'..to not be an endless source of easy credit and bail-outs..'

'Long ago, in a universe of sane fiscal policy far away, there existed an institution, then new to the world of international banking and finance, called the Federal Reserve Bank, whose primary concern of the day—the day being its founding on December 13, 1913—was to have very large reserves of cash backed by even larger reserves of gold that were enough “to earn the public trust.” It was an unusual kind of organization, where crude, simplistic policy directives such as “safety and sound judgement”, “lawful money” and “normal monetary order” possessed none of the sophisticated reasoning of “zero-interest rate policy”, “helicopter Ben” and “quantitative easing’ characterizing that Bank’s latter day ne’er-do-well progeny. Few American bankers at the time really even wanted a “Fed”, fearing that the public--and the bankers themselves--would not understand what its mission was not: that is, to not be an endless source of easy credit and bail-outs. Indeed, it was altogether another world.

“There are always many citizens and some bankers who believe that a central bank exists for the purpose of making credit easy at all times and obtainable without difficulty by any bank, no matter what its condition may be or the circumstances under which it wishes to borrow”, wrote Thomas Conway, Jr. in a seminal article, “The Financial Policy of the Federal Reserve Banks” in The Journal of Political Economy in April 1914. A central bank, as “the bankers’ bank”, was in a general way expected to do what banks of the community were supposed to do for the individual business man and depositor, “and this does not mean that it is free to tend lavishly to a bank without inquiry into the purpose of the loan”, continued Conway. “Nor does it mean it is obliged to come to the rescue of every bank that is in serious difficulty.”

The early Fed founders took their cues from the central banks of the British and the French—in particular, those banks’ stringent codes of monetary conduct. Without wanting to romanticize the era, one may say that fiscal conservatism was indeed the international order of the day and the models of the mighty Bank of England and the Bank of France made high reserve ratios the imperative of the early Federal Reserve. Before the days of those Fed banks, no agency existed to lead banks in attempting to avoid undue credit expansion such as preceded the crisis of 1907. The general economic situation at the time was comparatively sound and the crisis was largely a result of the excessive inflation caused by the banks. “The importance of a large reserve cannot be too strongly emphasized”, wrote Conway, “and the directors of these institutions must be forced by public opinion, if necessary, to realize that they are trustees of the nation’s prosperity and that they must carry large reserves.” Conway added: “It would be very unsafe for the Federal Reserve Banks customarily to allow their reserves to run down below 50% and safety demands, at least in the early years when the system is getting into operation that reserves shall run as high as 75%.”

..

"It was, at least in theory, simple enough in the old days," wrote a wistful W. Randolph Burgess, head of the New York Federal Reserve, in 1938. "In the present strange new world, where the old gold portents have lost their former meaning, where is the radio beam which the central banker may follow? As noted in this article, “the men of his era and of the late nineteenth century understood the meaning of such a question and, more importantly, why it is one that must be asked.” But theirs was a different world, when some antiquated notion such as “the public trust” guided policy and to be a conservative was the most future-oriented outlook one could adopt.'

- Marcia Christoff-Kurapovna, Central Banks Haven't Always Been Quite as Bad as They Are Now, May 30, 2018



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