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fnof The Early Years Discount as Primary Tool Changing the discount rate was the primary tool of monetary policy when the Fed was created and the Fed had not yet discovered the power of open market influencing money supply Before WWI the Fed had taken a passive role the utilized policy following the real bills doctrine However by the end of WWI Feds passive policy had led to a raging inflation As a result Fed decided to take an active role in influencing the economy and raised the discount rate significantly in 1920 which led to a sharp recession in 1920-1921 Although the Fed was blamed from its action in one sense the Fed was still successful since it did make the price level declined fnof Discovery of Open Market Operations In the early 1920 Fed accidentally discovered the use of open market operation When the Fed was created its revenue came exclusively from the interest it received on the discount loans However by the end of the 1920s open market became the most important weapon to the Fed fnof The Great Depression The stock market boomed in 1928 and 1929 In the beginning the Fed wanted to temper the boom by raising the discount rate However it was reluctant to do so due to its concerns about business and individual that may have credit needs As a result when the Fed decided to intervene it was too late The stock market crashed and thus led to a recession of the economy Many banks failed during that time fnof War Finance and the Pegging of Interest Rates 1942-1951 During WWII the spending of US government increased sharply therefore the Treasury issued huge amount of debt The Fed agreed to help the Treasury pegging the low interest rate which result in a rapid growth of money supply When the Korean War broke out in 1950 inflation began to heat up and the Fed
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