Abstract: Supporting the Price of Patriotism: Federal Interventions in the Bond Market, 1917-1929
This paper recovers a forgotten precursor to the Federal Open Market Committee (FOMC), the Federal Reserve's most important tool for executing monetary policy. Sixteen years before the Banking Act of 1933 established the FOMC, Congress authorized the Treasury Department to launch a special state-administered fund to buy Liberty bonds in order to support their price in the secondary markets. At that time, policymakers' concerns were largely political—rather than economic—in nature. During the First World War, declines in the market value of Liberty bonds presented an enormous public relations problem for Woodrow Wilson's administration. Wartime propaganda had cast Liberty bond purchases as votes of confidence in the war cast by loyal citizen-investors. Policymakers fretted that as the "financially ignorant" disposed of their bonds "at a loss," they would turn against "not only Government bonds but against all kinds of securities" and lose faith in political democracy, along with private property and financial markets. Attempting to refute criticism and to stem the tide of bond redemptions, the Treasury Department called into question the efficacy of privately administered securities markets and impinged upon their "free" operations. The First World War inspired novel policy experiments and state incursions into the financial markets.