The Federal Reserve System had failed to stem the tide of bank closures and failures. The response of the Roosevelt administration was to centralize power in Washington. By centralizing authority and putting its own people in charge, the administration believed that it could secure more vigorous action from the Federal Reserve. In 1935 the Federal Reserve Board became the Board of Governors, all of whose members the president appointed. The Board of Governors was given control of the system’s most powerful economic tool, the ability to buy or sell securities on the open market. Marriner S. Eccles, a Utah banker, who believed strongly in using federal deficit spending and monetary policy to stimulate the economy, was the first chair of the newly empowered board. The district banks, which had been important in the 1920s, would now serve only an advisory role in making monetary policy. As a result the Federal Reserve played a much more active role as lender of last resort after World War II than it had before. The U. S. financial system at last had a fire department that could prevent individual fires from turning into mass conflagrations. The United States did not experience another financial crisis until 2008, when so many institutions caught fire at once that an overworked Federal Reserve was unable to prevent a general conflagration.
Although some of the financial reforms introduced by the New Deal were later abandoned, many, such as the Federal Deposit Insurance Corporation and the Securities and Exchange Commission, continue to this day. There are few better examples of how institutions created in the heat of an emergency (Walton 1979) may continue to influence economic actions for decades to come (Economic Reasoning Proposition 4, institutions matter).
World History
