The Revival of Monetary Policy

Abstract

mHE enormous growth of the public debt during World War II has been widely interpreted as a crippling restraint upon monetary policy. It has taken the exposure and experience of several years to demonstrate that this debt has, in fact, created a great new potential for monetary control. Although that potential has not yet been extensively utilized, the issues that have been raised as a limited application of the new power has been attempted are already coming under the scrutiny of scholarly analysis and of Congressional investigation. The process of discovery has, of course, been piecemeal; no one has yet produced a comprehensive formulation of the emerging possibilities; and in many quarters there has not yet been any real recognition or understanding of what has come about. Each of the three publications reviewed in the present paper deals with important segments of the new monetary doctrine that is slowly coalescing from the controversies aroused by Federal Reserve System policy over the past several years. Dr. Goldenweiser, uniquely suited for his task by more than a quarter century of participation in monetary policy formation at the highest levels, combines in very short space a clear, elementary, description of Federal Reserve functions, a succinct critical review of the principal actions taken by the System since its founding, and an outline of the measures he considers necessary to make adequate use of monetary control in its present environment.' Professor Bach's book, based largely upon his work for the Hoover Commission on governmental reorganization, is concerned more with the methods than with the substance of Federal Reserve policy-making.2 Although Bach sees less clearly than the others the new opportunities for monetary control, his description of System procedures fills a long-felt need, and his provocative suggestions for strengthening the control apparatus (while not altogether acceptable in the judgment of this reviewer) acquire added significance as the stature of monetary policy is enlarged. The Report of the Subcommittee on Monetary, Credit, and Fiscal Policies, prepared under the chairmanship of Senator Paul Douglas (and referred to henceforth in this review as the Douglas Report), represents the most penetrating Congressional investigation into monetary and banking questions that has been made since the founding of the Federal Reserve System.3 Taken with its two supporting documents, a digest of replies to questionnaires and a volume of hearings, the Douglas Report provides a range of new materials on both the mechanics and the substance of monetary control that could not possibly be catalogued in the space available here. Ignoring the valuable descriptive sections in the Bach and Goldenweiser books,4 as well as those contained in the Douglas Subcommittee documents, the present paper will be devoted to the principal issues for policy and organization that emerge from them. On the substantive side there are three key questions: (I) why is effective control over the money supply and the availability of credit necessary; (2) how is effectiveness in monetary and credit control to be achieved; and (3) what guides or criteria should determine the timing and direction of policy actions? Three further questions arise in considering the details of technique and administration: (4) what tools are needed, both general and selective, to implement the over-all requirements for effectiveness in monetary control; (5) how should the Federal Reserve System be organized internally to achieve the highest level of performance in policy-making and in administration; and (6) how should Federal Reserve policy be coordinated externally with the activities of other credit agencies, and with the broad economic program of the governmental administration? What follows is a brief