Once Bitten, Twice Shy: Rethinking the Federal Reserve's Independence and Monetary Policy in the U.S.

It is widely believed that the Federal Reserve played a central role in bringing about the biggest catastrophe in American history—the Great Depression. The literature is extensive in seeking to provide an explanation for the Federal Reserve's policy errors. This paper offers a new interpretation on why such an event occurred by studying a heretofore-unexamined landmark court case. In 1928, a private citizen filed suit against the Federal Reserve Bank of New York for increasing discount rates; he sough a court injunction that would force the Federal Reserve to decrease rates. The courts found in the System's favor. In 1929, he appealed the case, which was dismissed due to a failure in enjoining the Federal Reserve Board as an indispensible party. The judge during the time further wrote an opinion, in which he clarified that the Board rather than the Banks had true authority within the Federal Reserve System. This paper looks at how these two decisions affected Federal Reserve policy between 1929-1933. It argues that the de-politicization of the Federal Reserve coupled with implicit judicial sanction allowed it to act on its flawed ideology without fear of political recrimination. The paper also examines the impact of the Great Depression on the Federal Reserve's independence today