Until the financial crisis of 2007-2008, it seemed as though dovish chairs of the Federal Reserve had used monetary policy to effectively keep down unemployment without noticeable negative consequences. The "Great Moderation" ushered in by Alan Greenspan was an enormous success story, until the dot-com bubble gave birth to the housing bubble and the Great Recession. In truth, easy-money policies at the Fed have had an inconsistent track record from the beginning.
Doves and Hawks
Those involved in formulating monetary policy are often divided into two camps: "hawks" and "doves." Doves tend to take the Keynesian position that reducing unemployment is the most critical role of the central bank, even if it means suffering inflation. Hawks focus on tighter monetary policy and controlling inflation.
Early Fed Doves
The first prominent Fed dove in history was Benjamin Strong, the president of the New York Fed from 1914-1928. Strong was heavily influenced by New York banking tycoon J.P. Morgan, who wanted the Fed to use its powers to provide cheap credit for his business expansions.
Strong was the first major proponent of open market operations to lower interest rates and inject liquidity, which he did aggressively starting in 1922. In his book "America's Great Depression," economist Murray Rothbard blames Strong for the stock market bubble in the 1920s that led to the Great Depression.
In the 1950s and 1960s, a string of Fed chairs adopted dovish policies to combat any rise in unemployment, largely as a reaction to the deflation during the Great Depression. These chairs were William Martin, Arthur Burns and G. William Miller. By the late 1970s, however, the U.S. economy was riddled with stagflation.
Alan Greenspan, the "Maestro"
After the reign of the hawkish Paul Volcker from 1979-1987, Alan Greenspan took control of the Federal Reserve. Over the next 20 years, Greenspan was widely praised for his model of dovish policies aimed at smoothing the business cycle. Greenspan's Fed could not avoid the rise of constant asset bubbles through low interest rates, though, leading to the rise and crash of the U.S. housing market in the 2000s.