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This chapter provides an overview of the Fed's policy structure. It addresses the following questions: Where does responsibility for monetary policy decisions reside in the Fed? What does the Federal Open Market Committee do and how is it organized? And how are other monetary policy instruments controlled? It also looks at how the politically appointed Board of Governors is chosen, how the Reserve Banks is governed, and the role of the Reserve Banks in the policy process. It also asks: should the regional structure of the Fed be modified for today's world? Should Reserve Bank presidents be politically appointed? Do member banks and directors of Federal Reserve Banks unduly profit or exert influence? It also examines what happens to the profits from Fed operations, the underlying connection between the government and the Fed, and how the government keeps tabs on the Fed. What does it mean in practice to say the Fed is independent?

The government successfully responded to the 2008 financial crisis through the Federal Reserve's use of its lender-of-last-resort (LLR) authority. The presence of a strong LLR is paramount to financial stability. The need for such a lender was the reason the Federal Reserve System was created. A strong and independent LLR is even more important than a strong and independent manager of monetary policy. A bad LLR policy could destroy the country in weeks, forcing huge losses of wealth and strong motives for revolt. This chapter discusses the creation of the First Bank of the United States (1791–1811) and Second Bank of the United States (1816–1836), federal banks that could loan to any borrowers, commercial as well as financial institutions, and ultimately foundered on the idea that it was improper for the US government to make loans to the private sector. It also details the creation of the Federal Reserve system in 1913 and its authority as LLR to nonbanks.

Chapter 1 introduces the unrivaled political and economic power of America’s Central Bank, the Federal Reserve System. The Federal Reserve Bank is a mutant institution of government. It has enjoyed anonymity from Americans for most of its history even though it wields unparalleled power on domestic policy that is largely free of the traditional system of checks and balances, which routinely grind down presidential and congressional proposals. The exceptionalism of Fed power stands out among the three branches of government within the United States and among democratic capitalist countries. Instead of studying the Federal Reserve as merely a state agency implementing technical monetary and interest rate policy, this book analyzes the Fed as a powerful political institution with its own interests (and market favorites), which its leaders pursue and which contribute to rising economic inequality and racial disparities. The Fed’s exceptional independent capacity and favoritism were spotlighted in its responses to the 2008–2009 Great Recession and the economic and financial turmoil created by the start of the coronavirus in 2020.

This chapter follows activists during the late 1970s and early 1980s, when the Home Mortgage Disclosure Act and the Community Reinvestment Act entered the federal regulatory state. Activists scored an important victory as the Federal Home Loan Bank Board embraced and spread a reinvestment program called Neighborhood Housing Services, a three-way partnership among municipal government, local banks, and community organizations that was created by Pittsburgh activists. But at the same time, two other developments suggested that the Board’s version of “urban reinvestment” ultimately deviated from what activists envisioned. First, regulators diagnosed the problem of reinvestment through non-discrimination framework that had emerged from the open housing movement; they focused on discrimination against individual borrowers. In contrast, activists had long argued that redlining should be understood as race-based geographic discrimination—a problem for entire neighborhoods when bankers assumed that non-white residents made communities “risky.” Here, activists and regulators talked past each other. Second, a new Board-led urban initiative called the Community Investment Fund revealed that regulators saw new urban lending as a potential boon to savings and loans. But the Board worsened gentrification by encouraging savings and loans to court more affluent back-to-the-city borrowers.

This chapter examines the experiences of Mexican immigrants in Broadway Federal Bank, established in the post-World War II period to specially serve the needs of African Americans in South Los Angeles. Drawing on oral interviews, it considers how the bank has changed over time in response to demographic change, particularly after the civil unrest of 1992. The chapter first provides a historical background on Broadway Federal and goes on to discuss how the civil rights activism of its founder and first chairman, H. Claude Hudson, and his son, Elbert, within the National Association for the Advancement of Colored People (NAACP) shaped their relationship with the African American community in South Central Los Angeles. It then explores how the 1992 Los Angeles uprisings affected the leadership of Broadway Federal and how the presence of Latinos as bank employees introduced a positive atmosphere of banking at Broadway Federal. It suggests that the bank's “success” is dependent not only on its rich African American history, commitment, and struggle but also on the support of Latinos.

This chapter examines how central bank cooperation became a multilateral enterprise during the opening weeks of the First World War. It was the Bank of England that took the initiative to establish a network of Allied central banks. The US Federal Reserve System was framed in 1913 and went into operation shortly after the war began in Europe. The Federal Reserve Bank of New York (FRBNY) also joined the Allied central bank network as soon as it could, well before the US government entered the war. In early 1915, backed by the FRBNY, US private banks began to finance the enormous military purchasing programs run by the British and French governments in the United States.

This chapter discusses Federal Reserve support of the Treasury market during World War I, which was founded on two statutory credit facilities: the original power of the Reserve Banks to discount, or purchase, loans made by member banks to their customers; and the subsequently added power of the Reserve Banks to lend to member banks. Reserve Bank discounts were limited to short-term loans “arising out of actual commercial transactions” and short-term loans to purchase or carry Treasury securities.

This chapter discusses how Alexander Hamilton pushed for a national, centralized, and government-coordinated banking system. He argued that only this system of banking would produce a world-class economy and a unified, prosperous nation. Hamilton emphasized that successful banking required a strong partnership with the federal government. As Lin Manuel Miranda's Hamilton: An American Musical makes clear, a large federal bank was Thomas Jefferson's worst nightmare. Jefferson feared that powerful, centralized banking would threaten democracy and suffocate credit for the non-elite small farmers that would be the lifeblood of the nation. He proposed that these inequalities should be remedied by forcing banks to serve only local markets. Jefferson won in the short term, but Hamilton was more prescient about what the country would need and the central role the federal government would take on within the banking sector.

This chapter begins with a discussion of the Federal Reserve and the Federal Reserve Banking System. The Federal Reserve System was created by Congress under the Federal Reserve Act “to provide for the establishment of federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States and for other purposes.” The Federal Reserve System comprises a central Board of Governors appointed by the president of the United States and confirmed by the Senate, and 12 regional Reserve banks. Monetary policy is set by the Federal Open Market Committee (FOMC). The remainder of the chapter covers monetary policy, quantitative easing, balance sheet normalization and the FOMC minutes.

William McChesney Martin Jr., who served as chairman of the Federal Reserve System from 1951 to 1970, is the son of Rebecca Woods and William McChesney Martin Sr. The elder Martin's father, Thomas L. Martin, was a co-owner of the McChesney and Martin Grain Company, which went bankrupt in 1894 due to a nationwide financial panic that often struck Americans in the second half of the nineteenth century. Thomas's bankruptcy convinced William McChesney Martin Sr. and his younger brother, Louis, to seek greener pastures in Missouri. Martin would become chairman of the board and agent of the St. Louis Federal Reserve Bank in 1914 at a time when the burning issue was the proposal for a National Reserve Association to strengthen the nation's banking system.

This chapter first takes into account the history of financial crises in America, citing financial crises as a regular and often debilitating feature of American life. The lack of a crisis for about 50 years, here, is attributed to the federal government’s active role in managing financial risk. This is a role which began to blossom in 1933 with the passage of the Glass-Steagall Act, which introduced federal deposit insurance, expanded federal supervision of banks, and separated commercial banking from investment banking. Critics of the Glass-Steagall Act, however, cited problems that could have arisen, such as the undermining of the nation’s financial system, or the encouragement of excessive risk taking or “moral hazard.” In the end, private financial institutions and markets cannot always be relied upon to manage risk effectively on their own. As a result, the best way to address the issue is through the identification and systematic regulation of significant financial institutions on an ongoing basis.

The HOLC was passed during the first hundred days of the Roosevelt administration, and like other New Deal programs was directed at a pressing problem with a clear constituency in mind. Given the foreclosure crisis described in the previous chapter, by early 1933 a variety of interest groups were putting great pressure on the federal government to pass a program to prevent foreclosures and stabilize the residential real estate market. Homeowners, lenders, and real estate builders all lobbied for action. The HOLC paralleled similar legislation for the farm mortgage sector, and followed less successful efforts to address the crisis, including state-level moratoria legislation, and the creation of the Federal Home Loan Bank system.

This chapter begins with an intellectual history of the Phillips curve. It then provides a summary of the revised conference papers and comments presented during the Federal Reserve Bank of Boston’s June 2008 conference, “Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective”, placing this material within the history of thought regarding the Phillips curve paradigm.

This chapter discusses how federal regulators contributed to the subprime crisis. Congress laid the groundwork back in 1999 and 2000, when it deregulated over-the-counter credit default swaps, which ultimately became pathways of contagion. The Securities and Exchange Commission (SEC) for its part looked the other way while banks issued droves of subprime bonds and collateralized debt obligations (CDOs) marred by shoddy due diligence, skimpy disclosures, and inflated credit ratings. Then federal banking regulators sealed the financial system's fate by allowing commercial banks to load up on toxic mortgage-backed securities.

Treasury officials adopted two strategies to ease fluctuations in government balances at the Federal Reserve Banks, which would have otherwise resulted from the immense flows of funds attributable to wartime tax payments and bond sales. The first was to raise (and quickly disburse) money in smaller amounts—several hundred million dollars at a time—by issuing certificates of indebtedness that could be used later to satisfy tax liabilities or to fund bond subscription payments. The second was to redeposit bond and tax receipts in Treasury accounts at commercial banks. This chapter examines the first strategy. Between April 1917 and mid-1919, the Treasury made thirty-three public offerings of bond-anticipation certificates and fourteen public offerings of tax-anticipation certificates. In view of the novelty and unprecedented scale of the operation, the certificate program worked quite well.

This chapter recounts the spring of 1920, when three of Wall Street's top bankers—Thomas W. Lamont of J.P. Morgan & Company, Frank A. Vanderlip of National City Bank, and Benjamin Strong of the Federal Reserve Bank of New York—made their own separate visits to Japan, which had suddenly emerged as a new financial power. These bankers, all ambitious to build a new world more open to American business, had already crossed paths the year before in London and Paris, where they were involved in planning postwar European affairs. Their Tokyo tour of 1920 was thus a follow-on to a European tour in 1919. Wall Street financiers subsequently became key actors in shaping US-Japan relations during the decade of the 1920s. Financially speaking, this was the beginning of Japan's first “American” age. However, this era ended abruptly and violently in the autumn and winter of 1931–32.