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December 13, 1971

Board of Governors'
Federal Reserve System
Washington, D. C.
Dear A rth u r:

What in God's name is happening? Despite your repeated assurances that
the recent cessation of monetary growth is a temporary departure from
a longer-run path of moderate growth, the figures show no sign of a
return to such a path. There was some justification for offsetting
the earlier unduly rapid growth. But this has by now been carried
too far too long.
In early I960, you correctly warned Mr. Nixon of the danger of recession,
arising at least partly from a sharp monetary slowdown, and you urged
the Fed, as I did also from my much more junior position, to reverse
course. The Fed did not do so until June, I960, by which time it was
too late to prevent a recession.
In 1971, you are fit the head of the Fed, and a far sharper slowdown
has occurred in monetary growth than in 1959» The slowdown has now
continued for over four months.
It may already presage at least a
pause in the rate of economic recovery next spring — as a similar
short-lived monetary slowdown in 1962 produced a pause in late 1962
and early 1963. But whether it does or not, continuation of the
slowdown for many more montbs would almost certainly abort the revival
that is now under way.
The comparison with 1959 is frightening. Then, as in 1971, the slowdown
in monetary growth began in July. Here are the rates of change in mon­
etary aggregates for 1971 and for the corresponding periods in 1959~60.
4 weeks end i ng
1/ 27/ 71
7/28/71

to

to

4 weeks ending
7/28/71
12/1/71

ANNUAL RATE OF CHANGE
Monet;
M1
M2
Base

10.8
0.4

18.0
4.8

9.3
3.3

3.5
-2.9
-3.0

3.4
-1.7
-1.4

2.4
-1 .2
-1.2

1959-60
Ja n ., 1959
J u ly , 1959
Nov., 1959

to
J u l y , 1959
to
Nov., 1959
to June, I960

In 1971, the rate of growth was reduced by
H|j 13.2, for M 2 ; and 6, for the base.
In
reductions, for the same months, were 6.4,
eration this time is something like twice
in 1959-

10.4 percentage points for
1 9 5 9 , the corresponding

5.1, and 3.6. The decelas sharp as the deceleration

I remain concerned about the danger of a swing back to the other extreme
of an inflationary rate of monetary growth. That danger of over-heating
can and should be avoided. But the danger provides no excuse for going
to the other extreme and putting the economy in the deep-freeze.



MF TO AFB

December

1 3,

1971

Page 2

Moaetary growth has been more erratic in 1971 than in any year in the
past several decades. Try as I may, I find it hard to see any excuse
for such an ^irresponsible pol icy.? The Fed can avoid such wild swings
It must accept fu l 1 responsibi1 ity for them and for their consequence
]
Best personal regards to you and Helen. Vermont has been beautiful
in its mantle of white, especially these past few days when we have
enjoyed bright surrshine.
-- ---

M i1ton Friedman
cc. George P. Shultz





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102