BIS central bankers’ speeches  1  recommended by the British economist and writer Walter Bagehot.4 Legislators imposed limits on the Federal Reserve’s ability to lend in response to panics, for example, by denying nonmember banks access to the discount window and by restricting the types of collateral that the Fed could accept.5 The framework that the Federal Reserve employed in its early years to promote financial stability reflected in large measure the influence of the so-called real bills doctrine, as well as the fact that the United States was on the gold standard.6 In the framework of the real bills doctrine, the Federal Reserve saw its function as meeting the needs of business for liquidity – consistent with the idea of providing an elastic currency – with the ultimate goal of supporting financial and economic stability.7 When business activity was increasing, the Federal Reserve helped accommodate the need for credit by supplying liquidity to banks; when business was contracting and less credit was needed, the Fed reduced the liquidity in the system.
As I mentioned, the Federal Reserve pursued this approach to policy in the context of the gold standard. Federal Reserve notes were redeemable in gold on demand, and the Fed was required to maintain a gold reserve equal to 40 percent of outstanding notes.