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Navigating constraints: the evolution of Federal Reserve monetary policy, 1935-59

Author

Listed:
  • Carlson, Mark A.

    () (Board of Governors of the Federal Reserve System)

  • Wheelock, David C.

    () (Federal Reserve Bank of St. Louis)

Abstract

The 1950s are often cited as a decade in which the Federal Reserve operated a particularly successful monetary policy. The present paper examines the evolution of Federal Reserve monetary policy from the mid-1930s through the 1950s in an effort to understand better the apparent success of policy in the 1950s. Whereas others have debated whether the Fed had a sophisticated understanding of how to implement policy, our focus is on how the constraints on the Fed changed over time. Roosevelt Administration gold policies and New Deal legislation limited the Fed’s ability to conduct an independent monetary policy. The Fed was forced to cooperate with the Treasury in the 1930s, and fully ceded monetary policy to Treasury financing requirements during World War II. Nonetheless, the Fed retained a policy tool in the form of reserve requirements, and from the mid-1930s to 1951, changes in required reserve ratios were the primary means by which the Fed responded to expected inflation. The inability of the Fed to maintain a credible commitment to low interest rates in the face of increased government spending and rising inflation led to the Fed-Treasury Accord of March 1951. Following the Accord, the external pressures on the Fed diminished significantly, which enabled the Fed to focus primarily on macroeconomic objectives. We conclude that a successful outcome requires not only a good understanding of how to conduct policy, but also a conducive environment in which to operate.

Suggested Citation

  • Carlson, Mark A. & Wheelock, David C., 2014. "Navigating constraints: the evolution of Federal Reserve monetary policy, 1935-59," Globalization and Monetary Policy Institute Working Paper 205, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:205
    DOI: 10.24149/gwp205
    Note: Published as: Carlson, Mark A. and David C. Wheelock (2016), "Navigating Constraints: The Evolution of Federal Reserve Monetary Policy, 1935-59," in The Federal Reserve's Role in the Global Economy: A Historical Perspective, ed. Michael D. Bordo and Mark A. Wynne (New York, NY: Cambridge University Press), 50-83.
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    References listed on IDEAS

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    1. repec:ucp:bkecon:9780226519999 is not listed on IDEAS
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    Cited by:

    1. Gabriel P. Mathy & Matthew Jaremski, 2016. "How Was the Quantitative Easing Program of the 1930s Unwound?," Working Papers 2016-01, American University, Department of Economics.
    2. Carlson, Mark & Wheelock, David C., 2018. "Near-money premiums, monetary policy, and the integration of money markets: Lessons from deregulation," Journal of Financial Intermediation, Elsevier, vol. 33(C), pages 16-32.
    3. Michael D. Bordo & Owen F. Humpage, 2014. "Federal Reserve Policy and Bretton Woods," NBER Working Papers 20656, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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