Robert Hetzel is a Senior Economist and Policy Adviser in the Research Department of the Federal Reserve Bank of Richmond, where he has been working for more than thirty years. Earlier, back in 1975, he received his PhD from the University of Chicago, where Milton Friedman chaired his dissertation committee. This book on the history of the Federal Reserve's monetary policy constitutes to a large extent a synthesis and overview of his research work. The vision in the book is very much a Chicago view. Hetzel (p. xiii), explains how he ‘left Chicago for the Federal Reserve Bank of Richmond in 1975 with several assumptions about monetary economics: (1) the price level is a monetary phenomenon; (2) the price system works; and (3) the public learns to form its expectations in a way that conforms to the Fed's monetary policy (rational expectations)’. This is also the red thread throughout the book (see, e.g., p. 166 or 311).

The book contains 26 chapters. The first two chapters and the last one discuss general issues. Chapter 3, ‘From gold to fiat money’, examines monetary policy from the founding of the Federal Reserve System in 1913 through the end of the Great Depression. Chapters 4 to 9 examine the post-war monetary system. Chapters 10 to 14 discuss the Great Inflation of the 1970s, Volcker's disinflation at the end of the 1970s and monetary policy during the early 1980s. Chapters 15 to 25 focus on monetary policy during the Greenspan era. The book also contains a wealth of empirical material, especially in the form of charts. More technical issues are discussed in annexes. The attention paid to the different time periods in the Fed history differs greatly. This shows the focus of the book, which is largely on post-war monetary policy and particularly on the recent decades, in line with Hetzel's own experience. Moreover, the book focuses almost exclusively on monetary policy. Prudential issues are very much absent, the LTCM case being the main exception.

For Hetzel (p. 315), ‘The great modern heresy of monetary policy has been discretion.’ For him, the real turning point was 1979. Inflationary expectations became unmoored and long-term bond markets began to shut down. The Volcker Fed reacted and introduced, in October 1979, a new approach to monetary policy, the so-called non-borrowed reserves strategy, which permitted interest rates to go up. Crucial for the new strategy was the adoption of a new nominal anchor, ‘the expectation of low, stable inflation’ (p. 163). According to Hetzel, this concern for ‘nominal expectational stability’ gave a rule-like consistency to monetary policy. So, the great achievement of the Volcker-Greenspan era is that discretion gave way to rule-like behaviour: ‘The FOMC succeeded in controlling inflation by behaving consistently. … The key to credibility is the belief by markets that in response to macroeconomic shocks the FOMC will ultimately move the funds rate by whatever amount required to maintain trend inflation unchanged’ (p. 316). To institutionalise the new regime, Hetzel advocates adoption of an explicit inflation target. Hetzel (p. 263) is quite hard on the intellectual foundations of US monetary policy, saying that ‘The FOMC cannot explain the restoration of near price stability except as an uninterrupted succession of good luck. The FOMC cannot discuss causation until it replaces the language of business economics, which is descriptive, with the language of economics which identifies cause and effect.’ An inflation target would further enhance public understanding of the Fed and support for its independence.

I have two main remarks concerning this work. First, Hetzel talks about the Volcker – Greenspan regime or standard and puts them very much on the same footing: ‘Volcker and Greenspan shared an intense dislike of inflation and a concern for inflationary expectations … Their common desire to reestablish the nominal expectational stability lost with stop-go imposed a “rule-like” character to the FOMC's standard lean-against-the-wind procedures. The essence of the V-G standard was a rule that both created a nominal anchor through the expectation of low, stable inflation and moved the funds rate in a way that allowed the price system to work’ (p. 196). However, he also admits that this goes against the picture that Greenspan portrayed of himself: ‘Greenspan himself depicted monetary policy as an ongoing exercise in discretion. His “risk-management” characterization of the FOMC as a crisis manager together with his non-monetary view of inflation was reminiscent of stop-go’ (p. 197). An interesting episode is the expansionary monetary policy after the Russian crisis in 1998. According to Greenspan, the ‘seizing up’ of US financial markets was an important reason for the reduction in interest rates. Hetzel (p. 221) disputes that there was such a ‘seizing up’ of US financial markets. However, he does not give an explanation of why Greenspan advanced this argument. My second remark concerns the ‘ageing’ of the book. The book was published in 2008 and probably finished in 2007. However, the reader does not find much on financial innovations or other elements which presage the present financial crisis (the word sub-prime is not mentioned in the index). Also a discussion of the role of US monetary policy in the erosion of risk premia in the early twenty-first century is largely absent.