34 Report on the Task Force on System Foreign Currency Operations, 159–62 required reserve step index (RSI), 57–58 reserve currency dollar as, 266–73 global dollar system and, 282–84 reserve requirements See also bank reserves; excess reserves “backseat” era constraints on, 62–68 changes in ratios, 1935–59, 53–58 doubling in 1936–37 of, 68n18 Fed monetary policy and, 10, 53 Fed operating procedures and, 78–79 Fed-Treasury Accord of 1951 and, 75–78 Glass Steagall and, 39–41 government security yields and, 66–68 inflation pressures and, 109–13 macroeconomic conditions and, 57–58, 84–88 National Bank Act of 1863 and, 54n7 private credit and, 71–72 recession of 1920–21 and, 28–31 during World War II, 69–70 Rice, Emmet, 148n20 Richardson, Gary, 84–88 Riefler, Winfield, 20–21 Riefler–Burgess Doctrine, 20–21, 25, 46–49 Crash of 1929 and, 34–36 expansionary policies in 1924–27 and, 32, 33–34 Fed operating procedures and, 78n24 Glass–Steagall Act and, 39–41 Riksbank, historical evolution of, 222–26 Rist, Charles, 32–34 Robertson, J L., 104–9 Rodrik, Dani, 46–49 Rogers, James Harvey, 27–28 Rogoff, Kenneth, 138–40 Romer, Christina D., 50–53 on Fed monetary policy 1951–72, 103–4 macroeconomic policy analysis and, 58–62 on required reserve ratios, 53–58 Romer, David H., 50–53 on Fed monetary policy 1951–72, 103–4 macroeconomic policy analysis and, 58–62 on required reserve ratios, 53–58 Roosa, Robert, 102n19, 292–99 Index Roosa bonds, 102 Roosevelt, Franklin D., 72–75, 241–43 Glass–Steagall Act and, 25–26 suspension of gold standard and, 3, 10 Roosevelt Doctrine, 27–28, 46–49 Rowen, Hobart, 156–59 Rubin, Robert, 163–67, 172–75 rules-based monetary policies, 195–98 central banks and, 222–26 financial crisis and, 220–22 global impact of deviations from, 203–7 historical analysis of deviation from, 253–54 legislative initiatives for, 213–14 multiplier effect of deviations and, 210–11 strategies for preventing deviations, 213–14 Salinas, Carlos, 170–73 savings institutions, banking panics of 1930–33 and, 241–43 Schacht, Hjalmar, 32–34 Schwartz, Anna, 38n55, 39–41, 68n18, 166–67, 241 Harrison Doctrine and, 24–25 Strong Doctrine and, 23–24 Securities Exchange Act of 1934, 50–53, 72–75, 84–88 securities trading See also government securities Crash of 1929 and, 238–39 Crash of 1987 and, 247–48 dollar stability and, 266–73 expansionary policies of 1924–27 and, 32–34 Glass–Steagall and, 25–26 World War II yield structure, 69–70 Seger, Martha, 156–59 semiannual contribution, exchange rate intervention and, 138–40 shadow banking system, 228–29 Shafer, Jeffrey R., 139n9, 144–46 Sheets, Nathan, 175–78, 271–73 Shin, Hyun Song, 207–10 short-term interest rates “backseat” era constraints on Fed and, 84–88 benign neglect paradigm and, 113–17 emerging market economies and, 195–98 Fed targeting of, 58–62 policy rule deviations and, 203–7 short-term markets Crash of October 1929 and, 238–39 Index dollar shortage and Triffin’s paradox and, 92–95 global dollar system and, 278–84 Operation Twist and, 104–9 Penn Central bankruptcy and, 243–45, 250–53 in postwar environment, 71–72 Riefler–Burgess Doctrine and, 20–21 World War II yield structure and, 69–70 Shultz, George, 135–38 Siegman, Charles, 149–54 SIGMA model, policy rule deviations and, 203–7 Silva Herzog, Jesus, 149–54 silver standard, central banks and, 222–23 Slifman, Larry, 156–59 Smets, Frank, 203–7 Smith, Adam, real bills doctrine and, 18–20 Smithsonian Agreement, 116, 135–38 foreign exchange policy and, 142–43 Sneddon, Jane, 167–69 Solomon, Anthony, 148n20 Solomon, Robert, 135n6, 135–38 sovereign debt external deficits and exchange rates and, 146–62 third world debt crises, 148–53 Soviet Union, 175–78 Bretton Woods and, 121–26 Special Drawing Rights (SDRs), 97–98, 124–25 spillback effect, international financial crises and, 285–91 spillover policies of central banks, 203–7, 260–61 international financial crises and, 274–77, 285–91 Mexican financial crisis and, 289–91 Sprinkel, Beryl, 154 Stable Money Association, 25 Steagall, Henry, 25–26 sterilized intervention strategy, 152–59, 163–67, 191–94 sterling crisis of 1968, 4–5 Stockton, David, 156–59 stop-go operations benign neglect paradigm and, 113–17 inflationary pressures and, 109–13 stress tests for financial institutions, 230 banking panics of 1930–33 and, 241–43 Stroebel, Johannes, 207 319 Strong, Benjamin, 2, 19–20 expansionary policies in 1924–27 and, 31–34 Strong Doctrine and, 23–24 Warburg Doctrine and, 21–23 Strong Doctrine, 23–24, 41–43, 46–49 Crash of 1929 and, 34–36 recession of 1920–21 and, 30–31 strong dollar policy, establishment of, 163–67 subprime crisis asset purchases and, 266–73 collateralized debt obligations and, 226–27 dollar stability and, 266–73 intervention strategies and, 193–94 Lehman Brothers collapse and, 228–29 Troubled Asset Relief Plan and, 229–30 Suh, Myeongguk, 275 Summers, Lawrence, 163–67, 172–73, 175–78 Supervisory Capital Assessment Program (SCAP), 230 Swanson, E T., 106n23 swap transactions crisis of 1931 and, 36–39 Crisis of 2008 and, 226–27 dismantling of network for, 167–69 dollar stability and, 266–73 Fed establishment of, 4–5 Fed intervention strategies and, 159–62 Federal Reserve foreign exchange intervention and, 99–102 Foreign exchange intervention and, 138–40, 141–42 global dollar system and, 278–84 global recession of 1970s and, 140–41 LTCM crisis and, 248–50 Mexican exonomic crisis and, 286–89 Mexican financial crisis and, 170–73 Swiss Interbank Clearing (SIC), 223n5 Swiss National Bank international cooperation during Crisis of 2008, 227 monetary policy cooperation and, 218–19 monetary targeting rule and, 223n5 swap transactions and, 7–9, 36–39, 266–73 Swiston, Andrew, 129–35 sworn-statement requirements, 26n26 syndicated bank lending, US GDP and, 5 systemically important financial institutions concept, history of financial crises and, 230–36 320 taper strategy for asset purchases, 274–77 target rules central banks and, 224, 259–65 LTCM crisis and, 248–50, 253 target zones dollar depreciation and, 156–59 in postwar environment, 71 Taylor, John B., 11–12, 195–214, 198n5 Taylor Rule, 9–10 federal funds rate and, 58–62, 113 as instrument rule, 230–36 interest rate coefficients, 60n16 real-time Taylor rules, 107–8 Teeters, Nancy, 148n20 Temporary Guarantee Program for Money Market Funds, 229–30 Temporary Liquidity Guarantee Program (TLGP), 229–30 ten-year treasury rate dollar depreciation and, 135–38 managed floating vs intervention and, 163–67 recession of 1980–82 and, 147–49 Tepper, Alexander, 275 Tequila Crisis of 1994–95, 286–89 Term Auction Facility (TAF), Crisis of 2008 and, 227 Term Securities Lending Facility (TSLF), 227 Terrell, Henry, 144–46 third world debt crises, 149–54 Thomas, Elmer, 39–41 Thornton, Henry, 230–36, 250–53 time-inconsistency problem instrument rules and, 223–24 metallic standard and, 222–23 time-series analysis, of global economy, 202–3 TMCM model, deviations from monetary policy and, 203–7 Too Big to Fail doctrine, Continental Illinois bank crisis and, 245–46, 250–53 trade acceptances, Warburg Doctrine and, 21–23 trade policies Bretton Woods and, 95–97, 121–26 capital constraints and balance of payments, 98–99 inflation pressures and, 109–13 tradeoff curves Minsky-Taylor curve, 202–3 in multicountry modeling, 198–202 Index transactions data, US global integration and, 129–35 Treasury (US) “backseat” era constraints on Fed and, 62–68 banking panics of 1930–33 and, 239–43 Bretton Woods and, 121–26 conflicts with Fed, 73n22 crisis of 1907 and role of, 236–38 Crisis of 2008 and actions of, 229–30, 262–64 debt financing by, 71–72 dollar rescue package of 1978 and, 144 Exchange Stabilization Fund and, 99–102 Fed cooperation with, 50–53, 69–70 international monetary system reform and, 142–43 Lehman Brothers collapse and, 228–29 managed floating vs intervention and, 163–67 Secretary’s pressure on Fed, 1936, 66–68 security yields of, 60n15 supervisory actions during Crisis of 2008, 230 Treasury securities Crisis of 2008 and, 228 Fed holdings of, average annual change in, 104–9 Fed-Treasury Accord of 1951 and, 75–78 Operation Twist and yields on, 104–9 World War II yield structure for, 69–70 Triffin’s paradox, 4, 92–95, 266–73 Troubled Asset Relief Plan (TARP), 229–30 Truman, Edwin M., 11, 128–81, 191–94 Tucker, Paul M W., 280 two-country model of monetary policy, 198n5 unemployment rate in 1961 recession, 103–4 Bretton Woods and, 95–97 inflation pressures and, 113–17 monetary policy and, 109–13 Union Générale (France), 230–36, 250–53 United Kingdom financial crises in, 220–22, 260–61 gold standard in, 2–3 suspension of gold standard in, 38 swap transactions with, 140–41 United States history of financial crises in, 220–22 policy rule deviation effects in, 203–7 postwar gold stocks of, 3–4 unsterilized intervention strategy, 152–59 Index Velde, Francois R., 68n18 Versailles Treaty, crisis of 1931 and, 36–39 Veterans Bonus of World War I, 39–41 Victory Loan, 28–31 Volcker, Paul, 5, 11–12, 13 China delegations and, 175–78 current account balances and, 135–38, 153–59 easing of credit controls and, 147–49 on emerging market economies, 195–98 on global financial crisis, 220–22 inflation crises and, 144–46 multicountry models data base, 203–7 Roosa Lecture excerpts from, 292–99 third world debt crises and, 149–54 von Peter, Goetz, 278–84 wage and price freezes, 116 inflationary crisis of 1970s and, 144 multicountry modeling and, 198–202 Wallich, Henry, 142–43 war loan deposits, during World War II, 69–70 Warburg, Paul, 2, 46–49 Warburg Doctrine, 21–23, 41–43, 46–49 warehousing dollar stability and, 160n45 floating rate management and, 163–67 Mexican financial crisis and, 172–73 Warren, George, 27–28 Wealth of Nations (Smith), 18–20 Wheelock, David C., 10, 24–25, 50–80, 68n18 White, Eugene N., 12, 220–54 Kamin’s comments on, 259–65 Wieland, Volker, 203–7 Williamsburg G7 summit, 156–59 Willis, H Parker, 18–20 Wilson, Woodrow, 1–2 Woodin, William, 27–28 Woodward, Bob, 172n55 World Bank Bretton Woods and, 121–26 third world debt crises and, 149–54 World Economic Conference 1933, 27–28 World War I, gold standard and, 2–3, 17 World War II dollar shortage and Triffin’s paradox after, 92–95 Fed monetary policy during, 3, 50–53, 69–70, 84–88 required reserve ratios during, 57 Wouters, Raf, 203–7 Yellen, Janet, 202–3 Yeltsin, Boris, 175–78 yen, dollar depreciation against, 156–59, 161–62, 207–10 Yeo, Edwin H., 141–42 yield curve, twist in, 104–9 Young, Clifford S., 72–75 Zedillo, Ernesto, 170–73 zero interest rate policy, 271–73 global impact of, 207–10 Zhu, Feng, 207–10 Zhu Rongji, 175–78 Zoellick, Robert, 175n58 321 newgenprepdf Other books in the series (continued from page iii) Michael D Bordo and Roberto Cortés-Conde, Editors, Transferring Wealth and Power from the Old to the New World, 2001 Howard Bodenhorn, A History of Banking in Antebellum America, 2000 Mark Harrison, Editor, The Economics of World War II, 2000 Angela Redish, Bimetallism, 2000 Elmus Wicker, Banking Panics of the Gilded Age, 2000 Michael D Bordo, The Gold Standard and Related Regimes, 1999 Michele Fratianni and Franco Spinelli, A Monetary History of Italy, 1997 Mark Toma, Competition and Monopoly in the Federal Reserve System, 1914–1951, 1997 Barry Eichengreen, Editor, Europe’s Postwar Recovery, 1996 Lawrence H Officer, Between the Dollar-Sterling Gold Points, 1996 Elmus Wicker, Banking Panics of the Great Depression, 1996 Norio Tamaki, Japanese Banking, 1995 Barry Eichengreen, Elusive Stability, 1993 Michael D Bordo and Forrest Capie, Editors, Monetary Regimes in Transition, 1993 Larry Neal, The Rise of Financial Capitalism, 1993 Stephen N Broadberry and Nicholas F. R Crafts, Editors, Britain in the International Economy, 1870–1939, 1992 Aurel Schubert, The Credit-Anstalt Crisis of 1931, 1992 Trevor J. O Dick and John E Floyd, Canada and the Gold Standard, 1992 Kenneth Mouré, Managing the Franc Poincaré, 1991 David C Wheelock, The Strategy and Consistency of Federal Reserve Monetary Policy, 1924–1933, 1991 ... in managing the financial system, situated as he was at the epicenter of US financial markets and having been involved in managing the last major financial crises in 1907 and 1914 Strong was advised... Truman’s chapter examines the Fed’s role in international economic and financial policy and in international economic analysis covering four areas:? ?the emergence and taming of the Great Inflation,... centralbank policies and has appeared in the International Journal of Central Banking, the International Journal of Finance and Economics, and the Journal of Money, Credit and Banking Humpage has