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July 5, 1570

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Professor Milton Friedman,
CAPITA?,
Ely, Vermont, 05044
Dear Milton:
There should be some way of avoiding the violently
different interpretations of money supply data among those
who understand their conceptual limitations. We are working
on the latter problem, and I am hopeful we can remove the major
defects on that score that are leading to different views as to
contemporary trends.
One of your problems seems to be that you assume the
Fed operates through the administration of a uniform daily
monetary dosage. The manager does not operate in that fashion
and is not instructed to so. The Committee asks him to
achieve over a period of time--say a%month to a quarter--an
approximate rate of monetary growth. That growth may be in
relatively large or small increments according to the Committee's
instruction and the manager's operating judgment.
Your preference for judgmental (i.e., non-aberrant)
base periods from which to measure changes in monetary growth
would have merit, if the aberrations in the data were promptly
and easily recognizable, if they were infrequent, and if the
Committee always moved during such base periods to make market
changes in its policy posture. But, as you well know, none of
the conditions are met with any consistency. In particular,
most policy changes are gradual--their timing is diffused over
several meetings through shadings of emphasis and shifts in
the position of the Committee members.
For that reason I think it is better to use calendar
periods for measuring monetary change--they cannot be juggled

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to suit any particular thesis and they’are 'consistently
appropriate to tne actual pace or ticst policy changes*

1

Beyond tnis point we nave lict^le.except.details t o
cisagree aocut— tne £>oarc. a m tne Committee currently t,sa tne
daily average for the last month of the quarter instead of the
quarterly average to represen: quarter-to-quarter changes. I
have no particular brief for that system; over time, however, it
will make very little difference, and its ability to mislead us
in any incerim is constrained by the attention we give to the
averages for the component months of the quarter as well.
As to the numbers between last December and new, I
don!t think I or the System have misled you but that you are
the victim of your beliefs as to the Committeefs intent or com­
petence. In December the Committee was shifting away from the
excessive restraint to which I (and Sherm as well) had dissented
in the Fall. It was perfectly obvious that a small monetary
growth would displace no growth.
The first quarter growth in 1970 had freaks of timing
but it had no freak of intent. The second quarter growth rate,
judged by our reckoning now (4.2 per cent) and subject to some
revision because of unexpected liquidity strains stemming from
the Penn CentralTcommercial paper problem, is if anything too low
and not too high as your figures indicate.
We are trying to do better on the numbers and we need
your help and understanding. I assume we will get more of it when
we get your confidence.
Cordially,

.
-ca£George, t v-iit C U 1
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Professor Hilton Friedman

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1969
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