A History of the Federal Reserve, Volume 1: 1913-1951

By Allan H. Meltzer
University of Chicago Press
848 pages

Tom Humphrey provided valuable comments. The views expressed are the author's alone and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

Introduction

In his marvelous book Allan Meltzer tells the story of the early decades of the Federal Reserve. Meltzer employs a lifetime mastery of monetary theory, monetary history and knowledge of the political economy of monetary policy to bring this demanding story to life. The book utilizes internal Federal Reserve System memos and correspondence that have not been available to others in order to understand, as no one else has, why the Federal Reserve acted as it did throughout the period. For instance, why had it failed to respond to the Great Depression or to the deep recession of 1937-38?

Meltzer points out that a body of monetary theory developed previously by Henry Thornton (on the relationship between money, prices and economic activity), Walter Bagehot (on the lender of last resort) and Irving Fisher (on the distinction between real and nominal interest rates) would have helped the Fed to avert many if not most of its policy mistakes (see Chapter 2).¹ That is true enough, although the Fed might be forgiven for not picking the right ideas from what was then an exceedingly confusing array of theories of monetary policy.

In any case, the root of the problem was that the Fed was founded in the belief that it would operate within the classical gold standard like the Bank of England. However, the classical gold standard collapsed with World War I, and the Fed had to find a way to make monetary policy in the absence of a close link to gold.

Prior to the 20th century the world had little experience with regimes in which money was unbacked by a commodity such as gold or silver. There was great confusion in the economics profession about the relationship between monetary policy, inflation and economic activity in the absence of a close link to gold. In effect, the Fed was forced prematurely to assume responsibility for managing a fiat money system.* Unfortunately, monetary policy improved only gradually during the century as the Fed and the economics profession learned from each other's mistakes. Meltzer's book tells the story through midcentury.

* The United States left the gold standard in 1973. But the gold standard did not constrain Fed monetary policy very much after the early 1920s. See Goodfriend (1988).

The book contains a wealth of historical information. Meltzer discusses the misleading nature of the real bills doctrine, early conflicts between the Federal Reserve Board and the Reserve banks led by the New York Fed, monetary policy and the interwar gold standard, international monetary cooperation and the Fed's fight for independence from the Treasury after World War II.²

The book can be appreciated for its wonderful detail and extensive footnotes. Section 1 of my review references some "nuggets," historical facts in the book that I find particularly interesting. In Section 2, I report a few of the powerful monetarist conclusions arrived at by Meltzer on the basis of the evidence surveyed in the book. I focus in Section 3 on the tremendous difficulty the Fed encountered in pursuing transparent interest rate policy in the early 1920s, and how the Fed changed its operating procedures in response. In this I draw heavily on Meltzer's thorough discussion, but I make a few points of my own. In particular, I argue that the Fed adopted borrowed reserve targeting in the mid-1920s to help make interest rate policy less visible.

The Fed lost its independence during World War II when it agreed to keep interest rates low to help finance the Treasury. The Fed regained its independence with the 1951 Accord. In Section 4, I briefly summarize Meltzer's account of how the Fed regained its independence and how, in effect, the modern Fed was born. I conclude with some lessons about the Fed that one learns from reading the book.

Nuggets

I find the following nuggets unearthed by Meltzer to be particularly interesting. President Hoover wrote the Federal Reserve Board a few times near the end of his term in the winter of 1933 for advice on what to do in the financial "emergency." Hoover was not happy with the Board's replies (pp. 383-88). President Roosevelt personally drafted a "fireside chat" aired on radio in October 1933, which sensibly described the prior deflation as the root of the economy's problem and the solution as a reversal of that deflation (p. 452). Lauchlin Currie wrote a remarkable memo for a Treasury committee in 1934 emphasizing the role of money in cyclical fluctuations, at a time when virtually no one thought that money mattered (p. 473). The famous dictum that monetary policy "could not push on a string," characterizing the view that monetary policy is powerless near the zero bound on interest rates, came initially from a congressman during a 1935 congressional testimony by Marriner Eccles (p. 478). In 1935, Eccles, the new chairman of the Federal Reserve Board, issued press releases after Federal Open Market Committee meetings (p. 497).

The Banking Act of 1935 did not specify who could represent the Reserve banks on the FOMC, and some Reserve banks wanted to nominate representatives with wide experience in financial affairs
who were not themselves officers of the banks (p. 501). Shortly thereafter, the Reserve banks were required to send either presidents or first vice presidents to FOMC meetings. President Truman chose not to reappoint Eccles as Fed chairman in 1948, but Eccles continued to serve as a member of the Federal Reserve Board until 1951. (p. 656). The Federal Advisory Council, a group of bankers that advises the Federal Reserve Board, did not support the restoration of Fed independence after World War II (p. 709). Meltzer argues that the famous phrase the Fed is "independent within the government" originated with Allan Sproul, president of the New York Fed, in a 1952 letter to Congressman Wright Patman (p. 713). Patman regarded the period of pegged interest rates during and after World War II as a golden age of monetary policy (p. 715).

Meltzer and monetarism

The book is written as if the reader is thoroughly familiar with the monetarist approach to understanding monetary policy and central banking. Events are interpreted in terms of monetarist logic, with relatively little attention to background analytics. The presumption is that the reader looking back with a monetarist perspective will understand the analytical points without too much elaboration. Meltzer can be forgiven for this presumption, since arguably, monetarist doctrine has been the most influential force in central banking in the last half century. And Meltzer together with Karl Brunner contributed heavily to this doctrine. In any case, given the length of the book, it would have been impossible to provide more background. I personally had no problem in this regard, having used monetarist logic repeatedly in my career as a Fed economist. A reader less familiar with monetarist thinking, however, would benefit enormously if he could access hypertext now and then for more analytical background!

In the concluding chapter (Chapter 8) Meltzer provides a comprehensive overview of lessons from the early history of the Fed. The following powerful sentences summarize his most important conclusions. "If the Federal Reserve had maintained monetary growth, the country and the world would have avoided years of depression" (p. 728). "Nothing in theory or central banking practice can explain why the Federal Reserve did not respond to the failure of thousands of banks [in the early 1930s]" (p. 729). Meltzer says of a congressional mandate for price stability under consideration in 1928: "It is an understatement to say this was a missed opportunity. If the mandate for price stability had been passed and followed, the Federal Reserve could not have permitted deflation during the Great Depression of 1929-33 or inflation during the Great Inflation of 1965-80. Possibly a recession would have occurred in 1929, but the United States and the world would have avoided the deflationary policy and its consequences. The Federal Reserve would have had to choose price stability over the real bills doctrine and to lose gold, thereby reducing or preventing deflation elsewhere" (p. 192).

Interest rate policy in the early years

As pointed out above, the expectation was that Fed interest rate policy would be guided by classical gold standard rules. The collapse of support for the gold standard created two problems for the Fed. First, the Fed needed new operating procedures to guide its interest rate policy. Second, the Fed had to deal with adverse public and political reaction whenever higher interest rates were called for over the business cycle. In what follows I review Meltzer's account of interest rate policy in the early 1920s, and I show how the Fed confronted and tried to resolve these two problems.

Interest rate policy in the deflation and recession of 1920-21

The January 1920-July 1921 recession was sharp and deep. Meltzer reports that unemployment averaged around 4 percent in 1920 and rose to around 12 percent in 1921. The Fed's index of industrial
production fell from 39 in 1920 to 30 in 1921 and returned to 39 in 1922. The wholesale price index fell 37 percent during the recession and stayed there during the recovery. That was a much sharper deflation than in any year of the 1929-33 Depression and a total decline of comparable magnitude (p. 109).

Meltzer argues persuasively that the deflation and recession of 1920-21 were due to insufficiently preemptive monetary policy. Expansionary monetary policy clearly facilitated the inflation that took the wholesale price index from 76 in 1917 to 100 in 1920 (p. 111).

Interest rate policy was then geared to defending the Fed's minimum required gold reserve ratio against its liabilities. Meltzer reports that years later Adolph Miller, economist and member of the Federal Reserve Board at the time, said: "It is a terrible thing to admit that the only thing that really awakened us was the fact that we were in sight of the 40 percent [gold reserve] ratio" (p. 104). The Fed had a relatively large cushion of gold reserves when World War I ended in November 1918. However, its excess gold reserves declined sharply in 1919 as the monetary base rose, the price level rose, and gold began to flow out of the country with the end of the gold export embargo in June 1919. By early 1920 the Fed's gold reserves were barely above the required minimum. Meltzer points out that "the risk of suspension [of gold convertibility of the U.S. dollar] was greater in 1920 than at any time in the next fifty years" (p. 105).

Consequently, the Reserve banks raised their discount rates sharply. For instance, the New York Fed increased its discount rate from 4 percent in October 1919 to 7 percent in June 1920. The deflation started in July, the gold flow began to reverse, and the Fed succeeded in defending its required gold reserve ratio. The discount rate stayed at 7 percent through March 1921.

Having been insufficiently preemptive in 1919, the Fed then kept interest rates high through much of the 1920-21 recession to deflate the price level somewhat and reverse the gold outflow. Meltzer does not mention it, but this policy mistake is the first to resemble the mistakes later to be characterized as go-stop policy in the post-World War II era.³ The main difference is that in the post-World War II era the Fed merely reversed prior inflation somewhat during the stop phase of the policy cycles; it did not deflate the price level as it did in 1920-21.

It is no exaggeration to say that the Fed was traumatized by its first use of interest rate policy. Congress discussed legislation limiting the Federal Reserve's power to raise discount rates beyond a ceiling rate without congressional approval (p. 127). As Meltzer puts it, "High interest rates were very unpopular with Congress and large parts of the public. The Federal Reserve did not raise interest rates to this level again for a generation" (p. 13; see also pp. 112-16). I would add that even then the Fed tended to raise rates timidly, creating the go-stop inflationary problems mentioned above.

One of the great tragedies of central banking is that the improvements in monetary policy made possible by breaking the link to gold were not properly exploited until price stability became a priority near the close of the 20th century. In particular, the idea that interest rate policy sufficiently preemptive of fluctuations in inflation might stabilize both inflation and economic activity was not appreciated fully until the 1990s.⁴

Borrowed reserve targeting as invisible interest rate policy

After its unhappy experience managing transparent discount rate policy geared to the gold standard in the early 1920s, the Fed set out to rethink its operating procedures. The Federal Reserve Board presented the new operating framework in its 1923 Annual Report. The new operating framework had two parts. Meltzer refers to the first part as the Riefler-Burgess doctrine (pp. 161-5).* According to the doctrine, the stance of monetary policy should be characterized by the quantity of aggregate banking system borrowing at the Fed's discount window, and the Fed should adopt borrowed reserves as a short-run operating target.⁵ The second part of the new operating procedures involved the development of a "research function, first in New York and later at the Board, to provide indexes of industrial production, prices, interest rates, credit, and other measures of current and prospective economic activity. These measures, and the volume of discounts, replaced the gold reserve ratio as guides to policy action" (p. 141).

* Winfield Riefler was an economist at the Federal Reserve Board, and W. Randolph Burgess was at the New York Fed.

The second part of the change in operating procedures is easy to understand. Indicators of domestic economic conditions were needed to guide monetary policy in lieu of adherence to the rules of the gold standard. The need for the first part of the change, the shift to borrowed reserve targeting, is not as easy to understand. After all, the Fed was initially expected to pursue monetary policy in the manner of the Bank of England. And it was widely understood that the Bank of England transmitted monetary tightening through its "bank rate," the counterpart of the Fed's discount rate. Moreover, the level of the discount rate remained the key determinant of market rates with a borrowed reserve target, as I discuss below.

Meltzer argues that the Fed's adoption of borrowed reserve targeting was an attempt to satisfy real bills advocates and their opponents (p. 734).⁶ I find his explanation less than satisfactory. For one thing, it does not explain why the Fed used borrowed reserve targeting (or free reserve targeting) long after the real bills doctrine was discredited.

The Riefler-Burgess framework ought to be understood primarily in terms of a separate objective. Borrowed reserve targeting allowed the Fed to manage short-term interest rates much as before, but less visibly. It appeared to loosen the link between market rates and the discount rate and enabled the Fed to talk about interest rate policy in terms of borrowed reserves rather than short-term interest rates. One can understand borrowed reserve targeting as follows.

Meltzer reports that commercial banks borrowed heavily at the Fed's discount window from 1919 to the end of 1921. The Fed did not then discourage borrowing, and eligible collateral was abundant. In fact, aggregate borrowing actually exceeded total bank reserves most of the time. That is, the banking system then financed all of its reserves plus a portion of currency in circulation by borrowing from the Fed! Collateralized discount window loans were essentially riskless, and other money market rates floated relative to the discount rate at spreads commensurate with their riskiness. In other words, the Fed's discount rate put a ceiling on relatively riskless money market rates and, thereby, held riskier loan rates down as well.⁷

The public understood that the discount rate effectively anchored money market rates in this way. The Fed's discount rate increases in 1919-20 were widely publicized. Its actions were understood to raise money market rates deliberately, and the Fed's high interest rate policy was suspected to have caused the deflation and recession of 1920-21.

This difficult experience, I believe, motivated the Fed to adopt borrowed reserve targeting in large part to pursue interest rate policy less visibly. Ironically, to do so the Fed needed to discourage banks from borrowing at the discount window. Meltzer reports that "the Board's annual reports and statements of members during the next few years seem intended to inform banks of the 'tradition' (Meltzer's quotes) against borrowing or to impose it on them through the administration of the discount window" (p. 163). The Fed informed bankers "that borrowing was a privilege and not a right of membership and [imposed] administrative restrictions to limit the amount and duration of borrowing" (p. 734).

By discouraging borrowing, the Fed was able to create a "reluctance" to borrow at the window. Banks were willing to borrow ever greater sums from the Fed only if the opportunity cost of borrowing at the Fed, short-term money market rates, rose relative to the discount rate.

The Fed would manage the spread between market rates and the discount rate by using open market operations to vary the quantity of reserves that it "forced" the banking system to borrow at the discount window. The Fed could bring about higher (lower) money market rates relative to a fixed discount rate by selling (buying) securities in the open market, forcing banks to borrow more (less) heavily from the discount window. By 1923, gold inflows and open market purchases had risen enough to provide the lion's share of currency and bank reserves.⁸ And the Fed varied its borrowed reserve target in a range that was only a fraction of aggregate bank reserves. Of course, for any given forced target for borrowed reserves the discount rate was still the key determinant of the level of money market rates, as it had been in the early 1920s.

Borrowed reserve targeting enabled the Fed to create the illusion that money market rates were determined largely if not completely by market forces. There were three reasons for this: (1) Money market rates floated relative to the discount rate with a spread that fluctuated (in a narrow range) with credit risk and with bank reluctance to borrow from the Fed. (2) Money market rates could be manipulated by forcing the banking system to borrow more or less of its reserves at the discount window, without changing the high profile discount rate. (3) The Fed could use borrowed reserves to create the impression that the discount rate followed market rates. For instance, if the Fed wanted to raise market rates, it could force banks to the window by selling securities. That would raise the market rate without raising the discount rate. Later, the Fed could move the discount rate higher while maintaining the higher market rate by reversing the initial open market operation to restore the initial forced borrowed reserve target.

In effect, borrowed reserve targeting was noisy interest rate policy in which the Fed continued to manage short-term interest rates closely, but in a relatively invisible way. The adoption of borrowed reserve targeting by the Fed after 1923 should be understood as affording the Fed a means of quietly implementing interest rate policy. In this way, one can understand why the Fed returned to borrowed reserve targeting in the 1950s, 1960s and again in the 1980s. The trauma of discount rate policy pursued in 1920-21 was so great that the Fed did not fully return to transparent interest rate policy until it began in February 1994 to announce its "intended" federal funds rate target immediately after each FOMC meeting.

The Accord: the Fed regains its independence after World War II

The Fed surrendered its independence during World War II to help the Treasury finance the war effort. In April 1942 the Fed agreed to keep the interest rate on Treasury bills fixed at 0.375 percent per year by buying or selling T-bills offered or demanded at that rate. The T-bill rate was kept fixed until the middle of 1947 and then moved up somewhat. The Fed also agreed to enforce a ceiling of 2 1/2 percent on longer-term bonds by buying (that is, monetizing) bonds if necessary to defend the rate ceiling. The ceiling on bond rates remained in effect until the 1951 Accord. Essentially, the Fed gave up the power to use interest rate policy to stabilize the macroeconomy during this period.

The Treasury was reluctant to let interest rates change after World War II. Meltzer points out that the Treasury's position was more extreme than after World War I, when it had insisted in 1919 on no change in interest rates only as long as it had to undertake large-scale financing. Meltzer notes that by the spring of 1946 the Treasury had current and prospective surpluses in its cash budget, so that it could retire debt. But the Treasury continued to oppose interest rate increases, in part because the outstanding stock of debt was around 10 times larger after World War II than it was at the end of World War I. Presumably, the Treasury was concerned that higher interest rates would raise the cost of rolling over short-term debt and create capital losses for existing holders of longer-term debt.

Meltzer emphasizes that, unlike in 1919, few at the Fed were willing to challenge the Treasury's position. Meltzer reports that according to Eccles there was no political support for the use of interest rate policy to contain inflation, if need be. The Treasury would object, and more importantly Eccles was doubtful that inflation could be controlled without raising interest rates so high that a postwar depression would result. In addition, Meltzer points out that the dominant view of professional economists at the time was that the task of monetary policy was to promote budgetary finance. In addition, many economists believed the war would be followed by a return to unemployment and slow growth as in the 1930s (p. 581). For all these reasons, the Fed felt no great urgency to free interest rate policy from Treasury domination.

Meltzer does not mention it, but it is worth emphasizing that in sharp contrast to the deflations after World War I and the Civil War, there was absolutely no inclination to reverse any of the inflation that had occurred as a result of World War II. The financial distress and high unemployment associated with deflation in 1920-21 and again in the early 1930s saw to that. The public was prepared to accept the permanent upward drift in the price level that occurred as a result of the war. That willingness would help give rise to expectations of inflation and complicate monetary policy in the decades to follow.

Except for the burst of inflation that occurred after the lifting of wartime controls in 1946, the price level remained relatively stable in the late 1940s. Nevertheless, a number of factors worked to restore the Fed's independence. First, Fed officials realized that it was only a matter of time before higher interest rates would be needed to avert a protracted rise in inflation. Sproul, president of the New York Federal Reserve Bank, was an early influential advocate of independent interest rate policy after the war. Second, the Employment Act of 1946 made government formally responsible for macroeconomic stabilization, strengthening the case for a return to independent interest policy.

Third, in the fall of 1949 the Joint Committee on the Economic Report (later the Joint Economic Committee) held hearings on money, credit and fiscal policies.* Under the sympathetic and able leadership of Sen. Paul Douglas, the hearings gave the Fed a public forum in which to make its case for independent monetary policy in support of the Employment Act.** The committee report was a victory for the Fed. The Douglas hearings were crucially important in the Fed's drive to regain its independence because they enabled the Fed to obtain the support of Congress and the financial press. According to Meltzer, Sproul and W. Randolf Burgess, by then a prominent banker in New York, were particularly effective in making the case for Fed independence. Interestingly enough, the chairman of the Federal Reserve Board, Thomas McCabe, was more willing to continue to accommodate the needs of the Treasury (pp. 685-90).

* One of the committee's roles was to discuss the Economic Report of the President written by the Council of Economic Advisers, a group of economists set up within the White House by the Employment Act.
** Douglas was in economics professor at the University of Chicago before his election to the Senate. He helped to develop and popularize the Cobb-Douglas production functions widely used in economics to this day.

The start of the Korean War in June 1950 and especially the entry of China into the conflict in November intensified the debate about Fed independence. The Fed was forced to purchase a large volume of Treasury debt in December to defend the 2 1/2 percent rate ceiling. The monetization would have expanded the monetary base substantially were it not for a large outflow of gold that occurred at the time (pp. 696-7).

Meltzer describes in detail the public debate about Fed independence that ensued. One highlight was a speech by Treasury Secretary John W. Snyder in which he asserted that the FOMC remained committed to the 2 1/2 percent bond rate ceiling, which by this time many members no longer supported (p. 701). Another highlight was a very public invitation (suggested by Secretary Snyder) from President Truman for the whole FOMC to visit the White House. Meltzer tells us that it was the first and only meeting of its kind ever held (p. 703). Following the meeting the White House released a statement that "the Federal Reserve Board has pledged its support to President Truman to maintain the stability of Government securities as long as the emergency lasts" (p. 705). In fact, no such commitment had been given. Federal Reserve Board member Eccles proved it by releasing a confidential summary of the meeting to the public.* The episode solidified support for Fed independence in the press and the public and accelerated the freeing of the Fed from Treasury control.

* Recall that Truman refused to reappoint Eccles as Chairman of the Federal Reserve Board in 1948, but Eccles continued to serve as a member of the Federal Reserve Board until 1951.

On March 4, 1951, the Fed and the Treasury issued the so-called Accord, which read: "The Treasury and the Federal Reserve System have reached full accord with respect to debt-management and monetary policy to be pursued in furthering their common purpose to assure the successful financing of the government's requirements and, at the same time, to minimize monetization of the public debt"
(p. 711).⁹

Meltzer describes the Accord as a major achievement for the country, and not at all inevitable. Meltzer points out that "the Truman administration could have appealed to patriotism, to the exigencies of war and to populist sentiment against higher interest rates to keep the [interest rate ceiling] in place" (p. 712). So why did the Accord work? Meltzer offers a few reasons. First, as it turned out, there was not much change in interest rates after the Accord. Truman decided to finance the Korean War by taxes rather than with deficit spending. According to Meltzer, that may have convinced the public that the price-level increase that did occur during the first months of the Korean War was a one-time change and not the start of sustained inflation. Moreover, modest budget surpluses and no gold inflow in the late 1940s and the 1950s were consistent with low inflation and low interest rates. Hence, there was little expected inflation, no inflation premium built into interest rates, and interest rates did not rise much after the Accord.

Second, Meltzer points out that the Treasury's choice to lead the post-Accord Fed, William McChesney Martin Jr. (the man who helped negotiate the Accord on the Treasury's behalf) proved to be a person of unusual character and integrity (p. 712). Martin would lead the Fed until the late 1960s.

Third, Meltzer points out that when Eisenhower became president in 1953 he chose Burgess, the strong supporter of Fed independence, as deputy Treasury secretary. I would also point out that Truman fired General MacArthur on April 11, 1951, just about a month after the Accord was released. Needless to say, Truman did not need another fight (about the Fed) with Congress and the public at a time when he was about to make the unpopular decision to fire MacArthur. Among other things, the firing of MacArthur and the Korean War itself caused Truman not to run again for president in 1952, paving the way for a more Fed-friendly administration.

Conclusion

The more I studied the book in preparing my review, the more I came to appreciate what Allan Meltzer has accomplished. This is a book that repays repeated readings. There is much more in it than I have been able to convey. Nevertheless, I would like to conclude by summarizing those points that one can take away from Meltzer's book based on what I covered in my review.

First, Meltzer emphasizes that individuals matter. "Individuals matter most when they are able to lead others to act in ways that do not fit comfortably within the prevailing orthodoxy" (p. 8). In connection with this point, Meltzer mentions Sproul's leadership in the Fed's fight for independence after World War II. I would point to the leadership of Sen. Paul Douglas in the Congress as another example.

Second, Meltzer mentions that Fed staff reflected the views of contemporary economists in the past as it would in the future (p. 633). This means that the economics profession, monetary and macroeconomists in particular, must bear some responsibility for guiding the thinking of the central bank. For instance, Meltzer explains how misguided academic attachment to the real bills doctrine in the 1920s and the collapse of confidence in interest rate policy dating from the early 1920s through the 1940s led the Fed astray.

Third, the fight to free the Fed from the Treasury after World War II demonstrated that the Fed's power ultimately rests on its ability to create understanding and support for monetary policy in the country at large.

Fourth, unfortunately the Fed's first use of interest rate policy in the early 1920s, associated as it was with deflation and recession, cast a long shadow over its subsequent history. Decades passed before the Fed employed interest rate policy aggressively enough to stabilize inflation and inflation expectations, and thereby stabilize both the price level and real economic activity. Moreover, it would take until 1994 for the Fed to feel sufficiently confident about monetary policy to return fully to transparent interest rate policy.

Fifth, recently Federal Reserve and academic economists have converged on a dynamic macromodel capable of guiding and rationalizing the use of interest rate policy in pursuit of low inflation and macroeconomic stability.¹⁰ Hopefully, this understanding will spread more broadly and help to secure good monetary policy in the future.

For more on Allan H. Meltzer, see the September 2003 Region interview.

Endnotes

1/ Humphrey (2001) makes this point.

2/ See Humphrey (2001) for a thorough discussion of the real bills doctrine.

3/ See Goodfriend (1997).

4/ See Goodfriend (2003).

5/ The discussion of borrowed reserve targeting below draws on Goodfriend (1983).

6/ See Humphrey (2001) for a thorough discussion of the real bills doctrine.

7/ See Board of Governors (1976).

8/ See Board of Governors (1976).

9/ For more on the Accord and Treasury-Federal Reserve relations, see Federal Reserve Bank of Richmond (2001).

10/ See, for instance, Brayton, Levin, Tryon and Williams (1996), Clarida, Gali and Gertler (1999), Goodfriend and King (1997) and Woodford (2003).