The Political Economy of Central Banking
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The Political Economy of Central Banking

Contested Control and the Power of Finance, Selected Essays of Gerald Epstein

Gerald Epstein

Central banks are among the most powerful government economic institutions in the world. This volume explores the economic and political contours of the struggle for influence over the policies of central banks such as the Federal Reserve, and the implications of this struggle for economic performance and the distribution of wealth and power in society.
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Chapter 5: THE FEDERAL RESERVE-TREASURY ACCORD AND THE CONSTRUCTION OF THE POSTWAR MONETARY REGIME IN THE UNITED STATES

Gerald Epstein and Juliet B. Schor

Abstract

In 1913, The Federal Reserve Act established the Federal Reserve System as an independent central bank. The Federal Reserve's autonomy was overridden during the Second World War when the Federal Reserve agreed to maintain fixed interest rates on long-term government bonds and limit fluctuations in short-term interest rates. This agreement effectively meant that the Federal Reserve came to be dominated by the Treasury Department and, as a result, fiscal policy dominated monetary policy. More important, the World War II agreement meant that elected government officials, rather than the unelected members of the Federal Reserve System, controlled monetary policy for the first time in the history of the Federal Reserve. An unprecedented experiment in democratic, rather than banker, control of monetary policy was about to begin.

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