Quantity Theory and Needs-of-Trade Measurements and Indicators for Monetary Policymakers in the 1920s

Considers contributions of developments during the age of measurement in US economics (1920s-1930s) to the rise of central banking during that same period, noting in particular the development of statistical indicators later used by banks in matters of monetary & credit policy. Two sets of rival indicators are examined in detail: (1) the money stock, price level, & real rate of interest; & (2) measures of aggregate output, type & amount of commercial paper in bank portfolios, levels of short-term nominal rates of interest, & volume of member bank borrowing at the discount window. The appeal of each set of indicators for different types of banks -- activist & centralized vs passive & decentralized -- is described. The choice of the second set of indicators by the Federal Reserve Act of 1913 & the subsequent battle over stabilization vs accommodation are recounted, along with conflicts regarding the Federal Reserve System's (Fed's) preference for the real bills or needs-of-trade doctrine (the commercial loan theory of banking) over the quantity theoretic or monetary-approach-to-the-business-cycle framework. The rivalry between these theories & their constituent policy indicators is traced, questioning whether the Fed's adoption of quantity theory insights into its analytical policy framework could have prevented or mitigated the effects of the Great Depression. Broader issues surrounding the relationship between statistics & economic policy making are considered. 41 References. K. Hyatt Stewart