Full text of Review (Federal Reserve Bank of St. Louis) : January 1974

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FEDERAL RESERVE BANK
OF ST. LOUIS
JANUARY 1974




The Monetary Economics of Gold
By A LBERT E. BURGER

X n TH E last two years there have been two changes
in the official dollar price of the U.S. gold stock. In
May 1972 Congress approved a change in the official
price of gold from $35 an ounce to $38 an ounce;
Congress approved a further change effective in Oc­
tober 1973 from $38 an ounce to $42.22 an ounce. The
aot of changing the official dollar price of gold, under
the situation in recent years where the United States
has not bought or sold gold at the official price, does
not by itself have monetary consequences. However,
subsequent transactions between the Treasury and the
Federal Reserve do have important monetary effects.
This article analyzes the monetary effects of the
two recent changes in the official price of gold. As
will be shown, a change in the price at which the
United States does not buy or sell gold can have an
influence on aggregate demand in the economy, and
does have implications for the level of the national
debt.
Before beginning the analysis, it should be empha­
sized that this article is concerned only with the mone­
tary effects of changing the official price of the gold
held by the United States. Dining the last five years
the market price of gold has changed daily and has
been much higher than the official gold price.1 Also,
the change in the dollar value of the U. S. gold stock
1In March 1968, the United States and major European gov­
ernments agreed to discontinue intervention in the private
gold market to stabilize the price of gold. In effect, this deci­
sion established a so-called “two-tier” system under which
central banks agreed to buy and sell gold only at the official
price of $35 an ounce. The two-tier system separated the
official price of gold for transactions among central banks
from the market-determined price. In August 1971, the Presi­
dent announced that temporarily the United States would no
longer redeem dollars for gold. Finally in November 1973,
the United States along with six European countries agreed to
abandon the two-tier gold system. According to Arthur Bums,
Chairman of the Board of Governors of the Federal Reserve
System, at a press conference held on November 13, “the
practical upshot of all this is, that from the standpoint of the
American Government, the U.S. may henceforth sell gold
from its stockpile but the U.S. Government will not buy gold
either from other central banks or from the market, in
present circumstances and in foreseeable circumstances.”

Page 2


on the two occasions discussed in this article resulted
solely from official revaluation of the gold stock, not
from changes in the amount of gold owned by the
United States. In the analysis that follows, it is as­
sumed that the Federal Government did not alter
its spending plans as a result of the changed official
price of gold.
In this article the term “gold stock” will refer to the
“monetary” or “Treasury” gold stock of the United
States. The Treasury gold stock consists of monetized
gold (gold against which gold certificates have been
issued to the Federal Reserve Banks) plus nonmone­
tized gold (gold against which no gold certificates
have been issued). The Treasury gold stock differs
from the total gold stock of the United States. The
total gold stock also includes gold in the Exchange
Stabilization Fund, a Treasury account that has been
used for stabilization operations in foreign exchange
markets and for official purchases and sales of gold.
Both the Treasury and the total gold stock exclude the
U.S. gold subscription to the International Monetary
Fund.2
First, Treasury actions subsequent to the two recent
changes in the official dollar price of gold are ex­
amined; then Federal Reserve actions and the mone­
tary consequences of the combined Treasury and Fed­
eral Reserve actions are discussed; and finally the
effects of Treasury and Federal Reserve actions on the
national debt are analyzed.

Treasury Actions
Given an increase in the official dollar value of the
gold stock, the Treasury may decide to hold the in­
creased value of its assets as more “cash,” in which
case, there is no effect on bank reserves or the mone­
tary base. On the other hand, the Treasury may de2Federal Reserve Bank of New York, Glossary: Weekly Fed­
eral Reserve Statements, “Factors Affecting Bank Reserves”
(September 1972), pp. 19 and 20.

JANUARY 1974

FEDERAL RESERVE BANK OF ST. LOUIS

T a b le I

SOURCES OF THE MONETARY BASE
I. Factors S u p p ly in g
Fed eral

M o n e ta r y B ase

Reserve

h o ld in g s

of

G o ve rn m e n t

secu rities1

monetary base. Since the $800 million increase in the
dollar value of the gold stock was absorbed into
Treasury cash holdings,6 there was no net increase in
monetary base which would have provided more bank
reserves to support additional private deposits.

L oans
Fed e ral Reserve float
G o ld stock p lus S p e cia l D ra w in g R igh ts certificate account^
T re asu ry currency o u tsta n d in g
O th e r Federal Reserve asse ts
II. Factors A b s o r b in g

M o n e ta r y B ase

T re a su ry cash h o ld in g s
D e p o sits with Fed eral Reserve B a n k s
T re asu ry
Foreign
O th e r2
O th e r Fed eral

Reserve lia b ilitie s a n d

capital

On May 15, 1972, the Treasury took steps to mone­
tize the increased value of the gold stock. This oc­
curred as follows: the Treasury issued to the Federal
Reserve Banks gold certificates equal to the increased
official dollar value of the gold stock and, in return,
the Treasury received from the Federal Reserve an
increase of an equal amount in its deposits at the Fed­
eral Reserve Banks. These results are shown in Illus­
tration I.

III. Reserve A d justm en ts3
IV. M o n e t a r y B a se

( I— II + 111)

Illu stra tio n

I

Monetization of Gold
includ es acceptances held.
*On January 1, 1970, the United States received an initial alloca­
tion of $866.9 million of Special Drawing Rights (SD Rs) from
the International Monetary Fund. The Treasury, through its E x ­
change Stabilization Fund, monetized $400 million of this allocation
within a few months. In monetizing, the Treasury issued $400
million of SDRs to the Federal Reserve Banks and in return re­
ceived an equal credit, initially, to its Exchange Stabilization Fund
at the New York Federal Reserve Bank which is included in
other deposits.
3Computed by this Bank. I t includes the effects of reserve require­
ment changes and shifts in deposits where different reserve re­
quirements apply.

cide to “monetize” the increased dollar value of the
gold stock. In this case the Treasury engages in trans­
actions with the Federal Reserve Banks.
May 1972 C hange in the Official Price o f G old —In
early May 1972 Congress approved an 8.6 percent in­
crease in the official price of gold from $35 an ounce
to $38 an ounce. As a result, the official dollar value
of Treasury gold holdings rose by about $800 million.3
Initially, in the accounts of the monetary authorities,
Treasury cash holdings, which include nonmonetized
gold, also rose by $800 million, the amount of the in­
crease in the official dollar value of the Treasury gold
stock.
An increase in the gold stock is a factor that in­
creases the monetary base, as shown in Table I.4
Increases in Treasury cash holdings decrease the
3The actual change in the official value of the Treasury gold
stock was $822 million. For expositional ease, this figure is
rounded to $800 million. As a result of the change in the
official price of gold, total reserve assets of the United States
rose by $1,016 million on May 8, 1972; this consisted of $822
million Treasury gold stock, $6 million in gold holdings in
the Exchange Stabilization Fund, $33 million in the reserve
position at the International Monetary Fund, and $155 million
in SDRs.
4For a discussion of the monetary base, see Leonall C. Ander­
sen and Jerry L. Jordan, “The Monetary Base —Explanation
and Analytical Use,” this Review (August 1968).



T re a su ry
L iab ilities

A sse ts
+ $ 8 0 0 m illion T re a su ry
d e p o sits at Fed eral Reserve
Federal
A sse ts
+ $ 8 0 0 m illion g o ld
certificates

+ $ 8 0 0 m illion g o ld
certificates
Reserve
Liabilities
+ $ 8 0 0 m illion T re a su ry
d ep o sits

The Treasury does not buy goods and services di­
rectly with gold. The Treasury disburses its payments
for goods and services from its accounts at the Federal
Reserve Banks. Hence, the Treasury converted the in­
creased dollar value of gold, a non-spendable item, in­
to a spendable item, deposits at the Federal Reserve
Banks. Meanwhile, the increased value of the gold
stock became a 100 percent backing for the gold cer­
tificates which the Treasury issued to the Federal
Reserve.
Referring back to Table I, it can be seen that the
monetary base would still be unchanged. The expan­
sionary effect on the base of a decrease in Treasury
cash holdings was offset by the contractionary effect
of an increase in Treasury deposits at the Federal
Reserve Banks. The amount of base money held by
the public and the commercial banks was still un­
changed.
5Treasury cash holdings represent the funds that the Treasury
technically has at its disposal without drawing on its deposits
at the Federal Reserve or Tax and Loan accounts at com­
mercial banks. This account includes any currency and coin
held by the Treasury in its own vaults plus nonmonetized
gold and silver bullion, silver dollars, ana nonsilver coinage
metal. Federal Reserve Bank of New York, Glossary: Weekly
Federal Reserve Statements, “Factors Affecting Bank Re­
serves” (September 1972), p. 20.
Page 3

FEDERAL RESERVE BANK OF ST. LOUIS

The monetary base expanded only as the Treasury
subsequently used its newly acquired $800 million to
pay for goods and services. In the week ended May 17,
Treasury deposits at the Federal Reserve Banks de­
creased by over $800 million. The effects of these
transactions are shown in Illustration II. As the Treas­
ury bought goods and services from the private sector
of the economy, there was an increase in demand de­
posits of the public at commercial banks. Reserves of
commercial banks (member bank deposits at the Fed­
eral Reserve Banks) increased as deposits of the
Treasury at the Federal Reserve Banks decreased. Re­
ferring again to Table I, on the sources side of the
monetary base, Treasury deposits decreased, and
therefore the previously increased dollar value of the
gold stock resulted in an equal rise in the monetary
base, other factors remaining constant.

JANUARY 1974

Illu stra tio n

II

Treasury Purchases Goods and Services
T re a su ry
A sse ts

L iab ilities

— $ 8 0 0 m illion
T re a su ry d ep o sits

no change

+ $ 8 0 0 m illion g o o d s
a n d services
Federal

Reserve

A sse ts

Liabilities
— $ 8 0 0 m illion
T re a su ry d e p o sits

no change

+ $ 8 0 0 m illion
m em ber b a n k d e p o sits
Banks
A sse ts

Liabilities

+ $ 8 0 0 m illion reserves

+ $ 8 0 0 m illion d e m a n d
d e p o sits o f p ub lic

October 1973 Change in the Official Price of Gold
— In the week ended October 24, 1973, following
Congressional approval, the official dollar price of
gold was again increased, this time by slightly over 11
percent. The Treasury gold stock, which had been
officially valued at about $10.4 billion in the previous
week, was now valued, with the new official price
of gold, at about $11.6 billion. The official dollar value
of the gold stock rose by about $1.2 billion.8
The U.S. Treasury again, as in May 1972, had a
choice of actions — either neutralize the effect on the
monetary system of this increase in the dollar price of
gold or monetize the $1.2 billion and use it to pay for
goods and services, hence increasing bank reserves
by this amount.
In the week ended October 24, 1973 the dollar
value of the gold stock rose by about $1.2 billion, and
Treasury cash holdings also increased by $1.2 billion.
At this point there was no net effect on the monetary
base. On October 25 the Treasury issued gold certifi­
cates to the Federal Reserve Banks and Treasury
deposits at Federal Reserve Banks increased $1.2
billion. Thus the increase in the official value of the
gold stock was monetized, or, in other words, was
available for the Treasury to use to pay for goods and
services produced by the private sector.
So far, there still had been no net effect on the
monetary base. Then, over the three-week period
6As a result of the change in the official price of gold, total
reserve assets of the U.S. rose by $1,436 million on October
18, 1973. The total increase consisted of the following: $1,157
million Treasury gold stock, $8 million in gold holdings in the
Exchange Stabilization Fund, $54 million in reserve position
at the International Monetary Fund, and $217 million in
SDRs.

Page 4


Public
A sse ts
+ $ 8 0 0 m illion
d e m a n d d e p o sits

L iab ilities
no change

— $ 8 0 0 m illion g o o d s
a n d services

from October 24 through November 14, as the Treas­
ury made payments, Treasury deposits at the Federal
Reserve decreased by $1.2 billion, and deposits of the
public, the monetary base, and bank reserves were
increased by $1.2 billion (assuming other factors af­
fecting reserves and deposits were unchanged).

Federal Reserve Response to the Monetization
of Gold
The analysis of the effect of the change in the offi­
cial price of gold has proceeded up to this point with
the assumption that Federal Reserve actions did not
offset the expanding effects of the Treasury’s actions
on the monetary base. By altering its holdings of
Government securities, the Federal Reserve can offset
any other factors operating to change the monetary
base.
The following analysis is not intended to ascribe
any policy intent to Federal Reserve actions. The anal­
ysis is only concerned with whether Federal Reserve
open market actions, regardless of the reason for
which they were conducted, offset the effects of the
monetization of gold and subsequent Treasury actions
on the monetary base.
Following the May 1972 change in the official price
of gold and the subsequent actions by the Treasury,
initially the monetary base rose by $800 million. The

FEDERAL RESERVE BANK OF ST. LOUIS

$800 million effect on the monetary base was not off­
set by Federal Reserve sales of Government securities.
From the week ended May 10 through the week
ended May 31, 1972, the Federal Reserve’s average
holdings of Government securities remained un­
changed.
The private sector had exchanged $800 million of
goods and services for $800 million of noninterestbearing debt (monetary base) of the monetary au­
thorities (assuming other factors affecting the supply
of base were unaffected by the transactions following
the change in the official price of gold). In the process
by which commercial banks adjusted their portfolios
to the increased amount of monetary base, the money
stock expanded by a multiple of the increase in the
monetary base. Given the prevailing value of the
money multiplier, an increase of about $800 million in
the monetary base supported about a $2 billion higher
level of the money stock.
The Treasury was able to pay for $800 million of
goods and services without using tax revenues or put­
ting additional upward pressures on market interest
rates by increasing the stock of Government securities
held by the public. However, this does not mean that
the Government sector was able to acquire goods
without any effects on the real disposable income of
consumers. Since the effect on the monetary base was
not offset by Federal Reserve actions, there was a re­
sulting expansion of the money stock, an expansion
of total demand, and ultimately upward pressures on
prices.
Following the October 1973 monetization of gold,
the expansionary effect on the monetary base of the
subsequent Treasury actions was offset by Federal
Reserve sales of Government securities. From the
week ended October 24 through the week ended
November 14, the Federal Reserve reduced its aver­
age holdings of Government securities by about $1.2
billion, an amount equal to the increased dollar value
of the gold stock.
The complete process by which Federal Reserve
actions offset the effect of the monetization of gold
is shown in Illustration III. In the first stage, gold
certificates held by Federal Reserve Banks and Treas­
ury deposits at the Federal Reserve Banks both rose
by an equal amount. In the second stage, the Treas­
ury paid the public for goods and services by writing
checks on its accounts at Federal Reserve Banks. De­
mand deposits of the public rose, demand deposits of
the Treasury at the Federal Reserve Banks fell, and
bank reserves rose.



JANUARY 1974

In the third stage, the rise in bank reserves was
offset as the Federal Reserve sold securities to the
public. U.S. Government securities held by the public
rose and, as they paid for these securities, demand de­
posits of the public fell and bank reserves contracted.
The final result is also shown in Illustration III. The
public had exchanged goods for interest-bearing
Government debt. The monetary base was unchanged
and the money stock was either unchanged or some­
what higher, depending upon the interest rate effects
necessary to induce the public to hold a larger stock
of interest-bearing Government debt.
Federal Reserve open market operations offset the
effect of the Treasury actions on the monetary base
and hence nullified the possible multiple expansion
of the money stock. However, the stock of Govern­
ment securities held by the public was increased as a
result of the Federal Reserve open market sales.

The Effect of Monetization of Gold on the
National Debt
For the operations of the Treasury, one of the main
effects of the two increases in the dollar value of the
gold stock was that the Treasury now had an alter­
native means, in addition to using tax revenues or the
proceeds from the sale of Government securities, to
finance its planned expenditures. By monetizing the
increased dollar value of the gold stock the Treasury
was able to pay for $800 million of goods in the spring
of 1972 and $1.2 billion of goods in the fall of 1973
without using tax revenues or issuing more Govern­
ment securities, and hence increasing the amount of
Federal debt subject to the statutory debt limit set
by Congress. This result holds regardless of whether
Federal Reserve actions offset the effects of the Treas­
ury actions on the monetary base.
In the case where the Federal Reserve did not sell
Government securities to the private sector as the
Treasury bought goods and services from the private
sector, as appears to be the case after the May 1972
gold price change, the amount of noninterest-bearing
Government debt (monetary base) held by the pri­
vate sector increased. There was no increase in the
amount of interest-bearing debt (Government secu­
rities) held by the private sector, as would have been
the case if the Treasury had financed its $800 million
expenditure through proceeds obtained by selling
Government securities to the private sector. Hence,
the amount of outstanding Government debt subject
to the national debt ceiling was less than it other­
wise would have been for the same amount of Govern­
ment expenditures.
Page 5

Page 6

Illu stra tio n

III

MONETIZATION OF GOLD — OCTOBER 1973
( D o lla r A m o u n ts

STAGE I — GOLD REVALUATION
IS MONETIZED

STAGE II — TREASURY DISBURSES
MONETIZED FUNDS

L ia b ilitie s

T re a su ry d e p o sits
at Fed eral Reserve
$ + 1 .2

G o ld certificates
$ + 1 .2

T R EA SU R Y

T R EA SU R Y
L iab ilities

A sse ts

FINAL RESULT

STAGE III — FEDERAL RESERVE
OFFSETS EXPANSIONARY
TREASURY ACTIONS

T R E A SU R Y

TREASU RY
A ss e ts

in B illio n s)

A sse ts

T re asu ry d ep o sits
at Federal Reserve
$ — 1.2

L iab ilities

A sse ts

Liabilities

[ G o o d s a n d services]
$ + 1 .2

N o Change

G o ld certificates
$ + 1 .2

[ G o o d s a n d services]
$ + 1 .2

F ED ER A L
A ss e ts

R ESER V E
L ia b ilitie s

F ED ER A L
A sse ts

RESERVE
Lia b ilities
T re asu ry d e p o sits
$ — 1.2

T re a su ry d e p o sits
$ + 1 .2

G o ld certificates
$ + 1 .2

M e m b e r b a n k d ep o sits
$ + 1 .2

B A M KS
A sse ts

Change

L iab ilities

M em ber bank
d ep o sits at
Federal Reserve
$ + 1 .2

D em and d e p o sits
o f p ub lic
$ + 1.2

Change

M O N E T / ^RY B A S E
S o u rc e s
U se s
G o ld stock
$ + 1.2
T re a su ry d e p o sits
at Fed eral Reserve
$ (— ) 1 -2 *

A sse ts

D ep osits
at Federal Reserve

$—

Liabilities

A sse ts

D e m a n d d e p o sits
o f p ublic

$— 1. 2

A sse ts

D e m an d d ep o sits
$ + 1 .2
[ G o o d s a n d services]
$ — 1.2

U. S. G o ve rn m e n t
securities

T re asu ry d ep o sits
at Federal Reserve
$< + ) ! . 2 *

G o ld certificates
$ + 1 .2
U. S. G o ve rn m e n t
securities
$ — 1.2

N o Change

1. 2

P U B LIC

P U B LIC
L iab ilities

L iab ilities

U ses
M e m be r bank
d e p o sits at
Federal Reserve
$ + 1.2

M O NETARY
Sou rces
Fed eral Reserve
h o ld in g s of
G o ve rn m e n t securities
$ — 1.2

Liabilities

A sse ts
U. S. G o ve rn m e n t
securities
$ + 1 .2
[ G o o d s a n d services]
$ — 1.2

$ + 1.2

BA SE

RESER VE
Liabilities

BANKS
L iab ilities

A sse ts

D e m a n d d e p o sits
$ — 1.2

M ONETARY
Sources

1.2

1.2

P U B LIC
L iab ilitie s

No

$—

$—

FED ER A L
A sse ts

BANKS

A sse ts

P U B L IC
A ss e t s

M e m b e r b a n k d ep o sits

U. S. G o ve rn m e n t
securities

BANKS
L iab ilitie s

No

F ED ER A L RESER VE
A sse ts
L iab ilities

BASE
U ses
M em ber bank
d ep o sits at
Federal Reserve
$ — 1.2

signs on these entries reflect the impact on the monetary base, not the direction of change in those entries. See Table I for further explanation.
Digitized for♦The
FRASER


M ONETARY
Sou rces

B A SE

N o Change

U se s

FEDERAL RESERVE BANK OF ST. LOUIS

In the case where the Federal Reserve engaged in
open market operations and sold Government secu­
rities as the Treasury disbursed the funds it acquired
from monetizing gold, the national debt was also less
than if the Treasury had financed its purchases by
selling securities to the private sector. This situation
occurred in the fall of 1973 and was shown in Illustra­
tion III. Federal Reserve sales of Government securi­
ties offset the influence of Treasury actions on the
monetary base. The stock of Government securities
held by the Federal Reserve Banks fell and the stock
of Government securities held by the private sector
rose by an equal amount. Government securities held
by the Federal Reserve Banks are also counted in the
Federal debt subject to the debt ceiling. Therefore,
on balance, there was no additional upward pressure
on the national debt ceiling.
Whenever the Treasury finances its expenditures by
selling Government securities to the private sector,
then clearly the net nominal interest cost to the
Treasury rises. When the Treasury finances its expen­
ditures through monetization of gold, the effect on
the net interest cost to the Treasury depends upon
subsequent Federal Reserve actions. Net interest pay­
ments made by the Treasury are affected by whether
Federal Reserve actions offset the monetary effects of
Treasury actions following the changed dollar value
of the gold stock.
To understand the effects on the net interest cost
to the Treasury it is necessary to understand that the
proportion of the national debt held by the Federal
Reserve Banks affects the net interest cost to the
Treasury. Interest earned by the Federal Reserve
Banks on their holdings of Government securities, ex­
cept for a small percentage used for operating ex­
penses, is returned to the Treasury.7
Hence, as the proportion held by the Federal Re­
serve of the total outstanding stock of Government
securities rises, the net interest cost to the Treasury
falls. Essentially, the Treasury makes interest pay­
ments to the Federal Reserve on the Government
7The Federal Reserve System returned to the Treasury an
average of 89 percent of current earnings during the past
five years. For an example, see “Earnings and Expenses of
the Federal Reserve Banks in 1972,” Federal Reserve Bul­
letin, January 1973, pp. 35 and 36.




JANUARY

1974

securities it holds, just as to any other holder of Gov­
ernment securities. Then, the Federal Reserve trans­
fers most of the interest payments back to the
Treasury. For all practical purposes, the amount of
Government securities held by the Federal Reserve
represents interest free debt to the Treasury. Therefore,
when the Federal Reserve sells Government securities
to the private sector, net interest costs of the Treasury
rise. The Treasury must then make interest payments
to the private holders of its securities, and the inter­
est payments are not directly returned to the
Treasury.
When net interest costs to the Treasury rise this
means that Treasury financing requirements also rise
to meet the increased net interest payments. There­
fore, the Treasury must seek to have Congress raise
taxes or must issue more Government securities with
the attendant upward pressures on market interest
rates.
During the most recent monetization of gold, as
discussed earlier, Federal Reserve holdings of Gov­
ernment securities decreased by about the same
amount as Treasury actions subsequent to the mone­
tization of gold added to the monetary base. Govern­
ment securities held by the private sector rose by
about $1.2 billion, just as they would have if the
Treasury had issued securities to finance its expend­
itures. Hence, the net interest cost to the Treasury
increased by the same amount as if the Treasury had
financed the purchases by sale of securities, although
the total Government debt subject to the debt ceiling
remained unchanged.
However, during the May 1972 monetization of
gold, there was no decrease in Federal Reserve hold­
ings of Government securities. In this case, the private
sector’s holdings of noninterest-bearing Government
debt was increased. Hence, not only was the amount
of Government securities subject to the national debt
ceiling lower, but, also, the net interest cost to the
Treasury was reduced from what it would have been
if the Treasury had financed its expenditures by sell­
ing Government securities. As stated earlier, however,
this process, unless offset, results in an increase in the
money stock and, ultimately, an acceleration in the
rate of inflation.

Page 7

Monetary and Fiscal Actions
in Macroeconomic Models*
by KEITH M. CARLSON

C o n t r o v e r s y persists in macroeconomics. This
statement sounds trite and almost immediately
prompts the response, “What else is new?” With ref­
erence to the “monetarist-fiscalist” controversy, this
disinterested attitude is probably on the rise. Professor
James Tobin, for example, has written:
“If the monetarists and the neo-Keynesians could
agree as to which values of which parameters in
which behavior relations imply which policy conclu­
sions, then they could concentrate on the evidence
regarding the values of those parameters.”1

In other words, if there were agreement on a common
theoretical apparatus, the controversy about relative
roles of monetary and fiscal policies could be reduced
to an econometric debate about empirical magnitudes.
There are many who believe that the monetaristfiscalist debate centers on empirical questions. For
example, Professor Milton Friedman indicated his
“belief that the basic differences among economists
are empirical, not theoretical.”2 But Professor Tobin
is not willing to accept this characterization of the
debate. In fact, Tobin expresses disappointment in
Friedman’s theoretical framework, citing several cases
where Friedman displays inconsistency with his ear­
lier works.3
“This paper is essentially unchanged from its original form as
prepared for the Fourth Annual Konstanzer Conference on
Monetary Theory and Policy, Konstanz, West Germany,
June 1973. Though not fully reflected in this paper, I since
have benefited from comments by Professors John Pippinger,
Ronald Sutherland, and Jai-Hoon Yang.
1James Tobin, “Friedman’s Theoretical Framework,” Journal
of Political Economy (September/October 1972), p. 852.
2Milton Friedman, “A Theoretical Framework for Monetary
Analysis,” Journal of Political Economy (March/April 1970),
p. 234. Many other examples could be cited suggesting that
this view is common in the profession. Typical is the follow­
ing statement by Professor Crouch [Robert L. Crouch, Macro­
economics (New York: Harcourt Brace Jovanovich, 1972),
p. viii]: “. . . macroeconomists are separated only by the
assumptions they make concerning price flexibility, money
illusion, expectations, and distribution effects. Therefore, to
the extent that macroeconomists are divided into factions,
they are divided over empirical questions and not the
theory.”
3Tobin, “Friedman’s Theoretical Framework.”



Since there is confusion as to the nature of the
monetarist-fiscalist controversy, it is not surprising that
the debate persists. Until there is at least agreement
as to the nature of the controversy, we cannot expect
much progress toward resolving the central issues.4
Professor Karl Brunner has grouped the central is­
sues of macroeconomics under four topics: the nature
of the transmission mechanism, the inherent stability
of the economic system, the nature of impulses gen­
erating economic income fluctuations, and the ap­
proximate separation of allocative and aggregative
forces.5
The focus of this paper is on the monetarist-fiscalist
controversy primarily as it relates to (1 ) the nature of
policy impulses and the business cycle and (2 ) the
nature of the transmission mechanism. As background,
the historical development of the controversy is
traced, albeit cursorily. Next, the current nature of
the controversy is examined in greater detail and the
Brunner-Meltzer view of the transmission mechanism
is discussed in juxtaposition with the well-known
Hicksian model. Alternative views of the transmission
mechanism can provide some insights into the issues
relevant to the monetarist-fiscalist controversy.
4Several articles have appeared since this paper was first drafted
which have attempted to identify the issues in the contro­
versy. One is Axel Leijonhufvud, “Effective Demand Fail­
ures,” Swedish Journal of Economics (March 1973), pp. 2748, where he argues that the central issue concerns the selfregulatory capabilities of market systems. Another is Robert
H. Rasche, “A Comparative Static Analysis of Some Mone­
tarist Propositions,” this Review (December 1973), pp. 15-23,
where he suggests that the issues revolve on the assumptions
about price perceptions by economic units. Professor Rasche
concludes that the debate over the relative stability of mone­
tary velocity vs. the autonomous expenditure multiplier has
been misdirected. Also see Leonall C. Andersen, “The State
of the Monetarist Debate,” and the accompanying commentary
by Lawrence R. Klein and Karl Brunner, this Review (Sep­
tember 1973), pp. 2-14. Important earlier surveys of the issues
are Karl Brunner, “A Survey of Selected Issues in Monetary
Theory,” Schweizerische Zeitschrift fur Volkswirtschaft und
Statistikl (Winter 1971), pp. 1-146, and David I. Fand, “Some
Issues in Monetary Economics,” this Review (January 1970),
pp. 10-27.
5See Karl Brunner’s review of Bert G. Hickman, ed., Econ­
ometric Models of Cyclical Behavior, Journal of Econo­
metric Literature (September 1973), pp. 927-33, and “A Sur­
vey of Selected Issues in Monetary Theory.”

FEDERAL RESERVE BANK OF ST. LOUIS

DEVELOPMENT OF THE
CONTROVERSY: AN OVERVIEW
Development of the controversy between mone­
tarists and fiscalists during the post-World War II
period is divided into four periods.6 Though these
periods are not precise and well defined, it is useful
to associate evolving opinions and beliefs with the
passage of time. Central to the discussion is the inter­
play of economic experience with economic thinking.
Specific economic episodes are capable of having
pronounced effects on prevailing macroeconomic
thought which rival in importance the effects of care­
fully prepared theoretical analyses or detailed econo­
metric studies.

Pre-1961
The post-World War II period prior to 1961 can be
characterized as the period marking the development
of the Keynesian orthodoxy. This orthodoxy centers
on the income-expenditure model as the basic analyt­
ical framework of macroeconomic analysis.7 That is,
the “C + I + G” approach tended to dominate
macroeconomic thinking, and paralleled closely the
development of the national income accounts.

JANUARY

1974

that of convincing policymakers that there were other
goals besides balancing the Federal budget. The rea­
sons underlying this lack of interplay between policy
and economic thought can be traced to the state of
development of economic information at the time and
the relatively undeveloped means of processing what
information was available. Inability to monitor closely
economic conditions contributed to a division between
economic thought and policy.
The development of macroeconomic thought prior
to 1961 was decidedly Keynesian in the “C + 1 + G”
sense, with little emphasis on monetary policy. The
notion of compensatory fiscal policy became a fixture
in textbooks long before it was considered at all seri­
ously by policymakers. About the only dissenting
voices during this period were those of Clark Warburton and Milton Friedman.9 Insofar as the Keyne­
sian model and the ascending role for fiscal policy was
concerned, this dissenting challenge was not a serious
one. Even though the Warburton-Friedman challenge
was strongly supported with statistical evidence, the
developing Keynesian orthodoxy was not about to
backstep to an analysis with classical underpinnings.

1961 to 1966

This school of macroeconomic thought developed
quite independently of economic experience. For ex­
ample, during the middle and late 1950s economic
policy involved very little experimentation in efforts
to achieve the goals of the Employment Act of 1946.
As a result, there were few direct tests of macroeconomic propositions on the economic policy front.
As near as economists could tell, monetary and fiscal
policies were being conducted on the basis of certain
established patterns of behavior, with little interplay
between economists and policymakers.8 One of the
great “missions” of macroeconomists seemed to be

The year 1961 is chosen as the beginning of the next
era in macroeconomic thinking primarily because of
two significant developments — one dealing with eco­
nomic policy and the other with a controversial con­
tribution to the economic literature. The policy de­
velopment was the formation of the “Heller Council,”
and the “sale” of the Keynesian model to Congress
and the public.10 A significant development in the
literature was the publication of a study on quantity
theory vs. Keynesian theory for the Commission on
Money and Credit by Professors Friedman and
Meiselman.11

6For a very readable summary of the development of the con­
troversy, see A. James Meigs, Money Matters: Economics,
Markets, Politics (New York: Harper and Row, 1972), esp.
part 4. See also Beryl W. Sprinkel, Money and Markets: A
Monetarist View (Homewood, Illinois: Irwin, 1971), esp.
pp. 1-17.
7The Keynesian orthodoxy, or tradition, is defined in the sense
of Axel Leijonhufvud, On Keynesian Economics and the E co­
nomics of Keynes (New York: Oxford University Press, 1968).
In contrast to Leijonhufvud, whose book focuses on specific
theoretical issues, the purpose of this section of the paper is
to discuss the interplay between economic pohcy experience
and macroeconomic thought in a very general way.
8For discussion of the role of the economist in the evolution of
economic policy in the post-World War II period up to 1961,
see Herbert Stein, The Fiscal Revolution in America (Chi­
cago: University of Chicago Press, 1969), pp. 197-371. See
also Hugh S. Norton, The Role of the Economist in Gov­
ernment: A Study of Economic Advice Since 1920 (Berkeley:
McCutchan Publishing Corporation, 1969).

9The most relevant contributions can be found in Milton
Friedman, The Optimum Quantity of Money and Other Es­
says (Chicago: Aldine Publishing Company, 1969) and
Clark Warburton, Depression, Inflation and Monetary Pol­
icies, Selected Papers 1945-53 (Baltimore: Johns Hopkins
University Press, 1969). There were, of course, others who
questioned developing trends in macroeconomic theory during
this period.
10See Stein, The Fiscal Revolution, pp. 372-453. The state of
prevailing opinion among macroeconomists as of 1961 is
probably best summarized in U.S. Congress, Joint Economic
Committee, Current Economic Situation and Short-Run Out­
look Hearings, 86th Congress, 2nd Session (December 1960),
and January 1961 Economic Report of the President and
the Economic Situation and Outlook: Hearings, 87th Con­
gress, 1st Session (1961).
n Milton Friedman and David Meiselman, “The Relative Sta­
bility of Monetary Velocity and the Investment Multi­
plier in the United States, 1897-1958,” in Commission on




Page 9

FEDERAL RESERVE BANK OF ST. LOUIS

With reference to applied Keynesian economics, the
record and contributions of Professor Walter Heller
and his colleagues are familiar.12 The notion of “fiscal
drag” was developed and eventually Congress was
sold on the need for a tax cut to eliminate this
“drag.” There were few dissenting views within the
economics profession during this period of applied
Keynesianism. Almost all maoroeconomists felt the
time was ripe for stimulative policy, and recommenda­
tions for expansionary fiscal policy assumed “matterof-factly” that monetary policy was to be accommoda­
tive, maintaining stable money market conditions
when the Federal Government required funds to
finance the deficit.13
The 1964 tax cut was considered an unqualified
success by most analysts at that time, and the stabili­
zation potential of fiscal policy was enhanced by the
acceleration of depreciation allowances and the im­
plementation of an investment tax credit, both in
1962.14 In fact, by late 1965 the faith in fiscal policy
was apparently so strong that it was felt that any
significant move toward restraint could be postponed
until the last possible moment so as to get maximum
advances in output before turning to the problem of
checking inflation.15
The other development, the Friedman-Meiselman
(F-M ) study, was creating substantial discussion in
academic circles during the 1961 to 1966 period.16
The F-M study represented a statistical challenge to
the Keynesian orthodoxy. The F-M study really did
not present evidence which was inconsistent with
Keynesian theory, but, rather, the statistical evidence
was presented as also being consistent with quantity
theory.
Money and Credit, Stabilization Policies (Englewood Cliffs,
N.J.: Prentice-Hall, Inc. 1963), pp. 165-266.
12For an informative accounting of the accomplishments of the
Heller Council, see Walter W. Heller, New Dimensions of
Political Economy (Cambridge, Mass.: Harvard University
Press, 1966).
13See any of the Annual Reports of the Council of Economic
Advisers from 1962 through 1966.
14For an example of one of the few dissenting views at that
time, see Allan H. Meltzer, “The Money Managers and the
Boom,” Challenge (March/April 1966), pp. 5-7.
15The following quotation is typical: “Consultations between
the Federal Reserve and the Administration continue, help­
ing to assure that monetary and fiscal policy together will
provide appropriately for sustained and balanced expansion.
Both are keenly aware of uncertainty in the outlook and
are prepared to respond to emerging developments.” The
Annual Report of the Council o f Economic Advisers (Wash­
ington: U.S. Government Printing Office, 1966), p. 60.
16For the relevant references, see Ronald L. Teigen, “A Crit­
ical Look at Monetarist Economics,” this Review (January
1972), pp. 10-25.

Page 10


JANUARY

1974

The F-M study prompted a reaction in defense of
the Keynesian model, as well as a challenge to the
methodology of the F-M study. In general, after the
smoke had cleared and scores of words had appeared,
both sides emerged believing they had won.17 And
until 1965 or 1966, Keynesian supporters could cite
apparent successes in applied Keynesianism as addi­
tional evidence buttressing their position.
Late 1965 could be characterized as a low point for
quantity theorists, or more generally for anyone who
believed in the potency of monetary actions.18 It was
not that economic conditions were inconsistent with
the tenets of the quantity theory, but rather that fiscal
policy appeared to be so successful that monetary
policy was cast in a minor supporting role. For ex­
ample, the 1966 article by Professor Allan Meltzer
challenged the success of the 1964 tax cut, but there
is no evidence in the literature indicating that Meltzer’s challenge was taken seriously.

1966-1968
This brief period is noted primarily because of
economic events and not the development of eco­
nomic literature.19 Late 1965 and early 1966 marked
a significant shift in economic policy. Fiscal policy was
stimulative in late 1965. In faot, there was an overt
move toward stimulus with an excise tax cut as well as
an unplanned stimulus from Vietnam War expendi­
tures. As the fiscal stimulus continued and tjie econ­
omy approached capacity, the Federal Reserve moved
independendy, announcing a policy of restraint and
increasing the discount rate in December 1965. Mon­
etary restraint became effective by spring 1966 when
growth in the money stock came to a halt. The result
of this combination of stimulative fiscal actions and
restrictive monetary actions is well known; in late
1966 the economy slipped into a mini-recession.
17For example, in Teigen, “A Critical Look,” p. 10, says, “The
empirical evidence presented in support of this quantity
theory’ viewpoint was subjected to criticism so severe that
the evidence has never been taken very seriously.”
18Note the following statement from Heller, New Dimensions,
p. 9: “The basic structure of the Keynesian theory of in­
come and employment —and even the basic strategies of
Hansenian policy for stable full employment —are now the
village common of the economics community. When Milton
Friedman, the chief guardian of the laissez-faire tradition
in American economics, said not long ago, ‘We are all Key­
nesians now,’ the profession said ‘Amen.’ ”
l9Given normal publication lags, as well as recognition lags by
economists, it is probably impossible to detect any trends in
economic literature for a period as short as two or three
years. To gain insights into economic thinking on policy is­
sues during short periods, testimony before Congressional
Committees is probably the best source, rather than the
professional journals.

FEDERAL RESERVE BANK OF ST. LOUIS

Within the economics profession, but chiefly among
policymakers, the power of monetary restraint was
quickly recognized.20 In fact, out of fear of a major
recession, monetary actions turned stimulative in
early 1967. The response of the economy was very
rapid. In combination with continuing fiscal stimulus,
the turn to monetary stimulus very quickly led to a
re-emergence of inflation.
This short experience of about two years resulted
in a more eclectic view of monetary and fiscal policy
among macroeconomists. General belief in the power
of fiscal policy continued, but now monetary policy
was recognized for its potential contribution. This
experience, however, was not viewed as a defeat for
fiscal policy and the Keynesian model. Rather, the
experience suggested that the economy had moved
into the “classical range” of the LM curve — the range
in which monetary actions have their greatest potency
relative to fiscal actions.
This short period from 1966 to early 1968 can be
dubbed as the “emergence of eclecticism.” Interest in
the Friedman-Meiselman controversy waned because
that controversy implied that one of two extreme posi­
tions should be accepted. The experience of 1966 to
1968, though demonstrating a dominant role for
monetary actions, led to the general conclusion that
both monetary and fiscal policy “mattered.” The de­
velopment of the FRB-M IT model at this time was
consistent with such an eclectic position.21

JANUARY

1974

the fact, the explanation offered by the supporters of
Keynesian theory was that the surcharge was viewed
by economic units as temporary.22 The damage to
the “fiscalist position” was especially significant be­
cause it marked the first policy setback for Keyne­
sianism since its serious application began in 1961.
At about the same time that doubt was beginning
to emerge as to the effectiveness of the 1968 tax sur­
charge, the Andersen-Jordan (A -J) study was pub­
lished.23 The initial reaction by Keynesians was that
the A-J results were simply a rerun of the FriedmanMeiselman estimates, except that more sophisticated
procedures were used in estimating the lags in the
response of economic activity to monetary and fiscal
actions.24 But controversy started building up as the
success of the 1968 surcharge became more and more
suspect.
The A-J results were impressive, and to the limited
extent that Keynesians attempted to “beat” them at
their own game, the A-J results stood up remarkably
well.25 As it became difficult to counter the A-J re­
sults on statistical grounds, the “black box” notion
developed.26 That is, the old “correlation is not causa­
tion” argument appeared, and Keynesians said, “Where
is your theory?” Such criticism had been lingering
unused among the Keynesians for several years, but
the new challenge to the Keynesians provoked a re­
incarnation of the black box.
22See Teigen, “A Critical Look,” footnote 4 and the references
cited therein.

1968-1973
The final period of review begins with the imple­
mentation of the tax surcharge of 1968, which was
also accompanied by legislated controls on Federal
spending. Faith in the success of this fiscal action was
so great that monetary pohcy was shifted toward ease
to avoid “overkill.” Monetary expansion was rapid
well into 1969, and inflation accelerated. Accelerating
inflation in the face of fiscal restraint was a setback for
the advocates of fiscal pohcy. If monetary restraint
could slow the economy in 1966 in the face of fiscal
stimulus, why could not the tables be turned? After
20“In particular, the power of tight money as a tool of restraint
—as well as its uneven impact —was demonstrated beyond
any reasonable doubt.” The Annual Report o f the Council of
Economic Advisers (Washington: U.S. Government Printing
Office, 1967), p. 38.
21Frank deLeeuw and Edward M. Gramlich, “The Federal
Reserve —MIT Econometric Model,” Federal Reserve Bul­
letin (January 1968), pp. 11-40, and “The Channels of
Monetary Policy: A Further Report on the Federal Reserve
-M IT Econometric Model,” Federal Reserve Bulletin (June
1969), pp. 472-91.



23Leonall C. Andersen and Jerry L. Jordan, “Monetary and
Fiscal Actions: A Test of Their Relative Importance in
Economic Stabilization,” this Review (November 1968),
pp. 11-24.
24Frank deLeeuw and John Kalchbrenner, “Monetary and
Fiscal Actions: A Test of Their Relative Importance in Eco­
nomic Stabilization —Comment,” this Review (April 1969),
pp. 6-11.
25See E. Gerald Corrigan, “The Measurement and Importance
of Fiscal Pohcy Changes,” Federal Reserve Bank of New
York Monthly Review (June 1970), pp. 113-45. More
significant, however, were probably the corroborative studies
of Michael W. Keran. See his “Monetary and Fiscal Influ­
ences on Economic Activity —The Historical Evidence,”
this Review (November 1969), pp. 5-24, and “Monetary
and Fiscal Influences on Economic Activity: The Foreign
Experience,” this Review (February 1970), pp. 16-28. The
reader is also referred to Thomas O. Nitsch, “A Further
Adjustment in a Test of the Relative Importance of Mon­
etary and Fiscal Actions in Economic Stabilization,” Ne­
braska Journal of Economics and Business (Winter 1972),
pp. 11-24.
26See Meigs, Money Matters: Economics, Markets, Politics,
for an expanded discussion. Also see Richard G. Davis,
“How Much Does Money Matter? A Look at Some Recent
Evidence/’ Federal Reserve Bank of New York Monthly
Review (June 1969), pp. 119-31, and Edward M. Gram­
lich, “The Usefulness of Monetary and Fiscal Policy as Dis­
cretionary Stabilization Tools,” Journal of Money, Credit,
and Banking (May 1971), pp. 506-32.
Page 11

FEDERAL RESERVE BANK OF ST. LOUIS

The nature of the controversy has continued along
these lines up to the present. There have been no
periods since 1968 when monetary and fiscal actions
have moved sharply and persistently in opposite di­
rections, so direct tests of the relative potency of
monetary and fiscal actions are generally unavailable
from late 1969 to early 1973.27

RESEARCH METHODOLOGY AND
THE CONTROVERSY
Over the last five years there has been considerable
confusion as both monetarist and fiscalist factions have
been guilty of distorting the opposing faction’s model
in order to make a point. For example, the discussion
has run from “money doesn’t matter vs. money mat­
ters” to “money matters vs. money only matters,” and
recently it has been suggested that the issue is really
“fiscal matters vs. fiscal doesn’t matter.”28
Associated with the development of the monetaristfiscalist controversy has been the question of appro­
priate research methodology. The evidence in support
of monetarist propositions has been based in large
measure on a reduced-form approach to the estima­
tion and testing of statistical relationships between
monetary and fiscal variables and economic activity.
The fiscalist participants in the controversy, on the
other hand, have relied on a structural model ap­
proach to the estimation and testing of relationships
regarding the economic impact of policy variables.29
The purpose of this section is to discuss these method­
ological questions as they bear on the controversy.

Side Issues in the Debate
Several side issues have developed in the contro­
versy over the Andersen-Jordan article. The A-J study
27Sprinkel, Money and Markets: A Monetarist View, pp. 1516, indicates there were two other episodes of contrasting
policy change in 1969 and 1970, but these cases are not as
clearcut as the episodes of 1966 and 1968.
28For discussion of “money” issues see Paul Samuelson, “The
Role of Money in National Economic Policy,” in Controlling
Monetary Aggregates (Proceedings of the Monetary Con­
ference Held on Nantucket Island, Sponsored by Federal
Reserve Bank of Boston, June 8-10, 1969), pp. 7-13. For
discussion of “fiscal” issues, see Ronald L. Teigen, “Some
Observations on Monetarist Analysis,” Kredit und Kapital,
3 (1971), pp. 243-63, and Warren L. Smith, “A NeoKeynesian View of Monetary Policy,” in Controlling Mon­
etary Aggregates, pp. 105-26, and Corrigan, “Measurement
and Importance of Fiscal Policy Changes.’
29For a readable account of the distinction between statistical
estimation and hypothesis testing, which seems to be a
relevant issue underlying the reduced form vs. structural
controversy, see R. L. Basmann, “The Role of the Economic
Historian in Predictive Testing of Proffered ‘Economic
Laws,’ ” in Ralph L. Andreano, ed., The New Economic
History: Recent Papers on Methodology (New York, John
Wiley and Sons, 1970), pp. 17-42.

Page 12


JANUARY

1974

consisted of the formulation and testing of several
macroeconomic propositions. These hypotheses in­
volved various characteristics of the response of
nominal GNP to monetary and fiscal actions. The test
included direct estimation of equations with changes
in GNP as the dependent variable and measures of
monetary and fiscal actions as independent variables.
This method of testing was called the reduced form
approach.
Use of the term “reduced form” is unfortunate, be­
cause the term has an alternative meaning in applied
econometric analysis. To most of the profession, “re­
duced form” is automatically associated with a struc­
tural model, that is, a set of equations serving as a
representation of the behavior of the economic system.
Commonly accepted procedure in macroeconometric
analysis in 1968, and continuing to the present is to:
(1 ) Collect data and make point estimates of the
parameters in the structural equations;
(2 ) Assume (a ) the model is correct, (b ) the back­
ground conditions are true, and (c ) the point
estimates of the structural parameters are the
true values;
(3 ) Use data for the exogenous variables, outside
of the sample period, and generate values for
the endogenous variables;
( 4 ) Compare forecasted values of the endogenous
variables with actual values;
( 5 ) Draw conclusions about the validity of the
model on the basis of this comparison.30

The Andersen-Jordan study, on the other hand, did
not follow commonly accepted procedure in applied
econometrics. Their study reported the results of sev­
eral tests of hypotheses concerning the characteristics
of the response of GNP to monetary and fiscal actions.
They did not test a particular model depicting the
operation of the economic system. Their estimated
equations were reduced forms in that they were rela­
tionships between one endogenous variable and a
number of exogenous variables, but the form of these
equations was not derived from an explicitly stated
structural system.
30This method of evaluating an econometric model is called
the “method of forecasting test.” See James L. Murphy,
“An Appraisal of Repeated Predictive Tests on an Econo­
metric Model,” Southern Economic Journal (April 1969),
pp. 293-307, and Introductory Econometrics (Homewood,
iff.: Irwin, 1973). Basmann comments on the procedure as
follows: “The tendency of policy-oriented econometricians
has been to formulate models, to argue in a more or less
Aristotelian fashion for the plausibility of the underlying
assumptions, and to trust to the efficacy of asymptotically
efficient (viz., large-sample) methods of statistical estima­
tion to bring them somewhere near knowing the true values
of economic parameters.” [Basmann, “The Role of the
Economic Historian,” p. 161.]

FEDERAL RESERVE BANK OF ST. LOUIS

The nature of the A-J results caused considerable
confusion. At the time, there were certain notions (or
vague hypotheses) about the operation of the eco­
nomic system that prevailed among macroeconomists.
These notions were, of course, carryovers from the
Friedman-Meiselman controversy earlier in the dec­
ade. The A-J results appeared to be consistent with
the quantity theory and not consistent with the Key­
nesian theory. The “implications” of the Keynesian
theory were that fiscal actions were more powerful
than monetary actions, so the A-J results were viewed
as a challenge to the existing Keynesian orthodoxy.
In retrospect, this association of the A-J results with
tentative acceptance or rejection of particular models,
though probably inevitable, was also unfortunate.
These results set off discussions which were not rele­
vant to the issues at hand, namely, “How can we
accept your results until we see your theory?”
To isolate the issues which are relevant, consider
first the irrelevant issues. One irrelevant issue is
whether the A-J test is a test of a quantity theory vs.
a Keynesian theory. Andersen and Jordan did not
develop and test explanatory models of the mecha­
nism describing the transmission of monetary and fiscal
impulses to the economic system. The A-J tests
yielded some interesting implications for the quantity
vs. Keynesian theory question, but as presented, the
A-J article did not represent a direct test of these
alternative theories.
A second irrelevant issue is whether structural or
reduced forms are the appropriate methodology. The
terms “structural form” and “reduced form” do not
represent competing methodologies. If the model
builder is interested in describing one possible system
that is useful in forecasting and simulating economic
experience, then a structural form may be most ap­
propriate. On the other hand, if the model builder is
interested in policy recommendations or evaluations,
a theoretical inteipretation of parameters is required.
And such an interpretation requires the formulation
and testing of hypotheses; an integral part of this
procedure is the definition of regions of acceptance
and rejection in terms of the reduced form
parameters.31
It is certainly true that the A-J study did not
follow procedure that was commonly accepted at
31For extensive discussion of this alternative method of eval­
uating econometric models, which is called the “method of
predictive testing,” see Murphy, “Repeated Predictive Tests
on an Econometric Model,” and the references to Basmann’s
other works cited therein.



JANUARY

1974

the time. But this point is fundamental: the A-J
study reflected dissatisfaction with existing proce­
dures in assessing the impact of monetary and fiscal
actions. Over the years, monetary and fiscal multi­
pliers, which were derived from models assumed to be
true, had come to be accepted as approximations of
reality.32 The A-J propositions, simple as they were,
were direct tests of alternative hypotheses about the
response of the economic system to monetary and
fiscal actions.
What issues relating to the A-J study are relevant?
First, the statistical properties of the estimated equa­
tions used in the A-J study require close scrutiny. To
a considerable extent this scrutinizing has been done
by examining in detail the choice of combinations of
monetary and fiscal variables.33 Also, the “endogeneity
of money” issue is relevant to the extent that a bias is
present in the estimated coefficients. Though it
should be pointed out that the question of money
endogeneity has little to do with the formulation of
the hypothesis about monetary influence.34
A second issue that seems relevant to the discussion
is an examination of the derived reduced form mul­
tipliers for the Keynesian models in light of the di­
rectly estimated A-J multipliers. In other words, once
the estimated A-J equations have been checked out
for their statistical properties, it seems logical for the
Keynesians to develop their systems in such a way
that they could be tested as an interdependent unit,
rather than accepting point estimates of structural
parameters as a basis for calculating policy multipliers.
Rigid attachment to this method of calculating policy
multipliers has been a stumbling block to raising the
level of discussion relating to the A-J results.35 The
- For further discussion of this point, see Meigs, Money
Matters: Economics, Markets, Politics, and John Deaver,
“Monetary Model Building,” Business Economics, (Septem­
ber 1969), pp. 29-32.
33See deLeeuw and Kalchbrenner, “Monetary and Fiscal
Actions —Comment,” Davis, “How Much Does Money Mat­
ter,” and Corrigan, “Measurement and Importance of Fiscal
Policy Changes.”
34See Christopher A. Sims, “Money, Income, and Casuality,”
American Economic Review (September 1972), pp. 540-521
an interesting unpublished paper by J. W. Elliott, “The
Influence of Monetary and Fiscal Actions on Total Spend­
ing: The St. Louis Model Re-visited” (December 1972),
presents evidence supporting the notion that government
spending is “endogenous” rather than money. For further
discussion of endogenous stabilization actions, see Stephen M.
Goldfeld and Alan S. Blinder, “Some Implications of Endo­
genous Stabilization Policy,” Brookings Papers on Economic
Activity, 3(1972), pp. 585-640.
35For an example of the serious misuse and misinterpretation
of the A-J equation, the reader is referred to Franco Modig­
liani, “Monetary Policy and Consumption: Linkages via
Interest Rate and Wealth Effects in the FMP Model,”
Page 13

FEDERAL RESERVE BANK OF ST. LOUIS

Keynesian model had been used so often and so long
by macroeconomic analysts that it evolved into con­
ventional wisdom without being tested except on a
piece-meal basis.

Suggestion for Further Research
Given the confusion that has arisen in connection
with the A-J study, as well as the resulting upheaval
of emotions, what might represent an appropriate di­
rection for future research? One’ possible effort, given
the interest in the monetarist “black box,” would be
for monetarists to develop and test theories relating
to the mechanism whereby monetary and fiscal im­
pulses are transmitted to the economy. Such studies
could shed light on the meaning and significance of
the monetarist propositions.36
The following list of steps as outlined by Professor
James Murphy could serve as a guide to testing the
model, since the objective is to understand the modus
operandi of the effect of monetary and fiscal actions
rather than to replicate economic experience:
(1 ) Specify the model in structural form and formu­
late postulates about its parameters;
(2 ) Derive the reduced form parameters as func­
tions of the structural parameters;
(3 ) Derive the acceptance region for the reduced
form parameters to satisfy the identifiability
hypothesis;
( 4 ) From the structural parameters and identifi­
ability conditions, derive the acceptance region
for the model;
(5 ) Define the appropriate tests for acceptance or
rejection, then obtain estimates of the reduced
form parameters;
Consumer Spending and Monetary Policy: The Linkages
(Proceedings of a Monetary Conference Held on Nan­
tucket Island, Sponsored by Federal Reserve Bank of
Boston, June 1971), esp. pp. 59-74. Modigliani performs
what he calls a Monte Carlo experiment (1) assuming
that the solution values of the Federal Reserve-MIT-Penn
(FMP) model are a true representation of the economic
system, then (2 ) using these solution values as “data” and
running an A-J type equation. The results of this experiment
are an A-J equation of the usual type, i.e., a money mul­
tiplier equal to about 6 and a fiscal multiplier near zero.
Modigliani’s interpretation of his experiment is that reduced
forms are subject to the danger of severe bias. An alter­
native interpretation is that the experiment demonstrates
only that the FMP model is a “good” forecasting model, cap­
able of generating simulated values very close to actual
values. Until the FMP model is tested and confirmed as an
explanatory economic model, such experiments carry little
meaning.
36An example of an effort in this direction is Rasche, “Analysis
of Some Monetarist Propositions.” Though Rasche has not
tested his model, he has developed hypotheses about eco­
nomic behavior which appear to provide a basis for further
investigation of monetarist propositions. See also an unpub­
lished paper by Ronald J. Sutherland, “On The Effective­
ness of Monetary and Fiscal Actions” (November 1973).



JANUARY

1974

(6 ) Determine whether the relevant background
conditions hold, and accept or reject the
model.37

This stands as an ambitious list, and is, of course,
much easier said than done. Attempted use of this
method of predictive testing of alternative models
could shed considerable light on the monetaristfiscalist controversy, especially as it relates to the
transmission mechanism.

THE TRANSMISSION MECHANISM
AND THE CONTROVERSY
One of the more interesting issues relating to the
monetarist-fiscalist controversy is the assumed nature
of the transmission mechanism. Even though Brunner
lists the transmission mechanism as a separate issue in
macroeconomics, it seems that the transmission issue
is in a focal position so far as the controversy is con­
cerned. Clarification of the assumed nature of the
transmission mechanism can provide a better under­
standing of the other macroeconomic issues, in par­
ticular, the dominant impulse and aggregative vs.
allocative issues.

Hicksian IS-LM Models
The Hicksian IS-LM model is the fundamental ex­
pository framework for virtually everyone who works
and teaches in the field of macroeconomics.38 A basic
characteristic of this model is that the channels of
monetary influence are restricted to interest rates and
wealth. The primary channel of influence for fiscal ac­
tions, on the other hand, is via a direct effect on
income. The IS-LM model is seldom used in its sim­
plest form, but it does serve as a core model that helps
to maintain order among the thought processes of the
investigator. Its simplicity, as well as adaptability to a
large number of problems, has accounted for its al­
most universal acceptance. Continued use of the
IS-LM analysis in a form almost identical to that
published in 1937 attests to its durability as a tool of
macroeconomic analysis.
Attacks on the IS-LM model have been few and far
between over the past 36 years. What is even more
37Murphy, “Repeated Predictive Tests on an Econometric
Model,’ also notes that if the model contains lagged en­
dogenous variables, dynamic stability conditions are also a
part of step (4 ).
38J. R. Hicks, “Mr. Keynes and the ‘Classics’: A Suggested
Interpretation,” Econometrica, Vol. 5 (1937), pp. 147-59.
See also Karl Brunner and Allan H. Meltzer, ‘Mr. Hicks
and the ‘Monetarists,’ ” Economica (February 1973), pp.
44-59.

FEDERAL. RESERVE BANK OF ST. LOUIS

surprising is that the IS-LM model has not been
tested as a unified set of hypotheses. This is not to say
that individual relations embodied in the model have
not been tested and estimated, but this procedure is a
far different matter than applying the BasmannMurphy method of predictive testing.
One critique of the IS-LM analysis is found in a
comment by Professor David Meiselman at the first
Federal Reserve Bank of Boston Monetary Conference
in 1969.39 Meiselman raises the following questions:
( 1 ) Are IS and LM curves independent of each
other?
(2 ) Is the IS curve negatively or positively sloped?
(3 ) How are price expectations effects taken into
account in the IS-LM analysis?

JANUARY

1974

The Brunner-Meltzer Framework
For a number of years Professors Brunner and
Meltzer have been critical of the traditional usage of
the IS-LM model. The general nature of their objec­
tions is contained in their comment on Friedman’s
theoretical framework.41 These objections are given
more specifically in their presentation of an alternative
framework.42 In this article, Brunner and Meltzer
develop a model that they propose as an alternative
to the IS-LM framework.
The deficiencies of the IS-LM framework, accord­
ing to Brunner and Meltzer, are as follows:43
(1 ) Bonds and real capital are treated as a single
asset. Money substitutes only for bonds, not for
existing assets or output.
(2 ) The theory has not been successfully confirmed.

Meiselman’s criticisms apply to the IS-LM analysis as
traditionally used. As a theoretical construct, the
Hicksian model is not criticized. Rather, Meiselman
tends to level his attack on users of the model, not on
the model itself.
In summary, it appears that the Hicksian IS-LM
model provides a convenient starting point for analyz­
ing macroeconomic problems, even if it has never
been subjected to predictive tests. If it is found that
the traditional use and interpretation of the model
leads to incorrect conclusions with respect to the for­
mulation and implementation of stabilization policy,
then there is good reason to question the usefulness
and validity of the model in its simplest form. Un­
fortunately, it is difficult to point to a particular piece
of published work that gets specific and forms a policy
recommendation on the basis of the Hicksian model.
This model almost always seems to be invoked after the
fact.40 One would think if a model is so universally
applicable in ex post explanation, it would be used
more widely as a predictive tool.
39David Meiselman, “Discussion,” in Controlling Monetary
Aggregates (Proceedings of the Monetary Conference Held
on Nantucket Island, Sponsored by the Federal Reserve
Bank of Boston, June 8-10, 1969), pp. 145-51. Milton
Friedman was also critical of some aspects of the IS-LM
analysis in “Interest Rates and the Demand for Money,”
Journal of Law and Economics, (October 1966), pp. 71-85.
There are, no doubt, other critiques, but the fact so few
come to mind suggests that such critiques have been rare
over the last 36 years.
40For example, Teigen, in “A Critical Look,” pp. 19-20, argues
that observed parallel movements between money and in­
terest rates are quite consistent with the basic IS-LM struc­
ture. This is very common procedure: manipulating the
IS-LM model in such a way as to explain economic events
after they happen. More often than not, these “explana­
tions” are not logical implications of the model itself.



(3 ) The only simultaneous solution for the price
level and real output is the full-employment solu­
tion. The problem of persistent unemployment
is not explained.

Brunner and Meltzer’s objective in their article was
to correct two of these three deficiencies, omitting
consideration of (2).
Before examining Brunner and Meltzer’s effort to
correct these deficiencies, consider the possible reac­
tion to this short list of deficiencies. Not enough time
has passed for comments on the Brunner-Meltzer
paper to appear, but it is not difficult to formulate a
possible reaction to their characterization of the
“standard model.”
(1 ) True, the original Hicksian article focused on
money-bond substitution, but the work of Pro­
fessor Tobin represents an important extension
of the Hicksian model to include substitution
between money and real capital.44
41Karl Brunner and Allan H. Meltzer, “Friedman’s Monetary
Theory,” Journal of Political Economy ( September/October
1972), pp. 837-51. See also their “Mr. Hicks and the
‘Monetarists.’ ”
42Karl Brunner and Allan Meltzer, “Money, Debt, and Eco­
nomic Activity,” Journal of Political Economy (September/
October 1972), pp. 951-77. The work of Brunner and Meltzer
relating to this alternative framework goes back many years.
An early discussion of this framework, though not the first, is
“The Place of Financial Intermediaries in the Transmission of
Monetary Policy,” American Economic Review, Papers and
Proceedings (May 1963), pp. 372-82.
43A comparison of this list with the first two pages of their
article, “Money, Debt, and Economic Activity,” indicates
a difference in the listing. In their article, deficiency (3 ) is
listed under (1), and their third deficiency is that standard
macro theory has not incorporated developments in monetary
and price theory of the past two decades.
44See the relevant articles in James Tobin, Essays in Macro­
economics, Volume I (Chicago: Markham, 1972).
Page 15

FEDERAL RESERVE BANK OF ST. LOUIS

(2 ) This statement is not true because currently
existing econometric models are essentially com­
plex and detailed extensions of the IS-LM
framework, and these models have proven
successful.
(3 ) The inability of the IS-LM model to explain
persistent unemployment is well-known. This
model has long since been extended to deter­
mine the price level, output, and employment.
“Extended” models, permitting determination
of prices and output have become standard ma­
terial in macroeconomic textbooks.

It is not hard to imagine the barrage of charges and
countercharges that could be set in motion if this type
of rejoinder appeared. And in the process, the sig­
nificance of the Brunner-Meltzer contribution could
easily be lost in the smoke of the argument.
The purpose of this section of the paper is to clarify
a fundamental difference between the IS-LM model
and the alternative framework developed by Brunner
and Meltzer. First, the question of whether the IS-LM
model has been confirmed is set aside in an effort to
focus on the differences in specification of the two
models. Second, the problem of output and employ­
ment determination is set aside for expository pur­
poses. This procedure simplifies the problem by focus­
ing on the differences between the two models as they
relate to the determination of the demand for output
at a given price level. To ignore these issues is not to
say that they are unimportant; there should be general
agreement to the contrary.
By the process of elimination we are left with the
deficiency relating to the assumption of substitution
between only money and bonds. The interpretation
offered here is that this assumption is a key one
differentiating the aggregate demand portion of the
Brunner-Meltzer framework from the “traditional”
IS-LM model.45
Why are Brunner and Meltzer so concerned with
the money-bonds substitution assumption? The an­
swer is that this assumption implies that the trans­
mission mechanism from money to economic activity
is limited to interest rates. The IS-LM model may be
amended to include wealth effects, but the moneybonds substitution assumption places emphasis on a
borrowing cost mechanism for transmitting monetary
45The adjective “traditional” is used here to be representative
of that class of IS-LM models which is used in macroeco­
nomic textbooks. With very few exceptions, textbook IS-LM
models build in the assumption of “money and bonds only”
substitution. Furthermore, with the exception of Tobin, recent
published articles by neo-Keynesians continue to give little
emphasis to this assumption. See, for example, Teigen, “A
Critical Look.”

Page 16


JANUARY

1974

impulses. More generally, in an attempt to represent
the essence of the operation of the economic system,
limiting a model to only one relative price — the in­
terest rate —is considered far too restrictive. The
logical implications for the effects of monetary and
fiscal actions, as well as other factors, are seriously
limited if such impulses are permitted to be chan­
neled to economic activity through the movement of
only one relative price — the interest rate.
The procedure followed by Brunner and Meltzer
to correct the “money-bonds” deficiency in the IS-LM
model is to add a market for existing assets, or what
they call the market for “existing real capital.” By
adding such a market, another relative price is added
to the IS-LM model, broadening substantially its
capabilities for testing hypotheses about the effects of
monetary and fiscal actions and other exogenous
impulses.46
By excluding the price of existing real capital, the
traditional IS-LM model must either assume (1 ) that
there is a perfect capital market whereby the price of
existing real capital is always equal to the price of new
production, or (2 ) that there is no market for existing
capital.47 The first assumption is a property of clas­
sical economic models where all costs of information
and adjustment vanish, and defines what is generally
known as long-run equilibrium. The second assump­
tion, on the other hand, is more typical of Keynesian
models.
By adding a market for existing real capital to the
IS-LM model, the price relevant to that market is
added to the list of variables that are potential argu­
ments in each of the behavioral equations of the
model. But the effect is much more significant than
just adding another variable. One benefit is that the
model can then be written in such a way as to
separate the market for money from the market for
46The question may naturally arise as to how this price is
measured, and measurement problems have no doubt been
a factor underlying the neglect of this variable in macroeco­
nomic analysis. In principle, such problems should be litde
greater than measuring ‘ the price’ applicable to new pro­
duction. The development of the national income accounts
to the neglect of balance sheet considerations has no doubt
contributed to the development of theory in the direction
of focusing on new production and its related price. But
lack of data on the price of existing capital does not negate
its role in the transmission mechanism. For a recent discus­
sion of prices and price indices, see Armen A. Alchian and
Benjamin Klein, “On a Correct Measure of Inflation,”
Journal of Money, Credit and Banking (February 1973),
pp. 173-91.
47See the unpublished paper, Karl Brunner and Allan H.
Meltzer, “The Inflation Problem” (March 1973), for discus­
sion of this point.

FEDERAL RESERVE BANK OF ST. LOUIS

credit.48 In the opinion of Brunner and Meltzer, the
relative role of these two markets has been one of the
chief contributing factors to the confusion surround­
ing the monetarist — neo-Keynesian controversy.49
And it is this separation that leads to logical implica­
tions which differ substantially from those derived
from the traditional IS-LM analysis.
In the traditional IS-LM analysis, the credit market
is the hidden, or “left-out,” market. Or in Patinkins
work it is the bond market.50 On occasion, failure to
examine the implied credit market has resulted in the
development of some very peculiar conditions which
do not become obvious until the hidden market is
explicitly derived.61
Brunner and Meltzer do not question the existence
of the hidden credit market; rather, they are con­
cerned with the limited nature of the transmission
mechanism whereby monetary and fiscal actions affect
economic activity in traditional IS-LM models. Every
multimarket model has at least one redundant market,
as long as Walras’ law of markets is accepted. Brunner
and Meltzer, after adding an additional asset —exist­
ing real capital —retain the option of maintaining the
credit market as the redundant market. However, they
choose to make the credit and money markets explicit,
making the market for existing real capital the re­
dundant market. With this choice they are able to
examine thoroughly the factors which contribute to
the nature of economic response to monetary and
fiscal actions.
By examining the expanded model, the deficiencies
implicit in the use of the traditional IS-LM model
become apparent. Very generally, Brunner and Melt­
zer conclude that the effect of monetary and fiscal
actions, as well as other exogenous impulses, depends
on the price of existing real capital as well as the
interest rate and the price of new production. ( Recall
48It should be pointed out, however, that the term “money
market” is a misnomer. In a money economy money is
traded in every market; there is no “market” for money.
For further discussion, see R. W. Clower, “A Reconsidera­
tion of the Microfoundations of Monetary Theory,” Western
Economic Journal (December 1967), pp. 1-8.
49For a comprehensive discussion of this essential distinction,
see Albert E. Burger, The Money Supply Process (Belmont,
California: Wadsworth Publishing Company, Inc., 1971).
B0Don Patinkin, Money, Interest, and Prices, second edition
(New York: Harper and Row, 1965).
51Carl Christ, “Monetary and Fiscal Policy in Macroeconomic
Models,” in The Economic Outlook for 1969 (Papers pre­
sented to the Sixteenth Annual Conference on the Economic
Outlook at the University of Michigan, November 14-15,
1968), pp. 93-112, and Bent Hansen, A Survey of General
Equilibrium Systems (New York: McGraw Hill Book Com­
pany, 1970), esp. pp. 134-37.



JANUARY

1974

that throughout this discussion the price of new pro­
duction has been treated as a given, and its deter­
mination requires further extension of the model. This
extension, of course, is provided by Brunner and
Meltzer.) What is implied is that the nature of the
response of the economy to monetary, fiscal, and other
stimuli is conditioned by an enlarged number of
considerations.
More specifically, the Brunner and Meltzer conclu­
sions, as they relate to the aggregate demand portion
of their model, can be summarized as follows:
(1 ) The interest elasticities (or slopes) of the tradi­
tional IS and LM curves are neither necessary
nor sufficient for determining the response of
aggregate demand for output (at a given price
level for such output) to monetary and fiscal
actions.
(2 ) The role of wealth or real balance effects in
macroeconomic models is substantially changed
when a market for existing real capital is intro­
duced. In particular, the response of aggregate
demand to monetary impulses need not depend
on wealth effects (or interest elasticities of IS
and/or L M ).
(3 ) A maintained government deficit financed by
issuing debt raises interest rates and the price of
existing real capital. Consequendy, fiscal multi­
pliers are conditioned by considerations other
than interest elasticities and wealth effects.

This is a partial restatement of Brunner-Meltzer’s
own summary. Their conclusions are more far-reach­
ing than the above summary suggests. But the nature
of these statements is interesting in that their conclu­
sions, for the most part, list those factors that are
relevant in testing hypotheses. For example, virtually
all of the macroeconomic textbooks characterize the
monetarist model as the “extreme” case where the
interest elasticity of money demand is zero, for this is
the only way to get a fiscal multiplier of zero. Accept­
ance of such a characterization of the monetarist model
implies that the statistical significance of the interest
elasticity of money demand becomes the crucial test
of the monetarist model (at least with respect to its
implications for fiscal policy). If this elasticity is not
significandy different from zero, the hypothesis as it
relates to fiscal impact has to be rejected. Brunner
and Meltzer, in contrast, show that a zero interest
elasticity of money is not necessary in order that the
fiscal multiplier be zero.

Summary
The Brunner-Meltzer macroeconomic framework
has been discussed at some length, but certainly not
in detail, and contrasted with the traditional IS-LM
Page 17

FEDERAL RESERVE BANK OF ST. LOUIS

analysis. However, it should be emphasized that only
the short-run aggregate demand aspect of the Brunner-Meltzer model has been discussed here. This focus
is very limited, for they have devoted substantial ef­
fort to delineating price and quantity adjustments in
the output market and to longer-run considerations.
As indicated earlier, such considerations are ignored
here, but in no way is this meant to denigrate their
importance.

CONCLUDING OBSERVATIONS
The focus of this paper is on recent macroeconomic
controversy. A brief review of economic events and
economic thinking in the period since World War II
serves as background for elaboration of the nature of
the controversy as it presently exists. A general obser­
vation developing out of this review is that particular
economic events or experiences do have a substantial
impact on the development of economic thought. A
likely consequence of this immediacy of response to
recent experience is that the profession can be misled
for a considerable period of time. At all times the
experience of economic history should be kept clearly
in perspective.52 It is in this connection that the ex­
tensive work by Friedman and Schwartz serves as a
significant contribution to macroeconomics relative to
that of econometric studies based on only 15 or 20
years of data.58 However, studies with a long histori­
cal perspective tend to be ignored by policymakers
who are preoccupied with solving short-run problems
of economic stabilization.54 Apparent lack of im­
52For an example of perspective on the relation between
money and prices covering the period from 500 B.C. to
the early 1930s, see Anna J. Schwartz, “Secular Price
Change in Historical Perspective,” Journal of Money, Credit
and Banking (February 1973), pp. 243-69.
53Milton Friedman and Anna Jacobson Schwartz, A Monetary
History of the United States: 1867-1960 (Princeton: Prince­
ton University Press, 1963).
54Note the following statement by Fritz Machlup in Emil
Claasen and Pascal Salin, eds., Stabilization Policies in Inter­
dependent Economics (Proceedings of a conference held at
the University of Paris-Dauphine, March 1972), p. 34:


Page 18


JANUARY

1974

mediate relevance does not negate the operation of
longer-run principles.
The second part of this paper identified those fac­
tors which appear relevant to the present controversy
on the relative impact of monetary and fiscal actions.
Several side issues were shown not to be directiy rele­
vant to the issues at hand. A gap has developed be­
tween monetarists and fiscalists that has tended to
impede rather than advance the level of understand­
ing relating to the role of monetary and fiscal actions.
It was concluded that methodological issues have
been confused with the hypotheses. Specifically, ques­
tions of “reduced forms vs. structure” have sidetracked
the discussion as well as introduced confusion as to
just what a hypothesis is. Tracing the source of con­
fusion to one side or the other is difficult and not
particularly useful. It is probably to be expected that
the advance of knowledge is almost always accom­
panied by confusion as the conventional wisdom
comes under attack.55
In an attempt to clarify the issues, the final section
of the paper discussed a portion of an alternative
framework for macroeconomic analysis. This frame­
work has been developed by Professors Brunner and
Meltzer, and stands in contrast to the traditional
IS-LM model. A market for existing real capital is
explicidy incorporated in the Brunner-Meltzer model
and the stabilization implications of monetary and
fiscal actions are shown to be substantially broader
than those of the IS-LM model.
“While we are on the distinction between the short run and
the long, I may be allowed to comment on the famous
dictum by Keynes to the effect that we always live in the
short run, and in the long run we’ll all be dead. My counter­
dictum is that the short run is awfully short and before long
we’ll all be terribly sick. This does not mean that we should
forget about the short run, but it does mean that serious
economics should deal chiefly with the long-run conse­
quences of our public policy actions.”
55This statement is not attributable to Harry Johnson, but the
reader is referred to Harry G. Johnson, “The Keyne­
sian Revolution and the Monetarist Counter-Revolution,”
American Economic Review, Papers and Proceedings (May
1971), pp. 1-14.

FEDERAL RESERVE BANK OF ST. LOUIS

JANUARY

1974

REVIEW INDEX - 1973
Month
of Issue

Jan.

Title of Article

Interest Rates and Monetary Growth
Monetary Developments in 1972
Federal Reserve System Actions During 1972
Fiscal and Monetary Policy: Opportunities and
Problems

Feb.

Business Recovery Continues
Relative Movements in Wages and Profits
Operations o f the Federal Reserve Bank o f St.
Louis — 1972

Mar.

T he 1973 National Economic Plan: Slowing the
Boom
FOMC Policy Actions in 1972

Apr.

The National Plans to Curb Unemployment and
Inflation
Foreign Exchange and U.S. Balance-of-Payments
Developments in 1972 and Early 1973

May

June

Spending, Prices, and Employment in Early
1973
The Usefulness o f Applied Econometrics to the
Policymaker
Food and Agriculture in 1973
Meat Prices
Strong Credit Demands, But N o "Crunch” in
Early 1973
The Problem o f Re-Entry to a High-Employment Economy




Month
of Issue

Title of Article

The Response of the Mexican Economy to Policy
June
Actions
(cont.)
July

Problems o f Interpreting Recent Monetary
Developments
Formulating a M odel o f the Mexican Economy

Aug.

Business Developments and Stabilization Policies
Employment Growth in St. Louis
Income and Expenses o f Eighth District Member
Banks

Sept.

The State o f the Monetarist Debate
Commentary on "The State o f the Monetarist
Debate”
A Value Added Tax and Factors Affecting Its
Economic Impact

Oct.

The Russian W heat Deal — Hindsight vs.
Foresight
Foreign Investment in the United States — A
Danger to Our W elfare and Sovereignty?
Economic Issues in 1974

Nov.

Tbird Quarter Business Developments
Balance-of-Payments Deficits: Measurement and
Interpretation
Letter on Monetary Policy

Dec.

1973 — A Year o f Inflation
A Comparative Static Analysis o f Some Mone­
tarist Propositions

Page 19