I and most other monetarists have long favored a policy of a steady
and moderate rate of growth of the quantity of money. We have strongly
opposed the Fed’s trying to fine-tune the economy.
Recent policy conformed to our prescription only in 1970.
Critics ask why we are so modest. Why not use the powerful instrument
of monetary policy to offset other forces pushing the economy toward
inflation or recession? Why tie the hands of the Fed? Why not trust
their discretion in adapting changing circumstances?
We favor the rule of steady monetary growth for several reasons.
1. The Past Performance of the Fed.
Throughout its history, the Fed has proclaimed that it was using
its powers to promote economic stability. But the record does not
support the claim. On the contrary, the Fed has been a major source
The Fed was responsible for converting what would have been a serious
recession after 1929 into a major catastrophe by permitting the
quantity of money to decline by one-third from 1929 to 1933, even
though it had ample power to vent the decline.
In recent years, the Fed set off the accelerating inflation that
President Nixon inherited by expanding the money supply too rapidly
in 1967 and 1968, then stepped too hard the brake in 1969, and too
hard on the accelerator in the seven months of 1971. Federal Reserve
officials have admitted their errors after the fact—as Chairman
Burns did in July 1971, in testimony before the Joint Economic committee—and
have promised better performance in the future. But then the same
forces have produced a repetition of same errors.
We conclude that the urgent need is to prevent the Fed from being
a source of economic disturbance.
2. The Limitations of our Knowledge.
Economic research has established two propositions: (1) there is
a close, regular, and predictable relation between the quantity
of money, national income, and prices over any considerable period
of years; (2) the same relation is much looser from month to month,
quarter to quarter, or even year to year. In particular, monetary
changes take time to affect the economy, and time delay is itself
The first proposition means that a steady price level over the long
pull requires that the quantity of money grow fairly steady rate
roughly equal to the average rate of growth of output.
The second proposition means that any attempt to monetary policy
for fine-tuning is likely simply to introduce additional instability.
And this is indeed what has happened.
3. The Promotion of Confidence.
An announced, and adhered to, policy of steady monetary growth would
provide the business community with a firm basis for confidence
in monetary stability that no discretionary policy could provide
even happened to produce roughly steady monetary growth.
4. Neutralization of the Fed.
An independent Fed may at times be too insulated from political
pressures—as it was in early 1930s—and yet at other
times unduly affected by political pressures. If we really knew
enough to use monetary policy for fine-tuning, we would probably
experience a four- year cycle, with unemployment reaching its trough
in years divisible by four and inflation reaching its peak in the
A monetary rule would insulate monetary policy both from arbitrary
power of a small group of men not subject to control by the electorate
and from the short-run pressures of partisan politics.
Is the rule that we have proposed technically feasible? Can the
Fed control the quantity of money? No serious student of money—whatever
his policy views—denies that the Fed can, if it wishes, control
the quantity of money. It cannot, of course, achieve a precise rate
of growth from day to day or week to week. But it can come very
close from month to month and quarter to quarter.
As I wrote some five years ago, if the monetary rule were followed,
“other forces would still affect the economy, require change
and adjustment, and distort the even tenor of our ways. But steady
monetary growth would provide a monthly climate favorable to the
effective operation of those basic forces of enterprise, ingenuity,
invention, hard work, and thrift, that are the true springs of economic
growth. That is the most that we can ask from monetary policy at
our present stage of knowledge. But that much—and it is a
great deal— is clearly within our reach.”