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Expansionary Monetary Policy at the Federal Reserve in the 1920s

Studies in Austrian Macroeconomics

ISBN: 978-1-78635-274-3, eISBN: 978-1-78635-273-6

Publication date: 28 April 2016


This paper analyzes the two main divergent interpretations of Federal Reserve monetary policy in the 1920s, the expansionary view described by Rothbard (2008a [1963]) and earlier “Austrian” writers, and the contractionary view most notably held by Friedman and Schwartz (1993 [1963]) and later monetary historians. This paper argues in line with the former that the Federal Reserve engaged in expansionary monetary policy during the 1920s, as opposed to the gold sterilization view of the latter. The main rationale for this argument is that the increase in the money supply was driven by the increase in the money multiplier and total bank reserves, both of which were caused primarily by Fed policy (i.e., a decrease in reserve requirements and an increase in controlled reserves, respectively). Showing that this expansion did in fact occur provides the first step in supporting an Austrian Business Cycle Theory (ABCT) interpretation of the 1920s, namely that the Federal Reserve created a credit fueled boom that led to the Great Depression, although this is not pursued in the paper.




This paper was researched and completed with the assistance of a 2013 Mises Institute Summer Fellowship and a 2014 Mercatus Center Graduate Student Summer Research Fellowship. Earlier drafts of this paper were presented at the 2013 Austrian Economics Research Conference (AERC), at a 2014 Mercatus Center Graduate Student Paper Workshop (GSPW) roundtable discussion, and at the 2014 Austrian School of Economics Biennial Conference. The author would like to thank the participants at the above discussions as well as Joseph Salerno, Peter Boettke, and Lawrence White for their helpful comments.


Newman, P. (2016), "Expansionary Monetary Policy at the Federal Reserve in the 1920s", Studies in Austrian Macroeconomics (Advances in Austrian Economics, Vol. 20), Emerald Group Publishing Limited, Leeds, pp. 105-134.



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