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Conducting monetary policy without government debt: the Fed's early years

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  • David C. Wheelock

Abstract

The Federal Reserve implements its monetary policy by using open market operations in U.S. government securities to target the federal funds rate. A substantial decline in the stock of U.S. Treasury debt could interfere with the conduct of monetary policy, possibly forcing the Fed to rely more heavily on discount window lending or to conduct open market transactions in other types of securities. Either would cause the implementation of monetary policy to resemble the methods used by the Fed before World War II. This paper describes two things: (i) how the Fed implemented monetary policy before the war and (ii) the conflicts that arose within the Fed over the allocation of private-sector credit when discount window loans and Fed purchases of private securities were a substantial component of Federal Reserve credit. Those conflicts help explain the Fed’s failure to respond vigorously to the Great Depression. The experience suggests that a renewed reliance on the discount window or on open market operations in securities other than those issued by the U.S. Treasury could hamper the conduct of monetary policy if it leads to increased pressure on the Fed to affect the allocation of credit.

Suggested Citation

  • David C. Wheelock, 2002. "Conducting monetary policy without government debt: the Fed's early years," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-14.
  • Handle: RePEc:fip:fedlrv:y:2002:i:may:p:1-14:n:v.84no.3
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    References listed on IDEAS

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    1. Charles Calomiris & David Wheelock, 1998. "Was the Great Depression a Watershed for American Monetary Policy?," NBER Chapters,in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 23-66 National Bureau of Economic Research, Inc.
    2. Kevin L. Kliesen & Daniel L. Thornton, 2001. "The expected federal budget surplus: how much confidence should the public and policymakers place in the projections?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 11-24.
    3. Marvin Goodfriend, 2001. "Why we need an "accord" for Federal Reserve credit policy : a note," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 23-32.
    4. Gerald P. Dwyer & R. Alton Gilbert, 1989. "Bank runs and private remedies," Review, Federal Reserve Bank of St. Louis, issue May, pages 43-61.
    5. R. Alton Gilbert, 1998. "Did the Fed's founding improve the efficiency of the U.S. payments system?," Review, Federal Reserve Bank of St. Louis, issue May, pages 121-142.
    6. Robert L. Hetzel & Ralph F. Leach, 2001. "The Treasury-Fed Accord : a new narrative account," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 33-55.
    7. Dominique Dupont & Brian P. Sack, 1999. "The Treasury securities market: overview and recent development," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 785-806.
    8. Karl Brunner & Allan H. Meltzer, 1968. "What Did We Learn from the Monetary Experience of the United States in the Great Depression?," Canadian Journal of Economics, Canadian Economics Association, vol. 1(2), pages 334-348, May.
    9. Hamilton, James D., 1987. "Monetary factors in the great depression," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 145-169, March.
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