Sunday, October 7, 2012

J.P. Koning on the early Fed and banking tradition


Koning sorts through some of the recent discussions on Bob Murphy's blog about the precedent for Fed action. I think how you react to all this depends on where your bar is for "unprecedentedness". If you think that an accomodative monetary stance in a panic is what we're talking about, then the Fed clearly didn't break decades of precedence. If you think the distinct points and policy levers of Bagehot's advice are critical for defining "precedent" then it was not following the precedent for decades, but rather the precedent of about a decade - Fed policy since the 1920-21 depression. Bob was specifically concerned about policy under the Hoover administration, and that was definitely in line with this precedent, but Koning points out that after 1932 (i.e., during the Roosevelt administration) things changed again and the scope for making open market purchases was widened.

The way I look at these things, the important point is accomodation. Policy levers and doctrines clearly change over time but that seems less important to me. The Poor Laws in the 1700s were nothing like welfare today, but the principle of a safety net was there in some form. Thomas Paine's plan was very different from social security but you still had a classical liberal case for an entitlement to social insurance. Bagehot was not Bernanke but he still discussed accomodation in the crisis. I see thsese changes less as radical departures and more as policy evolution (and we're discussing another potential policy evolution now - NGDP level targeting).

There was a lot of policy evolution in the 1920s. It was a period of major change on fiscal policy as well, with Harding's budget act and the beginning of modern budgeting practice and the establishment of the OMB. A few years later the Fed would make the major change that Koning talks about from emphasis on the discount window to OMOs.


  1. "Bob was specifically concerned about policy under the Hoover administration, and that was definitely in line with this precedent, but Koning points out that after 1932 (i.e., during the Roosevelt administration) things changed again and the scope for making open market purchases was widened."

    I realize there is a huge debate between Keynesians and Austrians over Hoover vs Roosevelt... I don't really care about that.

    But in all fairness, the February 1932 widening of the scope for open market operations was during Hoover's administration, not Roosevelt's. QE0 started in March, 1932 and was pretty much over before Roosevelt was elected that fall.


    I do agree with the general gist of your post, though. Its really just about definitions. In a panic, a Bagehotian bank needs to discount freely. A bank using primarily open market operations needs to replicate what a Bagehotian bank does in a panic... buy a lot of assets. In this way one might say that the 1932 Fed was acting somewhat traditionally.

    1. I agree. It's one of those areas where if everyone is clear on what they're talking about there's probably likely to be more agreement than if we're not clear and end up arguing over definitions.

      It's kind of weird to be talking about the Fed "under Hoover" and "under Roosevelt" anyway!

    2. On a completely unrelated topic - yours is one of those blogs that I always figured I was following but then was shocked to realize it wasn't on my blogroll. I went back and looked at some of your older posts on the natural rate of interest, something I've been thinking a lot this past year w.r.t. how much stock we put in ABCT.

      I was curious - what is your opinion on Laubach and Williams's efforts to estimate the natural rate of interest (here, for example - but also elsewhere:

      I'm not sure if you've come across that. There's a project I'm going to spend a lot of time on later this fall and in the winter and I'm planning on essentially taking their estimates as decent estimates, but I was wondering your thoughts about it. Any reason to stay away?

    3. Thanks for the link. I haven't read it. I'll see if I can put some time aside to check it out. Hopefully I have something intelligent to say. David Glasner has some interesting posts on the natural rate of interest, but I think you've mentioned those on your blog before...

      "It's kind of weird to be talking about the Fed "under Hoover" and "under Roosevelt" anyway!"

      Yes and no. Nowadays the Fed is extremely independent, but prior to 1935 the Treasury Secretary was on the Fed Board. That's not to say the President controlled the Fed, but they did have more of a say in times past then they do now.

  2. One of the fallacies I LOATHE is the "unprecendentness" fallacy. "the fed's UNPRECENDENTED expansion of its balance sheet..." Dont you get tired of hearing the same old crap over and over again? :-) It makes you wonder how Scott Sumner and or Paul Krugman can keep themselves from flying into a rage


All anonymous comments will be deleted. Consistent pseudonyms are fine.