A History of the Federal Reserve, Volume 2, Book 2, 1970-1986

A History of the Federal Reserve

by Allan H. Meltzer

Allan H. Meltzer’s critically acclaimed history of the Federal Reserve is the most ambitious, most intensive, and most revealing investigation of the subject ever conducted. Its first volume, published to widespread critical acclaim in 2003, spanned the period from the institution’s founding in 1913 to the restoration of its independence in 1951. This two-part second volume of the history chronicles the evolution and development of this institution from the Treasury–Federal Reserve accord in 1951 to the mid-1980s, when the great inflation ended. It reveals the inner workings of the Fed during a period of rapid and extensive change. An epilogue discusses the role of the Fed in resolving our current economic crisis and the needed reforms of the financial system. In rich detail, drawing on the Federal Reserve’s own documents, Meltzer traces the relation between its decisions and economic and monetary theory, its experience as an institution independent of politics, and its role in tempering inflation. He explains, for example, how the Federal Reserve’s independence was often compromised by the active policy-making roles of Congress, the Treasury Department, different presidents, and even White House staff, who often pressured the bank to take a short-term view of its responsibilities. With an eye on the present, Meltzer also offers solutions for improving the Federal Reserve, arguing that as a regulator of financial firms and lender of last resort, it should focus more attention on incentives for reform, medium-term consequences, and rule-like behavior for mitigating financial crises. Less attention should be paid, he contends, to command and control of the markets and the noise of quarterly data. At a time when the United States finds itself in an unprecedented financial crisis, Meltzer’s fascinating history will be the source of record for scholars and policy makers navigating an uncertain economic future.

Genres: Economics, History, Banking

616 pages, Hardcover

First published January 1, 2009

Reviews

[Eugene Kernes · Rating 3 out of 5]

Overview:
During this era, the Federal Reserve had to deal with high unemployment and high inflation, known as stagflation. Myopic in policy, which produced temporary economic fixes. The short-term seemingly random policy changes were made without much concern for long-term consequences of its actions. There was more pressure on lowering unemployment than inflation, which caused the government to stimulate the economy while reducing pressure on anti-inflation programs. Errors in understanding the interactions between economic factors precipitated in procyclical bias.

The Federal Reserve learned from its experiences, and made changes such using different economic models for decision making, and changing how they interact with the economy and citizens. During 1975, Congress tasked the Federal Reserve to publicly announce a 12-month money growth target, have long-term policies for economic production, and make reports to Congress at open hearings before the banking committees. Volcker, and successors, changed how the Federal Reserve operated by focusing more on inflation control, and using counter-cyclical money growth policies.

Addendum:
There was conflict between domestic and foreign objectives. Governments were not willing to sacrifice domestic policy of lower unemployment for international policy. Much like many nations, the United States focused on high employment even at the expense of inflation. Citizens choose temporary unemployment over wage reduction, making wages sticky.

Controlling inflations requires patience and persistence, which the Federal Reserve lacked during the era. Lacked long-term objectives, and ability to achieve them. There was research and ideas about managing money growth and information. They were ignored by the FOMC, while government economists accepted them. Even though government economics accepted that money growth led to inflation, it yielded to political pressures. Monetary policy had managed economic factors to maintain economic stability when the Federal Reserve started to reducing volatility of output and limiting inflation.

Caveats?
This is not an introductory book on monetary policy. To understand much of the history presented, would require the reader to have a background in monetary policy.

[Nick Klagge · Rating 4 out of 5]

The end of an era! I'm finally finished with Meltzer's (very long, 3-book) history of the Fed. (He has said he is not going to keep writing past 1986.) This was an interesting book because it covered the inflation of the 1970s and the Volcker disinflation of the early 1980s. Most of all, I would say that reading this book made me interested to read something more about Volcker. The FOMC tried some very new tactics to defeat inflation in the 1980s, which I knew before; what I didn't know until reading this was how uncertain everyone, including Volcker, was that they would have any effect. For a significant time after the new policies began, indeed, it appeared that they were not working at all, and ultimately it took several years for the full disinflation to take effect as the public's inflation expectations had become heavily anchored at a high level. I am very curious as to Volcker's mindset through this period, and what it was that got him to persevere even in the face of uncertainty and fairly strong evidence that his policy was having no effect.

Meltzer, who has a fairly conservative perspective, ends the book with a fair amount of criticism of the Bernanke Fed and its actions in response to the crisis. Time will tell whether his warnings of inflation will be brought to fruition, but as Krugman keeps saying, the inflationistas have been wrong for about 5 years now.

[Hana]

A review from the Federal Reserve's Edward Nelson: http://www.federalreserve.gov/pubs/fe...

[Billy McCoy · Rating 5 out of 5]

well documented and thoroughly researched.