Reform Of The Federal Reserve System In 1935

This dissertation on the Federal Reserve (FED) reform of 1935 focuses on five issues: the original structure and operation of the Federal Reserve; the Great Depression and the FDR Administration's decision to reform the FED; the ideas and plans of Currie and Eccles on the reform; the debate in the Congress and the Banking Act of 1935; the significance of the 1935 reform and the new role of the FED in American economy.The Federal Reserve System that Congress created in 1913 was a product of compromise. It was designed to build a"regional"type of organization which consisted of twelve reserve banks run by bankers and a politically appointed Federal Reserve Board as an overseer and adjudicator. The compromise left the division of authority within the system unclear. As a result, conflicts frequently broke out between the reserve banks and the Board as both parties became rivals and failed in monetary policy making. Moreover, the real bills doctrine also diminished the Federal Reserve's ability to keep monetary management on the right track. Partly for these reasons, the FED did not succeed in preventing the stock market crash of Oct.1929, but made the depression even worse by its misjudgment in monetary policy. To put it in another way, the FED failed to play a role as a central bank because it was not a real one at that time.After the first one hundred days of the efforts to fight for the economic recovery, the FDR Administration began to realize they had to find a better way to get this country out of the Great Depression. A more centralized monetary policy-making system appeared to be vital to the success of many other measures that New Dealers were planning to put into practice such as deficit spending, anti-trust efforts, etc. It was in such a situation that the Federal Reserve reform was placed on the agenda of the FDR Administration. Lauchlin Currie, a young monetary theorist, became a designer of the reform when Marriner Eccles, a new Governor of the Federal Reserve Board took charge of the operation to win Congress'approval of the Banking Act of 1935. They both believed that the Federal Reserve Board should have greater power to control the supply of money and the FED should play a role as a true central bank to help American economy.The reform bill was hotly debated in both the House and Senate. The opposition from big banks in the east and Senator Glass was so strong that the FDR Administration had to make a compromise to get the final bill adopted by Congress. In spite of some setbacks, the Banking Act of 1935 successfully shifted the locus of power of the FED from regional reserve banks to the Federal Reserve Board which held a majority in the Open Market Committee. Consequently, the FED was transformed into a true central bank not only to finance the major reform programs of the New Deal but to help the U. S. government to manage American economy through its monetary tools in the long run. It is from this perspective that the Federal Reserve reform of 1935 should be seen as a turning point in the history of the Federal Reserve System.