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The article focuses on the development of fiscal policy for monetary policy and the banking system. Fiscal policy could perhaps be regarded from the beginning as a substitute for central bank policy. The analysis of income-creating expenditures has been the chief preoccupation of fiscal theory. Since the first World War, revolutionary changes have occurred in American banking. The greatest change which has occurred in banking since the Reserve System was established has been in the growth of bank investments. This growth began in the first World War when the banks, with the aid of the new Reserve System, bought government securities for their own account and made loans to finance purchases by the public. As bank investments have increased, long-term interest rates have shown increased sensitivity to changes in bank reserves, and the emphasis in monetary theory has shifted to the need for controlling the long-term rates, as more effective for the control of investment, income, and employment than control merely of the short-term rates.

This article presents information on the Banking Act of 1935. Title II of the Banking Act of 1935 is the part which consists of the new amendments to the Federal Reserve Act. The violence of feeling was, quite out of proportion to the actual content of the proposed legislation. There was a disposition on both sides to regard the bill as more revolutionary than it really was. On the one hand, some of the more enthusiastic believers in quantitative monetary control as a means of achieving economic stability were inclined to regard this legislation as marking a complete break with the past behavior and the past philosophy of the reserve system. On the other hand, the critics were inclined to read into it fears that arose not so much from its actual content as from their own hostility to previous new deal legislation and experimentation, particularly in the monetary sphere.

The article focuses on monetary policy rules. The conventional paradigm for the conduct of monetary policy calls for the monetary authority to attain its objectives of a low and stable rate of inflation and full employment by adjusting its short-term interest rate instrument in the U.S. In principle, when aggregate demand and employment fall short of the economy's natural levels of output and employment, or when other deflationary concerns appear on the horizon, the central bank should ease monetary policy by bringing real interest rates below the economy's natural rate of interest for some time. Conversely, the central bank should respond to inflationary concerns by adjusting interest rates upward so as to bring real interest rates above the natural rate. In this setting, the natural rate of unemployment is the unemployment rate consistent with stable inflation, the natural rate of interest is the real interest rate consistent with unemployment being at its natural rate, and therefore with stable inflation. In carrying out this strategy in practice, the policymaker would ideally have accurate, quantitative, contemporaneous readings of the natural rate of interest and the natural rate of unemployment.

This article discusses research paper by professor John H. Williams related to economics, published in the March 1936 issue of the journal "The American Economic Review." In connection with professor Williams' paper, a question can be raised about his comments on the composition of the Open Market Committee. One can agree with professor Williams that all the instruments of credit control, including discount rates, open-ma!rket operations, changes in reserve requirements, changes in margin requirements, and changes in interest rates on deposits, should be concentrated in one authority. But if all these powers are to be concentrated in one authority, the question arises whether a committee consisting of seven members of The U.S. Federal Reserve Board and five representatives of the banks is the best authority to which to entrust all these powers. There is one more question in mind whether it is proper to entrust all the important policy matters to a committee which only meets periodically. It seems that in order to discharge its functions adequately the body that has the responsibility for credit policy should be in continuous session, giving its entire time to such problems. This question will have to be settled some day. In the meantime, it may be that as a practical matter of operation it will work out satisfactorily under the existing law. If it does not, then the law will ultimately be modified.