Richard Anderson of St Louis Fed has a nice short note on US’s first quantitative easing – in 1930s in great depression.
It was actually quite interesting as Fed ended up creating reserves buying not just T-Bonds but gold as well. Fed was cautious buying bonds up to a point. Then came in gold via a superb tranfer of gold certificates:
The Fed’s reluctance could be overcome with gold. President Roosevelt controlled both the nation’s gold stock and monetary policy, so long as the Federal Reserve remained inactive. The president’s most effective tool was the Gold Reserve Act, passed January 30, 1934, which raised the value of gold from $20.67 to $35 per ounce. The mechanism by which the Treasury gained control was elegantly simple. On August 28, 1933, Roosevelt called all outstanding domestic gold into the Federal Reserve Banks; on January 30, ownership was transferred, before revaluation, to the Treasury from the Federal Reserve Banks in exchange for (paper) gold certificates. When gold’s price increased to $35 per ounce from $20.67, the Treasury realized a windfall profit of more than $2 billion.
The Treasury, Meltzer (2003) reports, began purchasing gold “immediately” via the issuance of additional gold certificates—bank reserves and the monetary base expanded when the gold certificates later were received by the Federal Reserve Banks. During 1934-36, markets, sharply increasing bank reserves and the monetary base. The effect on bank reserves is displayed in the table. In 1936, as today, concern arose regarding inflation.
Then, the Fed’s exit strategy was higher statutory reserve requirements, infeasible today. Today, the Fed’s exit strategy includes increasing the remuneration rate on deposits at the Fed, offering banks term deposits at the Fed, and the use of repurchase agreements.
Exciting stuff. What way of increasing bank reserves in the economy….
