Overview: Monetary History

Reading Selections:

On The Internet:

Optional Sections
Who's Who

While fiscal policy developed largely from academic theory, the development of monetary policy has been heavily influenced by the trial-and-error experience of policymakers. Hence, to understand monetary policy in the present, one must explore the past.

Monetary policy is entangled in the international payments system a nation uses. We begin by looking at how the rules of international payments can limit monetary policy. We also examine how the concerns of the Federal Reserve and the way it conducts policy have evolved in a long process of trial and error. Some of those errors were huge and horrendous, and the Fed did not acknowledge them for decades. But lessons were learned, and decisions of the Fed reflect their reading of the past.

This group of readings can serve as a final chapter for an introductory course. There is additional material in the optional sections that either take students beyond what is traditional in an introductory course or explore topics from this unit in greater detail.

After you complete this unit, you should be able to:

Summarize why fixed and convertible exchange rates reduce the scope of monetary policy.
Summarize why floating exchange rates reduce the scope of fiscal policy.
Explain the consequences of a central bank buying its currency in order to keep the price of its currency from falling in the foreign exchange market.
List the problems of using a monetary aggregate as a measure of monetary policy.
List the problems of using interest rates as a measure of monetary policy.
Explain what a policy rule is.
Compare and contrast the monetarist interpretation of the Great Depression with the view of those who argued for the "real-bills" approach to monetary policy.
Explain what the Federal Reserve presently sees as its goals and why.
Explain why the Federal Reserve abandoned monetary aggregates as a monetary target.