Expansionary Monetary Policy at the Federal Reserve in the 1920s
Advances in Austrian Economics, (2016) 20:105-134
39 Pages Posted: 3 Nov 2014 Last revised: 7 Apr 2016
Date Written: November 2, 2014
This paper analyzes the two main divergent interpretations of Federal Reserve monetary policy in the 1920s, the expansionary view described by Rothbard (2008a ) and earlier “Austrian” writers, and the contractionary view most notably held by Friedman & Schwartz (1993 ) and later monetary historians. This paper argues in line with the former that the Federal Reserve engaged in expansionary monetary policy during the 1920s, as opposed to the gold sterilization view of the latter. The main rationale for this argument is that the increase in the money supply was driven by the increase in the money multiplier and total bank reserves, both of which were caused primarily by Fed policy (i.e. a decrease in reserve requirements and an increase in controlled reserves respectively). Showing that this expansion did in fact occur provides the first step in supporting an Austrian Business Cycle Theory (ABCT) interpretation of the 1920s, namely that the Federal Reserve created a credit fueled boom that led to the Great Depression, although this is not pursued in the paper.
Keywords: Federal Reserve, 1920s, sterilization, monetary expansion
JEL Classification: E51, E52, E53, N120
Suggested Citation: Suggested Citation