One amendment enabled the Board to change reserve requirements in banks in New York City and Chicago, known as central reserve cities, without changing requirements for other banks. To enable the Federal Reserve to accomplish its wartime tasks, the Board of Governors asked Congress to amend the Federal Reserve Act. Single-payment loans were limited to ninety days. Installment loans were limited to twelve months. The Board’s Regulation W imposed large down payments and short maturities on loans to purchase a wide range of consumer durables. The Federal Reserve aided these efforts by regulating consumer credit. These included regulations on the prices of goods and wages of workers and a rationing program for scarce commodities and consumer durables. To prevent price increases from undermining the war effort, the government instituted an array of programs. When more money chases fewer goods, prices typically rise. Inflation was a fear because wartime policies increased incomes, employment, and the money supply, while restricting the available supply of consumer goods. The Federal Reserve focused on supporting war financing while minimizing inflationary consequences. The rates remained in effect until January 1948. All of the Reserve Banks implemented these rates in the spring of 1942. The Reserve Banks reduced their discount rate to 1 percent and created a preferential rate of one-half percent for loans secured by short-term government obligations, substantially below the 3 to 7 percent that had been common during the 1920s. The interest-rate peg became effective in July 1942 and lasted through June 1947. The Reserve Banks agreed to purchase Treasury bills at an interest rate of three-eighths of a percent per year, substantially below the typical peacetime rate of 2 to 4 percent. To keep the costs of the war reasonable, the Treasury asked the Federal Reserve to peg interest rates at low levels. To distribute these securities, the twelve Federal Reserve Banks organized Victory Fund committees and established plans to market war bonds in cooperation with commercial banks, businesses, and volunteers. To direct the savings of American citizens into the war effort, the Treasury and Federal Reserve marketed a range of securities that would fit the needs of all classes of investors, from small savers who wished to invest for the duration of the war to large corporations with temporarily idle funds. 2 Paying for the war through levies on current incomes would minimize inflationary pressures, promote economic expansion during the war, and promote economic stability when peace returned. The plan called for financing the war to the greatest extent possible through taxation and domestic borrowing. These organizations met frequently to determine how to finance the war and organize machinery for marketing United States government securities. Plans for financing the war were devised by the Treasury and the Federal Reserve. Military expenditures rose from a few hundred million a year before the war to $85 billion in 1943 and $91 billion in 1944. Accomplishing these tasks entailed paying entrepreneurs, inventors, and firms so that they, in turn, could purchase supplies, pay workers, and produce the weapons with which America’s soldiers and sailors would defeat its enemies. The military needed to recruit, train, and deploy millions of soldiers to theaters of action on six continents. The military needed to purchase thousands of ships, tens of thousands of airplanes, hundreds of thousands of vehicles, millions of guns, and hundreds of millions of rounds of ammunition. Before the war, America’s military was small, and its weapons were obsolescent. This mission differed from the mission of the System before and after the war.įinance formed a foundation for the war effort. Financing the war was the focus of the Federal Reserve’s wartime mission. prepared to use its powers to assure at all times an ample supply of funds for financing the war effort” (Board of Governors 1943, 2). When the United States entered the war, the Board of Governors issued a statement indicating that the Federal Reserve System was “. The Allied counteroffensive began in 1942. The American “arsenal of democracy” joined the Allied nations, including Britain, France, China, the Soviet Union, and numerous others, in the fight against the Axis alliance. Germany and Italy declared war on the United States. In December 1941, Japan attacked Pearl Harbor. In September 1939, Germany’s invasion of Poland triggered war among the principal European powers. The economic catastrophe produced political tensions that grew throughout the 1930s. The Great Depression strained societies around the globe.
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