This chapter analyses the Federal Reserve’s mandate and statutory objectives and how they have evolved since the Fed was established in 1913, and considers the mandate in the context of environmental and social sustainability challenges. The chapter argues that the Fed’s mandate and statutory objectives historically were interpreted broadly to allow discretion for the Fed and its Federal Open Market Committee (FOMC) to manage monetary policy in support of Government policy. The chapter further argues that the legislative history behind the adoption of the dual mandate to achieve price stability and full employment allows the FOMC and the Board of Governors discretion to use their powers to mitigate the risks emanating from the broader economy and society that might impact the price stability and full employment objectives. Despite the conventional interpretation by Fed officials that the Fed ‘should stick to its knitting’ by focusing on short-to-medium term risks to price stability, the chapter concludes that the economic evidence is compelling that climate finance risks and other sustainability challenges can undermine price stability and full employment and therefore should be factored into the Fed’s monetary policy and financial stability strategy.

This chapters describes the changes in monetary technology that occurred in the twentieth century. We start with a description of the Gold Standard, the global monetary system in the late nineteenth and early twentieth centuries. We characterize that system as a “mountain of paper on a plinth of gold”: gold has fundamental value but is rarely seen in circulation, whereas paper has no fundamental value, but represents it and circulates widely. Scientific discoveries and technological advances in that period resulted in the application of telecommunication to payment transfers and messaging. The first remarkable application was Fedwire, the interbank payment and settlement system created in the United States by the Federal Reserve shortly after its founding. We show how Fedwire worked and how it gave rise for the first time to a single US monetary system based in the dollar, where payments were “final” and irrevocable. The great step to digitalization occurred in the 1950s, with the computerized ledgers first introduced in the United States by Bank of America to handle checks, an arrangement soon adopted by all banks. This gave rise to an explosion of new payment means: credit and debit cards, and, after the rise of the internet in the 1990s, online banking and payment platforms and applications. We note that these new technologies have a common characteristic: They settle in bank books and ultimately in central bank books.

Daniel Carpenter and Brian Libgober conclude Part IV by examining policymaking that originates in the bureaucracy, focusing on debit card regulation under the Dodd-Frank Act. Here, key interest groups precisely understood the stakes and process of bureaucratic policymaking, rendering it highly traceable. In addition, the stakes were quite zero-sum. The authors argue that these conditions encourage more intense and effective interest group activity than is the case in typical administrative policymaking. To assess this argument, the chapter provides a detailed narrative of the rule’s development, integrating quantitative evidence about the impact of the rule’s evolution on stakeholder firms. Consistent with expectations, the analysis suggests that debit card regulation attracted more lobbying and of a more diverse kind than other Dodd-Frank regulations, including ones such as the Volcker Rule where the aggregate impact was far higher but with less readily traceable policy effects. These findings highlight that even in administrative policymaking, the traceability of policy outcomes to government officials’ decisions will affect how private interests act to shape these decisions.

The Fed was keen the cooperate with the Bank from early in the 1960s. The Bank on the other hand took time to warm up and share information with colleagues at the Fed. But progressively swaps became a key feature of the United Kingdom's exchange management strategy. They offered cheap and discreet short-term dollar loans. The Bank started to use and abuse these loans to manage sterling.

Choosing the optimum supervisory model to manage financial stability requires a consideration of country-specific preferences based on the level of market development and the configuration of the financial system. The choice of model, its structural design, and the regulatory mandates will influence a supervisor’s effectiveness for managing financial stability. This Chapter analyzes the sectoral models in Mainland China, the United States, and Hong Kong to showcase institutional design elements and variations across different financial systems. The chapter assesses the advantages and disadvantages of the unified central bank and banking supervisory design of the Hong Kong Monetary Authority. Understanding how monetary policies affect banking institutions can be critical for maintaining banking sector stability. A unified structure creates a supervisory synergy when calibrating the lender of last resort and unconventional liquidity tools because coordination tensions are eliminated. The Hong Kong Monetary Authority is compromised because of the Linked Exchange Rate System and the Interest Rate Adjustment Mechanism inhibits its ability to set and control interest rates which can destabilize the banking sector.

After his formal PhD, from 1936-1942 Kindleberger continued his education as a central bank staffer, absorbing the key currency approach of John H. Williams at the New York Fed, critically engaging the monetarist approach of Per Jacobsson at the BIS, and then enthusiastically signing on for the globalist vision of Alvin Hansen at the Board of Governors.

What role did J.P. Morgan & Co. play at home and abroad in the 1920s? Answering this question is at the core of Chapter 2. Progressivism saw in the Morgan bank the directing agency of the Money Trust, wielding tremendous power in American life. Power there was, but the chapter argues that notions of a Money Trust directed by the Corner are without foundation. Reality, however, did not matter; what mattered for many Americans was belief in hidden, untrammelled authority. Through the postwar decade the Progressive critique was dampened by prosperity. The chapter argues that, while the Morgan bank was the most important financial institution in American life, its influence was tempered by challengers and by structural changes that were remaking American banking in the 1920s. If Morgan supremacy was under assault, Morgan authority was buttressed by close ties with the victors of World War I, Britain and France. This identification was apparent in the firm’s willingness to participate in the task of assisting postwar European reconstruction, especially Western European redevelopment. The outcome was sustained Morgan involvement in issues such as reparations, war debts, and economic reconstruction in concert with central banks and governments.

We provide an overview of the monetary policy failures that resulted in the 2007–2008 financial crisis and ensuing Great Recession, focusing on the United States. Before the crisis, monetary policy was too loose, which fueled the bubble. After the bubble burst, monetary policy became too tight, hindering the recovery. These failures are fundamentally due to the Federal Reserve’s discretionary monetary policy. Furthermore, the popular approach of “constrained discretion” is really just discretion. Hence, it is sensitive to all the usual problems with discretionary monetary policy. Only firm monetary rules, ones that actually bind, can maintain macroeconomic stability and prevent crises.

We conclude by situating the theory and practice of monetary policy within liberal political economy more generally. As we have seen, there are significant tensions between existing monetary institutions (discretionary central banking) and liberal ideals. This has been made even clearer by the Federal Reserve’s response to COVID-19. In brief, the Fed is now engaging in not only monetary policy but fiscal policy as well. This represents an immense expansion in its mandate, one that poses serious challenges for general and predictable monetary policy. The way out of this mess is embracing a comparative institutions approach to monetary policy. We cannot be satisfied with technical refinements to existing models and data. We need to explore alternative monetary policy rules, ones that are effective at providing macroeconomic stability while also respecting the requirements of democracy.

In the wake of the recent financial crisis, Federal Reserve Chairman Ben Bernanke argued repeatedly that fostering healthy growth and job creation required legislative action. He warned that continued political battles over fiscal and monetary policy, financial regulation and the debt ceiling were “deeply irresponsible” and would have “catastrophic consequences for the economy that could last for decades.” At the same time, like Alan Greenspan before him, Bernanke joined secretaries of the Treasury and other technocrats in guiding and enabling legislation, helping presidents outmaneuver critics and compensating for political uncertainty when political battles between the President and Congress stalled economic legislation. Far from being apolitical actors, these technocrats manipulated authority, exploited deference from politicians and business leaders, and alternately bolstered and challenged national politicians in order to shape US economic policy, manage market behavior and coordinate global activities before, during and after the recent financial crises.