Open Market Operations and the Scissors Effect: A Reinterpretation of Monetary Policy in the 1920's

Many commentators have attributed the success of Federal Reserve monetary policy during the 1920s to the active use of open market operations to sterilize gold flows and to stabilize aggregate demand. We find, however, that the discount window was "open" during this period, thereby enabling banks to offset Federal Reserve open market operations. Monetary conditions during the 1920s were therefore not influenced by open market operations. Why then did the Federal Reserve conduct open market operations? We document that open market operations produced significant capital gains for the Fed on its bond portfolio.