Central Banking with (More) Centralization: The Breakdown of the 1913 Compromise and the Productive-Republican Fed

This chapter tells the tale of the demise of the 1913 Fed and its replacement by the Fed of today in preliminary, summary fashion in order to facilitate understanding of the more detailed, theoretically informed treatment of the subsequent chapters. The 1913 understanding of the RBD, this chapter indicates, was strong on endogenous money and hence productive allocation, but was weak on exogenous money and hence stable modulation—matters which didn’t assume continuously ‘existential’ import until the modern era with its ever-tighter integration of separate regional and international credit and money markets. This in turn led to the doctrine’s unfortunate wholesale ‘discrediting’ after the financial dramas of the later 1920s and early 1930s. The failure here, we find, was experienced by both Fed and Congressional policymakers as traumatic and confidence-killing. It thus led to an over-correction—in this case a frantic abandonment of the RBD altogether, rather than replacing its then ‘Strong’ formulation with the ‘Weak’ formulation I give it below. Though this change aided in the task of modulating exogenous money aggregates, it could not actually solve the full modulation problem without continuing to attend to the productive (not speculative) allocation of endogenous money aggregates as the original, pre-1935 Fed had done. That is then what the next Part of the Book endeavors to show.