This research examines Federal Reserve interest rate policies and outcomes for the 1979-1994 period. These policies and outcomes are considered following a review of the creation, purpose, structure, and functioning of the Federal Reserve System.
A severe financial crisis occurred in the United States in 1907. Unfortunately, the crisis was just the latest in a long line of such crises. The crisis of 1907, more than was true of most of these crises, however, exposed severe weaknesses in the country's national banking system (Kidwell and Peterson, 1992, p. 112). The creation of the Federal Reserve System through the Federal Reserve Act of 1913 was intended to correct those deficiencies. The Act had four stated goals, as follows (Kidwell and Peterson, 1992, p. 112):
1. The Federal Reserve System was to act as the central monetary authority for the country. In this capacity, the agency was expected to expand and contract the country's money supply according to the needs of the economy.
2. The agency was to act as a lender of last resort. In this role, the Federal Reserve System was expected to furnish additional funds to member banks during periods of financial crisis.
3. The Federal Reserve System was to establish and operate an efficient system for the clearing and collecting of checks. This payment system was to be operational nationwide.
4. The agency was expected to add vigor to bank super-vision in the country. Although the Federal Reserve System was charged with specific responsibilities with respect to bank supervision, its responsibilities were limited, and the agency was not the exclusive federal bank supervision agency.
From the beginning, the American political leadership officially recognized that the purposes for which the Federal Reserve System was formed were, in fact, elements of the broader economic and financial objectives of the country (Wallich and Brady, 1988, p. 414). Thus, over the years, the Feder...