Free A History of the Federal Reserve, Volume 2 by Allan H. Meltzer Page B

Congress expected the Federal Reserve to do more than avoid another Great Depression. It expected the act to lower the average and variability of the unemployment rate, and for many years it gave much greater weight to unemployment than to inflation. The new emphasis on employment heightened congressional interest in what the Federal Reserve did, in how and why it made its decisions. Increased frequency of congressional hearings reflected this political interest. Later, rising pressure for policy coordination with the administration challenged the Federal Reserve to find ways of reconciling independence and coordination. It did not succeed.
    Near the end of World War II, the Federal Reserve had engaged in domestic postwar planning, but it had not directly addressed or anticipated some of these issues. Its main concern was to avoid a return to the depressed high-unemployment economy of the 1930s. By 1951, with the Korean War under way, these concerns were no longer paramount. Its concern was re surgent wartime inflation. In the words of one of its principals: “Up to the time of the Korean crisis, the Federal Reserve was content to carry on a holding operation. It joined with the Treasury in opposing those who . . . counseled abrupt and vigorous use of credit policy to reduce the swollen money supply . . . In the face of the economic repercussions of the Korean crisis, however, such an approach was no longer practical” (Sproul, 1964, 234).

    At first, the Federal Reserve made no effort to set objectives for employment and inflation or develop the means of achieving them. It began its independent operation about where it had left off in the 1920s. Minutes of meetings show that the System’s principal concern was with current money market conditions, mainly control of the volume of member bank borrowing. By controlling borrowing, it expected to influence the banks’ supply of credit and thus the pace of economic activity. If this were done properly, officials and staff expected the price level to fluctuate around some stable value, but they did not have a framework linking their actions to these objectives, and they made no effort to develop one.
    Reversion to the practices of the 1920s is not entirely surprising. The new chairman of the Board of Governors, William McChesney Martin, Jr., was the son of a former Federal Reserve official. His father had served first as Chairman, later as governor and president of the St. Louis Federal reserve bank from 1914 to 1941. Martin reactivated the 1920s procedures with assistance from two staff members who served in the 1920s— Winfield Riefler and Woodlief Thomas. Riefler was assistant to the chairman and later Secretary of the Federal Open Market Committee. Thomas was research director and, after 1949, adviser to the Board. 2
    The structure of the modern Federal Reserve is, in large part, Martin’s creation. In the 1950s especially, he restructured the open market committee and its operating procedures. Shortly after coming to the Federal Reserve, he chaired a committee that recommended changes in the relation of the Federal Open Market Committee (FOMC) to the manager of the System account, the type of securities purchased, and the frequency of FOMC meetings. By 1955, the FOMC had adopted a policy of purchasing only Treasury bills (except in crises), eliminated the Executive Committee, greatly increased the frequency of its meetings, expanded the scope of its deliberations to include not just open market operations but all the tools of monetary policy, and encouraged all FOMC members to contribute to the policy discussion.
    2. Riefler joined the Board’s staff in 1923. In 1933, he left the staff but returned in 1948 as assistant to the chairman and secretary of the open market committee. During 1941–42, he served as a director of the Philadelphia Reserve Bank. He retired at the end of 1959. Thomas left the staff from 1928 to 1934. He retired in 1966.

    The 1950s were a period of