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February 10, 2012

Historical Echoes: Return to Jekyll Island (Not The Creature from)

Amy Farber, New York Fed Research Library

On November 5-6, 2010, the Federal Reserve Bank of Atlanta and Rutgers University cosponsored a conference titled “A Return to Jekyll Island: The Origins, History, and Future of the Federal Reserve.” It took place at the Jekyll Island Club Hotel on Jekyll Island, Georgia—the same location as the historic meeting that led to the Federal Reserve Act of 1913. A five-minute film called “Jekyll Island and the Creation of the Federal Reserve” tells the story with riveting still images of the participants and setting.

    The idea of a “reunion conference” came from Rutgers economist Michael D. Bordo, with the purpose of marking the 100th anniversary of this historic meeting. Bordo answers some questions on Rutgers’ website about the original conference and what the Fed has learned since then. The agenda for the conference, with links to papers, presentations, and interviews, is available from the Atlanta Fed.

    Of great interest at the conference was a panel discussion in which E. Gerald Corrigan (former president of the Federal Reserve Bank of New York), Alan Greenspan, and Ben Bernanke talked about their biggest Fed-related crises. The moderator was University of Chicago professor Raghuram Rajan, author of the book Fault Lines. The webcast of the discussion, at about forty-four minutes, is worth watching. The discussion covers such topics as the Fed response to the 1987 stock market crash, the Great Moderation, the liquidity interventions in response to the 2008 Lehman bankruptcy, and the Fed's use of large-scale asset purchases. The transcript is also available.

    Paul Volcker was invited to be on the panel, but was unable to attend. However, he does offer some introductory remarks to the webcast:

It [the Fed in 1913] was quite a different institution; there was a lot of suspicion that it would be politicized or dominated by Wall Street or too-concentrated power. Some of those suspicions were reflected in the fact that the Federal Reserve in those days didn't even have the authority to buy government securities. There wasn't any idea of open market operations. There really wasn't any concept of monetary policy in the interest of stabilizing a growing economy.

Now that's all passed, but the controversy clearly has remained; the challenges have remained. The Federal Reserve has taken heroic action in recent years; it's acted fully up to the limits of its authority, it stabilized the financial system, saved the economy. It's been, to me anyway, an unexpected reward for those efforts. Somehow we come out of that crisis with the Federal Reserve regulatory authorities enhanced.

    Here is some good news for the employment of economists: After Greenspan discusses the crash of 1987, he ends by saying:

Then we ran into 2007 and 2008, and it's a wholly different ball game. I think that is going to create more Ph.D.s and more work for advisers and a lot of paper from dissertations.

    A New York Times article about the conference states:

If there was a consistent theme here, it was that the Fed’s independence was hard-won and fragile. After all, it was only in 1951 that the Fed gained full control over interest rates, having been pressed by the Treasury to keep them low to finance the government’s wartime borrowing.

The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

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