The Federal Reserve: A New History by Robert L. Hetzel

Robert Hetzel is a central banker and monetary historian who has written extensively on the history of the Federal Reserve and monetary policymaking in the United States. The Federal Reserve: A New History, his latest contribution to this literature, presents a systematic interpretation of more than a century of US monetary policymaking based on the standard New Keynesian framework, which Hetzel believes to be the correct way to think about monetary policy. More specifically, the book offers an exhaustive evaluation of the Fed's operations and policy record according to how much it approaches the New Keynesian view. As Bordo (2023) has noted, this approach leads Hetzel to question the standard narrative about some major episodes—notably perhaps the role of monetary policy in the Great Financial Crisis—and the book is thus likely to arouse the interest of monetary historians and economists alike. Here I will instead focus on what historians of economics interested in central banks and US monetary discussions can find in Hetzel's account.

Let me begin by briefly summarizing Hetzel's core argument, which is rather straightforward despite the book's length of nearly seven hundred pages. Hetzel's view, following Goodfriend and King's (1997) depiction of the New Keynesian framework, is that the Fed's job is to make the real rate of interest track the natural rate of interest and then just let the price system work. On this basis, Hetzel recounts in detail the monetary history of the United States since the establishment of the Fed, focusing on whether Fed officials and other contemporary actors in monetary policy discussions (such as academics and legislators) “correctly” understood what the Fed's job was and the policy decisions needed to do it. Hetzel divides the evolution of US monetary policymaking into three stages. The first stage corresponds to the period between the establishment of the Fed and World War II. This period was dominated by the real bills doctrine and by Fed officials’ belief that their job was to prevent financial speculation—which they thought would ultimately lead to depression and deflation. Crucially, these policymakers failed to understand that the establishment of the Fed had created a fiat money regime, even during the periods when the dollar was convertible into gold. This led the Fed to reject any direct responsibility over the price level and to instead focus exclusively on preventing speculative excess. The second stage corresponds to the period between the end of World War II and the 1970s. Early on during this period inflation became the main concern of monetary policy, but the key aspect was the shift toward a lean-against-the-wind (LAW) view during William McChesney Martin's tenure at the Fed. Implementing policy as a reaction to inflation put the Fed on the right track, even if the language used by Martin and other Fed officials was not as direct or clear as it could have been. The third and final stage corresponds to the period since the 1980s, when the Fed finally found the right approach but lost it again after the Great Financial Crisis. The key development in this period was the shift from an ex post concern about inflation (LAW) to a preemptive view, in which the Fed raises interest rates to stop inflation from occurring rather than waiting for it to appear before acting. This view, which emerged and was consolidated under the tenures of Paul Volcker and Alan Greenspan, recently lost ground to concerns about financial stability during and following the Great Financial Crisis—which Hetzel sees as a partial return to a real bills type of view at the Fed. Hetzel concludes with a plea for a more transparent and systematic process of monetary policymaking at the Fed, which he believes would allow policymakers to learn from previous episodes and thus would help them make better policy decisions in the future.

Hetzel's account is by no means a history of US macro and monetary economics, and it does not seem to aspire to be one. Based on the almost complete lack of references to the specialized literature on these subjects, I also do not think historians of economics were at the top of his list of intended readers. However, a large portion of the book deals with the ideas of Fed officials and their contemporaries, and understanding the intellectual context in which Fed officials acted is furthermore presented as a central aspect of his strategy to make sense of US monetary policymaking: “The strategy pursued here is to use historical narrative based on contemporary documentary evidence and the state of knowledge among policy makers and economists to understand how the Fed has responded to the state of the economy” (4). Thus, although Hetzel's discussion of these ideas is subordinated to his larger case about the correct way to think about monetary policy, I do think it is sufficient to justify a critical engagement from historians of economics. I will focus on two major aspects of his account.

First, Hetzel's discussion of the ideas of Fed officials and other contemporary actors is uneven. His stated strategy is arguably fulfilled only in the discussion of the period before World War II, which occupies roughly half of the book and contains a detailed account of the views of various Fed officials, academics, and congressmen. Although somewhat repetitive and stained by an occasionally condescending tone, this part of Hetzel's account is a useful overview of the period's monetary discussions. On the contrary, the discussion of the postwar period and subsequent decades is considerably simpler, it involves a smaller and less varied set of actors, and their views are explored in much less detail. The lack of engagement with the history of economics literature was particularly evident in his discussion of the 1960s and 1970s, where the Phillips curve figures prominently as a device for understanding contemporary discussions and policy decisions without any consideration for the nuances introduced by Forder (2014) and the literature it has inspired (e.g., Goutsmedt 2022; Rancan 2022).

Second, Hetzel's account of the Fed's actions is centered on the chairman and the FOMC. Even for the prewar period the views of only a handful of other officials are discussed. The neglect of the rest of the staff at the Board and of the officials at the Reserve Banks was rather surprising considering the author's professional experience and the fact that he had previously conducted close to a hundred interviews of former Fed officials in various locations.¹ Furthermore, a discussion of the evolution of the work done by the Fed's staff—for instance, all the work related to the use of the DSGE models Hetzel favors—would have been useful context for his closing plea for greater transparency from the Fed. The book's final two chapters—where Hetzel demands the Fed be more transparent and argues in favor of his historical approach as a way to systematize the policy record—are perhaps the most interesting ones for historians of economics studying the practices of central bankers, their relation to the economics profession, and their role as experts in society. As such, the lack of a careful discussion of the evolution of modeling, forecasting, and data-production practices at the Fed is unfortunate—and a missed opportunity to fill, even if only partially, a major gap in the Fed's historiography.

To conclude, and despite the shortcomings mentioned above, let me unequivocally state that I do recommend historians of economics read and engage with Hetzel's history of the Fed. To be sure, I suspect his Whiggish approach and occasionally condescending tone will irritate many historians of economics, but his account offers at least a couple of interesting opportunities for us. The history of economics literature on the Fed is extremely patchy and has focused on only a handful of people, places, and episodes. Besides perhaps Mehrling 2010, which favors a different set of ideas, there is nothing that comes close to Hetzel's account in terms of its coverage and systematicity while remaining relatively manageable—unlike Meltzer's three-volume history of the Fed (2003, 2009a, 2009b). As such, Hetzel's account offers an opportunity to find holes, nuances, mistakes, and leads that could help organize and stimulate the history of economics literature on the Fed. Furthermore, the importance Hetzel places on understanding the intellectual context of policy and his visibility in the macroeconomics community could open a door for historians of economics to contribute—if they want to, and based on our actual expertise—to broader monetary policy discussions.

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