Hostname: page-component-586b7cd67f-dsjbd Total loading time: 0 Render date: 2024-11-22T17:36:48.264Z Has data issue: false hasContentIssue false
  • English
  • Français

A Reconsideration of Federal Reserve Policy during the 1920–1921 Depression*

Published online by Cambridge University Press:  03 February 2011

Elmus R. Wicker
Elmus R. Wicker
Affiliation:
Indiana University
Get access Rights & Permissions [Opens in a new window]

Extract

Criticism of the Federal Reserve Board for not advancing rates earlier in 1919 to halt a rampant inflation is seldom as severe or nearly as devastating as the criticism heaped upon it for not easing credit sooner during the sharp but brief depression episode of 1920–1921. After the collapse of prices in May 1920, the immediate goal of Federal Reserve policy was to prevent a widespread financial crisis by maintaining the liquidity of the banking system. Congress had created the Federal Reserve System for the specific purpose of preventing a recurrence of the financial panics that had plagued our pre-World War I monetary experience. In 1920 the Federal Reserve Banks succeeded in this task by making funds freely available at relatively high discount rates. Somewhat surprising is the fact that there was no liquidation of bank credit nor decline in the money supply during the first six months of the downswing. Loans at commercial banks continued to increase, and member-bank indebtedness continued to rise. The action taken by System officials probably warded off what might easily have been the worst financial catastrophe in our history. Unfortunately, the policy they pursued, though successful in preventing a banking crisis, was inimical to a quick recovery of business activity. Inventory decumulation, particularly in the agricultural sector, was hampered by a bumper harvest and a railway transportation bottleneck which was not eliminated until October.

Type
Articles
Information
The Journal of Economic History , Volume 26 , Issue 2 , June 1966 , pp. 223 - 238
Copyright
Copyright © The Economic History Association 1966

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

1 Chandler, Benjamin Strong (Washington, D.C.: Brookings Institution, 1959), p. 186Google Scholar.

2 Friedman, and , Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J.: Princeton University Press, 1963), pp. 234 and 249Google Scholar.

3 Sprague, O. W. M., Banking Reform in the United States (Cambridge: Harvard University Press, 1911), p. 56Google Scholar.

4 “Monetary stringency” refers to both seasonal and panic disturbances which led to a suspension of specie payment by wide sectors of the banking system.

5 Press statement issued by the Federal Reserve Board on Jan. 13, 1917, reproduced in Warburg, Paul M., The Federal Reserve System (New York: Macmillan, 1930), I, 746Google Scholar.

6 Quotation from the Commercial and Financial Chronicle of Sept. 30, 1916, CIII, 1153; quoted in Warburg, I, 727.

7 Bloomfield, Arthur I., Monetary Policy Under the International Gold Standard, 1880–1914 (New York: Federal Reserve Bank of New York, Oct. 1959)Google Scholar.

8 Ibid., p. 38.

9 Keynes, J. M., A Treatise on Money (London: Macmillan, 1950), II, 268Google Scholar.

10 U. S. Congress, House of Representatives, 63d Cong., 1st sess., H.R. Report 69; quoted in Willis, H. Parker, The Federal Reserve System (New York: Ronald Press, 1923), pp. 354–55Google Scholar.

11 Miller, Adolph C., “Federal Reserve Policy,” American Economic Review, XI (June 1921), 192Google Scholar.

12 Hawtrey, , “The Federal Reserve System of the United States,” Journal of the Royal Statistical Society, LXXXV (Mar. 1922), 249Google Scholar.

13 Hawtrey, R. G., The Pound at Home and Abroad (London: Longmans, Green, 1961), p. 59Google Scholar.

14 Miller, Adolph C., “The Decline in Value of Cold: America's Opportunity for Banking Leadership,” in Wildman, Edwin, ed. Reconstructing America (Boston: Page Co., 1919), pp. 119–20Google Scholar.

15 Ibid., p. 121.

16 Paul M. Warburg, “Some Phases of Financial Reconstruction,” in Wildman, ed., p. 116.

17 Chandler, p. 172.

18 U. S. Congress, Agricultural Inquiry; hearing before the Joint Commission of Agricultural Inquiry, 67th Cong., 1st sess., 1922; II, 716. (Hereafter, Agricultural Inquiry.)

19 Chandler, p. 174.

20 Agricultural Inquiry, III, part 2, 88.

21 Federal Reserve Bulletin, Mar. 1916, p. 102; an address delivered on Jan. 25, 1916, before the New York Credit Men's Association.

22 Ibid., Nov. 1918, pp. 1048–49.

23 In my opinion, Milton Friedman stretches the intent of the 1913 Act when he writes, “The Federal Reserve System … establishes a separate official body charged with explicit responsibility for monetary conditions and supposedly clothed with adequate power to achieve monetary stability or, at least, to prevent pronounced instability; A Program for Monetary Stability (New York: Fordham University Press, 1959), p. 14Google Scholar.

24 Federal Reserve Bulletin, Nov. 1918, p. 1050.

25 Ibid., Aug. 1920, p. 770.

26 Abramovitz, , Inventories and Business Cycles (New York: NBER, 1950), p. 94Google Scholar.