The Riefler-Burgess Doctrine

We saw in the last chapter that a discretionary model, designed to capture the modern view of the Fed as a policy activist intent on smoothing interest rates, failed to explain a 1920s empirical phenomenon, the scissors effect whereby one component of Federal Reserve credit, for instance, discount loans, tends to be offset by another component, for instance, government security holdings. We cannot at this point, however, give up on discretion. There is an older view, with historical roots in the 1920s, that contends that the early Fed was a policy activist who smoothed interest rates and that the scissors effect was a characteristic feature of that policy. And, indeed, this older view, originally developed by William Riefler and W. Randolph Burgess and today known as the Riefler-Burgess (RB) Doctrine (Meltzer 2003), has gained traction among a number of modern-day economic historians as a serious account of Fed policy during the interwar years. If the self-regulated model is to be a viable alternative to the discretionary motif, then it must battle with the RB Doctrine, engaging it in a debate over the empirical as well as the theoretical merits of the 1920s scissors effect.