Monetary Policy Frameworks and Indicators for the Federal Reserve in the 1920s

FRB Richmond Economic Quarterly, vol. 87, no. 1, Winter 2001, pp. 65-92

28 Pages Posted: 2 Dec 2012

See all articles by Thomas M. Humphrey

Thomas M. Humphrey

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: November 29, 2012

Abstract

The 1920s saw the Fed reject a state-of-the-art quantity theory framework for a flawed real bills one. The quantity theory framework featured the money stock, price level, and real interest rates as policy guides. By contrast, the real bills framework featured nominal interest rates, volume of discount window borrowing, and type of commercial paper eligible for discount. When the start of the Great Depression put these rival sets of indicators to the test, the quantity theory set correctly signaled that monetary policy was sharply contractionary, while the real bills set incorrectly signaled that money and credit conditions were sufficiently easy and needed no correction. This experience shows that policy guides originating in a theoretically flawed framework can lead the policymaker astray.

Suggested Citation

Humphrey, Thomas M., Monetary Policy Frameworks and Indicators for the Federal Reserve in the 1920s (November 29, 2012). FRB Richmond Economic Quarterly, vol. 87, no. 1, Winter 2001, pp. 65-92, Available at SSRN: https://ssrn.com/abstract=2182609

Thomas M. Humphrey (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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