Warburton on Theories of Monetary Control and the Fed

James A. DornIn December 1946, Clark Warburton published an article in thePolitical Science Quarterly titled,“Monetary Control under the Federal Reserve Act,”which was reprinted in chapter 14 of his landmark book,Depression, Inflation, and Monetary Policy (1966). He argues that the Federal Reserve ’s failure to prevent the Great Depression was “a result, in part, of the inadequacy of the monetary theory underlying the [Federal Reserve] Act and, in part, of the failure to carry out in practice the theory which was embodied in the Act” (Warburton, 1966: 301; all page numbers refer to his book). In particular, if the Fed had taken into account the importance of monetary deficiency, relative to the demand for money, the Great Depression and banking crisis could have been avoided. By focusing on preventing speculation, rather than thinking in terms of a suitable quantity of money to pr ovide for normal production and price stability, the Fed was led to restrict money growth rather than expand it to maintain total spending and income on a level growth path.Although theFederal Reserve Act of 1913 was intended to adhere to what Warburton called the “convertibility theory” of monetary control, the Fed subsequently drifted away from that theory. Nor did the Fed ever fully embrace what Warburton called the “responsibility theory” of monetary control. Hence, he concluded:Monetary law in the United States is ambiguous and chaotic, does not contain a suitable principle fo...
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