The strategy and consistency of Federal Reserve monetary policy, 1919-1933

This dissertation examines the strategy and consistency of Federal Reserve monetary policy from 1919-1933. The controversy concerning the Fed's failure to undertake expansionary policies during the Great Depression makes policy consistency an important question to address. Were the Fed's failures due to institutional changes within the System, which altered the Fed's strategy mistakenly? Or, were they the result of a flawed strategy, maintained mistakenly in the face of changed circumstances?;Reaction functions are estimated for each of the Fed's policy tools and subjected to tests of model stability. The results indicate that the Fed was less responsive to the Depression than it had been to economic fluctuations during the 1920's. However, Fed officials were convinced that they were pursuing aggressive policies during the Depression. Throughout the 1920's and early 1930's the Fed interpreted monetary conditions from the behavior of member bank borrowing and market interest rates. Their low levels during the Depression convinced Fed officials that money was easy, and that further expansionary operations would be redundant.;This dissertation shows that declining economic activity and financial crises contributed to the decline in member bank borrowing during the Depression. The greater the decline in economic activity the lower member bank borrowing fell, and the easier the Fed interpreted monetary conditions to be. The Fed believed that there was a lack of demand for Federal Reserve Credit and thus failed to offset the decline in borrowed reserves with open-market purchases. Thus, the Fed's errors were due largely to its use of a procyclical strategy.;Institutional changes with the onset of the Depression also contributed to the lack of vigorous countercyclical policy. The authority of certain officials with traditional real bills doctrine views was enhanced which decreased the System's willingness to make open-market purchases. Fear of speculation and its apparent inability to control the use of reserves supplied by its operations also made the Fed reluctant to pursue expansionary policies.