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Can It Happen Again

The New Uses of Monetary Powers
Introduction
Over the past several years United States financial markets have experienced their most serious stresses and strains since the great depression of the 1930s. These stresses and strains have been due to both domestic and international developments. As a result market instruments, institutions, and usages have undergone marked changes, and the federal reserve system as well as the other agencies of the peculiarly decentralized central bank of the United States, have responded by adjusting their operations: monetary powers have been used in new ways.
Some of these new uses of monetary powers will be discussed under two headings: the guidance of the evolution of financial markets and the manipulation of uncertainty. As a result of these new uses, the domain of responsibility of the federal reserve and the relation between it and other regulatory agencies need to be reexamined.
Central banking has always been a major determinant of what is known with certainty, what is probable, and what is purely conjectural in financial markets. The evolution and developments of central banking has not been solely a reaction to an independently-evolving financial structure, but has been also a determinant of this evolution. A sophisticated central bank has always cast a “wider net” than any narrow legislated or contractural responsibilities. Thus it can be claimed that these new uses are not really new. The context, however, is new: monetary policy operations are now being undertaken in a world where active monetary and fiscal policy is used to “fine tune” the economy and where there is a wide acceptance of the view that this can be accomplished. As a result monetary policy is being carried out without the constraints upon financial positions and experimentation with new financial market usages that might result from prospects of serious business depressions. That is, fear of the proverbial income and employment “rainy day” is...