Free In FED We Trust by David Wessel

has to pay to borrow money, a measure that ordinarily is a useful gauge for the Fed. More important, though, are the rates that consumers and businesses have to pay to borrow, if they can borrow at all. If the gap — known as the “spread” — between the rates the Treasury pays on supersafe borrowing and the rates that ordinary borrowers pay widens (if they can borrow at all), then that becomes a much more important gauge of financial distress.
    Bernanke found that the gap between medium-grade Baa corporate bonds and supersafe U.S. Treasury bonds widened from 2.5 percentage points in 1929 to 1930 to nearly 8 percentage points in mid-1932. That was more than double the spread recorded during the deep recession of 1920 to 1922. “Money was easy for a few safe borrowers, but difficult for everyone else,” he concluded. Exactly the same was true during the Great Panic, and many of Bernanke’s innovations at the Fed were aimed at reducing that same spread, which widened sharply from about 1.6 percentage points in December 2006 to over 6 percentage points in December 2008.
I NTERVENTIONISTS VS . L IQUIDATIONISTS
    In the wake of the Depression, Congress made the only substantial changes to the Federal Reserve Act it has ever made. In 1935, it removed the Treasury secretary and comptroller of the currency from the board in Washington, renamed it the Board of Governors of the Federal Reserve System to emphasize its primacy over the district banks, and changed the title of the heads of the regional banks from “governor” to “president.” Even more significant, Congress diluted the power of the regional Fed banks to set interest rates by creating a Washington-dominated committee, the Federal Open Market Committee. All seven governors in Washington have a vote at all times, but only five of the twelve regional bank presidents vote in any one year, serving in a rotation dictated by statute. (The New York Fed president is always one of the five voting presidents.)
    That institutional change would prove important during the Great Panic, giving Bernanke the power to act despite the resistance of the presidents of some regional Fed banks. But the broader consequence of the Depression was the nature of received wisdom. Today, the notion that the government should or would stand by as the stock market crashed, credit markets stalled, and the economy tumbled over the abyss seems implausibly bizarre. The public, politicians, professors, and the press have been shaped by searing memories or photographs from the Great Depression, the years in which the unemployment rate rose to 25 percent and the country’s output of goods and services declined by 29 percent over four years. The lasting lesson — taught by economists with views as different as John Maynard Keynes and Milton Friedman, the leading economic minds of the twentieth century — is embraced almost universally by politicians and economic policy makers: government can and should act to prevent such a dangerous downward financial and economic spiral. Indeed, during the Great Panic, the Fed took interest rates to zero, and President Barack Obama signed into law a package of tax cuts and spending increases that amounted to $787 billion in fiscal stimulus over ten years, $185 billion of which was to hit the economy in the first year and another $399 billion in the second year.
    This notion of the government’s role was not universal in the 1930s. In his memoirs, Herbert Hoover described tension within his own administration, putting words in Treasury Secretary Andrew Mellon’s mouth that are routinely reported as something Mellon actually said.
    In one camp were the “leave it alone liquidationists” headed by Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the