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The Federal Reserve

A New History

An illuminating history of the Fed from its founding through the tumult of 2020.

In The Federal Reserve: A New History, Robert L. Hetzel draws on more than forty years of experience as an economist in the central bank to trace the influences of the Fed on the American economy. Comparing periods in which the Fed stabilized the economy to those when it did the opposite, Hetzel tells the story of a century-long pursuit of monetary rules capable of providing for economic stability.

Recast through this lens and enriched with archival materials, Hetzel’s sweeping history offers a new understanding of the bank’s watershed moments since 1913. This includes critical accounts of the Great Depression, the Great Inflation, and the Great Recession—including how these disastrous events could have been avoided.

A critical volume for a critical moment in financial history, The Federal Reserve is an expert, sweeping account that promises to recast our understanding of the central bank in its second century.

696 pages | 117 line drawings, 24 tables | 6 x 9 | © 2022

Economics and Business: Economics--Government Finance, Economics--History, Economics--Money and Banking


"Robert Hetzel presents a historical narrative of how the Federal Reserve has responded to the state of the economy, exploring the evolution of monetary policy over time in terms of the consistency in its response to the economy’s behavior. The Federal Reserve [examines] the lead-up to and fallout from the Great Recession, the 2008 financial crisis, and the European debt crisis, [analyzes] Fed credit and monetary policy during the COVID-19 pandemic, [and considers] how to make the monetary standard explicit and determine the optimal monetary standard."

Journal of Economic Literature

"Hetzel's book skillfully traces out the Fed's uneven history. He carefully identifies and explains the reasons for the Fed's major failures and successes and he covers the most recent episodes—the financial crisis, Great Recession, and the COVID-19 crisis—in great detail. Hetzel's own intellectual framework provides valuable nuances, resulting in a unified view of Fed policy, before and after 1980, with reference to a single model."

Peter Ireland, Boston College

"This book does for monetary policy what Doug Irwin's Clashing over Commerce did for trade policy. It is original in its historical coverage and in its ideas, and it offers a novel critique of classics in the field. Unlike many other monetary history books, this is written by a real insider, who has been active in monetary policy for decades. His points will be of interest to historians as well as economists. Through Hetzel's broad historical sweep, one can see both good monetary policy and bad monetary policy, and thereby learn from history."

John B. Taylor, Stanford University

"Robert Hetzel’s book provides a very informative and detailed history of the monetary policy conducted by the Fed. Readers interested in Fed history will enjoy reading the book and learn a great deal from it. Hetzel takes a sympathetic but also critical look at the Fed’s actions since its inception. The book testifies to the challenges and difficulties faced by central banks in charting an appropriate policy course."

Georg Rich, retired director and chief economist of the Swiss National Bank

Table of Contents

List of Figures and Tables
Chapter 1. In Search of the Monetary Standard
Chapter 2. The Organization of the Book
Chapter 3. What Causes the Monetary Disorder That Produces Real Disorder?
Appendix: Tables of the Monetary Contraction Marker by Recession
Chapter 4. The Creation of the Fed
   4.1. Populist Opposition to a Central Bank
   4.2. Reform of the National Banking System and the National Monetary Commission
   4.3. The Real Bills Foundation of the Early Fed
   4.4. A Gold Standard Mentality in a Regime of Fiat Money Creation
   4.5. Concluding Comment
Chapter 5. Why the Fed Failed in the Depression: The 1920s Antecedents
   5.1. The Real Bills Ethos of the 1920s
   5.2. Stopping Speculation without the Discipline of Real Bills and the International Gold Standard
   5.3. The Controversy over Stabilizing the Price Level
   5.4. Regulating the Flow of Credit: The “Tenth Annual Report”
   5.5. Controversy over the Monetary Standard: The Eastern Establishment versus the Populists
   5.6. Concluding Comment
Chapter 6. A Fiat Money Standard: Free Reserves Operating Procedures and Gold
   6.1. Changing the Monetary Standard with No Understanding of the Consequences
   6.2. The Fed’s Primitive Free Reserves Procedures
   6.3. Reserves Adjustment and the Call Loan Market
   6.4. The Pragmatic Development of the New Procedures
   6.5. Gold Convertibility and Free Gold: Frozen into a Gold Standard Mentality
   6.6. The Fed’s Incomprehension of the Consequences of Its Operating Procedures
   6.7. Concluding Comment
Chapter 7. A Narrative Account of the 1920s
   7.1. (Mis)Understanding a Paper Money Standard
   7.2. Benjamin Strong
   7.3. Adolph Miller—the Nemesis of Benjamin Strong
   7.4. The 1920–21 Recession
   7.5. Free Gold
   7.6. Monetary Policy in Recession: 1923–24 and 1926–27
   7.7. 1927
   7.8. Eliminating Credit Diversion into Securities Speculation
   7.9. Were the 1920s the “High Tide” of Federal Reserve Monetary Policy?
   7.10. Concluding Comment
Chapter 8. Attacking Speculative Mania
   8.1. Liquidating Speculative Credit by Liquidating Total Credit
   8.2. New York: Raise the Discount Rate and Banks Will Cut Back on Speculative Loans
   8.3. The Board: Use “Direct Pressure” to Make Banks Cut Back on Speculative Loans
   8.4. Marching toward the Great Depression
   8.5. A Graphical Overview of the Transmission of Contractionary Monetary Policy
   8.6. Identifying the Cause of the Depression as Contractionary Monetary Policy
   8.7. Concluding Comment
Chapter 9. The Great Contraction: 1929–33
   9.1. An Overview of the Great Contraction
   9.2. The Great Contraction and Unrelievedly Contractionary Monetary Policy
   9.3. 1930: Why Did the Fed Back Off before Recovery Began?
   9.4. Guarding against a Revival of Speculation by Keeping Banks in the Discount Window
   9.5. 1931: Contractionary Monetary Policy Becomes Even More Contractionary
   9.6. The Gold Standard Transmitted Contractionary US Monetary Policy
   9.7. 1932: Open Market Purchases and What Might Have Been
   9.8. 1932: Why Did the Fed Back Off?
   9.9. Early 1933: The Collapse of the Banking System
   9.10. What Made the Great Contraction So Deep and So Long?
   9.11. Why Did Learning Prove Impossible?
   9.12. Concluding Comment
Chapter 10. The Roosevelt Era
   10.1. Another Monetary Experiment
   10.2. Ending Gold Convertibility in 1933: Setting Off and Killing the Boom
   10.3. Return to a Gold Peg
   10.4. Governor Marriner Eccles
   10.5. The 1936–37 Recession
   10.6. Keeping the Real Bills Faith
   10.7. Concluding Comment
Chapter 11. The Guiding Role of Governor Harrison and the NY Fed
   11.1. Was Policy “Inept” Because Leadership Shifted Away from New York?
   11.2. The Origin of the “New York View”
   11.3. Assessing the Friedman-Schwartz View That Power Shifted from New York to the Board
   11.4. 1930
   11.5. 1931
   11.6. 1932
   11.7. The Political Economy of Open Market Purchases in 1932
   11.8. 1933
   11.9. The 1936–37 Increases in Required Reserves
   11.10. Concluding Comment
Chapter 12. Contemporary Critics in the Depression
   12.1. H. Parker Willis
   12.2. John Henry Williams
   12.3. Charles O. Hardy
   12.4. Joseph A. Schumpeter
   12.5. Gottfried Haberler
   12.6. Carl Snyder
   12.7. Harold Reed
   12.8. Lionel D. Edie
   12.9. John R. Commons
   12.10. Gustav Cassel
   12.11. Ralph Hawtrey
   12.12. T. Alan Goldsborough
   12.13. Irving Fisher
   12.14. Lauchlin Currie
Chapter 13. From World War II to the 1953 Recession
   13.1. The Post-Accord Grand Experiment
   13.2. From the End of the War to the Accord
   13.3. Explaining Recession with Prewar Inflationary Expectations
   13.4. From Real Bills to Lean-against-the-Wind: The Crisis Leading to the Accord
   13.5. What Did the Fed Borrow from and What Did It Abandon of Its 1920s Monetary Policy?
Chapter 14. LAW (Lean-against-the-Wind) and Long and Variable Lags
   14.1. Lean-against-the-Wind (LAW)
   14.2. LAW with Trade-Offs and Long and Variable Lags
   14.3. LAW with Credibility or LAW with Trade-Offs?
   14.4. LAW with Credibility and LAW with Trade-Offs as Semicontrolled Experiments
   14.5. Concluding Comments
Chapter 15. The Early Martin Fed
   15.1. The End of Real Bills
   15.2. Free Reserves as the Intermediate Target and Bills Only
   15.3. Concluding Comment
Chapter 16. From Price Stability to Inflation
   16.1. Back-to-Back Recessions: 1957Q3 to 1958Q2 and 1960Q2 to 1961Q1
   16.2. How Did the Early Martin Fed Lose Its Way in the Second Half of the 1960s?
   16.3. Martin’s Ill-Fated Bargain
Chapter 17. The Burns Fed
   17.1. The Political and Intellectual Environment
   17.2. Burns’s View of the Business Cycle and Economic Stabilization
   17.3. Burns as FOMC Chairman
   17.4. Inflation as a Cost-Push Phenomenon
   17.5. “Macroeconometric Failure on a Grand Scale”
   17.6. Concluding Comment
Chapter 18. Stop-Go and the Collapse of a Stable Nominal Anchor
   18.1 The Complicated Politics of an Incomes Policy and Stop-Go Monetary Policy
   18.2. Lean-against-the-Wind with Trade-Offs or Stop-Go Monetary Policy: A Taxonomy
   18.3. Burns’s Juggling Act
   18.4. G. William Miller
   18.5. The Cost of Allowing Inflation to Emerge in Economic Recovery
   18.6. Concluding Comment
Appendix: Real Rate of Interest
Chapter 19. The Volcker Fed and the Birth of a New Monetary Standard
   19.1. Restoring a Stable Nominal Anchor
   19.2. Creating a New Monetary Standard: LAW with Credibility
   19.3. The Louvre Accord
   19.4. A Graphical Overview of Monetary Policy in the Great Moderation
   19.5. A New Monetary Standard
Chapter 20. The Greenspan FOMC
   20.1. Restoring a Stable Nominal Anchor
   20.2. A Rocky Start with Louvre and the 1987 Stock Market Crash
   20.3. The 1990 Recession, the Jobless Recovery, an Inflation Scare, and Finally Credibility
   20.4. The Asia Crisis and the 2000 Recession
   20.5. Balancing Price Stability with Cost-Push Pressures
   20.6. Fear of Deflation
   20.7. Did Expansionary Monetary Policy Cause a Housing Bubble?
Chapter 21. The Great Recession
   21.1. An Overview: This Time Was Not Different from Past Recessions
   21.2. A Chronology of the Great Recession
   21.3. Fall 2008, the Lehman Bankruptcy, and the Flight of the Cash Investors
   21.4. Monetary Policy Takes a Back Seat
   21.5. Bernanke and the Credit Channel
   21.6. Reviving Real Bills Theories of the Collapse of Speculative Excess
   21.7. Contractionary Monetary Policy
Chapter 22. The 2008 Financial Crisis
   22.1. The Financial Safety Net and Moral Hazard
   22.2. The Cash Investors Run the SIVs in Summer 2007
   22.3. From Bear Stearns to Lehman Brothers
   22.4. After Lehman
   22.5. Putting Out the Fires in Fall 2008
   22.6. Bank Bailouts
   22.7. The Political Economy of Credit Policy
   22.8. Credit Policy Crowded Out Monetary Policy
   22.9. Crossing the Rubicon to Allocating Credit
   22.10. The Great Financial Crisis and Erosion of Support for Free Markets
Chapter 23. The Eurozone Crisis
   23.1. A Narrative Account of the Great Recession in the Eurozone
   23.2. The Interaction of Financial Crisis and Contractionary Monetary Policy
   23.3. The Quantitative Impact of a Monetary Shock
   23.4. Concluding Comment
Chapter 24. Recovery from the Great Recession
   24.1. Monetary Policy Was Initially Moderately Contractionary in the Recovery
   24.2. A Slow Start to the Recovery and Preemptive Increases in the Funds Rate
   24.3. Secular Stagnation, Fear of Global Recession, and Central Banks Out of Ammunition
   24.4. Quantitative Easing
   24.5. What Accounts for the Near Price Stability in the Recovery from the Great Recession?
   24.6. Concluding Comment
Appendix: The FOMC’s QE Programs
Chapter 25. Covid-19 and the Fed’s Credit Policy
   25.1. Chair Powell Defines the Narrative
   25.2. What Destabilized Financial Markets in March 2020?
   25.3. What Calmed Financial Markets in March 2020?
   25.4. Credit Policy Does Not Draw Forth Real Resources
   25.5. Supporting Financial Markets While Avoiding Credit Allocation
   25.6. Can the Fed Maintain Its Independence?
   25.7. Concluding Comment
Appendix: Program Definitions
Appendix: The Political Economy of Credit Policy
Chapter 26. Covid-19 and the Fed’s Monetary Policy: Flexible-Average-Inflation Targeting
   26.1. FOMC Commentary
   26.2. An Evolving Phillips Curve Sidelines Inflation
   26.3. The Return of the Phillips Curve
   26.4. Monetary Policy Becomes Expansionary
Chapter 27. How Can the Fed Control Inflation?
   27.1. Is Monetizing Government Debt by the Fed Inflationary?
   27.2. The Control of Money Creation and Inflation with IOR (Interest on Reserves)
   27.3. Restoring Money as an Indicator
   27.4. Concluding Comment
Chapter 28. Making the Monetary Standard Explicit
   28.1. Why the FOMC Communicates the Way It Does
   28.2. Rules versus Discretion as Seen by a Fed Insider
   28.3. A Case Study in FOMC Decision-Making: The August 2011 Meeting
   28.4. Using the SEP to Move toward Rule-Based Policy
   28.5. Using a Model to Explain the Monetary Standard
   28.6. Rules, Independence, and Accountability
Chapter 29. What Is the Optimal Monetary Standard?
   29.1. From Monetarism to the “Basic” New Keynesian DSGE Model
   29.2. The NK Model
   29.3. LAW with Credibility and LAW with Trade-Offs (Cyclical Inertia)
   29.4. The Optimal Rule
   29.5. Money and the NK Model
   29.6. Concluding Comment
Chapter 30. Why Is Learning So Hard?

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