The Federal Reserve's Abandonment of its 1923 Principles
This paper studies the persistence and some of the consequences of the eventual abandonment by the FOMC of the principles embedded in the Federal Reserve's Tenth Annual Report of 1923. The three principles I focus on are 1) the discouraging of speculative lending by commercial banks, 2) the desire to meet the credit needs of business and 3) the preference of a focus on credit over a focus on monetary aggregates. I show that the first two principles remained important in FOMC deliberations until the mid-1960's. After this, the FOMC also spent less time discussing the composition of bank loans.
I wish to thank Ellen Meade and Edward Nelson for extremely helpful comments. I thank the Harvard Business School for research support. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.