Monetary and Other Explanations of the Start of the Great Depression

Homer Jones' most important contributions have been to the practice of monetary policy. The research work that he directed at the Federal Reserve Bank of St. Louis and the positions he took and encouraged others to take contributed to the remarkable change that has occurred in the conduct of monetary policy during the past few years. Jones and his colleagues at St. Louis played a major role in shifting monetary policy from exclusive concern with short-term interest rates toward control of the stock of 'money.* If in the future, we are able to look back on a permanent shift from concern for interest rates to control of money by the Federal Reserve, the contributions of Jones, Darryl Francis and their colleagues will, I believe, be recognized widely. Dominating most internal discussions of monetary policy is the view that central banks must control market rates of interest. Central bankers9 concern about market interest rates is itself a consequence of the real bills doctrine that dominated thinking about monetary policy at the Federal Reserve during most of its history. The main idea emphasized by proponents of the real bills doctrine is that monetary policy should be conducted to provide credit in response to the 'needs of trade.9 In practice, the central banker monitored the movement of interest rates an member bank borrowing. If market interest rates rose and the rise was accompanied by an increase in loans eligible for discount at the central bank - real bills - a central bank operating according to the doctrine permitted borrowing to increase. The stocks of money and bank credit rose in periods of economic expansion and declined in recessions.