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This paper describes the motives that gave rise to the creation of the Federal Reserve System, summarizes the history of Fed monetary policy from its origins in 1914 through the Treasury-Fed Accord of 1951, and reviews several of the principal controversies that surround that history. The persistence of conceptual errors in Fed monetary policy - particularly adherence to the "real bills doctrine" - is a central puzzle in monetary history, particularly in light of the enormous costs of Fed failures during the Great Depression. The institutional, structural, and economic volatility of the period 1914-1951 probably contributed to the slow learning process of policy. Ironically, the Fed's great success - in managing seasonal volatility of interest rates by limiting seasonal liquidity risk - likely contributed to its slow learning about cyclical policy.
"If stupidity got us into this mess, then why can't it get us out?" - Will Rogers
Charles W. Calomiris is a visiting scholar at AEI.