What Exactly is an “Open Market” Operation? #MonetaryPolicy201

#MonetaryPolicy201 is a monthly series about the basics of monetary policy. It’s a “201” series because I will be grounding the basics of monetary policy on their largely forgotten legal foundations. The beginning of this series will focus on various aspects of the question “What is Money Finance”? This is Part 1. You will need a paid subscription to read entire articles in this series. Find the link for paid subscriptions, which are 50% off for a limited time, here.  It is reader support which makes my Freedom of Information Act project, archival research and general writing possible.

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What actually is “printing money”? What is “Direct Monetary Finance”? These phrases, and many similar phrases, are thrown around constantly in discussions of economics and finance. They are discussed in confusing abstract terms which are hard to wrap one’s mind around. It is remarkable that in 2024, sixteen years after the Great Financial Crisis, such basic confusions can still be hanging around. I want to take a crack at clearing up these confusions in a new "Monetary Policy 201" series. 

This series will be unique because it will both be both introductory while, at the same time, highlight previously obscure or outright unknown material from the Federal Reserve’s archives. As I’ve accumulated archival material I’ve become convinced that much of what is difficult to understand about the Federal Reserve comes from the way monetary policy is discussed without the law that undergirds it and the way terminology loses earlier, more understandable meaning. Economists too often think they understand monetary policy because they understand their own theories- theories that are contemptuous of legislation as anything but an obstacle introducing frictions or an irrelevant detail. Legal scholars, for their part, have mostly neglected money- especially its archival history. 

So where do we start? An obvious place is the part of the Federal Reserve act that first used the phrase “Open Market”: Section 14 of the Federal Reserve Act. The phrase “open market” matters because the most common type of monetary policy action is called an “open market operation”. Many of the debates over “printing money” and “direct monetary finance” hang on the interpretation and perceived importance of “open market operations”.