Open Market Operations, Gold Flows, 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 determined by changes in the Reserve Banks' discont rates. While open market operations were ineffective in altering the level of reserves held by member banks, we document that they produced significant capital gains for the Fed on its bond portfolio.