The familiar Federal Reserve tools of monetary policy (open market operations, changing reserve requirements, and changing the discount rate) were first advocated by Ralph George Hawtrey (1879-1975). A British treasury official and prolific author in the area of monetary economics, Hawtrey saw central bank policies as crucial to maintaining credit stability and reducing business cycle fluctuations. In severe downturns, however, Hawtrey recognized that even the easiest monetary policy had limited power to stimulate recovery. As an observer of the Great Depression, Hawtrey argued that the best way to deal with severe economic stagnation was to act during the boom periods, using a tight money policy to restrain spending and the over extension of credit. In Hawtrey’s words: Possible though it is to stop this [depression] by taking prompt measures to relax credit in time, far better would it be to regulate credit at all times in such a way that neither of the two vicious circles ever gets a serious hold. In quiet conditions credit responds easily to moderate upward and downward movements of the bank [interest] rate. If these movements were always initiated in time, the conditions need never be other than quiet in a monetary sense. Some might argue that current Federal Reserve Chairman Alan Greenspan has taken Hawtrey’s advice, especially in light of monetary policy in 1999 and 2000.

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