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

Patrick Newman

Florida Southern College

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 [1963]) and earlier “Austrian” writers, and the contractionary view most notably held by Friedman & Schwartz (1993 [1963]) 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

Newman, Patrick, Expansionary Monetary Policy at the Federal Reserve in the 1920s (November 2, 2014). Advances in Austrian Economics, (2016) 20:105-134. Available at SSRN: https://ssrn.com/abstract=2518261 or http://dx.doi.org/10.2139/ssrn.2518261

Patrick Newman (Contact Author)

Florida Southern College ( email )

Lakeland, FL 33801
United States

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