The Fed After 1935: Where We Are Now

This Chapter takes our story up to the present. It shows how the 1935 reforms proved both well- and ill-advised much as the 1913 design of the Fed had proved well- and ill-advised ‘from the other direction.’ We find that the post-1935 inattention to money endogeneity and the associated imperative of productive allocation ultimately doomed the 1935 project of more effective money modulation itself. And that is for reasons rooted in money endogeneity as laid out in Chapter 4 . What we missed in 1935 and after was easy to miss for the first several decades following the 1935 reforms, this Chapter shows, thanks to the presence of other laws and institutions, put in place during roughly the same New Deal period, that effectively substituted for the pre-1935 allocative Fed. Chief among these were (a) the New Deal and WWII era Reconstruction Finance Corporation (‘RFC’), the most massive allocation-attentive special-purpose development bank in history; (b) tight restrictions on interstate banking and branching established or reinforced in the mid-1940s, which kept banking local hence not Wall Street focused; and (c) the Glass-Steagall separation of banking from speculative, as distinguished from productive, investment activity more generally in 1933. But as the RFC wound down and disbanded in the 1950s, and as Glass-Steagall separations and bank branching restrictions gave way in the 1980s and 1990s, the consequences of a no-longer allocative Fed grew no longer manageable or concealable. One of these consequences is an ever-more hollowed-out productive core of the American economy as Wall Street financial institutions seek profits in speculating and ‘outsourcing’ American production to cheap-labor jurisdictions. Another is the decline in real wages and hence struggling middle class that have been hallmarks of our nation’s past several decades. This has in turn led to increasing reliance by the American middle class on new forms of consumer, mortgage, ‘junk,’ and student debt, which in turn have fueled multiple bubbles and busts that bring ever more Fed QE rounds that leave the underlying problem of productive hollowing unaddressed while sowing the seeds for repeated and ever worsening asset and consumer price hyperinflations. Additional follow-on dysfunctions have of course been worsening inequality and social division, followed by political breakdown. The only way to ‘get our country back,’ the Chapter concludes, is to ‘get our Fed back.’ It’s to restore our once-great productive and industrially diversified economy, localized development banking, and the healthy middle class that those Productive-Republican institutions and practices historically enabled.