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