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

Listed author(s):
  • Carlson, Mark A.

    ()

    (Board of Governors of the Federal Reserve System)

  • Wheelock, David C.

    ()

    (Federal Reserve Bank of St. Louis)

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.

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File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2014/0205.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 205.

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Length: 31 pages
Date of creation: 01 Oct 2014
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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  1. repec:ucp:bkecon:9780226519999 is not listed on IDEAS
  2. Joseph H. Haslag & Scott E. Hein, 1995. "Measuring the policy effects of changes in reserve requirement ratios," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 2-15.
  3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
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  9. Romer, Christina D., 1992. "What Ended the Great Depression?," The Journal of Economic History, Cambridge University Press, vol. 52(04), pages 757-784, December.
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