David C Wheelock

David C. Wheelock, assistant professor of economics at theUniversity of Texas-Austin, is a visiting scholar at the FederalReserve Bank of St Louis. David H. Kelly provided researchassistance.

Monetary Policy in the GreatDepression: What the Fed Did,and Why

L IXTY YEARS AGO the United States—indeed, most of the world—was in the midst ofthe Great Depression. Today, interest in theDepression’s causes and the failure of govern-ment policies to prevent it continues, peakingwhenever the stock market crashes or the econ-omy enters a recession. in the 1930s, dissatisfac-tion with the failure of monetary policy to pre-vent the Depression, or to revive the economy,led to sweeping changes in the structure of theFederal Reserve System. One of the most impor-tant changes was the creation of the FederalOpen Market Committee (FOMC) to direct openmarket policy. Recently Congress has again con-sidered possible changes in the Federal ReserveSystem.’

This article takes a new look at Federal Reservepolicy in the Great Depression. Historical analy-sis of Fed performance could provide insightsinto the effects of System organization on policymaking. The article begins with a macroeconomicoverview of the Depression. It then considersboth contemporary and modern views of the

role of monetary policy in causing the Depressionand the possibility that different policies mighthave made it less severe.

Much of the debate centers on whether mone-tary conditions were “easy” or “tight” during theDepression—that is, whether money and creditwere plentiful and inexpensive, or scarce andexpensive. During the 1930s, many Fed officialsargued that money was abundant and “cheap,”even “sloppy,” because market interest rateswere low and few banks borrowed from the dis-count window. Modern researchers who agreegenerally believe neither that monetary forceswere responsible for the Depression nor thatdifferent policies could have alleviated it. Otherscontend that monetary conditions were tight,noting that the supply of money and price levelfell substantially. They argue that a more aggres-sive response would have limited the Depression.

Among those who conclude that contraction-ary monetary policy worsened the Depression,there has been considerable debate about why

“The Monetary Policy Reform Act of 1991” (S. 1611)would have abolished the FOMC and thereby ended thevoting on open market policy by Federal Reserve Bankpresidents. Although hearings on the bill were held, it wasnot brought to a vote before Congress adjourned at theend of 1991. The Banking Act of 1935 established the

present form of the FOMC, whose members include theBoard of Governors of the Federal Reserve System andthe 12 Reserve Bank presidents. Five of the presidentsvote on policy on a rotating basis.

Federal Reserve officials failed to respond ap-propriately. Most explanations fall into two cate-gories. One holds that Fed officials, though well-intentioned, failed to understand that more ag-gressive action was needed. Some researchers,like Friedman and Schwartz (1963), argue thatthe Fed’s behavior during the Depression con-trasted sharply with its behavior during the1920s. They contend that the death of BenjaminStrong in 1928 led to a redistribution of authori-ty within the System that caused a distinct de-terioration in Fed performance. Strong, whowas Governor of the Federal Reserve Bank ofNew York from the System’s founding in 1914until his death, dominated Federal Reserve policy-making in the years before the Depression.’These researchers argue that authority was dis-persed after his death among the other ReserveBanks, whose officials were less knowledgeableand failed to recognize the need for aggressivepolicies. Other researchers, like Wicker (1966),Brunner and Meltzer (1968), and ‘I’emin (1989),contend that Strong’s death caused no change inFed performance. They argue that Strong hadnot developed a countercyclical policy and thathe would have failed to recognize the need forvigorous action during the Depression. in theirview, Fed errors were not due to organizationalflaws or changes, but simply to continued useof flawed policies.

A second category of explanations holds thatthe Fed’s contractionary policy was deliberate.Epstein and Ferguson (1984) and Anderson,Shughart and Tollison (1988) contend that Fedofficials understood that monetary conditionswere tight. Epstein and Ferguson assert that theFed believed a contraction was necessary andinevitable. When it did act, they argue, it was topromote the interests of commercial banks,rather than economic recovery. Anderson,Shughart and Tollison emphasize even more the

Fed’s interest in aiding its member banks. Theyargue that monetary policy was designed tocause the failure of nonmember banks, whichwould enhance the long-run profits of memberbanks and enlarge the System’s regulatorydomain -

.A.N OVISIIITIE%V O.F~T.FHE G.REA.Tl7i).E~vJi1L:~iSS:lt).j.v

Analysts generally agree that the economiccollapse of the 1930s was extremely severe, ifnot the most severe in American history. Toprovide a sense of the Depression, Figures 1-3plot GNP, the price level and the unemploymentrate from 1919 to 1939. As the figures show, af-ter eight years of nearly continuous expansion,nominal (current dollar) GNP fell 48 percentfrom 1929 to 1933. Real (constant dollar) GNPfell 33 percent and the price level declined 25percent. The unemployment rate went from un-der 4 percent in 1929 to 25 percent in 1933.’Real GNP did not recover to its 1929 level until1937. The unemployment rate did not fall below10 percent until World War H.’

Few segments of the economy were unscathed.Personal and firm bankruptcies rose to unpre-cedented highs. In 1932 and 1933, aggregatecorporate profits in the United States werenegative. Some 9,000 banks, with $6.8 billion ofdeposits, failed between 1930 and 1933 (seefigure 4). Since some suspended banks eventuallyreopened and deposits were recovered, thesefigures overstate the extent of the banking dis-tress.’ Nevertheless, bank failures were numer-ous and their effects severe, even comparedwith the 1920s, when failures were high bymodern standards.

Much of the debate about the causes of theGreat Depression has focused on bank failures.

2until changed by the Banking Act of 1935, the chief ex-ecutive officers of the Reserve Banks held the title “gover-nor.” Today these officers are titled “president,” whilemembers of the Board of Governors, which replaced theFederal Reserve Board in 1935, now hold the title“governor.”

‘The appendix provides a list of sources for the data usedin this article. The GNP and unemployment series usedhere are standard, but Romer (1986a, 1986b) presentsnew estimates of GNP and unemployment for the 1920s.Both new estimates exhibit less variability than those tradi-tionally used; Romer’s estimate of the unemployment ratein 1929 is 4.6 percent, compared with 3.2 percent plottedhere.

4Darby (1976) argues that the unemployment rate seriesconsiderably overstates the true rate after 1933 because ittakes persons employed on government relief projects asunemployed. Kesselman and Savin (1978) offer an oppos-ing view. Regardless of which argument is accepted, un-employment during the 1930s was exceptionally severe,particularly since there were relatively few multi-incomehouseholds.

‘There was no deposit insurance in these years. The Bank-ing Act of 1933 created federal deposit insurance. Duringthe 19th and early 20th centuries a number of states ex-perimented with insurance plans for their state-charteredbanks, but none was still in existence by 1930. SeeCalomiris (1989) for a survey of the state systems.

Figure 1Nominal and Real Gross National Product

Billions of dollars

ID

00

90

eo

70 Nominal

60

50 ——— —.-—— -

1920 1925

Figure 2Implicit Price Index

1930 1935

120

1929=100

125

Is

110

105

100

95

90

85

80

1920 1925 1930 1935

0

1935

Were they merely a result of falling national in-

come and money demand? Or were they an im-portant cause of the Depression? Most contempo-

raries viewed bank failures as unfortunate forthose who lost deposits, but irrelevant in macro-economic significance. Keynesian explanations ofthe Depression agreed, including little role forbank failures. Monetarists like Friedman andSchwartz (1963), on the other hand, contend

that banking panics caused the money supply tofall which, in turn, caused much of the decline

in economic activity. Bernanke (1983) notes thatbank failures also disrupted credit markets,which he argues caused an increase in the costof credit intermediation that significantlyreduced national output. In these explanations,the Federal Reserve bears much of the blamefor the Depression because it failed to prevent

the banking panics and money supply con-traction.

~f7’~ C~. ¶ - ¶ ¶f7~-_ ~

Today there is considerable debate about thecauses of business cycles and whether governmentpolicies can alleviate them.” Just as there is noconsensus now, contemporary observers hadmany different views about the causes of theGreat Depression and the appropriate response ofgovernment. A few economists, like Irving Fisher(1932), applied the Quantity Theory of Money,which holds that changes in the money supplycause changes in the price level and can affect thelevel of economic activity for short periods. Theseeconomists argued that the Fed should preventdeflation by increasing the money supply. At the

Figure 3Unemployment Rate

Number of banks4000

3500

3000

2500

2000

1500

1000

500

01920 1925 1930

‘See Belongia and Garfinkel (forthcoming).

20

15

10

5

0

other extreme, proponents of “liquidationist” the-ories of the cycle argued that excessively easymonetary policy in the 1920s had contributed tothe Depression, and that “artificial” easing inresponse to it was a mistake. Liquidationiststhought that overproduction and excessive bor-rowing cause resource misallocation, and thatdepressions are the inescapable and necessarymeans of correction:

in the course of a boom many bad businesscommitments are undertaken. Debts are in-curred which it is impossible to repay. Stocksare produced and accumulated which it is im-possible to sell at a profit. Loans are madewhich it is impossible to recover. Both in thesphere of finance and in the sphere of produc-tion, when the boom breaks, these bad commit-ments are revealed. Now in order that

revival may commence again, it is essential thatthese positions should be liquidated. - .

One implication of the liquidationist theory isthat increasing the money supply during arecession is likely to be counterproductive. Dur-ing a minor recession in 1927, for example, theFed had made substantial open market pur-chases and reduced its discount rate. AdolphMiller, a member of the Federal Reserve Board,who agreed with the liquidationist view, testi-fied in 1931 that:

It lthe 1.927 action) was the greatest and boldestoperation ever undertaken by the FederalReserve System, and, in my judgment, resultedin one of the niost costly errors committed byit or any banking system in the last 75 years. Iam inclined to think that a different policy atthat time would have left us with a different

Figure 4Bank Suspensions

Percent

30

25

1920 1925 1930 1935

‘Lionel Robbins, The Great Depression (1935) [quoted byChandler (1971), p. 118].

condition at this time. - . - That was a time ofbusiness recession. Business could not use andwas not asking for increased money at thattime.’

in Miller’s view, because economic activity waslow, the reserves created by the Fed’s actionsfueled stock market speculation, which led in-evitably to the crash and subsequentdepression.

During the Depression, proponents of the Ii-quidationist view argued against increasing themoney supply since doing so might reignitespeculation without promoting an increase inreal output. Indeed, many argued that the Fed-eral Reserve had interfered with recovery andprolonged the Depression by pursuing a policyof monetary ease. Hayek (1932), for example,wrote:

It is a fact that the present crisis is marked bythe first attempt on a large scale to revive theeconomy.. - by a systematic policy of loweringthe interest rate accompanied by all other possi-ble measures for preventing the normal processof liquidation, and that as a result the depres-sion has assumed more devastating forms andlasted longer than ever before (p. 130).

Several key Fed officials shared Hayek’s views.For example, the minutes of the June 23, 1930,meeting of the Open Market Committee reportthe views of George Norris, Governor of theFederal Reserve Bank of Philadelphia:

He indicated that in his view the current busi-ness and price recession was to be ascribedlargely to overproduction and excess productivecapacity in a number of lines of business ratherthan to financial causes, and it was his beliefthat easier money and a better bond marketwould not help the situation but on the con-trary might lead to further increases in produc-tive capacity and further overproduction.’

While the liquidationist theory of the businesscycle was commonly believed in the early 1930s,

it died out quickly with the Keynesian revolu-tion, which dominated macroeconomics for thenext 30 years. Keynesian explanations of theDepression differed sharply from those of the Ii-quidationists. Keynesians tended to dismissmonetary forces as a cause of the Depression ora useful remedy. instead they argued thatdeclines in business investment or householdconsumption had reduced aggregate demand,which had caused the decline in economic ac-tivity.bO Both views, however, agreed that mone-tary ease prevailed during the Depression.

Friedman and Schwartz renewed the debateabout the role of monetary policy by forcefullyrestating the Quantity Theory explanation of theDepression:

The contraction is. - . a tragic testimonial to theimportance of monetary forces. - - - Differentand feasible actions by the monetary authoritiescould have prevented the decline in the stockof money. - - [This] would have reduced the con-traction’s severity and almost as certainly its du-ration (pp. 300-01).

Friedman and Schwartz argue that an increasein the money stock would have offset, if notprevented, banking panics, and would have ledto increased lending to consumers and businessthat would have revived the economy.

Many disagree with the Friedman and Schwartzexplanation, although some recent Keynesian ex-planations concede that restrictive monetarypolicy did play a role in the Depression.h1 Otherstudies, such as Field (1984), Hamilton (1987),and ‘remin (1989), conclude that contractionarymonetary policy in 1928 and 1929 contributedto the Depression. Bordo (1989) and Wicker(1989) provide detailed surveys of the monetarist-Keynesian debate about the causes of the GreatDepression, and interested readers are referredto them. Since most recent contributions to thisliterature emphasize the effects of monetarypolicy, a new look at the policies of the FederalReserve during the Great Depression is war-ranted.

‘U.S. Senate (1931), p. 134.‘Quoted by Chandler (1971), pp. 136-37. De Long (1990)details the liquidationist cycle theory, and Chandler (1971),pp. 116-23, has a general discussion of prevailing busi-ness cycle theories and their prescriptions for monetarypolicy.

10See Temin (1976) for a survey of Keynesian explanationsof the Great Depression.

IlMost criticize the Fed’s discount rate increases and failureto replace reserve losses suffered by banks in the panicfollowing Great Britain’s departure from the gold standardin late 1931. See Temin (1976), p. 170, and Kindleberger(1986), pp. 164-67.

Figure 5Interest RatesPercent

12

10

8

6

4

2

0

—2

A fundamental disagreement within the Feder-al Reserve System and among outside observers,even today, is whether monetary policy duringthe Depression was easy or tight. Most Fed offi-cials felt that money and credit were plentiful.Short-term market interest rates fell sharply af-ter the stock market crash of 1929 and remainedat extremely low levels throughout the 1930s(see figure 5). ‘to most observers, the decline inshort-term rates implied monetary ease. Long-term interest rates declined less sharply,however, and yields on risky bonds, such as

Baa-rated bonds, rose during the first threeyears of the Depression (see figure 5)12 Never-theless, the exceptionally low yields on short-term securities has suggested to many observersan abundance of liquidity.

Other variables also have been interpreted asindications of easy monetary conditions. Rela-tively few banks came to the Fed’s discountwindow to borrow reserves, for example, andmany banks built up substantial excess reservesas the Depression progressed (see figure 8)13 Tomost observers, it appeared that there was littledemand for credit and, since most policymakerssaw their mission as one of accommodating

l2The short-term rate series through 1933 is the averagedaily yield in June of each year on three- to six-monthTreasury notes and certificates, and the yield on Treasurybills thereafter. The long-term series is the average daily

yield in June of each year on U.S. government bonds.

‘3

Data on excess reserves before 1929 are not available,but they were not likely very large.

Baa

oflGfl-~-t,0n-,~

1920 1925 1930 1935

Figure 6Borrowed and Excess Reserves ofFederal Reserve Member BanksMillions of dollars

1100

1000

900

800

700

600

500

400

300

200

100

01922 23 24 25 26 27 28 29 30 31 32 33

ing credit demand, few believed that morevigorous expansionary actions were necessary.”

Low interest rates and an apparent lack of de-mand for reserves have led many researchersto conclude that tight money did not cause theDepression. Temin (1976), for example, writes:

There is no evidence of any effective deflation-ary pressure from the banking system betweenthe stock-market crash in October 1929 and theBritish abandonment of the gold standard in

September 1931. - - - There was no rise in short-term interest rates in this two-year period. - - -

The relevant record for the purpose of identify-ing a monetary restriction is the record ofshort-term interest rates (p. 169).

Other indicators of monetary conditions,however, suggest the opposite conclusion. Defla-tion implied that the value of the dollar rose 25percent from 1929 to 1933, which Schwartz

14The Federal Reserve System’s founders intended that itoperate according to the Real Bills Doctrine. Fed creditwould be extended primarily through the discount windowas member banks borrowed to finance short-term agricul-tural or business loans. A decline in economic activitywould reduce discount window borrowing, causing FederalReserve credit to decline. By 1924, System policy hadevolved away from a strict Real Bills interpretation, but it

probably continued to have considerable influence onmany Fed officials. See West (1977) or Wicker (1966) fordiscussion of the influence of the Real Bills Doctrine onpolicy over time.

Borrowed

—-

Figure 7Money SupplyMillions of dollars

50,000

25,000

20,000

15,0001920 1925 1930 1935

/ / /

(1981) argues reflected exceptionally tight justed for changes in the price level, rose shar-money. Another indicator, the money stock, fell ply during the Depression (see figure 8).” Whileby one-third from 1929 to 1933 (see figure 7)13 the nominal yield on short-term governmentFriedman and Schwartz contend that: securities fell to an exceptionally low level,

deflation implied that their real yield rose aboveit seems paradoxical to describe as ‘monetary 10 percent in 1930 and 1931. Thus, in contrastease’ a policy which permitted the stock of to the apparent signal given by nominal interestmoney to decline. - - by a percentage exceeded rates, member bank borrowing and excessonly four times in the preceding fifty-four years reserves, the falling money stock and deflationand then only during extremely severe suggest that monetary conditions were far frombusiness-cycle contractions (p. 37a). easy.”

And finally, numerous studies point out that the Many economists now conclude that the Fed-real interest rate, that is, the interest rate ad- eral Reserve should have responded more

“Ml is the sum of coin and currency held by the public and “Yet another indicator is the real money supply, i.e., thedemand deposits. M2 also includes time deposits at com- growth rate of the nominal supply of money less the ex-mercial banks. pected rate of inflation. Since the price level fell faster

“See Meltzer (1976) and Hamilton (1987), for example. The the Depression, Temiri (1976) argues thatreal interest rate plotted in figure 8 is calculated, as the monetary conditions were not tight. The increase in realprevailing yield on short-term government s!curltles In money balances was relatively slow, however, whichJune of each year, less the rate of inflation in the subse- Hamilton (1987) argues was contractionary.quent year. Since actual, rather than anticipated, inflationis used to calculate the real rate, it is considered an expost, rather than ex ante, rate.

“C

Figure 8Ex Post Real Interest Rate

Percent

25

20

15

10

5

0

—5

—10

vigorously tc the Depression. There is littleagreement, however, about why the Fed didnot. The next sections examine alternative ex-planations for Federal Reserve behavior duringthe Depression.

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Irving Fisher testified before Congress in 1935that the Depression was severe because “Gover-nor Strong had died and his policies died withhim. - - - I have always believed, if he had lived,‘~‘ewould have had a different situation.” Ac-cording to Fisher, Benjamin Strong had disco-vered how to use monetary policy to maintain

price level stability, “and for seven years hemaintained a fairly stable price level in thiscountry, and only a few of us knew what hewas doing. His colleagues did not understandit.”” In Fisher’s view, Strong adjusted the quan-tity of money to maintain a stable price level;had he lived, Fisher says, he would haveprevented the deflation of the 1930s by not al-lowing the quantity of money to decline.

Friedman and Schwartz agree with Fisher thatStrong’s death caused monetary policy tochange significantly. They argue that Strong’saggressive open market purchases and discountrate reductions in 1924 and 1927 had quickly al-leviated recessions, hut that his death produceda sharply different policy during the Depression:

1920 1925 1930 1935

ISU.5. House of Representatives (1935), p. 534. “Ibid, pp. 517-20.

If Strong had still been alive and head of theNew York Bank in the fall of 1.930, he wouldvery likely have recognized the oncoming li-quidity crisis for what it was, would have beenprepared by experience and conviction to takestrenuous and appropriate nieasures to head itoff, and would have had the standing to carry

the System with him (pp. 412-13).

Friedman and Schwartz make a persuasivecase. Strong was an experienced financial lead-er. He had served as an officer of BankersTrust Company, and during the Panic of 1907as head of a committee reporting to J. P. Mor-gan that determined which financial institutionscould be rescued.” He was the first governor ofthe Federal Reserve Bank of New York andemerged as leader of the Federal Reserve Sys-tern both because of his personality and staturein the financial community and because of therelative importance of New York member banksin the international financial market.” He chaireda committee of Federal Reserve Bank governorsthat coordinated System open market operationsand represented the System in dealings withforeign central banks and Congress.22 It is clearthat, with his death, the Fed lost an experiencedand forceful leader.

Some researchers argue, however, thatStrong’s death had little effect on policy. Temin(1989), for example, writes that “The death ofStrong was a minor event in the history of theGreat Depression” (p. 35). And Brunner andMeltzer (1968) argue that, “While there is someevidence that the death of Benjamin Strong con-tributed to a shift in the balance of power wi-thin the Federal Reserve. - - we find that aspecial explanation of monetary policy after1929 is unnecessary...” (p. 341). The disagree-ment between these authors and those such asFisher, Friedman and Schwartz rests on theirviews of whether Strong’s policies would haveprevented the monetary collapse and Depression.

fl.;ç; STRONG’S POLICY?

Much of Strong’s testimony before Congres-sional committees, as well as other speeches andwritings, suggests that he had developed a poli-cy of money supply control to limit fluctuationsin the price level. For example, in an unpub-lished article dated April 1923, he wrote: “If, asis now universally admitted, prices are in-fluenced to advance or to decline by increasesor decreases in the total of ‘money’. - - then thetask of the System is to maintain a reasonablystable volume of money and credit 23 And,in a speech to the American Farm Bureau inDecember 1922, he said that monetary policy:

- . should insure that there is sufficient moneyand credit available to conduct the business ofthe nation and to finance not only the seasonalincreases in demand but the annual or normalincrease in volume I believe that it shouldhe the policy of the Federal Reserve System, bythe employment of the various means at itscommand, to maintain the volume of credit andcurrency in this country at such a level so that,to the extent that the volume has any influenceupon prices, it cannot possibly become the me-ans for either promoting speculative advancesin prices, or of a depression of prices.”

These statements suggest that Strong would nothave permitted the money supply collapse ordeflation that occurred after 1929.

Other’ aspects of Strong’s testimony, speechesand writings give different or ambiguous im-pressions of his views, however, making itdifficult to infer what policies he would haveadvocated during the Depression. in testimonybefore the House Banking Committee in 1926,Strong described the relationship between Fedpolicy and the quantity of bank deposits, dis-cussing in detail the multiplier relationship be-tween bank reserves and deposits.” But he also

“Chandler (1958), pp. 27-28.‘1The Federal Reserve Act gave the individual ReserveBanks authority to initiate discount rate changes and openmarket operations. The Federal Reserve Board could ap-prove or disapprove these actions, but its role was primari-ly supervisory, with no clear authority to determine policy.Because of this, and perhaps because it lacked forcefulleaders, the Board did not dominate policy making until af-ter the System was restructured by the Banking Act of1935. See Wheelock (forthcoming) for details of this reor-ganization.

“Initially, each Reserve Bank determined its own open mar-ket operations. But Treasury Department complaints that

they made it difficult to price new debt issues and a grow-ing understanding of the impact of open market operationson economic activity, ted the Banks to form a “GovernorsCommittee” to coordinate open market operations. Thiscommittee was replaced in 1923 by the Open Market In-vestment Committee, which Strong headed until his death.

23”Prices and Price Control,” in Burgess (1930), pp. 229-30.

‘4Ouoted by Chandler (1958), p. 200.

“U.S. House of Representatives (1926), pp. 334-35.

testified that, “when it comes to a decline ofprice level, the origin of which can not be at-tributed to a credit policy, this effort that youmake by a credit policy to arrest a fall of pricesmay do more harm than good “ it is alsodifficult to interpret his writing that “the task ofthe System is to maintain a reasonably stablevolume of money and credit, with due al-lowances for seasonal fluctuations in demand, fornormal annual growth in the country’s develop-ment.. and with such allowance as may be im-posed by those great cycles of prosperity anddepression “ What sort of allowance forfluctuations does he mean? This statement couldbe read as advocating an increase or a decreasein money in response to a decline in economicactivity. The latter is suggested by the followingstatement: “there should be no such excessiveor artificial supplies of money and credit as willsimply permit the marking up of prices whenthere is no increase in business or productionto warrant an increase in the volume of moneyand credit.” This sounds like the warnings bysome officials during the Depression that mone-tary expansion would be inflationary or causespeculation because economic activity was low.

Strong also seems to have concluded that thedeflation from mid-1920 to 1921 had positiveeffects:

The deflation which took place in the UnitedStates following the collapse of prices resultedin extricating the reserve system—the wholemonetary system of the country—from a posi-tion of permanent entanglement. - - and I thinkthat was one of the fortunate results of thepolicy. - - - One of the results of this liquida-tion. - . has been to put this country on assound or a sounder monetary basis than anyother country in the world, without the in-troduction of a lot of money or credit into cir-culation, based solely upon the Governmentdebt to the bank of issue. I mean to explainthat there have been offsetting advantages tothat deflation. - -

This quotation suggests that Strong might havefound similar offsetting advantages to the defla-tion that followed the stock market crash in1929 and might have been reluctant to expandthe money supply through purchases of govern-ment securities.

These quotations illustrate the ambiguity ofmany of Strong’s statements and the difficultyof inferring what policies he would have pur-sued in the 1930s. To determine whether mone-tary policy was changed by Strong’s death, it isprobably more instructive to examine the poli-cies he actually implemented.

Two aspects of Strong’s policies have receivedattention from scholars studying FederalReserve behavior. First, beginning in the early1920s, the System offset or “sterilized” goldflows and other changes in reserve funds by al-tering the volume of Fed credit outstanding.”This policy limited fluctuations in bank reservesand, thus, in the money supply and price level.According to Friedman and Schwartz (1963), pp.394-99, however, the Fed permitted gold out-flows during the Depression to reduce bankreserves and the money supply and more thanoffset gold inflows. What had been an essential-ly neutral policy, therefore, became a contrac-tionary policy after Strong’s death.

Miron (1988) argues that a similar change oc-curred in the Fed’s accommodation of seasonalcredit and currency demands. From the Sys-tem’s inception, Federal Reserve credit was sup-plied to prevent seasonal demands fromdraining bank reserves and increasing interestrates. According to Miron, the Fed was less ac-commodative after 1928, which contributed tothe frequency of financial crises during theDepression.”

Beyond the offsetting of gold and currencyflows, a second aspect of Strong’s policies hasreceived considerable attention. In 1924 and1927, the Fed made large open market pur-chases and discount rate reductions that werefollowed by increases in bank reserves and the

“Ibid, p. 577.

“‘Prices and Price Control,” April 1923, in Burgess (1930),p. 230 (italics added).

“From a speech to the American Farm Bureau in 1922[quoted by Chandler (1958), p. 200].

“U.S. House of Representatives (1926), p. 309.“Federal Reserve credit is supplied by Fed purchases of

securities and discount window lending (member bank bor-rowing). It consists also of some miscellaneous compo-

nents, such as float. In this era, the Federal Reserve pur-chased both U.S. government securities and bankers ac-ceptances (at fixed acceptance buying rates), and discountwindow lending consisted of both rediscount of eligiblepaper and advances to member banks at the discountrate.

‘1Miron does not test this claim except to show that FederalReserve credit was somewhat less seasonal after 1928than before.

money supply. Friedman and Schwartz (1963)argue that the Fed’s purpose was to combatrecessions and that its failure to respond as ag-gressively during the Depression reflected ‘a dis-tinct change in System behavior. Otherresearchers, however, such as Wicker (1966)and Brunner and Meltzer (1968), find no incon-sistency in Fed behavior, arguing that the com-paratively weak response to the Depression wasin fact predictable from the policy strategy de-veloped by Strong.

i’he srei’t’in~,;3tj’C;i~ti~ohct~’~

Before entering World War I, the UnitedStates absorbed large gold inflows that addeddirectly to bank reserves and caused a signifi-cant money supply increase.” Although inflowsceased after America entered the war, bankreserves and the money supply continued to in-crease rapidly as Federal Reserve credit was ex-tended to help finance the war. After the war,gold outflows reduced the reserves of theReserve Banks, leading them to raise their dis-count rates and thereby restrict credit to mem-ber banks.3’ The resulting decline in Fed creditcoincided with a sharp decline in the moneysupply and deflation.’~

Following the violent inflation-deflation cycleof 1917-21, the Fed began to intervene to pre-vent gold flows from affecting bank reserves.”In testimony before the House Committee onBanking and Currency, Strong gave a clear ex-planation of this policy, presenting charts show-ing the relationship between gold fiovvs, Fedcredit, bank reserves and the price level.” Heexplained:

In the old days there was a direct relation be-tween the country’s stock of gold, bank depositsand the price level because bank deposits

were. - - based upon the stock of gold and borea constant relationship to the gold stock, andthe volume of bank deposits and the generalprice level were similarly related. But in recentyears the relationship between gold and bankdeposits is no longer as close or direct as itwas, because the Federal Reserve System hasgiven elasticity to the country’s bank reserves.Reserve Bank credit has become the equivalentof gold in its power to serve as the basis ofbank credit. . - - Hence. - - the present basis forbank credit consists of gold plus FederalReserve credit. Federal Reserve bank credit isan elastic buffer between the country’s goldsupply and bank credit.”

Strong credited the Federal Reserve System forpreventing inflation in 1921 and 1922:

As the flow of gold imports was pouring intothe United States in 1921 and 1922, manyeconomists abroad, and in this country as well,expected that this inward flow of gold wouldresult in a huge credit expansion and a seriousprice inflation. That no such expansion or infla-tion has taken place is due to the fact that theamount of Federal Reserve credit in use wasdiminished as the gold imports continued. Thus,in the broad picture of financial events in thiscountry since 1920, the presence of the ReserveSystem may be said to have prevented ratherthan fostered inflation.”

Figure 9 illustrates the policy of offsettinggold and currency flows during the 1920s.”The shaded insert on pages 18-19 describes themechanics of this policy. Since gold is a sourceof banking system reserves, gold inflows, unlessoffset, add to the stock of reserves. A gold in-flow thus has the same effect on reserves as a

“The accompanying shaded insert discusses the sourcesand uses of reserve funds and explains the mechanics ofthe Fed’s sterilization policy.

“The Reserve Banks were required to maintain goldreserves of 40 percent against their note issues and 35percent against deposits. A discount rate increase was in-tended to reduce discount loans and, thus, the Fed’s noteand deposit liabilities, as well as encourage gold inflowsas investors sought higher yields in the United States.

“In January 1916, the All Commodities Price Index stood at112.8 (1913t 100). In April 1917 (when the United Statesentered the war), it was at 172.9. At its peak in May 1920,the Index was at 246.7. It then fell to a low of 138.3 inJanuary 1922.

“Before the war, the Fed lacked the resources to offsetgold inflows, so sterilization was impossible. By the end of1921, the Reserve Banks had sufficient reserves to reduce

their discount rates, and individually they began to pur-chase government securities. By 1923, there seems tohave been a conscious effort to offset gold flows [Fried-man and Schwartz (1963), pp. 279-87].

“These charts are reproduced by Hetzel (1985), p. 7, whoexamines Strong’s unwillingness to support legislation thatwould require the Fed to adopt a price level stabilizationrule.

“U.S. House of Representatives (1926), p. 470.

“Ibid, p.471.

“In practice, the Fed also offset changes in other sourcesand uses of reserve funds, but gold and currency flowswere the most substantial; the others can be ignored for il-lustrative purposes.

Figure 9Gold and Currency Sterilization

January 1924 to February 1933

I 1929 I 1930 I 1931 I 1932

Federal Reserve purchase of securities. Currencyheld by the public is a use of reserves: in-creases in public currency holdings reflectreserve withdrawals from banks. Thus, if notoffset, an increase in currency would correspondto a decrease in bank reserves. The differencebetween gold and currency is plotted in figure 9.It is clear that net increases (decreases) in thisdifference were largely offset by declines (in-creases) in Fed credit outstanding, so that totalbank reserves changed relatively little.

It is also clear that Benjamin Strong’s deathdid not interrupt the offsetting of gold and cur-

rency flows, at least until the fourth quarter of1931. The money supply contraction and defla-tion during the first two years of the Depres-sion were not caused by a decline in bankreserves. Instead, as figure 10 illustrates, themoney supply fell because the money multiplierdeclined.~°This was particularly true beginningin the fourth quarter of 1930, when bankingpanics caused marked increases in thecurrency-deposit and reserve-deposit ratios.”‘The relative stability of bank reserves endedabruptly in September 1931. On September 21,Great Britain left the gold standard. Speculation

“The multiplier plotted in figure 10 equals (1 + k)/(r + k),where k is the ratio of currency held by the public to de-mand deposits and r is the ratio of bank reserves todeposits. The multiplier is defined as the money supply(here M2) divided by the monetary base, or ‘high-poweredmoney,” which is the sum of bank reserves and currencyheld by banks and the public.

4’Friedman and Schwartz (1963), pp. 340-42, conclude thatthe money supply decline between August 1929 and Oc-tober 1930 was caused by a decline in the monetary base.This decline was due to a decrease in currency, not bankreserves. Thereafter, the base rose, but less than neces-sary to offset the sharp decline in the multiplier.

Millions of dollars

3000

2500

2000

1500

1000

Reserves

500

0

—500

•1000

1500

~1

1’‘ ,~.

/ V ~ V

VA

I’

I

V—2000

Gc’fci c\’’

I 1924 I 1925 I 1926 I 1927 I 1928 I 1933 I

Figure 10Money Supply and Base Multiplier

Multiplier

7

6.5

6

5.5

5

4.5

4

3-5I 1929 I 1930

January 1929 to February 1933

I 1931 I 1932 I 1933

Monthly Data

48.000

that the United States would soon follow led toa large withdrawal of foreign deposits fromAmerican banks and a consequent gold out-flow.~’In the six weeks ending October 28,1931, the gold stock declined $727 million (15percent).” The Fed raised its discount and ac-ceptance buying rates, hoping that an increasein domestic interest rates would halt the goldoutflow by raising the relative yield of U.S.financial assets. This action was hailed asdemonstrating the Fed’s resolve to maintain goldconvertibility of the dollar, and the gold outflowceased.

Banks continued to lose reserves, however, asdepositors panicked and converted deposits intocurrency. Member banks were able to partiallyoffset the reserve outflows by borrowing andby selling acceptances to the Reserve Banks, al-beit at the recently increased discount and ac-ceptance buying rates. But the Fed made onlytrivial purchases of government securities, and,in all, Federal Reserve member banks suffered a$540 million (22 percent) loss of reserves be-tween September 16, 1931, and February 24,1932.~’

“If the United States had left the gold standard, it is likelythat the dollar would have depreciated against gold andother currencies that remained linked to gold. This wouldhave meant an immediate loss of wealth in terms of goldfor anyone holding dollar-denominated assets.

~‘Boardof Governors of the Federal Reserve System (1943),p. 386.

“Non-borrowed reserves declined $1112 million (52 per-cent), while discount loans (borrowed reserves) increased$572 million.

Multiplier

38., 000

The Federal Reserve Balance Sheet and ReserveSterilization

.\ smipliied er~tonol lilt’ I ederal He~er~eS.;tcrns balance sheet tin l)ect’riihc’r 31 - Federal Reserve System Balance Sheet

cii December 31, 1929 (billions of dollars)reserves LtrId I ed rredil outstanding. I it’ al— AssetsIn I’ eonsis ted of inen i her I m nk hoc l0\\ i ng Gold and ~asb reserves $3.01(hills clkcoitnlcid. hariki’i’’~acceptances held Feceral Reservo credit 1 58

I he Resect i’ Ban ks lbills bong] ill .~ - s. Bills discounted S0.63got e inn ico t sectII’I tip I iel d b~ tiin Fe erte Bills bought 0 39• - . Govenment securities 051kinks and a rni~c.elliuwouscoinponenl. tiiadc Other 005up pirmw iv n float. ‘11w pnncipal liabilities Other assets 087ol I he St-stem n ire I- edera I l-k’sc’i-~eIloLen rolal assets S5 46outsIandirig (lt’pi)sitS cit nieiiiht’r lianks ~tnildepo~aI,, of I he I .5. 1 rea%ui’v alIt! ul her’~. Liabilities and Capital

Federal Reserve notes 51 91such a~I urei~n ceni cal hank’-.

Deposits 2.41\losl M\’slc’n transactions inti.ilt I’ nenther Member oank S236

coflflfl~1ren1banks arid di cccl I’, a ifecI im’uiihei- Other 005Other Iiabilit;ps 0 69

bank rt’ser\ I~s It Liic’ I ccl makes an op1o Captal accounts 045market pui’chase ol government sc’curities Total liabilities and capital S5~6lioni a menilier hank, I or i’~ample. it pa~for the securit ins by ci’i’clilirig I lit’ nit’mlic’rhank3 de1’,o’at tt ith the Federal Re~r’i-t~ tb a ‘econd transaction bating the opposite

a (leposil al the I ed is [tic’ principal impart on resect (!5. Fiji exanipic’, ii the ledfin-ni in n hich hLtnks hold their legal sold government securities Ill he alliloillit oFresect i’s au O~WI] Iiizii’kt’l purchase iclils a gold irrI ott then’ would he 110 net changeciin’ctl’ lo hank re’~ertes. in aggregate inenihe, bank re’~erves. I he

Mant I (‘dclii Reserve transaction’- tIle ~il open market sale u caild reduce reserve.s uslitiateci ht rciiiiui,erciiil banks U hen hi’ I nil - as the gold inf!ott added Li theni lea’ rig noid StaIe~tt as on hit’ gold standqrd. 11w led 11(1 I’es(’l\ t’ cii~iuige. Siniilaiit . a bank couldheld substantial gold reserves, and tran’,ar— hnr’rott resect c’’~1mm its Resect e Ihir’l~10lions in gold n crc’ coinnion. I or c’xaniple. pat Ion federal lieseite noR’s net’dc’cI to ‘~alis-

suppose gold coin n as depusited bt a dos iv tvilhdran at du’niaiui’,. and lhus it oidtoiiic’i’ ul a neniber bank. I lie bank could i.hau ing ciutt n its reselt ci clr’r)osih In liii’‘-end hit c()in Iii its I c’clc’i-al Rc’ei’t ~ I3~’~~iu~d~ case. leclc’rai Resect ci ‘ieclit hull’, di’~cotililc’clIiec(i\ t’ an incn’itst’ in ii’. c’sert 1’ clejii~~itcil ~ ouki iiic:rea’~c’in lilt’ aniotirit ol the increaseI hal amount he I H’, gold -Isert es and ill Federal Rc’sert e note’~otil’-laiiding, Lull

1

member haiik cleposik t~ould ncr-ease lit the b~uikIV5~tP’, \\ 0(11(1 riot change \olc’ lhalsame amount ~nppuse instead that -l nieinbc’r in lhr~ra’,e the Fed did riot iniliate liii’ oil—h,mk ‘,t as i’\pt’nend1r124 large cash tt tlidrau - sc’Uing lran~acIion. Indeed. nun h ol Ihe

Lds intl needed e\tra ctn’renict - It could re— ‘~ieii1i7Mtk;iioI gold and cii rre.ncv llott s clw-—

tluesl rnrrc’ne\ in 11w I olin ol lecic’rai jug the I 9!tis and eai’lv 1930s tt as at Lilt’ in—Re’,c’rte ilciles, irculil its Iteseit ~‘ Bank arid pa’ ituWt c’ of unn-nihei- banks although it n as

lie rurreoct u jIb a iecltit’tion in its c]efinitelt the I ccl s inlent lhat stc’nihi,utionresi’I’\ r’ deposit I lenee ‘I’, lederal Ri’si’it c. oct10-.

noIe,~oiitstaiidii’’ iric;r’zisc’d haiik reserves , -h I c’deral heserve ster-W,.alion cit gold and

ttinrlcl clic-liric’ lit the ~anie aiuioiirit -

currency flints Iron laotian v t).~-Ito I c’hiti—1 he I ccl could oh lsel. or ~tt’i~iIize In’ ha— zir’v I fu.L-i is ihlustr,itecl iii ligiric’ 9. \otc’ Iliat

pact cif one Ii ansac’tion on hank i’esc’r’t c’s iricri’,l’,t’s cl eruc’asc’si in Federal Result

The Fed’s failure to fully offset the gold andcurrency outflows suffered by banks permittedthe money supply contraction to accelerate. Fedofficials claimed that the Reserve Banks’ lack ofreserves precluded government security pur-chases to offset the reserve losses suffered bybanks45 The Reserve Banks were required tomaintain gold reserves equal to 40 percent oftheir note issues and reserves of either gold or‘eligible paper” against the remaining 60 per-cent4°Since gold outflows had reduced the Sys-tem’s reserve holdings, and since the Systemlacked other eligible paper, Fed officials assertedthey could not increase Fed credit by purchas-ing government securities, which were not eligi-ble collateral.

Friedman and Schwartz (1963), pp. 399-406,dispute the Fed’s justification for not buyinggovernment securities. They argue that the Sys-tem had sufficient gold reserves and, in anyevent, that the Federal Reserve Board had thepower to suspend the reserve requirements

temporarily. Epstein and Ferguson (1984),pp. 964-65, contend, however, that Fed officialsdid feel constrained by a lack of gold. Wicker(1966), pp. 169-70, suggests that Fed officialsfeared that open market purchases wouldweaken confidence in the Fed’s determination tomaintain gold convertibihty and thereby renewthe gold outflow.

In any case, the Glass-Steagall Act of 1932 re-moved the constraint by permitting governmentsecurities to serve as collateral for FederalReserve note issues. In March 1932, the Systembegan what was then the largest open-marketpurchase program in its history.~~BetweenFebruary 24 and July 27, 1932, the Fed bought$1.1 billion of government securities. Memberbank reserves increased only $194 million inthese months, however, because of renewedgold and currency outflows and a reduction inmember bank borrowing. Moreover, the supplyof money continued to fall because of a sharpdecline in the money multiplier (see figure 10).~~

45See the Board of Governors of the Federal Reserve Sys-tem. Annual Report (1932), pp. 16-19.

46Eligible paper consisted of either bankers acceptances orcommercial notes acquired by direct purchase or pledgedby member banks as collateral for discount loans. SeeBoard of Governors of the Federal Reserve System (1943),pp. 324-29, and Friedman and Schwartz (1963), p. 400.

4TWhy the Fed undertook these purchases is unclear, espe-

why purchases were not made immediately following Bri-tain’s departure from gold. Friedman and Schwartz (1963),pp. 384-89, argue that the Fed succumbed to pressurefrom Congress, while Epstein and Ferguson (1984) con-clude that pressure from both Congress and commercialbanks was important.

~During these months, both the reserve-deposit andcurrency-deposit ratios rose.

c-rc-clit acc-nrnpanied declines iinc’reasesl in the months. tlierc’ tvas ‘-sri iuiei’c’a~c’ot S259 nil—net uI gold and cui’i’eucv outstanding and Iic,ri iii the nicutic’tait gold stock arid a SI 211thus bank resect es changed c:curnparatit cIt lit— million decline ill c’urrerict in rirculalicni. ThetIc’. In 193(1, fur c’xarnple member batik gold inflott antI clecliru’ in c-tn’renet’ wouldl’d’si’r’tes rusc’ lr’nni 5231)5 million in l)c’ct’m— have aclclc’cl 5371) million to bank i’e’.ei’t e~.

her- 11129 to 52115 milliun in b)ec’c’rnher 11131). hut Fed credit clc’c-Iirit’cl by 537Q million toan increase of jnst 821.) niillion. ()vc.r the samc’ offset their unpac’t alinosl c’ntirc’lv)

~Loansto member oanks consisted & aiscounls anc ad- qal reserves. At other tines, vault cash has alsovances. Many commerc’ah loans wh,ch often ‘were counted.cabled “bills were made on a oiscount basis, hence. ‘Even ‘f the rod were to purchase securities from some-wnen they were endorsed by a bank and sent lo a one other tnan a member bank, bank reserves wouldReserve Banx i-i exchange for reserve balances, they still increase once ihe check issued by the Fed to paywere re-discounted oy the Rese’ve Bank al the for the securities was depos~tedin a member bankprevailing discount rate Ahternat.vely. bils we’e used Open market security sales reduce bank reservesas collate’aI to’ direct advances to member banks, since, ultimately, a member bank reserve deposit -shence the term “bills discounteo. reduced to pay for tie securities sold by the Fed.

2Tne terminology is confusing because bills’ •n tnis ~Tne gold inflow, decline in currency and decline in Fed-case refer to bankers acceptances riot to lhe promisso- eral Reserve credit do not sum exactly to the change r.ry notes that member banks used as collateral br dis- bank reserves because of the effect of other, smallcount loans, transactions affecting reserves

3From 1917 to 1960. such deposits were the only formin whicn member banks were permitted to hold their he-

cialby if fear of undermining the gold standard explains

The Fed ended its purchase program in July1932, largely because officials believed it haddone little good.49 Bank reserves continued toincrease) however) as gold inflows were not off-set by a corresponding reduction in Fed creditoutstanding. Although the money supply ceasedto fall, it also failed to rise significantly. in early1933, large gold and currency outflows causeda renewed money supply decline.~°On this oc-casion, the crisis was stopped by Franklin U.Roosevelt’s decision to declare a Bank Holidayand suspend gold shipments. In essence, theFed’s failure to insulate the banking systemfrom gold outflows and panic currency with-drawals had caused the president to act to pre-vent further reserve losses.

While failure to sterilize gold and currencyoutflows in 1931 and 1933 was inconsistentwith previous actions, it did not represent afundamental change in regime. Fed officials ap-parently believed strongly in the gold standard,and there seems to have been no discussion offollowing Great Britain off gold. BenjaminStrong had been a committed advocate of thegold standard, and it seems doubtful that hewould have proposed actions that might haveweakened it.’” As an institution, the FederalReserve System was willing to forego short-runstability to preserve the gold standard, which itsaw as its fundamental mission.’”

Reserve sterilization constituted one aspect ofSystem policy begun under Strong, and the Feddeviated little from the policy after his death, atleast until the fourth quarter of 1931. In fact,from the stock market crash in October 1929 toBritain’s departure from gold on September 21,1931, the Fed did little but offset gold and cur-rency flows. It certainly did not make largeopen market purchases, despite the deepeningdepression. On the surface, this lack of vigorappears at odds with the relatively large openmarket purchases the Fed made during theminor recessions of 1924 and 1927.

The Fed’s actions in 1924 mark its first use ofopen market operations to achieve general poli-cy objectives. In that year, the Fed purchased$450 million of government securities and cutits discount rate (in three stages) from 4.5 per-cent to 3 percent. In testimony before theHouse Banking Committee in 1926, BenjaminStrong listed several reasons for these actions,including the following:

1) To accelerate the process of debt repay-ment to the Federal Reserve Banks by themember banks, so as to relieve this weaken-ing pressure for loan liquidation.

2) ‘Jo give the Federal Reserve Banks an assetwhich would not be automatically liquidatedas the result of gold imports so that later, ifinflation developed from excessive gold im-ports, it might at least be checked in part byselling these securities, thus forcing memberbanks again into debt to the Reserve Banksand making the Reserve Bank discount rateeffective.

3) To facilitate a change in the interest rela-tion between the New York and London mar-kets. - . by establishing a somewhat lowerlevel of interest rates in this country at atime when prices were falling generally andwhen the danger of a disorganizing price ad-vance in commodities was at a minimum andremote.

4) By directing foreign borrowings to thismarket to create the credits which would benecessary to facilitate the export of com-modities. -

5) To render what assistance was possible byour market policy toward the recovery ofsterling and the resumption of gold paymentby Great Britain.

6) To check the pressure on the banking situ-ation in the west and northwest and theresulting failures and disasters.’~

‘9Banks’ excess reserves increased substantially during themonths of the open market purchases, which many saw asidle balances that were unneeded and potentially inflation-ary. See Friedman and Schwartz (1963), pp. 385-89. Asdiscussed below, Epstein and Ferguson (1984) suggestthat pressure from commercial banks contributed to theFed’s decision to end the program.

~°Themoney supply fell both because of a decline inreserves and a decline in the money multiplier induced bypanic deposit withdrawals.

5’Strong testified before the House Banking Committee in1928 that, When you are speaking of efforts simply to

stabilize commerce, industry, agriculture, employment andsoon, without regard to the penalties of violation of thegold standard, you are talking about human judgment andthe management of prices which I do not believe in at all.”lOuoted by Burgess (1930), pp. 331.1 See also Temin(1989), p. 35.

‘“See Temin (1989), pp. 28-29 and 76-87, and Wheebock(1991).

‘“U.S. House of Representatives (1926), p. 336,

The Fed undertook a second large purchaseprogram in 1927, purchasing $300 million ofgovernment securities and reducing the dis-count rate again. Strong left no written justifica-tion for these operations. Friedman andSchwartz (1963) argue that they were made inresponse to a recession, and that the 1924 pur-chases had also been intended to bring about adomestic recovery. Wicker (1966), pp. 77-94 and106-16, challenges this interpretation, arguingthat the actions were motivated by internationalconsiderations. According to Wicker, the pur-chases in 1924 were intended to encourage theflow of gold to Britain by reducing U.S. interestrates relative to those in London, with the goalof assisting Britain’s return to the gold standard.The 1927 purchases were intended to help Bri-tain through a payments crisis, again by direct-ing capital toward London; these purchasesfollowed closely a meeting between Strong andEuropean central bank heads.

Chandler (1958), p. 199, argues that bothdomestic and international goals were importantin 1924 and 1927, and Wheelock (1991), ch. 2,finds empirical support for this view. Wheelockalso shows that, relative to the decline in eco-nomic activity, the Fed made substantially feweropen market purchases in 1930 and 1931 thanit did during 1924 and 1927. This might reflecta significant change in System behavior betweenthe 1920s and early 1930s. But an analysis ofthe Fed’s policy methods suggests that its anem-ic response in 1930-31 might also be explainedas the consistent use of a single strategy.

During the early 1920s, the Fed developed astrategy of using open market operations anddiscount rate changes to affect the level ofmember bank discount window borrowing. Fedofficials observed that, when the System pur-chased government securities, member bankborrowing tended to decline by nearly the sameamount and, sinsilarly, that open market salesled to comparable increases in member bankborrowing. But, while the Fed’s operations hadlittle impact on the total volume of Fed creditoutstanding, they appeared to have a significant

impact on money markets. Accorcling to Chan-dler (1958):

Federal Reserve officials soon discovered.much to their amazement at first, that openmarket purchases and sales brought about

marked changes in money market conditionseven though total earning assets of the ReserveBanks remained unchanged. When the FederalReserve sold securities and extracted moneyfi-om bank reserves, more banks were forced tohot-row from the Reserve Banks, and those al-ready borrowing were forced niore deeply intodebt. Since banks had to pay interest on theirborrowings and did not like to remain continu-ously in debt, they tended to lend less liberally,which raised interest rates in the marketpp. 238-39).

Strong testified that “the effect of open marketoperations is to increase or decrease the extentto which the member banks must of their owninitiative call on the Reserve Bank forcredit ~ Security purchases led to less mem-ber bank borrowing and lower interest rates,while sales increased borrowing and rates.55

Strong believed that monetary policy couldstimulate economic activity by easing moneymarket conditions:

.[Wlhen we have very cheap money, corpora-tions and individuals borrow money in order toextend their businesses. That results in plantconstruction; plant construction employs morelabor, brings in to use more materials. - . - Itmay cause some elevation of wages. It createsmore spending power; and with that start itwill permeate through into the trades and thegeneral price level.’~

Chandler (1958) and Friedman and Schwartz(1963) conclude that under Strong’s leadershipthe Federal Reserve System attempted to stimu-late economic activity during recessions bypromoting monetary ease (cheap money). Thisexplains why Strong listed “to accelerate theprocess of debt repayment. - . by the memberbanks” as a reason for the open market pur-

~4lbid,p. 468.

‘“Presumably, discount rate changes alone could achievethe same impact on interest rates, but the Fed preferred toprecede discount rate changes with open market opera-tions. Strong testified that “the foundation for rate

possible otherwise, and the effect is less dramatic andless alarming. - - than if we just make advances andreductions in our discount rate.” [U.S. House of Represen-tatives (1926), p. 3331-

‘“U.S. House of Representatives (1926), pp. 578-79.changes can be more safely and better laid by thesepreliminary operations in the open market than would be

Table 1Fed Policy During Three Recessions(dollar amounts in millions)

Date AlP GS DR.DL DI4NYC)

1929 Jut 124 $147 5.0% $1096 $319Oct 118 154 60 885 74

1930 Jan 106 485 4.5 501 39Apr 104 530 35 231 17Jul 93 583 25 226 0Oct 88 602 25 196 6

1931 Jan 83 647 2.0 253 5Apr 88 600 2.0 155 0Jul 82 674 15 169 0Oct 73 733 3,5 614 74

1923Apr 106 229 45 658 123Jul 104 97 45 834 143Oct 99 91 45 873 121

1924 Jan 100 118 45 574 85Apr 95 274 4.5 489 45Jul 84 467 35 315 13Oct 95 585 3.0 240 28

1925 Jan 105 464 3.0 275 32

1926 Oct 111 306 4.0 663 841927 Jan 107 310 4.0 481 76

Apr 10$ 341 40 447 78Jul 106 381 4.0 454 59Oct 102 506 3.5 424 75

1928 Jan 107 512 3.5 465 94

Variable definitions. AlP: Index of Industrial Production(seasonallyadjusted); GS. Federal Reserve government secu-rity holdings, DR: discount rate of the Federal Reserve Bankof New York; DL: discount loans (member bank borrowing)of all Federal Reserve member banks, DL(NYC): discountloans of reporting banks in New York City.

chases in 1924. Strong used the level of mem-ber bank borrowing to determine the specificquantity of security purchases necessary tobring about monetary ease:

Should we go into a business recession whilethe member- banks were continuing to borrowdirectly 500 or 600 million dollars. . - we shouldconsider taking steps to relieve some of thepressure which this borrowing induces by pur-chasing Government securities and thus ena-bling member banks to reduce theirindebtedness. . . - As a guide to the timing and

extent of any purchases which might appeardesirable, one of our best guides would be theamount of borrowing by member banks in prin-cipal centers. . - . Our experience has shownthat when New York City banksare borrowing in the neighborhood of 100 mil-lion dollars or more, there is then some realpressure for reducing loans, and money ratestend to he markedly higher than the discountrate. On the other hand, when borrowings ofthese banks are negligible, as in 1924, themoney situation tends to be less elastic and ifgold imports take place, there is liable to hesome credit inflation, with money rates drop-ping below our discount rate. When memberbanks are owing us about 50 million dollars orless the situations appears to be comfortable,with no marked pressure for liquidation. . .

Table 1 compares Federal Reserve actions dur-ing the 1924, 1927 and 1930-31 downturns. TheFed’s index of industrial production indicatesthe severity of each recession. Following thestock market crash in October 1929, the NewYork Fed purchased $160 million of governmentsecurities and, by the end of December, the Sys-tem had purchased an additional $150 million.But, from January 1930 to October 1931, theFed made only modest purchases, particularly incomparison with those made in 1924 and 1927,when the declines in economic activity wereless.

The relatively small purchases in 1930 and1931 appear consistent, however, with the useof member bank borrowing as a policy guide.1’his, according to Brunner and Meltzer (1968),explains the Fed’s failure to respond aggressive-ly to the Depression.58 Member bank borrowingfell substantially following the stock marketcrash in October 1929 and averaged just $241million from January 1930 to August 1931. Bor-rowing by reporting member banks in NewYork City averaged just $8 million over thesame months. Thus, by Strong’s guidelines,money was exceptionally easy and substantialopen market operations were unwarranted.

The Fed’s use of member bank borrowing asa guide to monetary conditions could explain

t7Presentation to the Governors’ Conference, March 1926[quoted by Chandler (1958), pp. 239-401.

‘“Wicker (1969) agrees that, to the extent that the Fedresponded to domestic conditions, it used member bankborrowing as a guide. See also Mebtzer (1976).

why it permitted the money supply to declinesharply during the Depression. During a reces-sion, loan demand declines and banks have fewerprofitable investment opportunities. Consequent-ly, the demand for borrowed reserves declines.If this decline in demand is not offset, totalreserves and the money supply fall. In a minorrecession, as in 1924 and 1927, member bankborrowing falls little. The Fed’s guidelines wouldhave suggested that monetary conditions wererelatively tight and, in response, it would havemade large open market purchases. In a severeeconomic downturn, as in 1930-31, however,member bank borrowing may fall substantially.But, by Strong’s rule the Fed would have madefew open market purchases. Thus, ironically,this strategy could result in a greater contrac-tion in the supply of money, the more severe adecline in economic activity.58

If, as Brunner and Meltzer (1968) argue, Sys-tem officials followed Strong’s prescription touse the level of bank borrowing to guide policyduring the Depression, then it seems that theFed made no fundamental change in policy afterStrong’s death.

Although Friedman and Schwartz (1963),pp. 362-419, believe that Strong would have re-sponded aggressively to the Depression, theyagree that a majority of Fed officials interpretedthe low level of member bank borrowing in1930 and 1931 as signaling monetary ease. Theycontend, however, that officials of the New

York Fed understood the flaws in using member’bank borrowing as a policy guide and wouldhave pursued appropriately expansionary poli-cies if they had the authority.60

In March 1930 the Open Market InvestmentCommittee, which consisted of five ReserveBank governors, was replaced by the Open Mar-ket Policy Conference, in which representativesof all 12 Banks participated. ‘The InvestmentCommittee had been led by Benjamin Strong,and then by George Harrison, Strong’s successoras governor of the Federal Reserve Bank of New

York. Friedman and Schwartz, p. 414, contend

that the Policy Conference was established towrest power from the New York Bank. Andthey show, pp. 367-80, that New York officialsproposed more expansionary actions, particular-ly in 1930, than were accepted by the rest ofthe System. Wicker (1966) finds, however, thatHarrison ceased to advocate open market pur-chases once New York banks were no longerborrowing reserves. Thus, while the FederalReserve would likely have pursued somewhatmore expansionary policies had New York offi-cials held more authority, the modest open mar-ket purchases of 1930 and 1931 wereapparently consistent with the guidelines out-lined by Strong.

In sum, during the Depression, the FederalReserve continued to sterilize gold and currencyflows and made limited open market purchasesand discount rate reductions in response to theeconomic decline. Notable deviations from thesepolicies occurred, such as the incomplete sterili-zation of gold outflows during the crises of1931 and 1933. But it seems likely that mone-tary policy would have been somewhat moreresponsive to the Depression, particularly in1930, had officials of the Federal Reserve Bankof New York been able to dominate policymak-ing in the way Strong had before his death.8~The general thrust of policy, however, appearsconsistent with that of Benjamin Strong.

IN’vERF;s9•~(~R(JtfI~•Pi11~StiLtt1

~ (J.F ~

i3F:1•~iA’V.I.O)R

Until recently, most studies of Fed behaviorhave concluded that policymakers failed to per-ceive a need to take expansionary actions,despite deflation, rising unemployment andwidespread bank failures. Some researchersnow argue, however, that Fed officials werequite aware that their policies were contribut-ing to the contraction. These researchers con-clude that policymakers responded to interestgroup pressure and their own lesire for in-

‘“Indeed, except for a brief decline in Ml in 1927, the abso-lute quantity of money did not fall in 1924 or 1927, althoughits rate of increase declined. The Fed’s strategy and theconsequences of using bank borrowing as a policy guideare examined in greater detail in Wheelock (1991), ch. 3.

‘“See also Schwartz (1981), pp. 41-42.

policies, particularly in 1927, had contributed to stock mar-ket speculation and the crash and depression that fol-lowed. See Wheelock (1991), ch. 4, for analysis ofdisagreements among System officials during theDepression.

efl~is by no means clear that Strong could have retainedthis degree of influence, as many officials believed that his

fluence, rather than the public interest. Epsteinand Ferguson (1984), for example, contend thata combination of ideology and conflicting in-terests explain the System’s policy. And Ander-son, Shughart and Tollison (1988) argue that“the restrictive monetary policy of the Fed inthe 1929-33 period was not based on myopiabut instead on rational, self-interested behavior”(p. 4).

Epstein and Ferguson (1984) focus their studyon the Federal Reserve’s $1.1 billion open mar-ket purchase program of 1932. They ask whythe Fed waited so long to begin an expansionaryprogram, what had changed to cause the Fed tobegin the program when it did, and what led tothe decision to end the program.

To the first question, Epstein and Ferguson(1984) conclude that the liquidationist businesscycle theory was dominant among Fed officials.Liquidationists believed that depressions were“vital to the long-run health of a capitalist econ-omy. Accordingly, the task of central bankingwas to stand back and allow nature’s therapy totake its course.” (p. 963). This certainly was theopinion of some key officials, such as GeorgeNorris, who argued at the September 25, 1930,meeting of the Open Market Policy Conference:

We believe that the correction must comeabout through reduced production, reduced in-ventories, the gradual reduction of consumercredit, the liquidation of security loans, and theaccumulation of savings through the exercise ofthrift. These are slow and simple remedies, butjust as there is no ‘royal road to knowledge,’ webelieve there is no short cut or panacea for therectification of existing conditions. - -

We have been putting out credit in a period ofdepression, when it was not wanted and couldnot be used, and will have to withdraw creditwhen it is wanted and can be used.’”

Norris clearly believed that monetary policy hadbeen too stimulative and was interfering withthe natural process of liquidation and recovery.

Strong and other officials apparently heldsimilar views during the recession of 1920-21.According to Wicker (1966):

26

In the view of System officials the money sup-ply in 1920 was redundant (excessive) andshould decline to restore the ‘proper’ relation-ship between prices, credit, and volume ofproduction. The term most frequently used todescribe this process was ‘liquidation,’ thenecessity for which was not disputed by eitherthe Board or by any other Federal Reserve offi-cial including Benjamin Strong. - (p. 49).

Most researchers argue that Strong’s viewschanged significantly after the 1920-21 episode,however. Chandler (1958) writes:

Like most other Federal Reserve officials, [in1920-1921 Strongl believed that some deflationof bank credit was essential and that someprice reduction was inevitable and desirable.Within three years, Strong himself had rejectedmany of these ideas. A much smaller businessrecession in 1924 led him to advocate large andaggressive open-market purchases of govern-ment securities and reductions of discount ratesto combat deflation at home as well as to en-courage foreign lending (p. 181)65

In rejecting the importance of Strong’s death,Epstein and Ferguson (1984) implicitly deny thatStrong sought to prevent loan liquidation duringrecessions by pursuing monetary ease or thathe subscribed to the countercyclical policy guide-lines he presented to the Governors Conferencein 1926: “Should we go into a business reces-sion. - - we should consider taking steps torelieve. - - the pressure. - - by purchasingGovernment securities 64

Epstein and Ferguson emphasize two addition-al reasons for the timing and extent of Fed ac-tions during the Depression. First, in contrast toFriedman and Schwartz, they conclude that alack of gold reserves did keep the Fed frommaking open market purchases in the fourthquarter of 1931. They argue further that, whilethe Glass-Steagall Act of 1932 lessened theproblem for the System as a whole, some of theReserve Banks were reluctant to continue thepurchase program in 1932 because they lackedsufficient gold reserves.65

Second, Epstein and Ferguson argue that Fedconcern with member bank profits contributed

‘“Quoted in Chandler (1971), p. 137.

‘“See also Friedman and Schwartz (1963), pp. 249-54, Wick-er (1966), pp. 57-66, and West (1977), pp. 173-204.

‘“Quoted by Chandler (1958), p. 239-40.

‘“Each Reserve Bank was required to maintain its ownreserves. Pooling was not permitted, although the Bankscould lend to one another.

to the timing and extent of open market pur-chases in 1932. During the first two years ofthe Depression, leading bankers generally ar-gued for loan liquidation and lower wages. Butthe sharp increase in interest rates in thefourth quarter of 1931 reduced the value ofbond portfolios and threatened the solvency ofmany banks. Bankers then began to press theFed to support bond prices. Epstein and Fergu-son argue that “a major goal of the [purchasesof 1932] was to revive railroad bond values.and bond prices in general.” (p. 967).

Just as constituent pressure contributed to thedecision to make open market purchases, it alsoseems to have caused the program’s end. Dur-ing the Depression banks generally had shiftedtheir bond portfolios toward short-term maturi-ties. And, while the need to support bond priceswas paramount in early 1932, as the yearprogressed short-term interest rates fell sharplyand bank earnings declined. The decline inearnings was especially acute in Boston andChicago because banks in those cities had un-usually large holdings of short-term securities.Epstein and Ferguson conclude: “That the gover-nors of the Boston Fed and, especially, theChicago Fed should be early critics of the refla-tion program is therefore no mystery.” (p. 972).

Declining interest rates and questions aboutthe willingness of the United States to maintainthe dollar’s gold convertibility led to depositwithdrawals by foreigners, causing commercialbanks to raise further doubts about the pur-chase program: “The continued loss of gold anddeposits put many New York banks in an in-creasingly uncomfortable position. - - - Manycomplained that the reflation program had‘demoralized money and exchange markets’.””Thus, pressure from member banks experienc-ing falling earnings and deposit outflows andthe desire of some Reserve Banks to protecttheir gold reserves caused the System to aban-don its program of open market purchases.67

Epstein and Ferguson (1984) were the first toexplain Federal Reserve behavior during theDepression as a response to pressure from com-mercial bankers. Anderson, Shughart and Tolli-son (1988) push this view to the extreme,arguing that the principal aim of Fed policy dur-ing the Depression was to enhance the long-runprofitability of member banks by eliminatingnonmember competitors. This, in turn, benefitedthe Fed by increasing the proportion of thebanking system under its regulatory control:

The fall in the money supply presided over bythe monetary authority between 1929 and 1933eliminated a large number of state-charteredand small, federally-chartered institutions fromthe commercial banking industry. The profits ofthose banks that survived. - - rose significantlyas a result. Coincidentally, the monetary con-traction expanded the proportion of the com-mercial banking system within the Fed’sbureaucratic domain. Thus, rather thanrepresenting the leading example of bureaucraticineptitude, the Great Contraction may insteadbe the leading example of rational regulatorypolicy operating for the benefit of the regula-tors and the regulated.”

Nonmember banks made up 75 percent of thebanks that suspended operations between 1930and 1933. Failures were highest among small in-stitutions located in rural areas. Policymakerstypically argued that such failures were causedby bad management or transportation improve-ments that made many banks redundant. GeorgeHarrison, Governor of the New York ReserveBank, for example, testified before the SenateBanking Committee in 1931 that:

- - with the automobile and improved roads, thesmaller banks. - - with nominal capital, out inthe small rural communities, no longer had anyreason really to exist. Their depositors wel-comed the opportunity to get into their automo-biles and go to the large centers where theycould put their money.°°

66Epstein and Ferguson (1984), p. 975.

‘“in a comment on Epstein and Ferguson, Coelho and San-toni (1991) present econometric evidence suggesting thatbanks did not suffer reduced profits as a result of theFed’s 1932 purchases, and they question whether pres-sure from commercial banks caused the Fed to end itsprogram. Indeed, they even doubt that expansionary policywas ended since the monetary base continued to rise. Ep-stein and Ferguson (1991) present additional qualitativeevidence showing that banks thought that low interestrates had reduced their earnings.

“Anderson, Shughart and Tollison (1988), pp. 8-9.“U.S. Senate (1931), p. 44.

5

25

From the Federal Reserve’s inception, Fed offi-cials argued that it was important that all banksjoin the System. Benjamin Strong argued in 1915that “no reform of our banking methods in thiscountry will be complete and satisfactory to thecountry until it includes all banks. - - in onecomprehensive system.”°Policymakers werelikely less concerned with the failure of non-member banks than they were with the healthof member banks.” But it remains to be shownthat Federal Reserve policies were deliberatelyintended to cause the failure of thousands ofnonmember institutions.

Anderson, Shughart and Tollison (1988) arguethat “the Great Depression... was a by-productof economically rational behavior on the part ofFederal Reserve member banks seeking rentsthrough the elimination of their nonmemberrivals.” (p. 9) Member banks did not capture theFed directly, they argue, but rather exertedpressure through members of the House andSenate Banking Committees. To test this hypoth-esis, the authors regress deposits in failed non-member banks in each state on dummy varia-bles indicating whether a state was representedon the House or Senate Banking Committees.”They find that nonmember bank losses werehigher if a state had a representative on theHouse Banking Committee. This, they argue,supports their view that the Fed deliberatelycaused nonmember bank failures to be highestin states having a congressman on the BankingCommittee, thereby enhancing the long-runprofits of the member banks that remained. TheFed’s payoff came in 1933 when it was freedfrom having to return a portion of its revenuesto the Treasury.”

This explanation of Federal Reserve policyprovokes a number of questions. Left unclear,for example, is why member banks had moreinfluence over Congress than nonmember banks.Nor is it explained how the Fed was able to af-fect the fortunes of nonmember banks in partic-

ular states with the tools at its disposal. The Fedcannot control the destination of reserve flowsgenerated by open market operations, and thediscount window was not open to nonmemberbanks. Perhaps Fed officials could have selec-tively restricted credit to member banks thatlent to nonmember banks in particular states,but it is doubtful that such a circuitous routewould have had a large impact on losses.

Huberman (1990) casts further- doubt on theAnderson, Shughart and Tollison (1988) view.He notes that, although 75 percent of banksthat suspended during the Depression werenonmember banks, the ratio of nonmember tomember bank suspensions from 1930 to 1933was lower than it had been during the 1920s.Nonmember banks that suspended, mom-cover,reopened twice as often as member banks.Membership in the Federal Reserve Systemgrew’ at a comparatively low rate during theDepression.

Santoni and Van Cott (1990) also report evi-dence contrary to the Anderson, Shughart andTollison hypothesis. They calculate a share priceindex for large New York City member banksand show that, relative to both the wholesalecommodity price index and the Standard andPoor’s index, bank share prices declined sub-stantially from 1929 to 1934. They show alsothat the index of bank stock prices was not af-fected by changes in the money supply, suggest-ing that monetary policy did not enhance thefortunes of banks in their sample.~~

CONCLUSION

The Federal Reserve’s failure to respondvigorously to the Great Depression probablycannot be attributed to a single cause. Each ofthe explanations discussed in this article clarifiescertain points about Fed behavior during theDepression. A number of contemporary observ-ers, both within and outside the System, attrib-

70Quoted by Chandler (1958), p. 80.

“Friedman and Schwartz, pp. 358-59, also make this point.7tThey include deposits in failed member banks, total bank

deposits, and other control variables as additionalregressors.

“Anderson, Shughart and Tollison (1988), pp. 16-17.74Anderson, Shughart and Tollison (1990) reply by pointing

out that member bank share prices rose dramatically rela-tive to those of nonmember banks during 1930. Even the

share prices of “small” member banks rose relative tothose of nonmember institutions. Neither study testswhether the profits of surviving member banks were en-hanced in the long run, although the former note that in1936 the average national bank profit rate was higher thanin 1925. Unfortunately, it is impossible to determinewhether the increase in bank profits was caused by thedemise of nonmember banks or by New Deal reforms,such as deposit interest rate ceilings, deposit insurance,and increased chartering requirements, which reducedcompetition and enhanced bank charter values.

uted some of the blame to what they viewed asexcessively easy monetary policy during reces-sions in 1924 and 1927. They argued that theFed’s actions had promoted stock market specu-lation and led inevitably to the crash andDepression. The best policy during the Depres-sion, according to these observers, was to pro-mote loan liquidation and wage rate reductions,to allow recovery on a “sound basis.” Whilethose officials subscribing to the liquidationistview did not win approval of open market sales,they were able to prevent significant open mar-ket purchases until 1932. It is likely that theFed would not have made large purchases eventhen without pressure from major bankers andCongress.

The most important explanations of FederalReserve behavior during the Depression,however, appear to be the dedication ofpolicymakers to preserving the gold standardand their attachment to policy guides that gaveerroneous information about monetary condi-tions. Benjamin Strong’s death robbed the Sys-tem of an intelligent leader at a crucial time andundoubtedly imparted a contractionary bias tomonetary policy during the Depression. It seemsclear, however, that Strong’s death did notcause a fundamental change in regime. Strongbelieved in the gold standard, and he would notlikely have done anything to jeopardize goldconvertibility of the dollar. There was also littledeviation from either the gold sterilization orthe countercyclical policy rules that Strong haddeveloped during the 1920s—at least until thefourth quarter of 1931, when maintenance ofthe gold standard became the overriding goal ofpolicy. Thus, while leadership changes and in-terest group pressure probably had some effect,monetary policy during the Depression was notfundamentally different from that of previousyears. Federal Reserve errors seem largely at-tributable to the continued use of flawedpolicies.

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Sanloni, G. J., and T. Norman Van Cott. “The Ruthless Fed: Reserve Monetary Policy 1924-1933 (Cambridge UniversityA Critique of the AST Hypothesis,” Public Choice (Decem- Press, 1991).ber 1990), pp. 269-75. ______ . “Banking Act of 1935,” in John Eatwell, Murray

Schwartz, Anna J. “Understanding 1929-1933,” in Karl Milgate, and Peter Newman, eds., The New Paigrave Dic-Brunner, ed.. The Great Depression Revisited (Kluwer- tionary of Money and Finance (Macmillan Press, forth-Nijhoff, 1981), pp. 5-48. coming).

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I:;/4% g:~aH.t.i a:~

.hHa :i.i. ~/••~f’*~

All Commodities Price Index: Bureau of Gold stock: Board of Governors of the FederalLabor Statistics (1926), pp. 24-25. Reserve System (1943), pp. 369-77.

Bank reserves: Board of Governors of the Gross national product: Department of Coin-Federal Reserve System (1943), pp. 369-77 merce (1960), Historical Statistics of the United(member banks) and Friedman and Schwartz States, series Fl (current dollar) and F3 (cons-(1963), table A-2 (all banks). tant dollar).

implicit price index: Department of CommerceBank suspensions and deposits in suspended (1960) Historical Statistics of the United States,

banks: Board of Governors of the Federal series F5.Reserve System (1943), p. 283.

Index of Industrial Production: Board ofCurrency stock: Board of Governors of the Governors of the Federal Reserve System

federal Reserve System (1943), pp. 369-77. (1937), Annual Report, pp. 175-77.

Discount rate (Federal Reserve Bank of New Interest rates: 1) Baa-rated: Board of GovernorsYork): Board of Governors of the Federal of the Federal Reserve System (1943), pp.Reserve System (1943), pp. 440-41. 468-70; 2) long-term (daily average yield in

June of each year on U.S. governmentFederal Reserve credit and its components: bonds): ibid, pp. 468-70; 3) short-term (daily

Board of Governors of the Federal Reserve average yield in June of each year on U.S.System (1943), pp. 369-77, and ibid, ~ government three- to six-month notes and136-44 (discount loans of reporting New York certificates (1919 to 1933), and on TreasuryCity member banks). bills (1934 to 1939): ibid, p. 460.

Money supply: Friedman and Schwartz (1963),Federal Reserve System balance sheet: Board oftable A-i, col. 7 (MI) and col. 8 (M2).

Governors of the Federal Reserve System(1943), p. 331. Unemployment rate: Lebergott (1964), p. 27.