Financial History Issue 121 (Spring 2017) | Page 35
attention to the central bank, and yet an
argument can be made that the actions of
this body have had the most direct effect
on the investment world.
Today, Capitol Hill, the White House,
Wall Street and the media have a love/
hate relationship with the Fed. But has
America economically performed bet-
ter with the Federal Reserve trying to
control inflation and enhance economic
growth? In looking at charts of inflation
and economic growth since 1800, it can be
seen that economic growth is more stable
under the Fed’s watch. Deflation is less
prevalent, yet inflation still seems to have
been a persistent problem since the Fed-
eral Reserve’s establishment in 1913.
The Fed
There have been 15 chairmen of the Fed-
eral Reserve, with tenures ranging from
1.2 to 18.8 years. Stocks and homes posted
their best inflation-adjusted gains dur-
ing the tenures of Charles Sumner Ham-
lin, Daniel Richard Crissinger and Paul
Volcker. The long tenures of William
McChesney Martin and Alan Greens-
pan were marked with strong investment
performance, even though inflation was
nearly twice as high during Miller’s terms.
The only Fed chairman to have declines in
both stocks and housing during his term
was Eugene Meyer during the 1930s.
Short-term interest rates were more
stable in the early days of the Federal
Reserve. From 1914–1951, there were eight
Federal Reserve chairmen and the range of
the federal funds rate was 2.4% (the high-
est inflation rate averaged 6.7%). Since
1951, there have been six different Federal
Reserve chairmen, and the federal funds
rate range increased to 9.6% (the highest
inflation rate averaged 8.8%). The long
tenure of Greenspan had a profound effect
on modern-day Fed policy, where infla-
tion was benign, yet short-term interest
rates ranged widely from 9.9% to 0.9%.
developed a complicated maze of invest-
ment-related taxes such as income tax
(with dividends taxed twice due to taxes
paid by the corporate entity), capital gains,
estate taxes and penalties for early and late
IRA withdrawals, to name a few.
Much has been written about taxes on
investment, and though these articles and
books have been written at different times
about different situations, they all deal
with the need for an individual’s invest-
ment strategy to strike a balance between
realizing maximum profits and minimiz-
ing the impact of taxes. Simply put, selling
an investment at the top is always an inves-
tor’s goal, and yet in the world of taxes, it
might not be the most profitable solution.
Income taxes were permanently
imposed on US citizens in 1913 and have
been increased and reduced on 22 sepa-
rate occasions. Top income tax rates have
ranged from 15% in 1916 to 94% in 1944.
Capital gains tax has ranged from 7% in
1913 to 39.9% in 1975. Big jumps in tax
rates (such as in 1917, 1932 and 1934) were
not well received on Wall Street.
There is also a strong inverse relation-
ship between the level of the capital gains
tax rate and the stock market. During the
two periods ranging from eight to 10 years
in which this tax exceeded 30%, the stock
market performed miserably. It is also
important to note that although the tax rate
level has been in a general decline since the
late 1940s, investment tax law has become
very complicated and can easily turn a
good investment into a tax nightmare.
Who Really Caused
the Great Depression?
One of the public’s mistaken beliefs about
Wall Street is that the Great Crash of 1929
caused the Great Depression. Though the
stock market reacted to the deteriorating
economic conditions of the 1930s, the US
government’s disastrous policies of large
increases in interest rates, imposing high
barriers to foreign trade, increasing income
taxes 152% and a massive increase of the
government regulation of business were
the real culprits in the economic meltdown
and the slow recovery. In fact, it took more
than 22 years for both stocks and real estate
to get back to their highs of 1929.
Uncle Sam Summary
The acco