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Abstract:
The paper surveys some main issues in the monetarist-Keynesian debate of the 1960s and 1970s, and the outcome of the debate. The debate was not static; the issues changed. At first Keynesians argued that money was largely irrelevant for output and the price level. By the end of the 1970s, issues such as neutrality, the natural rate, and the effect of inflation on nominal interest rates had been settled. Principal remaining issues were the use of money growth as a target, instrument, or indicator of monetary policy and reliance on rules. The paper sketches some of the progress on rules versus discretion in the past twenty years but focuses most on the role of money. Some evidence is presented for the United States supporting the monetarist position that control of money is useful in a medium-term or rule-based policy to control inflation as now advocated by several central banks.

Abstract:
The monetary policy of 1923 to 1929 led up to the great depression. French and U.S. deflationary policies forced deflation on other gold standard countries. The Federal Reserve did little as deflation and depression bankrupted firms, produced waves of bank failures and increased unemployment. This chapter considers why the Federal Reserve behaved as it did. A series of charts, including mainly data available at the time, show what was known at each meeting of the open market committee during the 43 months of decline. The chapter finds that Federal Reserve's failure stemmed mainly from acceptance of the real bills doctrine and the framework developed in the 1920s by two Federal Reserve economists, Winfield Riefler and W. Randolph Burgess. The latter frameworks focused attention on member bank borrowing. If borrowing was low, as it mostly was, open market purchases were unnecessary. The alternative conception--the real bills doctrine--left the initiative for expansion to member banks. If banks did not borrow by discounting real bills, the Federal Reserve should not act. Open Market purchases of government securities were especially bad because they based credit expansion on government debt, a type of speculative credit. Real bills proponents analyzed the depression as the "inevitable consequence" of the inflationary policies of the 1920s. To a modern reader this seems strange. The price level fell gradually from 1927 to 1929. This was irrelevant to the real bills proponents. Banks and the Federal Reserve had financed the expansion of the stock market. Speculative credit had to be purged. The differences between these views were resolved mainly by inaction. Large open market purchases did not begin until 1932, and much of their effect was offset by a gold outflow from the United States. After the fact, the Federal Reserve claimed that the so-called "free gold" problem prevented expansion. The minutes of the period suggest that this argument was not the main reason for inaction at the time. Economic decline from 1929 to 1933 was not a steady decline. A series of monetary and non-monetary shocks was interrupted by pauses or brief recoveries. The chapter identifies these shocks. Using a Kalman filter, I find nine large negative shocks and six large positive shocks to nominal GNP. This evidence alone rejects the popular belief that the depression was caused by the fall in stock exchange prices. Much additional evidence supports this conclusion. Some economists blame the international gold standard for the depth and severity of the depression. The chapter is skeptical of this explanation. The Federal Reserve did not follow gold standard rules and did not depend on foreign central banks. The deliberate behavior of the Federal Reserve and the Bank of France, not gold standard rules, created the deflation. Gold standard rules spread the deflation to other countries until the standard was abandoned. The beliefs that contributed most to the great depression were widely held in Congress, in the business community, and among academic economists. These beliefs were so deeply held that the Riefler-Burgess framework continued as a general guide to policy action and interpretation for many years.

Abstract:
The years 1923-1929 are often described as the best period in Federal Reserve history. Inflation though highly variable from quarter to quarter, averaged about zero for the period as a whole. Economic growth was variable but robust. The economy grew at a 3.3% average rate despite two recessions in six years. The Federal Reserve developed much more activist procedures than envisaged by the authors of the Federal Reserve Act or practiced in earlier years. The Reserve banks, particularly New York, gained more control of decisions, raising issues and disputes over substance, power and personalities. Policy actions intended to serve three principal aims: (1) reestablish the international gold standard, (2) maintain price stability, and (3) prevent or slow growth of speculative credit, particularly credit extended to carry securities traded on the New York Stock Exchange. The three aims were incompatible with economic conditions at home and abroad. The restoration of the gold standard (as a gold exchange standard) increased the demand for gold, forcing a decline in commodity prices. Britain returned to gold in 1925 at an overvalued exchange rate but was unwilling to deflate further. France returned in 1927-28 at an undervalued exchange rate, but was unwilling to inflate. The U.S. received large amounts of gold but was unwilling to inflate also. Both France and the United States sterilized gold inflows, forcing deflation on the rest of the world. French and U.S. policies were incompatible with the gold standard. Either their policies had to change, or the gold standard would break down. With hindsight, we know the answer: Britain, followed by many others, abandoned the gold standard after 1931. Canada left the standard in 1929. Three distinct groups coexisted within the Federal Reserve system. One, led by member of the Board but including several Reserve bank governors, accepted the real bills doctrine. They believed that speculative credit--including loans to brokers, dealers or customers to purchase shares on the New York Stock Exchange--was inflationary and must be prevented. Despite slowly falling prices, they worried most about inflation after 1927. A second group, led by Benjamin Strong of the New York bank, abandoned the real bills doctrine. In its place, they put the framework developed in pathbreaking books by Winfield Riefler and Randolph Burgess. Their framework emphasized the role of member bank borrowing as an indicator of the banks' position. Increased borrowing indicated increased tightness of the money market; reduced borrowing meant greater ease. Open market operations, by removing or augmenting reserves, were said to force banks to borrow or encourage repayment. This group regarded the high level of borrowing in 1929 as evidence that money was "tight". They wanted to raise the discount rate to force repayment and ease the money market. The third group included Governors of several Reserve banks. This group was concerned mainly with the earnings of the Reserve banks. Strong could gain their votes for his policy by increasing their banks' earnings. Despite the deflationary policies of the late 1920s, Federal Reserve officials wanted to tighten. They could not agree on the means. By the time they moved, world recession had started in Germany and Britain. The Federal Reserve entered the depression divided on personal and substantive issues. The rise in stock prices from 1927 to 1929 was driven by a comparable rise in corporate earnings. Market capitalization remained relatively high in these years; the capitalization rate fluctuated but did not generally rise. A large rise in capitalization rates occurred earlier, in 1926. As in 1966-68 and 1996-97, the rise seems to have been driven, at least in part, by a belief that the Federal Reserve had learned to control inflation and mitigate recessions.

Abstract:
The Federal Reserve Act passed on December 28, 1913. Almost a year later, in November 1914, Federal Reserve banks opened for business. The Act was a compromise that bundled together those who wanted a central bank, those who feared control of credit and money by bankers and "Wall Street", and those who wanted government control of money and credit. The compromise created 12 semi-autonomous banks and a supervisory board in Washington. From the beginning the compromise produced conflict over control that persisted until the 1930s. The initial conception was passive. The gold standard was expected to keep prices stable in the long-run. The real bills (commercial loan) theory ceded responsibility for deciding on the volume of borrowing to the banks. The discount rate was a penalty rate, set at a premium to the market rates. The intention, or hope, was that a bankers acceptance market would develop, like the market in London, so that the Federal Reserve could operate as the Bank of England did by buying acceptances. Wartime finance, postwar inflation and deflation ended this plan. The Federal Reserve helped to finance World War I by increasing the money stock and by lending to banks to enable them to profitably carry government bonds. For a year after the war, the System remained subservient to the Treasury. Then, faced with rising inflation, it contracted sharply. The recession of 1920-21 provides a test of alternative explanations of recovery. It is the only recession in which long-term interest rates are higher at the trough than at the preceding peak. Prices fell, so real interest rates rose above nominal rates. Falling prices raised the value of real balances, and gold inflows--attracted by real returns--increased the nominal and real money stock, increasing aggregate spending and bringing the recession to an end. The experience during inflation and deflation convinced the Federal Reserve that its conception was flawed. The gold inflow and rising gold reserve ratio signalled lower discount rates despite large portfolios of Treasury securities (non real bills) and at a time when the penalty discount rate had not been restored. The real bills doctrine called for a higher discount rate; the gold reserve rate signalled the opposite. Political considerations tipped the balance toward lower rates. Farmers and small merchants were highly critical of Federal Reserve policy, particularly the rise in interest rates and reliance on so-called progressive discount rates. To many in the south and west, the Federal Reserve had done what they feared most--raised interest rates to help Wall Street and bankers at the expense of farmers and merchants. This experience convinced the Federal Reserve that the original policy conception was flawed. The Bank of England policy arrangement could not be transplanted unchanged to the United States. This conclusion was based more on conjecture than on careful analysis, the conclusion itself as much political as economic. In addition, some within the system realized that the real bills doctrine provided no effective limitation to the total stocks of money and credit. One of these was Benjamin Strong, Governor of the New York Federal Reserve bank. Strong and others began work that became the effective operating procedure for the rest of the decade and beyond.