“The Group”: The Making of the Chicago Monetary Tradition, 1927–36

During the early 1930s University of Chicago economists developed a comprehensive set of policy proposals that presaged those proposed by Fed economists and academics in the aftermath of the 2007–8 financial crisis. Using the quantity-theory framework to analyze the business cycle, the Chicagoans advocated the use of the federal government’s fiscal operations to conduct monetary policy—entailing an expansion of the size of the Fed’s balance sheet—to combat the Great Depression, the abandonment of the gold standard in favor of exchange-rate flexibility, one-hundred- percent reserve requirements against demand deposits, and the embedding of monetary-policy rules in legislation. This paper assesses departmental memoranda, correspondence, and published material to document the development of core characteristics that left the Chicagoans well-placed to resist the Keynesian revolution.