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The rules verses discretion debate over monetary policy in the 1920s

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  • Robert L. Hetzel

Abstract

The question of whether monetary policy should be guided by legislated rules or left to the discretion of the policymaker has been a subject of debate since the early days of central banking. An important episode of the debate occurred in the 1920s when Kansas Congressman James Strong introduced legislation (the Strong bill) which was intended to institutionalize the price level stabilization policy that Benjamin Strong had implicitly followed as head of the New York Federal Reserve Bank from 1923 to 1927. In this article, Robert Hetzel reviews the debate which took place in the congressional hearings on the Strong bill. The hearings indicate that Benjamin Strongs policy was based on his belief that the Fed had the ability to influence the price level by controlling levels of bank reserves. However, the Board of Governors represented by Adolph Miller denied the causal influence of the supply of money on the price level. Miller instead advocated a policy based on the Real Bills Doctrine, according to which the Fed need only be concerned with speculative extensions of bank credit. Hetzel points out that an understanding of these fundamental disagreements is essential if one is to appreciate fully the impact that Benjamin Strongs death and the resulting shift in power from the New York Fed to the Board in Washington had on monetary policy during the Depression.

Suggested Citation

  • Robert L. Hetzel, 1985. "The rules verses discretion debate over monetary policy in the 1920s," Economic Review, Federal Reserve Bank of Richmond, vol. 71(Nov), pages 3-14.
  • Handle: RePEc:fip:fedrer:y:1985:i:nov:p:3-14:n:v.71no.6
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    References listed on IDEAS

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    1. George Garvy, 1978. "Carl Snyder, Pioneer Economic Statistician and Monetarist," History of Political Economy, Duke University Press, vol. 10(3), pages 454-490, Fall.
    2. R. H. Allen & William G. Murray & Gordon H. Ward & O. M. Johnson & L. H. Hauter & L. F. Garey & George S. Wehrwein & David L. Wickens & R. W. Cox & P. E. Quintus, 1932. "Notes," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 14(4), pages 679-700.
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    Cited by:

    1. George S. Tavlas, 2015. "In Old Chicago: Simons, Friedman, and the Development of Monetary‐Policy Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 99-121, February.
    2. Marvin Goodfriend, 2000. "The role of a regional bank in a system of central banks," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 7-25.
    3. Ohanian, Lee E., 2014. "The impact of monetary policy in the midst of big shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 49(C), pages 35-48.
    4. Robert L. Hetzel, 2013. "The Monetarist-Keynesian Debate and the Phillips Curve: Lessons from the Great Inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 83-116.

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