The Federal Reserve׳s abandonment of its 1923 objectives of monetary policy

Abstract

The “Guides to Credit Policy” in the Federal Reserve׳s Annual Report of 1923 specified that interest rates should be set so as to balance the benefits of meeting the credit needs of business with the dangers of speculative credit. This paper uses FOMC transcripts to study when these two objectives of monetary policy (meeting business needs and preventing speculative credit) ceased to be reiterated, so that they were effectively abandoned. It is demonstrated that this occurred in the mid-1960s, at roughly the same time that the Fed first abandoned its fight against inflation for fear of causing a recession. The 1923 Report also expressed a preference for using credit aggregates rather than monetary aggregates to judge the stance of monetary policy. Monetary aggregates appeared in Federal Reserve pronouncements before the mid 1960s while credit conditions continued to be discussed at FOMC meetings well past this date. The paper seeks to reconcile these dating differences.