Interest Fates
The Fed itself is a fascinating institution, very much a product of the grudging recognition by early 20th century policymakers of the need to regulate the financial markets in some way, especially after the endlessly repeated succession of giant manic economic bubbles and booms alternating with devastating economic plunges into major recessions and depression. (Notably, the Great Depression of the 1930s was actually the third or fourth market downturn to carry the name, along with the storied crashes and mass bankruptcies of the 1870s and 1890s.)
So there was widespread support among senior bankers for an emergency lender and system-stabilizer after the especially brutal Panic of 1907, a highly free-market episode in which a tycoon’s botched attempt to corner the copper market set in motion an excruciatingly arcane series of financial transactions that triggered a giant stock market collapse and incredibly widespread bank runs and panics. The spreading catastrophe was only halted by the towering finance capitalist J.P. Morgan, whose central economic legacy was “Morganizing” enormous naked monopolies in industries from oil to steel to banking. The 1907 maelstrom only ended when he personally pledged gigantic amounts of his own money to essential banks, and was famously able to cajole other elite financiers into going along by threatening them with collapse. Even the American ruling class had to recognize that a “lender of last resort” should at least be a legally defined institution rather than a single hyperloaded capitalist with a weird face.
The Fed was thus created to provide stability to the banking system, but also to carefully avoid bringing it under anything approaching popular control. Its original mandate was simply to be the “lender of last resort,” a semi-public body that could provide emergency cash to banks on the edge of failure—meaning their depositors were demanding their money back. Because commercial banks only hold a small portion of our deposits as cash, and loan the rest out as mortgages and business loans, the potential exists for depositors wanting to make large withdrawals to exceed the bank’s cash-on-hand, which historically and today have the potential to lead to major panics when people rushed to the bank to try to get their money out, known as a “bank run.” Obviously, with a still-rolling run on various midsize and large banks as I write, this issue hasn’t faded with time.
But at the time of the Bretton Woods economic accords, the U.S. Congress gave the Fed a new, broader mandate: the twin goals of maintaining full employment (meaning medium-low unemployment) and price stability (meaning low inflation). But since then, the Fed has developed a track record that suggests far more devotion to the anti-inflation part of its mission, which caters to inflation-hating Wall Street financial institutions, rather than the full employment leg.