ASPECTS OF FEDERAL RESERVE POLICY, 1951-59 FACTS AND CONTROVERSIES*

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SOME CRITICS OF MONETARY policy recently have gone so far as to argue that monetary policy is inherently defective and should be replaced by more reliance on direct control of various types of economic activity. This study examines the possibility that some of the alleged deficiencies of monetary policy in the 1951-59 period stem from the way in which monetary policy was applied by the Federal Reserve rather than from any inherent defect. The Federal Reserve's choice and use of monetary instruments and its general conception of the proper scope of monetary management are analyzed to determine how successful its approach was in influencing monetary magnitudes and the financial markets, for it is through these that the economic decisions of the nation are affected. Part I sets out the background in which the 1951-59 policies of the Federal Reserve were formulated and compares Robert V. Roosa's view-sometimes called the New York Reserve Bank -of monetary management with the view which apparently governed the actual conduct of Federal Reserve policy. Part II focuses on the Federal Reserve's use of monetary policy instruments during the 1951-59 period. Most attention is given to the policy of confining open-market operations to bills only because this aroused the most controversy and also because open-market operations are widely considered to be the most important monetary policy instrument. There is also extended discussion of discount policy, changes in reserve requirements, and selective controls on consumer and real estate mortgage credit. The following conclusions are drawn: (1) Continuous adherence to the bills only policy was and is undesirable. (2) The discount mechanism should be used primarily as a defensive weapon of monetary policy. (3) Moderate increases in reserve requirements might be a useful tool of credit restraint, to achieve a quicker, more pervasive impact on bank reserve positions and the money supply. (4) Selective controls on consumer and mortgage credit might prove useful supplements to general credit