A Return to Jekyll Island:
The Origins, History, and Future of the Federal Reserve

Federal Reserve Bank of Atlanta and Rutgers University
November 5–6, 2010, Jekyll Island Club Hotel, Jekyll Island, Georgia

Papers, Presentations, and Interviews

Conference papers have been collected in the book The Origins, History, and Future of the Federal Reserve: A Return to Jekyll Island, published by Cambridge University Press. For more information, please visit the Cambridge University Press website.

Friday, November 5, 2010
Welcome and opening remarks
Dennis Lockhart, President and CEO, Federal Reserve Bank of Atlanta
Video iconJekyll Island and the Creation of the Federal Reserve
Session 1—Monetary and Financial Systems of the National Banking Era
"'To Establish a More Effective Supervision of Banking': How the Birth of the Fed Altered Bank Supervision"

Bank supervision during the National Banking era (1865–1913) was light by modern standards, and bank failures were commonplace. This paper argues that the cost of bank failures was nonetheless minimal, thanks to a system of double liability for bank shareholders. Double liability induced shareholders to voluntarily liquidate banks if they appeared to be in trouble. The Comptroller of the Currency reinforced market discipline by inducing more disclosure, marking assets to market, and ensuring prompt closure of insolvent national banks. The author argues that the arrival of the Federal Reserve weakened this regulatory regime. Monetary policy decisions often conflicted with the goals of financial stability, and the appearance of the Fed as an additional supervisor led to "regulatory arbitrage" by banks. When the Great Depression hit, policy-induced deflation and asset price volatility were misdiagnosed as failures of competition and market valuation. In response, the New Deal shifted to a regime of discretion-based supervision with forbearance.

Paper presenter: Eugene White, Professor of Economics, Rutgers University Presentation [Presentation] PPT logo
Discussant: Warren Weber, Senior Research Officer, Federal Reserve Bank of Minneapolis [Presentation] PDF logo
Moderator: Charles Plosser, President, Federal Reserve Bank of Philadelphia

Session 2—The Passage of the Federal Reserve Act
"The Promise and Performance of the Federal Reserve as Lender of Last Resort, 1914–1933"

This paper examines the origins and early performance of the Federal Reserve as lender of last resort. The authors trace the Fed's failure to act as an effective lender of last resort during the Great Depression to defects of the Federal Reserve Act and, more broadly, defects of the U.S. banking system. The paper describes how the Fed's failures led to numerous reforms in the mid-1930s, including expansion of the Fed's lending authority and changes in the System's structure and fundamental changes to the U.S. banking system. Finally, the authors consider lessons about the design of lender-of-last-resort policies that might be drawn from the Fed's early history.

Paper presenter: Michael D. Bordo, Professor of Economics, Rutgers University (coauthor with David C. Wheelock, Federal Reserve Bank of St. Louis) [Presentation] PPT logo
Discussant: Ellis Tallman, Professor of Economics, Oberlin College [Presentation] PPT logo
Moderator: Sandra Pianalto, President, Federal Reserve Bank of Cleveland

headphones iconInterview with Michael Bordo and Ellis Tallman (MP3 11:36) | Transcript

Session 3—The Founding of the Fed from an International Perspective
"Where It All Began: Lending of Last Resort and the Making of Sterling as the Leading International Currency in the 1860s"

At the time of the Fed's founding, the National Monetary Commission was concerned with importing best practices based on British central banking experience. Yet many aspects of the British experience were only imperfectly understood. Focusing on the Overend-Gurney financial crisis of 1866, the authors use previously unexplored archival data to shed light on the Bank of England's liquidity provision policies. The data reveal the surprising extent of the Bank's interventions during the 1866 crisis. The Bank's emergency lending was broad (extending to contemporary "shadow banks" such as bill brokers), deep (in terms of the sheer value of credit provided), and effectively cross-border (many foreign bills of exchange were discounted). The Bank's ability to counteract the Overend-Gurney crisis contributed to the emergence of the pound sterling as the leading international currency of the time.

Paper presenter: Marc Flandreau, Professor of International History and Politics, the Graduate Institute of International and Development Studies, Geneva (coauthor with Stefano Ugolini, also of the Graduate Institute)
Discussant: Barry Eichengreen, Professor of Economics and Political Science, University of California, Berkeley
Moderator: Richard Fisher, President, Federal Reserve Bank of Dallas
Session 4—From Passage of the Act (1913) until the Treasury Accord (1951)
"Volatile Times and Persistent Conceptual Errors: U.S. Monetary Policy, 1914–1951"

The Fed was established to bring stability to the U.S. financial system through the creation of an elastic supply of liquidity. Yet the most remarkable aspect of the 1914–51 period was its volatility—economically, politically, and financially. This paper argues that this period was also characterized by numerous errors in the Fed's cyclical policy. The author focuses on five key issues confronting Fed policymakers: (1) how to react to the stock market boom of 1928–29; (2) how to manage the constraints imposed by the gold standard on the Fed's ability to counteract monetary contraction; (3) how to react to the four Great Depression banking panics identified by Friedman and Schwartz; (4) how to react to the "liquidity trap" of the early 1930s; and (5) whether the reserve requirement increases of 1936–37 led to the recession of 1937–38. The extreme economic volatility over this period hindered the ability of Fed officials to learn from past policy mistakes.

Paper presenter: Charles Calomiris, Professor of Financial Institutions, Columbia University [Presentation] PPT logo
Discussant: Allan Meltzer, Professor of Political Economy, Carnegie Mellon University
Moderator: James Bullard, President, Federal Reserve Bank of St. Louis
Session 5—From the Accord (1951) until the End of Monetary Targeting (1982)
"U.S. Monetary Policy in the 1960s and 1970s: Tracking an FOMC Confronting Declining Credibility"

The author examines the beginnings of the Great Inflation of the 1970s and argues that these can be found in the loss of Fed credibility in the late 1960s and particularly in late 1969. An examination of contemporary FOMC transcripts and briefing materials suggests that the Fed's policy decisions during the late 1960s were framed by "practical monetarism." Familiar monetarist concepts such as inflation expectations, the natural rate, and policy credibility were repeatedly, if also informally, incorporated into Fed policy discussions under Chairman William McChesney Martin. The author argues that the Fed's attempts to manage its credibility were undermined in 1969 by dissonant statements from President Nixon and the prospect of a change in the Fed chairmanship.

Paper presenter: Robert King, Professor of Economics, Boston University [Talking points] PDF logo [Presentation] PDF logo
Discussant: Bennett McCallum, Professor of Economics, Carnegie Mellon University [Presentation] PDF logo
Moderator: James Bullard, President, Federal Reserve Bank of St. Louis
Session 6—1982 until the Present
"Government Policy, Credit Markets and Economic Activity"

The crisis of 2007–8 led to a number of unconventional policy interventions meant to stem the loss of credit availability. This paper lays a theoretical framework for the analysis of such unconventional policies. Four types of interventions are considered: (1) government transfers of net worth to private agents, (2) reductions in the cost of funds to financial firms, (3) equity injections into financial firms, and (4) loans to financial and nonfinancial firms. Under various models of financial frictions, policies of the first and second types are always effective, whereas results for the third and fourth policies depend more on the exact nature of underlying financial frictions.

Paper presenter: Lawrence Christiano, Professor of Finance, Northwestern University
Discussant: Thomas Sargent, Professor of Economics, New York University
Moderator: Jeffrey Lacker, President, Federal Reserve Bank of Richmond

headphones iconInterview with Lawrence Christiano and Thomas Sargent (MP3 15:34) | Transcript

Saturday, November 6, 2010
Welcome back
Dennis Lockhart, President and CEO, Federal Reserve Bank of Atlanta
Session 7—The Role of Research in Monetary Policy Deliberations
"Policy Debates at the FOMC: 1993–2002"

This paper presents a firsthand account of how the FOMC dealt with important policy issues from 1993 to 2002. As policy adviser for J. Alfred Broaddus, president of the Federal Reserve Bank of Richmond, the author attended nearly every meeting of the Federal Open Market Committee over this period and drafted the policy positions that President Broaddus presented to the committee. The paper reviews those positions and identifies occasions when theoretical advances in economics made practical contributions to FOMC policy discussions. The review also demonstrates the value for policy deliberations of theoretical perspectives beyond those incorporated in macroeconomic model simulations alone. Finally, the paper illustrates the process by which fresh academic thinking is introduced into the policy debate.

Paper presenter: Marvin Goodfriend, Professor of Economics, Carnegie Mellon University [Presentation] PDF logo
Discussant: Athanasios Orphanides, Governor, Central Bank of Cyprus
Moderator: Charles Evans, President, Federal Reserve Bank of Chicago

headphones iconInterview with Marvin Goodfriend and Athanasios Orphanides (MP3 16:01) | Transcript

Session 8—The Future Role of the Federal Reserve System
"Two Models of Land Overvaluation and Their Implications"

This paper focuses on policy responses to price bubbles in assets such as land. A bubble occurs whenever an asset's market price exceeds the price that a buyer would pay for the asset if he never expected to resell it. Bubbles are potentially costly to an economy because they are random; a sudden drop in the price of a bubble asset can disrupt an economy's ability to channel savings to their best use. The first part of the paper focuses on the implications of bubbles for financial regulation. The author argues that, to avoid fueling a bubble, bank regulation should become more stringent the greater the divergence between market prices and fundamentals. In the second part of the paper, the author analyzes macroeconomic policies that may undo some of the undesirable effects of a bubble collapse.

Paper presenter: Narayana Kocherlakota, President, Federal Reserve Bank of Minneapolis [Presentation] PDF logo
Discussant: Anil Kashyap, Professor of Economics and Finance, University of Chicago [Presentation] PDF logo
Moderator: Eric Rosengren, President, Federal Reserve Bank of Boston [Presentation] PPT logo

headphones iconInterview with Narayana Kocherlakota and Anil Kashyap (MP3 13:14) | Transcript

Session 9—Panel Discussion

Watch the Webcast | Transcript

Panelists will share personal insights and perspectives on the purpose, structure, and functions of the Federal Reserve System.

Panelist: Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System
Panelist: Alan Greenspan, Former Chairman, Board of Governors of the Federal Reserve System
Panelist: Gerald Corrigan, Managing Director, Goldman Sachs, and Former President, Federal Reserve Bank of New York [Remarks] PDF logo
Moderator: Raghuram Rajan, Professor of Finance, University of Chicago

Conference closing remarks