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FEDERAL RESERVE BANK
O F ST. L O U IS
M R H 1972
AC

The 1972 National Economic Plan: An
Experiment in Fiscal Activism .....................

Monetary Expansion and Federal Open
Market Committee Operating Strategy
in 1971 ...........................................................
Has Monetarism Failed? — The Record
Examined ........................................................ 32

Vol. 54, No. 3

FEDERAL

RESERVE

BANK OF

ST. L O U I S

MARCH

1972

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TITLE OF ARTICLE

T he Federal Budget and Stabilization Policy in 1 9 6 8
1 9 6 7 — A Year of Constraints on M on etary M anagem ent
Does Slower M onetary Expansion Discrim inate Against Housing?
The Role of Money and M onetary Policy
T he M on etary Base — Explanation and Analytical Use
Interest Rate Controls — Perspective, Purpose, and Problems
An Approach to M onetary and Fiscal M anagem ent
M on etary and Fiscal Actions: A Test o f Their Relative Im portance
in Economic Stabilization
A Program of Budget Restraint
The Relation Between Prices and Em ploym ent: Two Views
M onetary and Fiscal Actions: A Test o f T heir Relative Im portance in
Economic Stabilization — C o m m en t and Reply
Tow ards a Rational Exchange Policy: Som e Reflections on the
British Experience
Federal Open M arket C o m m ittee Decisions in 1 9 6 8 —
A Year of W atchful W aiting
C ontrolling Money
The Case fo r Flexible Exchange Rates, 1 9 6 9
An Explanation of Federal Reserve Actions (1 9 3 3 -6 8 )
International M onetary Reform and th e "Craw ling Peg”
C o m m en t and Reply
The Influence o f Economic Activity on the Money Stock: Com m ent; Reply;
and Additional Em pirical Evidence on the Reverse-Causation Argum ent
A Historical Analysis o f the Credit Crunch of 1 9 6 6
Elem ents of Money Stock D eterm ination
M onetary and Fiscal Influences on Economic Activity —
The Historical Evidence
The Effects o f Inflation (1 9 6 0 -6 8 )
Interest Rates and Price Level Changes, 1 9 5 2 -6 9
The New, New Economics and M onetary Policy
Som e Issues in M onetary Economics
M on etary and Fiscal Influences on Economic Activity: The Foreign Experience
The A dm inistration of Regulation Q
Money Supply and T im e Deposits, 1 9 1 4 -6 9
A M on etarist Model fo r Economic Stabilization
N eutralization of the M oney Stock, and C om m ent
Federal Open M arket C o m m ittee Decisions in 1 9 6 9 —
Y ear of M onetary Restraint
M etropolitan Area Growth: A Test o f Export Base Concepts
Selecting a M onetary In d ic a to r— Evidence from the United States and
O ther Developed Countries
T he "C row ding O u t” o f Private Expenditures by Fiscal Policy Actions
Aggregate Price Changes and Price Expectations
T he Revised Money Stock: Explanation and Illustrations
Expectations, M oney and th e Stock M arket
Population, The Labor Force, and Potential Output: Im plications for
the St. Louis Model
O bservations on Stabilization M anagem ent
The Im p lem en tation Problem of M onetary Policy
Controlling Money in an Open Economy: The Germ an Case
The Y ear 1 9 7 0: A "M o d e s t” Beginning for M onetary Aggregates
Central Banks and the Money Supply
A M onetarist View of Dem and M anagem ent: T he United States Experience
High Em ploym ent W ithout Inflation: On the A tta in m e n t o f Adm irable Goals
Money Stock Control and Its Im plications for M onetary Policy
Germ an Banks as Financial D epartm ent Stores
Two Critiques o f M onetarism
Projecting With the St. Louis Model: A Progress Report
M onetary Expansion and Federal Open M arket C om m ittee
O perating Strategy in 1971

Digitized for Page 2
FRASER

ISSUE
M arch 1 9 6 8
M ay 1 9 6 8
June 1 9 6 8
July 1 9 6 8
August 1 9 6 8
Sep tem ber 1 9 6 8
N ovem ber 1 9 6 8
N ovem ber 1 9 6 8
March 1 9 6 9
March 1 9 6 9
April 1 9 6 9
April 1 9 6 9
M ay 1 9 6 9
M ay 1 9 6 9
June 1 9 6 9
July 1 9 6 9
February 1 9 6 9
July 1 9 6 9
August 1 9 6 9
Sep tem ber 1 9 6 9
O ctober 1 9 6 9
N ovem ber 1 9 6 9
N ovem ber 1 9 6 9
D ecem ber 1 9 6 9
January 1 9 7 0
January 1 9 7 0
February 1 9 7 0
February 1 9 7 0
March 1 9 7 0
April 1 9 7 0
M ay 1 9 7 0
June 1 9 7 0
July 1 9 7 0
S eptem ber 1 9 7 0
O ctober 1 9 7 0
N ovem ber 1 9 7 0
January 1971
January 1971
February 1971
D ecem ber 1 9 7 0
March 1971
April 1971
M ay 1971
August 1971
S eptem ber 1971
Septem ber 1971
O ctober 1971
Novem ber 1971
January 1 9 7 2
February 1 9 7 2
March 1 9 7 2

The 1972 National Economic Plan:
An Experiment in Fiscal Activism
by KEITH M. CARLSON

1
HE NATIONAL economic plan for the eighteen
month period ending June 30, 1973 has been presented
to Congress and the public. The Administration’s plan
is presented in the form of three documents — the
F ederal Budget, the Econom ic Report o f the Presi
dent, and the Annual R eport o f the Council of E co
nomic Advisers.1 Included in these documents is a
proposed Federal budget program designed to be
consistent with targets for total spending ( GNP), out
put, prices, and employment. General recommenda
tions are also made for the role of monetary actions
by the Federal Reserve System in the overall eco
nomic plan.
The goals for the U.S. economy in the months ahead
are stated most explicitly by the Council of Economic
Advisers (CEA) in their Annual Report.2 The goals
consist of a reduction in the annual rate of inflation
to less than 3 percent by the end of 1972, and a reduc
tion of unemployment to near 5 percent of the civilian
labor force by the end of the year. The Administration
believes that to achieve these targets an increase in
total spending for goods and services (GNP) of 10.5
to 11 percent for the year ending fourth quarter 1972
is required. This rapid increase in total spending is to
be facilitated by an increase in Federal expenditures
of about 11 percent, reductions in tax rates attributa
ble primarily to the Revenue Act of 1971, and “[a]n
abundant supply of money and other liquid assets and
favorable conditions in money markets . . ,”3
'T he Budget o f the United States Government, Fiscal Year
Ending June 30, 1973 (Government Printing Office, 1972),
and Econom ic Report o f the President, together with The
Annual Report o f the Council o f Econom ic Advisers ( Govern
ment Printing Office, 1972).
21972 CEA Report, Chapter 3.
3lb id ., p . 106 .

This article analyzes the Administration’s national
economic plan within the context of the St. Louis
model.4 First, the 1971 economic plan is compared
with the record to obtain some perspective. Then the
1972 economic plan is examined in terms of feasibility
and internal consistency. Since the evaluation is con
ducted with reference to the St. Louis model, the
conclusions reflect the particular characteristics of
that model.5

Evaluation of the 1971 Economic Plan
Confronted with unacceptably rapid inflation, high
unemployment and a continuing deterioration of our
balance-of-payments position, the Administration an
nounced several major policy changes on August 15,
1971.8 Included were suspension of the convertibility
of the dollar into gold and other reserve assets, im
position of a surcharge on imports, a proposed removal
of the Federal excise tax on automobiles, and intro
duction of a system of mandatory price-wage controls.
The announcement of these policy changes reflected
obvious dissatisfaction with the course of the economy
as it appeared at that time. In February the Adminis
tration had laid out a very ambitious set of economic
goals, and apparently by late summer was convinced
that sufficient progress was not being made toward
4The focus of this article is on the stabilization aspects of the
Administration’s economic program. The program is actually
much broader in scope, involving discussion of resource
allocation, income distribution, and international economic
affairs.
r,Leonall C. Andersen and Keith M. Carlson, “A Monetarist
Model for Economic Stabilization,” this Review (April 1970),
pp. 7-25.
6For an economic review of 1971, see Norman N. Bowsher,
“1971 — Year of Recovery and Controls,” this Review (D e
cember 1971), pp. 2-10.
Page 3

FEDERAL

RESERVE

B A N K O F ST. L O U I S

MARCH

their achievement.7 The purpose of the following sec
tion is to determine the source of the discrepancy be
tween the Administration’s economic plan and the
actual course of the economy.8

T a b le II

Projected and A ctu al C h a n g e s in Total Spending
(G N P )

and C o m p o n e n ts—

CEA
Projectio n

The CEA Report of a year ago projected a 9 percent
increase in total spending from 1970 to 1971. The
actual increase was 7.5 percent. This error of 1.5
percent was the largest since the CEA underestimated
GNP in 1966 by 1.7 percent. Although the 1971 error
was relatively large by recent standards, it actually
was small when compared to the last forecast made
for a full expansion year following a recession, that is,
1962 (see Table I).
I

CEA

Projection A ccu racy

o f Total Spending
CEA
Projected
Change

(G N P )

A c tu a l
Change*

19 70 to 1971

(B illio n s o f D o lla rs )

Economic Goals vs. Realizations

T a b le

1972

E rro r* *

1962

9 .4 %

6 .7 %

1963

4 .4

5 .4

— 1 .0

1964

6 .5

6 .6

6.1

7 .5

— 1 .4

1966

6 .9

8 .6

6 .4

5 .6

7 .8

9 .0

R e sid e n tia l C o n stru ction
F e d e ra l Pu rch ases
S ta te & Lo cal Pu rch ase s

$ 5 8 .3

$ 4 6 .4

$1 1 .9

3 .4

6.1

- 2 .7

4 .5

- 0 .7

5 .2

1 1 .3

1 0 .2

— 1 .7

0 .4

1.1
- 2 .1

1 4.1

1 3 .2

0 .9

0 .4

- 2 .9

3 .3

T o ta l S p e n d in g ( G N P ) * * $ 8 8 .5

$ 7 2 .7

$ 1 5 .8

N et Exp o rts

* Based on prelim inary data in the 1972 C E A R ep ort.
* * Components m ay not add to total because o f rounding.

The 1971 projections for real product, prices, and
unemployment were closely tied with the total spend
ing projection (see Table III). In early 1971, the CEA
believed that forces had been set in motion to reduce
the inflation rate quickly and significantly so that the
expected rapid advance of total spending could be
manifested in a sharp increase in real product and an
associated decline in unemployment.

0 .8

1968

B u sin ess In ve n to rie s

- 1 .7

1967

In vestm en t

E rro r

— 0.1

1965

Pe rso n al Con su m ption
B u sin ess F ixe d

A c tu a l*

— 1 .2

2 .7 %

1969

7 .0

7 .7

5 .7

4 .9

0 .8

1 971

9 .0

7 .5

Projected and A ctu al C h a n g e s in
Economic A ctivity

- 0 .7

1970

T a b le III

A v e ra g e a b so lu te e rro r

1 .2

* Based on figures given in the C E A R ep o rt in the year following
the forecast year.
** These are unadjusted e rro r s ; i.e., no adjustm ent is made for devi
ations o f policy realizations from plans, or for m ajor strikes.

A comparison of the actual changes in the com
ponents of GNP for 1971 with the CEA projections
(see Table II) indicates that the primary source of
error was an overestimation of personal consumption
by about $12 billion. The CEA also overestimated the
accumulation of business inventories and net exports.
Somewhat surprisingly perhaps, the CEA underesti
mated the increase in business fixed investment as
well as Federal purchases.
"The 1971 CEA Report attracted more attention among pro
fessional economists than other reports of recent years. See
the articles on the 1971 Report by M. J. Bailey, R. Eisner,
A. P. Lemer and J. L. Stein in T he American Econom ic R e
view (September 1971), pp. 517-37, and O. H. Brownlee,
“The Economic Report of the President, 1971,” Journal of
Money, Credit and Ranking (November 1971), pp. 833-39.
sFor a discussion of the 1971 economic plan as it was originally
presented, see Keith M. Carlson, “The 1971 National Eco
nomic Plan,” this Review (March 1971), pp. 11-19.

Page 4

—

1970 to

1971

CEA
P rojectio n
T o tal S p e n d in g

(G N P )

A c tu a l

E rro r

9 .0 %

7 .5 %

R e a l Product

4 .6

2 .7

1 .5 %
1 .9

Prices

4 .2

4 .6

- 0 .4

U n e m p lo ym e n t Rate

0 .4

1 .0

- 0 .6

Table III shows that the CEA projected an increase
in real product of 4.6 percent; the actual increase was
2.7 percent. Unemployment was expected to average
above the 1970 level of 4.9 percent, but was projected
to decline from 6 percent early in 1971 to below 5
percent of the labor force by late in the year. Unem
ployment held steady near 6 percent during the year.
And finally, prices were expected to slow to a 4.2 per
cent rate of advance. Prices rose 4.6 percent from
1970 to 1971, even when the marked slowdown in
prices in the second half of the year ( reflecting pricewage controls) was included.

Policy Plans vs. Realizations
As a first step in examining the source of error un
derlying the CEA projections for 1971, policy plans
are compared with realizations. Table IV gives
planned and actual changes in the NIA budget from

FEDERAL

RESERVE

MARCH

B A N K O F ST. L O U I S

G eneral Price Index*
R a t io S c a le
1 958= 100
160

R a t io S c a le
1 95 8= 10 0
160

1972

billion less than called for by the budget plan of early
1971. The source of this stimulus is traceable to a
combination of factors including a planned increase
in the social security tax base which was not im
plemented, a larger than planned increase in social
security benefits, and policy changes of the Adminis
tration’s own making as associated with the August 15
policy announcement.
Fiscal M easures
(+ )S u rp lu s; (-)D e ficit
Q u a rte rly To tals a t A n n u a l Rates
Sea so n a lly

B illio n s o f D o lla rs
25

B illio n s o f D o lla r s
25

High-Emp

1964

1965

1966

1967

1 96 8

1 969

1970

1971

1972

* A s used in N atio nal Income Accounts
S o u rc e : U .S . D e p a rtm e n t o f Com m erce
P e rce n tag e s a re a n n u al rotes of change between perio ds in d ic a te d .
Latest d a ta plotted: 4th quarter 1971; dashed line indicates half-year estimates by this Bank based on
the fiscal 1973 Federal Budget and the 1972 A nnual Report of the Council of
Economic Advisers.

B udget

1970 to 1971 on both an actual and a high-employment (that is, cyclically adjusted) basis.9 From the
standpoint of examining fiscal plans after the fact, the
high-employment budget is more relevant than the
NIA budget because it nets out the influence of GNP
T a b le IV

Planned and A ctual C h a n g e s in Fed eral Budget —
19 70 to 1971

1964

1965

1966

1 967

1968

1969

1 97 0

1971

1972

Sources: U.S . Department of Commerce, Council of Economic A dvisers, and Federal Reserve Bank of St. Louis

(B illio n s o f D o lla rs )

Latest data plotted: 4th quarter 1971; dashed line in dicates ha lf-ye a r estimates by this Bank based on

Budget
Plan
N IA

R eceipts

N IA

E xp e n d itu re s

1 7 .4

N IA S u rp lu s or D eficit

H ig h -E m p lo ym e n t R eceipts
H ig h -E m p lo ym e n t

1 7 .6

A c tu a l

E xp e n d itu re s

H ig h -E m p lo ym e n t S u rp lu s
or Deficit

0 .2

1 5 .6

$ -

0 .5

9 .7

9 .9

9 .3

6 .3

1 4 .9

$ -

1-2

5 .6

5.1

N o te : Federal budget plans for 1971 were estimated by this Bank
and published in the quarterly release “ Federal Budget
Trends,’ ' prepared by this Bank on February 20, 1971.

forecasting error on the movement of budget receipts
and expenditures. On a high-employment basis the
CEA underestimated the size of the fiscal stimulus;
there was more fiscal stimulus than planned as the
high-employment budget registered a surplus of $5.1
°A11 references to the high-employment budget are estimates
prepared by this Bank. For details on this Bank’s procedures
for estimating the high-employment budget, see “Technical
Notes on Estimating the High-Employment Budget,” avail
able on request from the Research Department of this Bank.

the fiscal 1973 Federal Budget and the 1972 Annual Report of the Council of
Economic Advisers.

$ + 1 0 .4

1 6 .9

16.1

$ -

7 .2

E rro r

The CEA assumption about monetary actions in
1971 was never made perfectly explicit. Based on
amplifying statements by CEA members to the press
and in testimony before Congress, a 6 percent expan
sion of money was considered the minimum necessary
to achieve the CEA goals. The actual increase in
money was 6 percent from late 1970 to late 1971,
although this increase for the year consisted of a rapid
10.3 percent rate of increase in the first 7 months,
followed by essentially no growth in the last 5 months.

Analysis Based on St. Louis Model
The fact that the CEA projections of economic ex
pansion in 1971 still proved overly optimistic, despite
the fact that key policy variables actually showed more
stimulus than planned, suggests that their economic
plan was not internally consistent. To quantify the
sources of error further, some alternative simulations
with the St. Louis model are presented. Two cases are
considered: estimates based on (1 ) changes in money
Page 5

FEDERAL

RESERVE

B A N K O F ST. L O U I S

MARCH

M o n e y Stock
R a tio S c a le
B illio n s o f D o lla r s
250

R a tio S c a le
B illio n s o f D o lla r s
250

M onthly A v e ra g e s of D aily Fig ui
S e a s o n a lly A djusted

+90%
+08%

240

• 2 3 1 5 ___

230

220

230

220

210

200

Federal expenditures. It should be pointed out, how
ever, that without price-wage controls, the St. Louis
model probably would have underestimated the extent
of inflation. The persistence of unemployment near
6 percent throughout the year was forecast quite
accurately by the St. Louis model.

210

200

1972

+76

190

180

180
+64%

170

170
-02%

+39%

160

£9-<oW-*-

150

1964

1965

It____

150

1966

1967

1968

N
it

1 969

1 970

R
t

tit

1971

1972

P e rce n tag e s o re a n n u a l rates o l change for perio ds in d icate d .
Latest d a ta plotted: Fe b ru a ry

and expenditures as assumed by the CEA in early
1971, and (2 ) actual changes in money and
expenditures.
Table V indicates that the St. Louis model was not
projecting a rise of total spending nearly as rapid as

The CEA erred significantly in their forecast of total
spending, real product, prices and unemployment in
1971. This error cannot be traced to less policy stim
ulus than planned. These observations suggest that
the CEA economic plan for 1971 overestimated the
expected impact of stimulus from proposed monetary
and fiscal actions.
The actions of the Administration in announcing
policy changes on August 15 indicated possible recog
nition of this error, but those policy changes also
reflected a belief that conventional monetary and
fiscal actions were not capable of reducing inflation
in an acceptably short period of time. Even though
the CEA recognized (in their 1972 R eport) the slow
down of inflation through second quarter 1971, manda
tory price-wage controls were introduced to accelerate
the decline.

T a b le V

Projected C h a n g e s in Spen d in g , O utput, Prices
a n d U n em p lo y m en t—

1970 to 1971
R eal
Product

Prices

U n e m p lo ym e n t
Rate

9 .0 %

4 .6 %

4 .2 %

0 .4 %

T o tal S p e n d in g
( B illio n s )
CEA

Pro je ctio n

(2 / 2 / 7 1 )

$ 8 8 .5

A c tu a l

7 2 .7

7 .5

2 .7

4 .6

1.0

S t. Louis M od el P ro je ctio n s :
C h a n g e s in m o ney a n d
F e d e ra l sp e n d in g
c o n siste n t w ith C E A
a ssu m p tio n s

6 8 .5

7 .0

2 .3

4 .7

1.1

C h a n g e s in m o ney an d
F e d e ra l sp e n d in g
as a c t u a lly occurred

7 4 .8

7 .7

2 .9

4 .7

1.1

N o te : St. Louis model projections are based on latest revised data, but coefficients are
estimated through I II/1 9 7 0 .

the CEA, even with their assumptions about the policy
variables. Furthermore, even though the St. Louis
model foresaw less buoyant total spending growth, it
projected a more rapid increase in prices than the
CEA, and thus substantially less expansion in real
output.
The course of the major economic variables in 1971
was captured well by the St. Louis model, as indicated
by the “ex post” simulation using actual money and

Page 6

The St. Louis model indicates that the
economy moved as expected in 1971.10
The rate of inflation was being reduced,
although slowly, and the growth of real
product was accelerating. Even though
unemployment was not declining in 1971,
the stage was being set for reductions in
the future. The pattern of monetary ex
pansion, although irregular, provided a
net stimulus to the economy in 1971,
and can be interpreted as having about
the same economic impact as a steady
8 percent growth.11 However, the pat
tern of rapid monetary growth followed
by essentially no growth has set the
stage for a different set of problems for
economic policy in 1972 than might
otherwise have occurred with a steady
growth rate.

Economic Goals and Policy Plans for 1972
The Administration has set targets of about a
5 percent rate of unemployment and a 2.5 to 3 percent
10It should also be noted that the economy moved in accord
ance with the “consensus” of economic forecasts in 1971.
11See Keith M. Carlson, “Projecting With the St. Louis Model:
A Progress Report,” this Review (February 1972), fn. 6,
p. 24.

FEDERAL. RESER VE

BANK OF

ST. L O U I S

rate of inflation by the end of 1972. These targets
represent a substantially less optimistic view of basic
economic forces than had been held by the Adminis
tration a year ago. Last year the Administration set
targets of 4.5 percent unemployment and a 3 percent
rate of inflation by mid-1972. To achieve the 1972
targets, the Administration projects an advance in
total spending of 9.4 percent from calendar 1971 to
1972, or slightly greater than the rate of increase
projected for 1971. This section summarizes the
Federal budget program for 1972, considers monetary
policy recommendations in the CEA Report, then
evaluates the Administration’s plan with the aid of the
St. Louis model.12

MARCH

1972

F e d e ra l G o v e rn m e n t E xpend itures
N a t io n a l In c o m e A c c o u n ts B u d g e t
R a tio S c a le

R a tio S c a le
la r s
350

Q u a rte rly Totals a t A nnual Rates

-----------------

300

2 50

✓

+9 2 % ^ n

To ta l

200

4 7%

000

72 B.7

200

+108%

+ 18

1 7 5 % /"'

*16%

Nond efens e

+78% ___^

+117%

100
141% ^

Defen e

+9 5%

*4 4%

✓ ~ “ "
f—

Federal Budget Program for 1972
The budget plan for calendar 1972 calls for a rela
tively large fiscal stimulus. As estimated by this Bank,
a deficit in the high-employment budget of $14.4
billion is implied.13 Relative to 1969-1971, the budget
plan for 1972 is highly expansionary. Considering the
size of the economy ( as measured by potential GNP),
the proposed fiscal stimulus for 1972 is about the same
as experienced in 1967.
Expenditures — The budget plan includes a 13 per
cent increase in Federal expenditures on an NIA basis
from calendar 1971 to 1972. This increase would be
up sharply from the 8.2 percent average rate of
advance from 1969 to 1971, but slightly below the 13.7
percent average rate of increase from 1965 to 1968.
Defense spending is projected to rise 6 percent in
calendar 1972, after declining at a 4.6 percent average
rate from 1969 to 1971. Nondefense spending, on the
other hand, is planned to rise a very rapid 16 percent
in 1972. This increase would follow increases of 16.1
percent in 1971 and 16.7 percent in 1970. From 1965
to 1969, nondefense spending increased at an 11 per
cent average rate. Projections of nondefense spending
for 1972 include a pay raise for Government em
ployees on January 1, a sharp increase in grants-in-aid
to state and local governments ( general revenue shar
ing) retroactive to January 1, a proposed increase in

r—

-5 5%

50
<»" -21% 2nd qtr

1st qtr

1964

1965

1966

2nd qtr

Is qtr

1967

1968

1969

4th c r

1 970

1971

1972

Source: U.S . Deportment of Commerce
Percentages ore a nnu al rates of change for periods indicated.
Latest data plotted: 4th quarter 1971,- dashed line in dicates half-year estimates by this Bank based on
the fiscol 1973 Federal Budget and the 1972 Annual Report of the Council of
Economic Advisers.

social security benefits, effective July 1, and increased
expenditures associated with a proposed reform of
welfare programs.
R eceipts — Federal receipts on an NIA basis are
projected to rise by over $16 billion in 1972, or about
S.2 percent. This increase is expected to be large
because incomes and profits are projected to advance
rapidly.
When sources of receipts growth are considered,
the GNP projections assume added importance. Table
VI gives the sources of changes in receipts for 1972.
Tax changes tending to reduce receipts include: (1)
the continuing effect of the Tax Reform Act of 1969;
(2) the effect of the Revenue Act of 1971, affecting
T a b le VI

Planned C h a n g e s in Fed eral Receipts —
1971

1972

N atio n al Income A ccounts Budget
(B illio n s o f D o lla rs )
Change

12Rates of increase projected for certain economic variables are
not stated explicitly in the 1972 CEA Report. Where such
increases are discussed, they are based on estimates made
by this Bank.
I3The level of the surplus or deficit in the high-employment
budget is subject to considerable variation, depending on
the nature of the assumptions underlying its estimate. See
“Technical Notes on Estimating the High-Employment
Budget,” available on request from this Bank.

in T o ta l

Change

d ue

Receipts

$ 1 6 .3

to G ro w th

2 1 .4

C h a n g e due to T a x R ate A d ju stm e n ts

— 5 .1

P e rso n al T a x a n d S u rta x

R eceipts

— 5 .9

C o rp o ra te Profits T a x A c cru a ls

— 1 .6

In d ire ct B u sin ess T a x a n d N o n ta x A c cru a ls

— 1 .7

C o n trib u tio n s fo r S o cia l In s u ra n c e

4.1

Page 7

FEDERAL

RESERVE

B A N K O F ST. L O U I S

personal taxes via increased exemptions
and deductions, corporate taxes through
the job development tax credit, and ex
cise taxes because of their removal from
automobiles, and the suspension of the
import surcharge. Changes in tax laws
tending to increase tax receipts include:
(1 ) expansion of the base for social se
curity taxes from $7,800 to $9,000; (2 )
a proposal for additional expansion of
the base from $9,000 to $10,200; and
(3 ) a revision toward less liberal depre
ciation allowances. The combined ef
fect of these changes in tax laws results
in a decrease of receipts of $5.1 billion.
Consequently, the projected $16.3 billion
increase in receipts implies a $21.4 bil
lion increase due to rapid economic
expansion.

MARCH

T a b le V II

Projected C h a n g e s in Total Spending
197 1

(G N P ) — 1971
1972

( B illio n s )
C E A P rojectio n

(1 / 2 4 / 7 2 )

9 .4 %

( B illio n s )

In cre a se

$ 9 8 .2

to 1973

1972

—

1973
In cre a se
— %

S t. Louis M od el P ro je ctio n :
1)

W ith 6 p ercen t m oney
g ro w th a n d F e d e ra l
sp e n d in g b ased on
fisca l 1 9 7 3 b udget

7 7 .0

7 .4

7 1 .2

6 .3

W ith 8 p ercen t m oney
gro w th a n d F e d e ra l
s p e n d in g b a sed on
fisca l 1 9 7 3 b udget

8 4 .0

8 .0

9 2 .6

8 .2

W ith 6 p ercen t m oney
g ro w th a n d F ed e ra l
sp e n d in g g ro w th a t a
s te a d y 9 .7 p ercen t ra te

7 1 .1

6 .8

8 1 .2

7 .3

W ith 8 p erce n t m oney
gro w th a n d F ed e ra l
sp e n d in g gro w th a t a
s te a d y 9 .7 p ercen t ra te

7 8 .1

7 .5

1 0 2 .5

9.1

Surplus/deficit position —The combined effect of
increased expenditures and receipts is an increase in
the deficit to $36 billion in calendar 1972 from $23
billion in 1971. Since the NIA budget is influenced by
the projected pace of economic activity, a better
measure of the expected economic impact of the
budget program is the high-employment budget.
On a high-employment basis (as estimated by this
Bank), the NIA budget is projected to be in deficit
by about $14 billion in 1972. The $14 billion figure
reflects an estimated $20 billion rate of deficit in the
first half and a $9 billion rate in the second half. This
fiscal stimulus for calendar 1972 is about the same
as in 1967, when measured relative to potential GNP.
However, the planned 1972 fiscal stimulus has substan
tially different economic implications than the stimu
lus in 1967. The 1967 stimulus occurred when there
was very little slack in the economy, and thus con
tributed importantly to the development of infla
tionary pressures. The proposed fiscal stimulus for
1972 comes at a time when there is considerable eco
nomic slack, suggesting that total demand for goods
and services can be expanded substantially without
reviving inflationary pressures.

Monetary Policy Recommendations
The CEA again carefully avoids making any spe
cific recommendations for monetary policy in 1972.
Monetary policy plays a definite role in the eco
nomic plan, however, as the CEA indicates that the
GNP increase of 9.4 percent is based on the assump

Page 8

1972

tion that the required monetary growth will be
forthcoming.14
Though very general in their recommendations, the
CEA does caution against extreme variations in the
rate of change of the money stock.
A similar precept of steadiness with respect to
monetary policy would also help to avoid inflationary
excesses of demand. T h e problem is that there is no
single measure or objective com bination of measures
of monetary policy that is a com pletely satisfactory
or com pletely superior measure of monetary policy
by which a principle of steadiness could be cali
brated. Judgm ent must be exercised. However, there
is probably a presumption against extrem e values or
variations of the rate of change of narrowly defined
money, i.e., currency plus demand deposits.15

Evaluation Based on St. Louis Model
The St. Louis model is used to focus on two con
siderations. (1) Is the projected increase in total
spending consistent with the proposed stabilization
policies?1'1 (2 ) Are the price and unemployment goals
consistent with the projected increase in total
spending?
Feasibility of total spending goal — Table V II shows
the results of the St. Louis model for the following
four combinations of policies:
1 ) increases of Federal spending as proposed in the
budget and an expansion of money at a 6 percent
annual rate;
141972 CEA Report, p. 26.
15Ibid., p. 112.
16For purposes of evaluation, steady growth rates for money
of 6 and 8 percent are assumed. These alternatives are
illustrative ana are in no way directly attributable to the
CEA, or the Federal Reserve System.

FEDERAL

RESERVE

B A N K O F ST. L O U I S

2 ) increases of Federal spending as proposed in the
budget and an expansion of money at an 8 per
cent annual rate;
3 ) an increase of Federal spending at a steady 9.7
percent annual rate (this is the rate of increase
of expenditures from second half 1971 to first
half 1 9 7 3 ) and an expansion in money at a
6 percent annual rate; and
4 ) an increase of Federal spending at a steady 9.7
percent annual rate and an expansion of money at
an 8 percent annual rate.

According to the St. Louis model, the proposed
budget policies would not yield an increase in total
spending of 9 percent even if money grew at a rapid
8 percent rate. This conclusion reflects the properties
of the St. Louis model with respect to the impact of
fiscal stimuli. According to the model, an acceleration
of Federal spending has a positive impact on GNP for
only two quarters, with the total effect receding to
zero after 5 quarters. This property is in sharp contrast
with other econometric models. Despite this substan
tial difference in the treatment of fiscal stimuli, the
error in projecting GNP for the St. Louis model has
averaged between $3 and $4 billion per year since
1965.
The combinations of policies in Table VII indicate
that Federal spending based on the budget and 8 per
cent money growth would come closest to the CEA
spending projection, though it would still fall short by
a substantial amount.17 The combinations based on
steady growth of Federal spending yield a lower total
spending projection in 1972 than those based on an
expenditure pattern as given in the budget. However,
a steady growth in Federal spending would imply a
stronger growth in GNP in 1973 than if the pattern
evolves as projected in the budget.
Im plications o f total spending goal —As a step
toward examining the internal consistency of the
Administration’s overall economic plan, attention is
focused on the price and unemployment projections.
Without regard for how the total spending target is
achieved, Table V III on the following page shows the
implied paths for real product, prices, and unemploy
ment as given by the St. Louis model in comparison
with the CEA. The St. Louis model result with 6 per
cent money growth is also included for reference.
These comparisons are influenced by assumptions
regarding the success of price-wage controls. The
17Given the proposed budget program, the St. Louis model
indicates that a 12 percent rate of increase in money be
ginning first quarter 1972 would be required to achieve the
CEA projection of a 9.4 percent increase in total spending
in calendar 1972. It should also be pointed out that GNP
has grown as fast or faster than 9.4 percent in only one
year (1966) out of the last twenty.

MARCH

1972

A ctual an d Potential Real Product

Reserve Bank o i St. Louis
|_l_Potential GNP in 1958 dollars, as o riginally formulated by the Council of Economic
A dvisers. Base period is mid-1955. Rate of growth from IV/1953 to IV/1962 is 3.5%,
IV/1962 to IV/1965 is 3.7 5% , IV/1965 to IV/1969 is 4% , IV/1969 to IV/1970 is 4.3% ,
IV / 1970 to IV /1971 is 4 .4 % .
£ Actual GNP in 1958 dollars,
lotest data plotted: Potential GNP projected through 4th quarter 1972
Actuol GNP, 4th quarter 1971; dashed line indicates half-year estimates by
this Bank consistent with projections in the 1972 Annual Report of the
Council of Economic Advisers.

CEA has indicated considerable confidence in the
controls, and has formed its targets with respect to
prices, real product and unemployment accordingly.18
The St. Louis model does not incorporate explicitly
any effect for price-wage controls, but focuses instead
on price trends in the absence of controls. St. Louis
model projections of prices, which are not markedly
different than those projected by the CEA, would sug
gest that the price-wage control program is not going
to be subjected to great strains by the underlying
course of monetary and fiscal actions.
The results for the year 1972 indicate that the St.
Louis price projections are not markedly higher than
the CEA’s, even given their projected path for total
spending. Where the difference may begin to appear
significant is in 1973, though the CEA does not pro
vide projections for calendar 1973. In other words, for
1972 the St. Louis projections for prices are roughly
consistent with those projected by the CEA with a
price-wage control program. The rate of inflation
appears to be in the process of being reduced even in
the absence of controls. It should be noted, however,
that unless this implication is taken into account, there
is a risk of setting the stage for severe strains on the
price-wage control framework in 1973 if monetary and
fiscal actions become unduly expansive.
181972 CEA Report, p. 26.
Page 9

FEDERAL

RESERVE

B A N K O F ST. L O U I S

MARCH

T a b le V III

Projected C h a n g e s in Spen d in g , O utput, Prices
and

U n em p lo ym en t—

1971

to 1 9 7 3 *

(P e rc e n t)
1972

1973

1
1 Pro je ctio n

III

Year

III

Year

(1 / 2 4 / 7 2 )* *
1 1 .0

1 1 .0

1 0 .7

1 0 .5

9 .4

—

5 .4

7 .7

7 .9

5 .9

—

Prices

5 .3

3.1

2 .8

2 .4

3 .2

U n e m p lo ym e n t R ate

5 .9

5 .8

5 .5

5 .3

5 .6

—

goals, a large fiscal stimulus
to total spending has been
proposed. Affirming a belief
in the success of price-wage
controls, the large advance in
total spending is expected to
be translated into faster real
product growth and lower
unemployment.

—

R e al Product

1972

T o ta l S p e n d in g

Louis M od el P ro je ctio n s:
W ith C E A to tal
s p e n d in g * * *
T o ta l S p e n d in g

1 1 .0

1 0 .7

1 0 .5

9 .4

1 0 .4

1 0 .2

1 0 .0

9 .8

1 0 .4

R eal Product

6 .8

6 .9

6 .8

6 .6

5 .9

6 .6

6 .5

6 .4

6 .3

6 .6

Prices

4 .0

3 .9

3 .8

3 .7

3 .3

3 .6

3 .4

3 .3

3 .6

U n e m p lo ym e nt Rate

6 .0

5 .8

5 .6

5 .4

5 .7

5 .3

5 .1

4 .9

4 .8

5 .0

W ith 6 p ercent m oney
g ro w th an d g o vern m en t
s p e n d in g b ased on
1 9 7 3 b ud g et
T o ta l S p e n d in g

8 .9

8 .6

5 .4

4 .6

7 .4

5 .6

7 .4

8 .0

7 .7

6 .3

R eal Product

4 .7

1 .8

1 .3

4 .0

2 .5

4 .6

5 .6

3 .3

Prices

4 .0

3 .8

3 .6

3 .3

3 .2

3 .0

2 .6

2 .3

2 .0

2 .9

U n e m p lo ym e nt Rate

6 .0

5 .9

6.1

6 .0

6 .3

6 .5

6 .4

6 .3

6 .4

* All figures, except for the unemployment rate, are annual rates of change. The unem ploym ent rate
is unemployment as a percent o f labor force.
** Estim ates o f the quarterly projections were made by this B ank, and were designed to be consistent
with the C E A annual projection. This particular quarterly pattern is illustrative and not directly
attributable to the C E A .
*** Total spending estimates for 1973 are simple extrapolations o f the C E A projection for 1972, with
allowance for some slight deceleration.

Given the CEA total spending goal and roughly
comparable projections of prices, the St. Louis model
indicates that unemployment will be reduced in 1972.
The rate of decline in unemployment is slightly less
than projected by the CEA (the differences being
minor).

Summary
The Administration has forecast that the U.S.
economy will attain reductions in unemployment and
inflation simultaneously in 1972. To achieve these

Page 10

According to the St. Louis
model, the projected increase
in total spending is not con
sistent with the policy actions
proposed by the Administra
tion. If for some reason the
targeted increase in total
spending is achieved, the St.
Louis model indicates that
the 1972 goals for unemploy
ment and prices are realistic.
However, achievement of
these goals in 1972 would
have important implications
for the course of economic
activity after 1972, In par
ticular, substantial employ
ment gains in 1972 may be
incurred at the cost of re
kindling inflationary pressures
in the future.

The economy is being confronted with a large fiscal
stimulus. However, it is not so large as to prevent
monetary actions from being controlled in such a way
as to keep the economy on a sustainable path toward
eventual attainment of full employment with relative
price stability. With moderate monetary growth, the
economic expansion will continue, although at a rate
slower than projected by the Administration. The
prospects for reducing inflation and phasing out pricewage controls are good, if monetary expansion is
maintained at a moderate rate.

Monetary Expansion and Federal Open Market
Committee Operating Strategy in 1971
by A LBERT E. BURGER and N EIL A. STEVENS

T h e PRIMARY policy objective of the Federal
Reserve System in 1971 was to continue progress
toward expansion of real output and employment
coupled with a slowing in inflation. The major policy
instrument used in pursuit of this objective was open
market operations, which are determined by the Fed
eral Open Market Committee (F O M C ).1
Expansionary policy actions taken in 1970 had laid
the foundation for economic recovery in 1971. The
money stock had increased at a 5.4 percent rate in
1970 compared to a 3.2 percent rate in 1969. Longand short-term interest rates had declined markedly
from peaks earlier in 1970. By the end of 1970, some
small improvements toward the reduction of inflation
could be noted, and further improvements in 1971
were anticipated. However, with unemployment at 6
percent and utilization of plant facilities at relatively
low levels, unemployed resources remained a primary
policy consideration.
Policy objectives of the Committee at the first three
meetings were stated as follows:2
. . . to foster financial conditions conductive to the
resumption of sustainable economic growth, while
encouraging an orderly reduction in the rate of
inflation and the attainm ent of reasonable equilib
rium in the country’s balance of payments.
1Other policy instruments of the Federal Reserve System,
such as reserve requirements and Regulation Q ceiling rates,
were not altered in 1971. The discount rate was changed six
times, lowered three times in January and February, raised
in July, and then lowered two more times by the end of
1971. These changes, however, primarily represented at
tempts to keep the discount rate in line with prevailing
market rates.
2Unless specifically footnoted, all quotes in this article come
from the “Record of Policy Actions” of the Federal Open
Market Committee, published in the Federal Reserve
Bulletin.

The FOMC members were also concerned about
large outflows of short-term capital that occurred dur
ing 1971. At the April meeting and continuing through
the July meeting, a new clause was added to the
policy consensus stating that the Committee desired
to moderate these outflows. The policy consensus was
further modified at the August meeting to take ac
count of the President’s New Economic Program. A
clause was added stating the intention of the Com
mittee to “foster financial conditions consistent with
the aims” of the new program.
In accordance with the objective of promoting eco
nomic expansion without renewed inflation, the Com
mittee desired throughout most of 1971 both relatively
low interest rates and moderate growth of monetary
aggregates. These intermediate objectives were to be
achieved by setting forth specified ranges for measures
of money market conditions —money market interest
rates and net borrowed or free reserves — to be
achieved by the Desk during the interval between
each Committee meeting.3
As the year progressed, conflicting views on the
relative importance that should be assigned to interest
rates and monetary aggregates became evident. For
example, at the May 11 FOMC meeting some
members expressed concern “that expansion in Mj
[currency plus demand deposits held by the nonbank»
public] at the first-quarter pace for an extended pe
riod would be inconsistent with an orderly reduction
in the rate of inflation.” Moderation of monetary
growth would have required that the Desk be in
structed to follow a less expansionary open market
policy, which in the near term, most likely would
3For a discussion of this type of operating strategy see page 13.
Page 11

FEDERAL

RESERVE

B A N K O F ST. L O U I S

MARCH

1972

have lead to higher interest rates. Other members
expressed the view that “sharp increases in long-term
rates at this juncture might have adverse conse
quences for spending . . . and might thus pose a
threat to the economic recovery under way.” These
members were reluctant to accept a more restrictive
open market stance.

sented in the “Record of Policy Actions.” The member
ship, procedures, and terms used in connection with
the FOMC are discussed in the section entitled “The
Federal Open Market Committee in 1971” on page 13.

Later in the year an opposite type of conflict de
veloped when the money stock had ceased to expand
and interest rates had fallen. At the November meet
ing “[t]he view was expressed that it would be par
ticularly unfortunate in this climate for the recent
weak performance of the monetary aggregates to per
sist for long, since the lack of significant growth in the
aggregates could become an important independent
source of uncertainty. At the same time, some mem
bers cautioned against unduly aggressive action to
stimulate monetary expansion.”

The operating strategy of the Desk remained essen
tially the same during 1971 as it had been in past
years. This strategy, as described by Governor Andrew
F. Rrimmer, was as follows:

An article in the Federal Reserve Bulletin discussed
the possibility that such conflicts could develop:
These desires may sometimes turn out to be in
conflict; for example, monetary aggregates as a
group may be rising more rapidly than desirable
while credit conditions may be tightening more than
desirable. M eeting one desire by holding back on
the provision of reserves in order to restrain growth
in bank credit and money would tend, at least
temporarily, to thwart the other desire by leading to
even more tightening of credit conditions. Under
such circum stances, the Account M anager would
have to adjust his operations — thereby affecting dayto-day money market conditions -— in line with the
sense of priority among operating objectives given
by the F O M C .4 '

Throughout most of 1971, the Committee sought to
resolve this problem by cautiously adjusting market
conditions in seeking desired rates of monetary
expansion.
This article is primarily concerned with an analysis
of problems inherent in the operating strategy used
by the FOMC. The following definitions are used:
policy refers to the ultimate objectives of FOMC
actions — total spending, output, employment, prices,
and the balance of payments; interm ediate objectives
are desired movements in monetary aggregates and
interest rates to achieve the Committee’s ultimate
objectives; operating strategy refers to the specific
instructions given to the Desk as a means of achieving
desired movements in the intermediate objectives.
The supplement at the end of this article reviews
in greater detail the FOMC decisions in 1971 as pre‘“Monetary Aggregates and Money Market Conditions in Open
Market Policy,” Federal Reserve Bulletin (February 1971),
p. 95.

Page 12

Implementing Policy With a
Money Market Conditions Strategy

They [the views of the members of the FO M C ]
would also probably contain enough common ele
ments relating to operating tactics to add up to a
pattern of behavior which can be described as the
pursuit of a money m arket strategy in the conduct
of open market operations. Basic to this strategy is
the focus on a configuration of money market con
ditions as operating guides for the M anager of the
SOM A [System Open M arket A ccount]. W hile the
specific money market variables have varied over
time, they have typically included: ( 1 ) mem ber
bank borrowings from the Federal Reserve Banks;
( 2 ) net free reserves; ( 3 ) the Federal funds rate;
and (4 ) the 3-month Treasury bill rate. These
money market variables are to b e used by the M an
ager to influence the behavior of a variety of inter
m ediate financial variables, which may include: ( 1 )
the general structure of nominal interest rates; ( 2 )
monetary or credit aggregates (such as the money
supply — broadly or narrowly defined, m em ber bank
credit, deposits of nonbank financial institutions, or
similar quantitative m easures); and ( 3 ) the general
environment of credit and banking m arket as re
flected in expectations, and the demand for and
supply of total credit in the economy. . . .
In other words, through reserve absorption or sup
plying operations in the market, the M anager of the
SOM A attempts to bring about or m aintain a de
sirable set of money market conditions (e .g ., raising
or lowering the 3-month Treasury bill yield or rates
on Federal funds) with the expectation th at the
intermediate monetary variables (e.g ., bank credit
or money supply) will contract or expand at a rate
consistent with the requirements of econom ic stabili
zation. F or each FO M C meeting, the staff prepares
an analysis of the relationships likely to prevail
among money m arket conditions, interest rates, and
the monetary aggregates over a com ing period, in
dicating the growth rates in various aggregates ex
pected to be associated with each of several described
kinds of money market conditions.5

The operating clause of the directive during 1971
placed varying emphasis on the intermediate objec5Andrew F. Brimmer, “The Political Economy of Money:
Evolution and Impact of Monetarism in the Federal Reserve
System” ( Paper delivered at the Eighty-fourth Annual Meet
ing of the American Economic Association, New Orleans,
Louisiana, December 27, 1971), pp. 15-16, 17.

FEDERAL

RESERVE

B A N K O F ST. L O U I S

MARCH

1972

The Federal Open Market Committee in 1971
The Federal Open Market Committee consists of
the seven members of the Federal Reserve Board of
Governors and five of the twelve Federal Reserve Bank
Presidents. The Chairman of the Board of Governors
is also, by tradition, Chairman of the Committee. The
President of the New York Federal Reserve Bank is a
permanent voting member of the Committee and is
its Vice-Chairman. All other Federal Reserve Bank
Presidents attend the meetings and present their
views, but votes may be cast by only four of these
Presidents, who serve as voting members for one-year
terms on a rotation basis.
Members of the Board of Governors included Ar
thur F. Burns, J. L. Robertson, George W. Mitchell,
J. Dewey Daane, Sherman J. Maisel, Andrew F.
Brimmer, and William W. Sherrill.1 At the first two
meetings of 1971 the five Presidents included Mr.
Hayes (New York), Mr. Mayo (Chicago),2 Mr. Heflin
(Richmond), Mr. Francis (St. Louis), and Mr. Swan
(San Francisco). Beginning with the March meeting,
the four rotating positions of the Committee were
filled by the following new members: Mr. Morris
(Boston), Mr. Kimbrel (Atlanta), Mr. Mayo
(Chicago), and Mr. Clay (Kansas City).
The Committee meets about every four weeks to
discuss economic trends and to decide upon the future
course of open market operations. At these meetings
they may discuss other possible policy actions for sub
sequent weeks and months. During 1971, the Com
mittee met thirteen times. At each meeting, a direc
tive was issued which stated the ultimate goals of the
Committee and provided general guidelines as to how
the Manager of the System Open Market Account3 at
the New York Federal Reserve Bank should conduct
open market operations to achieve these goals. The
first paragraph of each directive gave a short review
of economic data considered and the general eco
nomic goals sought by the Committee. The second
paragraph gave operating instructions to the Account
Manager. These instructions were stated in terms of
money and long-term credit market conditions, growth
rates of monetary and credit aggregates, and any spe
cial factors to be taken into account, such as Treasury
financing operations.
The decisions on the exact timing and amount of
daily buying and selling operations of securities in
fulfilling the Committee’s directive are the responsi
bility of the Account Manager at the Trading Desk of
xMr. Sherrill resigned effective November 15, 1971.
2Mr. Mayo voted as an alternate for the late Mr. Hickman
(Cleveland) at the January and February meetings.
3The Manager of the System Open Market Account may
be referred to as the “Account Manager” or “the Desk,”
meaning the Trading Desk of the New York Federal Re
serve Bank.

the New York Bank. Each morning, he and his staff
decide on a program for open market operations to be
undertaken that day. In developing this program,
money and credit market conditions and aggregate
targets desired by the Committee are considered as
well as other factors which may be of concern at that
time. Each morning, the Account Manager places a
conference call to staff members of the Board of Gov
ernors and one voting President to give information
about present market conditions and open market op
erations which he proposes to execute that day. Other
members of the Committee are informed of the daily
program by wire summary.
A summary of the Committee’s meetings are pre
sented to the public in the “Record of Policy Actions”
of the Federal Open Market Committee. This “Record”
is released about 90 days after each meeting and is
published in the Federal Reserve Bulletin, as well as
in the Annual Report of the Board of Governors of
the Federal Reserve System each spring. The
“Record” generally includes:
1) a summary of current economic conditions, such as
prices, employment and the trend of the compo
nents of aggregate demand; also, staff projections
concerning real output growth for the current and
following quarter(s) are usually discussed;
2) a discussion of the U.S. balance of payments in
cluding international financial developments;
3) a discussion of interest rate movements;
4) a discussion of the movements of monetary aggre
gates such as Mi, and M2, and the adjusted credit
proxy.4 Also included are comments concerning
staff analysis on the future growth rates of these
aggregates expected to be consistent with different
sets of money market conditions;
5) a discussion of open market operations since the
last meeting;
6) a general statement of the views of the members of
the FOMC;
7) conclusions of the FOMC;
8) a policy directive issued by the FOMC;
9) a list of the voting position of members and any
dissenting comments.
4Mi refers to the money stock, defined as private demand
deposits plus currency in the hands of the nonbank public.
M2 refers to money stock plus net time deposits, de
fined as money stock plus total time deposits at all commer
cial banks minus large time certificates of deposits at large
weekly reporting commercial banks. Adjusted credit proxy
is defined as member bank deposits subject to reserve
requirements plus bank-related commercial paper, Euro
dollar borrowings of U.S. banks, and certain other non
deposit items.

Page 13

FEDERAL

RESERVE

BANK OF

tives of monetary aggregates and interest rates. The
policy directive issued at the first FOMC meeting in
1971 placed equal emphasis on credit market condi
tions and monetary aggregates.
To implement this policy, the Committee seeks to
promote accommodative conditions in credit markets
and moderate expansion in monetary and credit
aggregates. System open market operations until the
next m eeting of the Committee shall be conducted
with a view to maintaining bank reserves and money
market conditions consistent with those objectives,
taking account of the forthcoming Treasury financing.

At the next three meetings, however, wording of
the directive was changed to place primary emphasis
on money market conditions and long-term interest
rates. For example, the February directive read:
. . . System open market operations until the next
meeting of the Committee shall be conducted with a
view to maintaining prevailing money market con
ditions while accom modating additional downward
movements in long-term rates. . . .

Aggregates were relegated to the proviso clause
which specified that money market conditions were to
“promptly be eased somewhat further if it appears
that the monetary aggregates are falling short of the
growth path desired.” At the March and April meet
ings, the proviso clause was modified to specify that
money market conditions should be modified if it
appeared that the monetary and credit aggregates
were deviating significantly from the growth paths
expected.
At the May 11 meeting the language of the direc
tive was shifted to place greater emphasis on growth of
monetary and crcdit aggregates. Other objectives were
also specified, including “taking account of the current
Treasury financing, developments in capital markets,
and uncertainties in foreign exchange markets.”
The May directive specified that, initially, money
market conditions should be maintained at those cur
rently prevailing. Thereafter, money market condi
tions were to be consistent with the objectives stated,
including moderating growth in monetary and credit
aggregates. At the remaining FOMC meetings in 1971,
the language of the directives gave primary emphasis
to monetary and credit aggregates. In addition, at
several meetings it was noted that capital market de
velopments should be taken into account as well as
Treasury financings.
Growth rates of monetary aggregates were not the
sole concern of the FOMC in 1971. However, at
every meeting the aggregates were discussed and at

Page 14

MARCH

ST. L O U I S

1972

most meetings some members of the FOMC expressed
concern about their current and projected growth
rates. At each meeting growth rates of the aggregates
expected to be consistent with given money market
conditions were presented to the Committee. To the
extent that the Committee was interested in growth of
the aggregates, these projections probably influenced
the decisions of the FOMC members on money market
conditions the Desk was instructed to maintain.

Projecting the Growth of Money
During the first half of 1971 projected growth rates
for money that were expected to result from the
adopted set of money market conditions were substan
tially below actual growth rates of money. On the
other hand, during the second half of the year, projec
tions, again based on the assumption of adopted
money market conditions, were substantially above
actual growth rates.
At the first three meetings of 1971 money was ex
pected to grow at an annual rate of about 6 to 7.5 per
cent during the first quarter. The actual rate was 9.4
percent.'1 In the second quarter, estimates for the
growth of money consistent with the adopted money
market strategy ranged from about 8 to 9 percent at
the April and May meetings. At the May meeting it
was expected that “a sharp firming of money market
conditions would be required to slow expansion in M,
sufficiently during the rest of the second quarter to
achieve a substantial moderation of growth over the
quarter as a whole.” Table I shows that there was
some firming of money market conditions in May and
June; however, money grew at an 11 percent rate over
the second quarter.
The FOMC desired a more rapid growth in money
over the first part of 1971 than had occurred in the
fourth quarter of 1970. However, the rapid increase
in money that occurred over the first half of the year
clearly exceeded that expected to accompany the
money market conditions adopted by the Committee.
As early as the March 9 meeting, when a 7 percent
monetary growth rate was projected for the first quar
ter, the FOMC decided that:
. . . money market rates were to be increased some
what if the aggregates were rising considerably
faster than expected. . . .
"Following the procedure used by the staff analysis for the
FOMC, quarterly growth rates are calculated on the basis of
the daily-average level in the last month of the quarter rela
tive to that in the last month of the preceding quarter.

FEDERAL

T a b le

RESERVE

MARCH

B A N K O F ST. L O U I S

an 8 to 9 percent rate with some further firming of
money market conditions. The actual annual growth
rate for money over the third quarter was 3.8 percent.

M oney M arket Conditions
A v e ra g e s o f D a ily Fig u res

1971
Ja n u a ry
F e b ru a ry
M arch
A p ril
M ay
Ju n e
J u ly
A u g u st
S e p tem b e r
O cto b e r
N o vem b e r
Decem ber

F ed e ra l
Funds
Rate
4 .1 4 %
3 .7 2
3 .7 1
4 .1 5
4 .6 3
4 .9 1
5 .3 1
5 .5 7
5 .5 5
5 .2 0
4 .9 1
4 .1 4

Net
B o rrow ed
R e se rve s*
(m illio n s )
$ 91
127
120
8
18
322
658
606
295
1 53
144
- 5 8 "

M em ber
B an k
B o rro w in g s
(m illio n s )

3-M o n th
T re a s u ry
B ill Rate
(m a rk e t
y ie ld )

$370
328
319
1 48
330
453
820
804
501
360
407
107

4 .4 4 %
3 .6 9
3 .3 8
3 .8 5
4 .1 3
4 .7 4
5 .3 9
4 .9 3
4 .6 9
4 .4 6
4 .2 2
4 .0 1

* Excess reserves minus member bank borrowings. W hen member
bank borrowings exceed excess reserves this series is called net
borrowed reserves. W hen excess reserves exceed member bank
borrowings it is called free reserves.
**Free reserves.

At the April 6 meeting, when the first quarter
growth rate of money was estimated at 8 percent, the
FOMC stated:
. . . it would like to see more moderate expansion
in the monetary aggregates in the second quarter
than had occurred in the first.

From the March 9 meeting to the August 24 meet
ing, the Policy Record stated, in general, that open
market operations were initially aimed at maintaining
prevailing money market conditions, and then aimed
at achieving slightly or somewhat firmer money market
conditions as incoming data indicated the monetary
aggregates were expanding significantly faster than
expected.
During this period only gradual tightening of
money market conditions was permitted. For example,
in the period prior to the April 6 meeting:
. . . efforts were made during the period to counter
repetitive tendencies toward undue firmness that
arose from market factors affecting reserves.

Also in the period immediately following the May 11
meeting:
System open market operations had been directed
at maintaining prevailing money m arket conditions
. . . in light of the Treasury financing then in process
and the sensitive state of conditions in capital
markets.

In late June the growth of money for the third
quarter, with prevailing money market conditions, was
projected to be at a slightly slower rate than the sec
ond quarter, and at about 9 percent with some firming
in money market conditions. At the July 27 meeting
projections were revised downward slightly to about

1972

At the September 21 meeting it was projected that
if prevailing money market conditions were main
tained, growth in M, would be slower in the fourth
quarter than in the third quarter. At the October
meeting growth of M t was projected to be about the
same rate in the fourth quarter as the third quarter,
assuming prevailing money market conditions. Money
market conditions in fact eased, yet the actual growth
rate for the fourth quarter was 1.1 percent.

Inconsistency of Money Market Conditions
and Desired Growth of Money
Although money market conditions approved at
each meeting of the FOMC as operating instructions
for the Desk may have been consistent with the mem
bers’ intermediate objectives for market interest rates,
these conditions were not consistent with the growth
rates of money expected by the members. The growth
trend of money accelerated at an extremely rapid rate
over the first seven months of 1971 and then deceler
ated at an equally rapid rate in the latter part of the
year.
Periodically some members of the FOMC expressed
concern about the growth paths of the monetary ag
gregates that were resulting from the money market
operating strategy. For example, Mr. Kimbrel dis
sented at the April meeting because he “believed that
higher short-term interest rates would be desirable
mainly to hold growth in the monetary and credit ag
gregates to a moderate pace in order to avoid a re
kindling of inflationary expectations.” At the May
meeting “[tjhe view was widely held among mem
bers that expansion in M1 at the first-quarter pace for
an extended period would be inconsistent with an
orderly reduction in the rate of inflation.” At the De
cember meeting “ [considerable concern was ex
pressed about the persistent weakness of key mone
tary aggregates despite the progressive easing of
money market conditions in recent months.”
In early 1971 the rapid acceleration was initially
viewed as representing a make-up for the slower than
desired growth rate in the fourth quarter of 1970, when
growth of money had slowed to a 3.8 percent rate.
However, over the last half of 1970 money had grown
at a 5.2 percent rate. Make-up for the fourth quarter
slowdown in monetary growth was very rapid; money
rose at a 9.4 percent rate in the first quarter and at
an 11 percent rate in the second quater. From June
Page 15

FEDERAL

RESERVE

B A N K O F ST. L O U I S

1970 to June 1971, money grew at a rapid 7.7 percent
rate.
In the third quarter of 1971, the early stage of the
deceleration of money was viewed as a welcome offset
to rapid growth over previous months of the year. At
first the FOMC was reluctant to push for a more
rapid growth of money. However, by the November
16 meeting, the FOMC clearly desired to reverse the
trend growth of money. The Committee desired:
. . . somewhat greater growth in monetary and credit
aggregates over the months ahead, recognizing that
pursuit of that objective might require appreciably
easier money market conditions.
Until mid-November the Desk moved cautiously
within the money market directive to prevent rapid
deceleration of money. Beginning in September, the
Policy Record states that, in general, open market op
erations were directed at a gradual easing of money
market conditions in light of the continuing tendency
of the monetary aggregates to fall below expected
paths.
As shown in Table I, money market conditions
eased somewhat from September through December.
However, until after mid-November easing was rela
tively gradual. The Federal funds rate, which aver
aged 5.53 percent between the late July and late
August meetings, fell to only 5.09 percent, on average,
prior to the mid-November meeting. The money stock
did not respond to this cautious easing of money
market conditions. There was no growth, on average,
in money from mid-September to mid-December.

Factors Influencing Money Growth in 1971
In published explanations of the behavior of money
growth last year the Federal Open Market Committee
placed primary emphasis on factors that were asserted
to determine the demand for money. The following
quotes illustrate this view:
The rate of growth of both currency and privately
held demand deposits rose because of considerably
lower interest rates than earlier and the post-strike
rebound in economic activity [“Financial Develop
ments in the First Quarter of 1971,” Federal Reserve
Bulletin (May 1971), p. 368].
And the monetary aggregates expanded at rapid
rates in the first quarter, with growth in M, (cur
rency and private demand deposits) reflecting in
creased transactions demands and the lagged effects
of previous declines in interest rates. [Monetary
Policy and the U.S. Economy in 1971: A Prelude
to the Annual Report, Board of Governors, p. 6].
The monetary aggregates continued to expand at
a strong pace in the second quarter of 1971. . . . Pri
marily, however, the increase reflected the impact

Page 16

MARCH

1972

on transaction demands for money of the substantial
expansion in expenditures that occurred in both
the first and second quarters of the year and the
lagged response of consumer demands for money to
the sharp earlier decline of market interest rates
[“Financial Developments in the Second Quarter of
1971,” Federal Reserve Bulletin (August 1971), p.
641],
Staff analysis suggested that the new economic
program, along with other forces — including lagged
reactions to earlier increases in short-term interest
rates — should tend to produce lower rates of growth
in the monetary aggregates over the rest of the year
[Federal Reserve Bulletin (December 1971), p. 994].
At the time of the previous meeting of the Com
mittee it had been expected that growth in M,
would slow from the average annual rate of 10
per cent recorded in the first 7 months of the year,
in part in a lagged response to earlier increases in
short-term interest rates, and that M2 would con
tinue to expand at about the moderate rate that
had emerged in July. For both measures, however,
actual growth rates in August were lower than had
been anticipated partly for reasons related to the
flows of funds into foreign currencies. . . .
As at the previous meeting, staff analysis sug
gested that the effects of the new economic program
on demands for money, together with lagged re
actions to earlier increases in short-term interest
rates, should tend to produce much lower average
rates of growth in the monetary aggregates over
the rest of 1971 than had been recorded earlier in
the year [Federal Reserve Bulletin (January 1972),
pp. 36, 37].
It seems likely that the sharp slowing of Mj
growth in August was in large part attributable to
the heavy outflow of dollars into foreign exchange
markets. Weakness continued in September, how
ever, after the outflow was severely cut back. This
was apparently related to a reduction in demands
for money balances in response to greater confi
dence and expectation of declining interest rates
resulting from the President’s new economic program
[“Financial Developments in the Third Quarter of
1971,” Federal Reserve Bulletin (November 1971),
pp. 872-873],
Staff analysis suggested that the effects of two
factors that had been tending in recent months to
hold down demands for money — moderation of in
flationary expectations as a result of the new eco
nomic program, and lagged reactions to the high
short-term interest rates of late spring and early
summer — probably had about run their course. Ac
cording to the analysis, if money market conditions
were similar to those prevailing or slightly easier,
M„ would begin to grow again in December and
would expand faster over the first quarter — at a
pace more nearly in line than recently with growing
transactions demands [Federal Reserve Bulletin
(February 1972), p. 139].
The rate of expansion in the narrowly defined
money stock (M,), which had declined substan

FEDERAL

RESERVE

B A N K O F ST. L O U I S

tially in the third quarter from the very rapid pace
established earlier in the year, slowed further to a
modest 1 per cent annual rate of growth, as public
demands for cash balances remained small in the
wake of the very large build-up in liquidity over
the first half of the year.
. . . M , may not have responded more sensitively
to factors that generally promote growth in this ag
gregate, in part because the public decided to reduce
precautionary balances built up earlier in the year
when there was greater concern about the eco
nomic outlook. In addition, some money-holders may
have been gradually shifting out of cash balances
into interest-bearing assets in the belief that the
wage-price control program would m eet with success
and that interest rates would be lower in the future.
Finally, experience indicates that it takes time for
the public to adjust its cash balances upward in
response to lower short-term interest rates [“F inan
cial Developments in the Fourth Quarter of 1 9 7 1 ,”
Federal Reserve B ulletin (February 1 9 7 2 ) pp. 95-96,
98 ].

A Supply and Demand Analysis
These propositions can be examined with de
mand and supply analysis. In Figures I-IV, the de
mand curve for money balances is represented by
“D”, and the supply curve for money balances by
“S”. Quantities of money (M ) demanded and sup
plied are expressed as dependent upon the current
interest rate (i). Let us assume that the demand for
money depends negatively on past values of the in
terest rate and positively upon growth of income as
the previous quotes suggest. These factors operate to
shift D. The money supply also depends on the mone
tary base. An increase in the base shifts S to the right
and a decrease in the base shifts S to the left.
A couple of expositional points should be empha
sized at this point. The money stock, quantity of
money balances demanded and quantity of money
balances supplied, is measured along the horizontal
axis in Figures I-IV. The money supply and money
demand refer to the curves labeled S and D. A change
in the money supply would appear as a shift in the
curve labeled S. The money stock is determined by
the interaction of money supply and money demand.
Values of the current interest rate are measured on
the vertical axis of the graphs.7 As the interest rate
rises the quantity of money supplied rises, even though
the monetary base is unchanged; for example, banks
reduce their excess reserves. In Figures I-IV this would
appear as a movement along S. As the interest rate
rises the quantity of money balances demanded de
creases and this appears as a movement along D.
7This analysis is based on conventional liquidity preference
theory. Another analysis would include credit market
conditions.

MARCH

1972

Lagged values of the interest rate enter as shift para
meters in the demand for money function.
In Figures I-IV the size of the change in the money
stock resulting from a shift in the demand for money
depends upon the slopes of D and S. If these curves
have relatively steep slopes, as shown in the illustra
tions, then a shift in either D or S will have less of
an effect on the money stock and relatively more of
an effect on the interest rate than if the curves are
drawn with flatter slopes. Most empirical estimates
indicate that the percent response of both the supply
and demand for money balances to a percent change
in short-term interest rates is small. This implies a
relatively steep slope for each curve. Therefore, this
analysis incorporates these empirical results.
D em and Factors — Over the first half of 1971, be
cause interest rates had declined in the second half of
1970 and growth of income accelerated in the first
half of 1971, the above analysis would suggest that
the demand for money (D ) shifted to the right
from D to D' as shown in Figure I. If the supply curve
(S ) is unchanged (that is, no change in the base),
then the interest rate rises to i' from i and the money
stock expands to M' from M.

Interest rates rose in the first half of 1971 and
growth of income slowed somewhat in the second half
of the year. This would imply, following the conjec
tured relationship between lagged interest rates, in
come and the demand for money given in the above
quotes, that the demand for money was shifting to
the left during the second half of 1971, as illustrated
Page 17

FEDERAL

RESERVE

B A N K O F ST. L O U I S

MARCH

F ig u r e II
In t e r e s t

in Figure II. As the demand for money falls from D
to D', and if the money supply function ( S ) remains
unchanged, then the interest rate declines from i to i'
and the money stock declines from M to M'.

1972

F ig u r e III
In t e r e s t

at only a 3.6 percent rate, and from September to
December at only a 2.3 percent rate. The supply
curve shifted only slightly to the right, as compared

If the supply of money (S ) is unchanged (that is,
no change in the monetary base), then growth of the
money stock that occurred was completely demand
determined, as postulated in the above quotes. However, as long as the response of the money supply to
changes in the base is not zero, then Federal Reserve
open market operations which alter the growth of the
base influence the supply of money, and hence, the
money stock outstanding.
Supply Factors — Consequently, for a more complete
analysis of money growth during 1971, behavior of
the monetary base must also be considered. Growth of
the base accelerated markedly during the first half of
1971, then decelerated sharply in the second half of
the year. Therefore, the explanations of Figures I and
II must be broadened to include shifts in S.
Figure III illustrates the conditions for the first half
of 1971 taking the supply factors into account. From
December 1970 to July 1971 the monetary base grew
at a 9.4 percent annual rate. As the base grew rap
idly, the money supply function ( S ) was substantially
shifted to the right to S'. Taking supply effects into
account, the interest rate rises only to i", but the
money stock expands to M " instead of only to M'.
Figure IV illustrates the case for the latter part of
1971. From July to December the monetary base grew

Page 18

to the first half of the year, and the money stock re
mained at M (no change) while market interest rates
fell.8
8The money stock averaged $228 billion in August 1971 and
$228.2 billion in December.

FEDERAL

RESERVE

BANK OF

ST. L O U I S

F ig u re V
In te re s t

Effect of Operating to Offset Changes In
Interest Rates
Figure V may be used to illustrate problems that
can arise in controlling the growth of money when
the Desk is instructed to use open market operations
to maintain a narrow range for short-term interest
rates or permit only gradual changes in interest rates.
Suppose that there is an increase in the money de
mand curve from D to D', as illustrated in Figure V,
and the Desk has been instructed to prevent the
interest rate from rising above i". If no offsetting action
is taken the interest rate will rise to i', above the
upper bound of the Desk’s instructions. To keep the
interest rate below i" the Desk would buy securities,
which would increase the growth of the base and
shift S to S' as shown in Figure V. The interest rate
temporarily rises only to i", but as shown in Figure V,
money rises to M " rather than M'. Assuming the growth
of income is positively related to the growth of money,
then the growth of income accelerates, the demands
for money and credit rise, and the Desk must again
increase the growth of the base to prevent a further
rise in interest rates. By reversing this analysis, it
can be seen that if market rates are falling and the
Desk is given instructions to operate within too nar
row a range on the interest rate then the opposite
situation could arise.
Therefore, FOMC instructions to the Desk to prevent demand induced changes in market interest
rates result in amplifying the fluctuations in the rate
of growth of the money stock. When in the face of
demand induced changes in interest rates the FOMC
gives the Desk instructions to maintain interest rates
within a narrow band, the growth of the money stock

MARCH

1972

can be considered demand determined. However,
“demand determined” in this case has quite a different
meaning from that in Figures I and II where no
change occurred in the money supply function, that is,
no change in the monetary base. The money stock
is demand determined in the case where the base
changes because the Desk is instructed to resist de
mand induced changes in market interest rates which
are not desired by the FOMC. In this circumstance
the FOMC faces the decision of whether to control the
growth of money or temporarily offset demand in
duced changes in interest rates. If the decision is made
to control market interest rates, then the growth of
money may deviate significantly from the expected
growth rate.
The relative weights attached by members of the
Committee to money stock growth and interest rates
were given careful consideration in the decisions of the
FOMC. For example, at the May 11 and June 29
meetings the possible short-run interest rate effects of
open market operations necessary to substantially slow
the growth of money influenced the decisions of the
Committee.
May 11 M eeting
In the discussion Committee members expressed
concern both about the recent high rates of growth
in the monetary aggregates and about the marked
increases that had occurred in long-term interest
rates. T h e view was widely held among members
that expansion in M , at the first-quarter pace for an
extended period would be inconsistent with an or
derly reduction in the rate of inflation. Also widely
held, however, was the view that sharp increases in
long-term rates at this juncture might have adverse
consequences for spending, particularly in the resi
dential construction and State and local government
sectors, and m ight thus pose a threat to the economic
recovery under way.
Although there were some rather marked differ
ences in the stress that individual members placed
on these two types of considerations, the Committee
agreed that it would not be desirable at present
either to revert to the money market conditions that
had prevailed until the end of April or to seek the
amount of firming that evidently would be required
to achieve a substantial slowing of growth in the
aggregates over to the second quarter.

June 29 M eeting
In the Com m ittee’s discussion considerable concern
was expressed about the rapid growth in the mone
tary aggregates, particularly in light of the persist
ence of inflationary pressures and expectations. At
the same time, concern was expressed about the recent
upward pressures on interest rates, in view of the
dependence of the current econom ic recovery on
continued expansion in such interest-sensitive sectors
of the economy as residential construction.
Page 19

Page 20

FEDERAL OPEN MARKET COMMITTEE ECONOMIC POLICY DIRECTIVES
D a te o f
FO M C
M e e tin g
J a n u a r y 12

Policy Consensus

Operating Instructions

In lig h t o f the fo re g o in g d e v e lo p m e n ts , it is the
p o lic y o f th e F e d e ra l O p e n M a rk e t Com m ittee to
fo s te r f in a n c ia l co n d itio n s co n d u cive to the r e
sum p tio n o f s u s ta in a b le e co n o m ic g ro w th , w h ile
e n co u ra g in g a n o r d e r ly red u ctio n in the ra te of
in fla tio n
and
th e a tta in m e n t o f re a so n a b le
e q u ilib riu m in the c o u n try ’s b a la n c e o f p aym e n ts.

To im p lem en t th is p o lic y , the C o m m ittee seeks to p ro
mote a cco m m o d ative co n d itio n s in cre d it m arke ts an d
m o derate e x p a n s io n in m o n e ta ry a n d cre d it a g g re g a te s .
System op en m ark e t o p e ra tio n s u n til the n e xt m eetin g of
the Com m ittee s h a ll be co nducted w ith a v ie w to m a in
ta in in g b a n k rese rve s an d m o n ey m ark e t co n d itio n s co n
sisten t w ith th o se o b je c tiv e s , ta k in g acco u n t o f the fo rth
com ing T re a s u ry fin a n c in g .

no p ro viso cla u se

Proviso Clause of Directive

D is s e n ts :
M r. F ra n c is
F e b ru a ry 9

No Change
D isse n ts:
M r. Fra n c is

. . . System o p en m ark e t o p e ra tio n s u n til th e n e xt m eet
in g of the C o m m ittee s h a ll be co nducted w ith a v ie w to
m a in ta in in g p re v a ilin g m o n ey m arket co n d itio n s w h ile
accom m od atin g a d d itio n a l d o w n w a rd m ovem ents in lo n g
term ra te s ;

p ro vid e d th a t m o ney m a rk e t co n d itio n s s h a ll p ro m ptly
b e e a se d so m ew h a t fu rth e r if it a p p e a rs th a t the m o ne
t a r y a g g re g a te s a re f a llin g sh o rt o f the g ro w th path
d e s ire d .

M a rch 9

No C h an g e
D isse n ts:
N one

. . . System open m ark e t o p e ra tio n s u n til th e n e x t m eet
ing of th e C o m m ittee s h a ll be co nducted w ith a v ie w to
m a in ta in in g p re v a ilin g m o ney m ark e t co n d itio n s w h ile
accom m od atin g a n y d o w n w a rd m ovem ents in long-term
ra te s ;

p ro vid e d th at m o n ey m ark e t co n d itio n s s h a ll be m odi
fied if it a p p e a rs th a t th e m o n e ta ry a n d cre d it a g g r e
g a te s a re d e v ia tin g s ig n ific a n tly from th e g ro w th p ath s
e xp e c te d .

A p r il 6

In lig h t o f th e fo re g o in g d e v e lo p m e n ts , it is the
p o lic y o f th e F e d e ra l O p e n M a rk e t Com m ittee to
fo s te r f in a n c ia l co n d itio n s co n d u cive to the
resu m p tio n o f s u s ta in a b le
econo m ic g ro w th ,
w h ile e n c o u ra g in g an o r d e r ly red uctio n in the
ra te o f in f la tio n , m o d e ratio n o f short-term c a p i
ta l o u tflo w s, a n d
a tta in m e n t o f re a so n a b le
e q u ilib riu m in the co u n try 's b a la n c e o f p a ym e n ts.
D isse n ts:
M r. H a y e s
M r. K im b re l

. . . w h ile ta k in g account o f th e T re a s u ry fin a n c in g the
term s of w h ich a re to be a n n o u n ce d la te in the m onth.
System op en m ark e t o p e ra tio n s u n til th e n e xt m eeting of
the Com m ittee s h a ll be co nducted w ith a v ie w to a tta in in g
te m p o ra rily som e m ino r firm in g in m o ney m ark e t c o n d i
tio n s , w h ile co n tin u in g to meet som e p a rt o f re se rve needs
through p u rch ase s o f coupon issu es in the in te re st of
prom oting a cco m m o d ative co n d itio n s in long -term cre d it
m a rk e ts;

p ro vid e d th a t m o n ey m a rk e t co n d itio n s s h a ll be m o di
fied if it a p p e a rs th a t th e m o n eta ry a n d cre d it a g g r e
g a te s a re d e v ia tin g s ig n ific a n tly from the gro w th p ath s
d e sire d .

M a y 11

No Change
D is s e n ts :
N one

. . . th e C o m m ittee seeks to m o d e rate g ro w th in m o n e tary
a n d cre d it a g g re g a te s o v e r the m onths a h e a d , ta k in g
account o f the cu rre nt T re a s u ry fin a n c in g , d ev e lo p m e n ts in
ca p ita l m a rk e ts , an d u n ce rta in tie s in fo re ig n e x c h a n g e
m arke ts. System open m a rk e t o p e ra tio n s u n til the n e xt
m eeting of the Com m ittee s h a ll be a im e d in it ia lly a t m a in
ta in in g cu rre n tly p re v a ilin g m o n ey m ark e t c o n d itio n s , an d
th e re a fte r conducted w ith a v ie w to m a in ta in in g b an k
reserves an d m o ney m a rk e t co n d itio n s co n siste n t w ith the
ab o ve -cite d o b je ctiv e s.

no p ro viso cla u se

Ju n e 8

No C h an g e
D is s e n ts :
N on e

. . . the Com m ittee se eks to m o derate g ro w th in m o n e ta ry
a g g re g a te s o v ® the m onths a h e a d , ta k in g acco u n t of
r
develop m en ts in c a p ita l m ark e ts. S ystem op en m arket
o p e ra tio n s u n til th e n e xt m eeting o f th e Com m ittee sh a ll
be conducted w ith a v ie w to a ch ie v in g b a n k re se rve an d
m oney m a rk e t co n d itio n s co n siste n t w ith th o se o b je c tiv e s .

no p ro viso cla u se

Ju n e 2 9

No C h an g e
D is s e n ts :
N on e

. . . th e Com m ittee se eks to a c h ie v e m ore m o d e rate
g ro w th in m o n eta ry a g g re g a te s o v e r th e m onths a h e a d ,
ta k in g acco u n t o f d eve lo p m e n ts in c a p ita l m a rk e ts. System
open m a rk e t o p e ra tio n s u n til the n e x t m eetin g o f the
C om m ittee s h a ll be conducted w ith a v ie w to a ch ie v in g
b a n k re se rve a n d m oney m arket co n d itio n s co n siste n t w ith
those o b je ctiv e s.

no p ro viso cla u se

J u ly 2 7

In lig h t o f th e fo re g o in g d e v e lo p m e n ts, it is
the p o lic y o f th e F e d e ra l O p e n M a rke t Com
m ittee to fo s te r fin a n c ia l co n d itio n s co nducive to
s u s ta in a b le econo m ic g ro w th , w h ile e n co u rag in g
an o rd e rly red u ctio n in the ra te of in fla tio n ,
m o d e ratio n o f short-term c a p ita l o u tflo w s, and
a tta in m e n t o f re a so n a b le e q u ilib riu m in the
c o u n try ’s b a la n c e o f p a ym e n ts.
D isse n ts:
N one

. . . ta k in g accou n t o f th e cu rre nt T re a s u ry fin a n c in g a n d
o f d eve lo p m e n ts in c a p ita l m a rk e ts, the C o m m ittee seeks
to a c h ie v e m ore m o derate g ro w th in m o n e ta ry a g g re g a te s
o ve r the m onths a h e a d . System op en m ark e t o p e ra tio n s
until the n e xt m eeting o f the Com m ittee s h a ll be conducted
w ith a vie w to a ch ie v in g b an k re se rve an d m o n ey m arket
co n d itio n s co n siste n t w ith those o b je ctiv e s.

no p ro viso cla u se

A ug ust 2 4

In lig h t o f th e fo re g o in g d e v e lo p m e n ts, it is
the p o lic y o f th e F e d e ra l O p e n M a rke t Com
m ittee to fo s te r fin a n c ia l co n d itio n s consistent
w ith the a im s o f the new g o ve rn m e n tal p ro gram ,
in c lu d in g s u s ta in a b le re a l econom ic g ro w th and
in c re a s e d e m p lo y m e n t, ab a te m e n t of in fla tio n a ry
p re s s u re s , a n d a tta in m e n t of re a so n a b le e q u ili
brium in the co u n try's b a la n c e of p aym e n ts.
D is s e n ts :
N on e

. . . the Com m ittee se eks to a c h ie v e more m o derate
g ro w th in m o n e tary a n d cre d it a g g re g a te s o ve r the months
a h e a d . System open m a rk e t o p e ra tio n s u n til th e n e xt
m eeting o f the Com m ittee s h a ll be co nducted w ith a v ie w
to a c h ie v in g b a n k rese rve a n d m o ney m arket co n d itio n s
co n siste n t w ith th at o b je ctive .

no p ro viso cla u se

S e p te m b e r 21

No Change
D isse n ts:
N one

. . . the C o m m ittee se eks to a c h ie v e m o derate g ro w th in
m o n eta ry a n d cre d it a g g re g a te s , ta k in g acco u n t o f d e v e lo p
ments in c a p ita l m ark e ts. System open m ark e t o p e ra tio n s
until the n e x t m eeting o f the Com m ittee s h a ll be conducted
w ith a vie w to a ch ie v in g b a n k rese rve a n d m o ney m arket
co n d itio n s co n siste n t w ith th at o b je ctive .

no p ro viso cla u se

O c to b e r 1 9

No Change
D is s e n ts :
N one

. . . the Com m ittee se eks to a c h ie v e m o d e rate g row th
in m o n e ta ry a n d cre d it a g g re g a te s o ve r th e m onths a h e a d .
S ystem open m arket o p e ra tio n s until the n e xt m eeting of
the Com m ittee s h a ll be co nducted w ith a v ie w to a ch ie v in g
b a n k re se rve a n d m o ney m arket co n d itio n s co n siste n t w ith
th at o b je c tiv e , ta k in g acco u n t of the fo rth co m in g T re a s u ry
fin a n c in g .

no p ro viso cla u se

N ovem ber 1 6

No Change
D is s e n ts :
N on e

. . . the Com m ittee se eks to p rom ote so m ew h a t g re a te r
g ro w th in m o n e ta ry a n d cre d it a g g re g a te s o ve r th e m onths
a h e a d . S ystem op en m ark e t o p e ra tio n s u n til the n ext
m eeting of the C o m m ittee s h a ll be co nducted w ith a vie w
to a c h ie v in g b a n k rese rve an d m o ney m ark e t co n d itio n s
co n siste n t w ith th a t o b je ctive .

no p ro viso cla u se

D ecem b er 1 4

No Chang e
D is s e n ts :
N one

. . . the C o m m ittee se e k s to prom ote the d e g re e o f e a se
in b a n k re se rve an d m o n ey m a rk e t c o n d itio n s e s s e n tia l to
g re a te r g ro w th in m o n e ta ry a g g re g a te s o v e r the m onths
a h e a d , w h ile ta k in g a cco u n t o f in te rn a tio n a l d e v e lo p m e n ts.*

no p ro viso cla u se

SOURCE:

Page 21

“ Record o f Policy A ction s” of the Federal Open
M arket Com mittee, published in the Federal Re
serve B ulletin

* Subsequent to the December m eeting, on December 20, 1971,
Committee members voted unanimously to amend the eco
nomic policy directive by adding the clause “ while taking
account o f international developments.”

FEDERAL

RESERVE

BANK OF

ST. L O U I S

MARCH

1972

W hile the members agreed that an unduly sharp
firming of money market conditions should be
avoided because of the risk of undesired repercus
sions on market interest rates, the Committee de
cided that open market operations in the coming
period should be directed at achieving more mod
erate growth in monetary aggregates over the months
ahead. As at the preceding meeting, it was agreed
that account should be taken of developments in
capital markets in the conduct of operations.

Every open market operation, regardless of its pur
pose, affects the base. Open market operations aimed
at offsetting market determined movements in inter
est rates result in accelerations or decelerations of the
growth of the base and hence, shifts in the money
supply function. If greater short-run variations in in
terest rates were permitted, the FOMC would be
better able to control the growth trend of money.

Money, Base, and Money Market Conditions
Movements in the base paralleled movements in
the money stock in 1971, as shown in Table II and the
accompanying chart. This close relationship between
growth of the monetary base and money is not unique
to this period. Table II also presents the pattern of
movements in the base and money over the recent
periods of sharp accelerations and decelerations.
Money Stock and Monetary Base
R a tio S c a le
B illio n s o f D o lla r s
250

R a tio S c a le
B illio n s o f D o lla r s
250

Monthly A ve ra g e s of Doily Figure

+ 0 8?
<03% *^

+3 2%

M o n By S lock

228.2

+5 4 % _

200

2 % ^ ^

+6 4
+3.8%

100

100
+ 3 65
9 4%

90
M o n e ta r

+6.2% .

Base*

+3.0%

^ ^ 8 9

+6 4 % ^ ~ »
+26%

+4.8%____

<
>
?
a
5
<
- J ___ — L

1963

1964

1965

•
<
g

a
i . .

1966

___
_ _ _........... ...............
1967
1968
1969

-3

As shown in Table I, money market conditions
firmed in the period March through July. However,
as shown in Table II, the growth rate of the base ac
celerated from 8.4 percent in March to 10 percent in
May and then remained at about a 9 percent rate
through July. Such a growth path for the base clearly
did not imply a much slower growth of money. Over
the second half of the year money market conditions
eased markedly, but the base decelerated dras
tically. The growth path of money paralleled the
growth path of the monetary base, not the pattern of
money market conditions.
The situation where the growth pattern of money
deviated from that expected from specified money
market conditions is not a situation peculiar to 1971.
This same pattern can be traced in the Policy Record
of the FOMC in prior years.10

t __ L .J

...........
1970

1971

•Uses o( the m onetary base ore member bank reserves and currency held by the public ond
nonmembef bonks Adjustments a re made for reserve requirement changes and shifts in deposits
among classes of banks. D ata a re computed b y this Bank.
Percentages are a n nu al rates of change for perio ds indicated.
Latest data plotted. Decem ber

Federal Reserve actions, primarily open market op
erations, dominate the growth pattern of the mone
Page 22

tary base.9 Over any period of time, there will be a
set of money market conditions, a growth rate of base,
and a growth rate of money consistent with a given
course of open market actions. However, open market
operations that achieve a set of money market condi
tions desired by the Committee may not be consistent
with a growth of the base necessary to achieve the
growth rate of money also desired by the Committee.

9Other Federal Reserve actions that influence the monetary
base include Federal Reserve lending to membr banks and
changes in member bank reserve requirements.
"'See Reprints 22, 28, 39, 57, and 68 for annual reviews of
monetary actions by the FOMC for the years 1966-70,
available on request from this Bank. See also Brimmer, “The
Political Economy of Money,” pp. 48-53, for a discussion of
the problems encountered in 1966.

FEDERAL

RESERVE

BANK

O F ST. L O U I S

MARCH

1972

T a b le II

GROW TH

RATES O F M O N E Y A N D THE M O N ETA R Y BA SE: SELECTED

PERIODS

(G ro w th Rates A re B a se d O n S ix-M o n th P e rio d s ) *

M oney
M id 1 9 6 5 - E a r ly 1 9 6 6
A c ce le ra tio n

1971

1967
A c ce le ra tio n

1966
D e ce le ratio n

1969
D e ce le ra tio n

D ecem ber 1 9 7 0

5 .2 %

M ay 1965

2 .4 %

D ecem ber 1 9 6 6

-0 -%

A p r il 1 9 6 6

6 .5 %

O c to b e r 1 9 6 8

8 .4 %

J a n u a r y 1971

4 .8

Ju n e

3 .3

Ja n u a ry 1 9 6 7

0 .5

M ay

5 .6

N o vem b e r

8.1

F e b ru a ry

5 .8

J u ly

3 .5

F e b ru a ry

2 .5

Ju n e

4 .5

D ecem ber

7 .8

M arch

6 .6

A u g u st

3 .8

M arch

3 .4

J u ly

2.1

Ja n u a ry 1969

7 .4

A p ril

7 .7

S e ptem ber

4 .4

A p ril

3 .2

A u g u st

1 .7

F e b ru a ry

7 .4

M arch

7 .3

M ay

9 .8

O cto b e r

5 .5

M ay

5 .4

S e ptem ber

Ju n e

1 0 .2

N o vem b e r

5 .9

Ju n e

6 .6

O c to b e r

— 0 .3

A p ril

7 .0

J u ly

1 1 .6

Decem ber

6.1

J u ly

8 .7

N o vem b e r

— 0 .4

M ay

5 .6

D ecem ber

-0-

1 .6

A u g u st

9 .7

Ja n u a ry 196 6

6 .8

Ju n e

4 .9

S e ptem ber

7 .3

F e b ru a ry

6 .8

J u ly

4 .6

O cto b e r

6 .0

M arch

6 .5

A u g u st

2 .9

N o vem ber

3 .5

A p ril

6 .5

S e ptem ber

2 .4

D ecem ber

2 .4

O cto b e r

2 .2

N o vem b e r

2.1

D ecem ber

1 .5

M onetary Base
M id 1 9 6 5 - E a r ly 1 9 6 6
A c ce le ra tio n

1971

1967
A c ce le ra tio n

1966
D e ce le ratio n

1969
D e ce le ratio n

D ecem ber 1 9 7 0

7 .3 %

M ay 1965

4 .1 %

Decem ber 1 9 6 6

2 .7 %

A p ril 1 9 6 6

6 .1 %

O c to b e r 1 9 6 8

6 .8 %

Ja n u a ry

8.1

Ju n e

4 .5

Ja n u a ry 1 9 6 7

1 .9

M ay

6 .0

N ovem ber

7 .4

F e b ru a ry

8 .4

J u ly

4 .7

F e b ru a ry

3 .9

Ju n e

4 .5

D ecem ber

7 .2

M arch

8 .4

A u g u st

4 .6

M arch

5 .2

J u ly

5 .4

Ja n u a ry 1969

6 .8

A p ril

8 .7

Se p tem b e r

4 .5

A p r il

5 .7

A u g u st

3 .9

F e b ru a ry

5 .9

1971

M ay

10.1

O cto b e r

5 .2

M ay

5 .9

S e p tem b e r

4 .0

M arch

5 .6

Ju n e

9.1

N ovem ber

5 .4

Ju n e

6 .0

O cto b e r

2 .3

A p ril

4 .5

J u ly

8 .9

D ecem ber

6 .2

J u ly

6 .3

N o vem ber

2 .0

M ay

4 .8

A u g u st

7 .9

Ja n u a ry 1 9 6 6

6.1

D ecem ber

2 .7

Ju n e

3 .6

S e ptem ber

7 .4

F e b ru a ry

6 .0

J u ly

2 .3

O cto b e r

6 .5

M arch

6 .0

A u g u st

2 .2

N ovem ber

5 .2

A p ril

6 .5

S e p tem b e r

1 .8

D ecem ber

4 .9

O cto b e r

2 .3

N o vem b e r

1 .9

D ecem ber

2 .4

♦For each month the growth rates o f both money and the monetary base are a compound annual rate based on a month six months earlier.
For example, the growth rate for December 1970 is computed by com paring the average for June 1970 to December 1970 and then converting
to an annual rate. The rate for January 1971 is computed by com paring July 1970 to January 1971.

Long-Run Compared To Short-Run Effects
of Changes in the Growth of the Rase
When implementing monetary policy, a careful dis
tinction has to be made between the short-run effect
of a change in the base and the longer-run effects of
such actions. The short-run effect of accelerating the
growth of the base is to lower market interest rates,
while a deceleration of the base puts upward pressure
on market rates and results in firming of other money
market conditions. However, longer-run effects of such

actions are opposite from their initial effect. For ex
ample, suppose that market rates are moving upward
and the FOMC decides to resist such a trend. The
Desk may be instructed to maintain prevailing money
market conditions; in other words use open market
operations to resist a further rise in market rates. To
do so, the Desk probably would have to accelerate its
purchase of securities, and thus growth of the base
would accelerate. The initial effect would be to slow
or to lower market interest rates.
Page 23

FEDERAL

RESERVE

B A N K O F ST. L O U I S

This acceleration of the base leads to an accelera
tion in the growth of money, and over time total
spending rises more rapidly. An increased demand for
credit develops, and thus additional upward pressures
on market interest rates follow. “Maintaining existing
money market conditions,” or even permitting only
“some moderate firming in money market conditions”
may require a further acceleration in the base. This
process creates severe problems when the FOMC at
tempts to control the growth of money by using a
money market strategy.
If money market conditions are firmed enough to
actually slow the growth of the base, then the growth
of money slows. However, if the slowdown of money
is maintained, then longer-run effects of this policy on
income and the demand for credit lead to falling mar
ket rates and easier money market conditions. As rates
fall the FOMC may reason that its open market opera
tions have caused the easing in the money market and
that the decline in market interest rates indicates that
open market operations are exerting a more expan
sionary (or less restrictive) effect on their policy
objectives. The FOMC may therefore be reluctant to
increase its purchases of securities to halt a rapid de
celeration of the base. Again, from a money market
operating strategy, it appears the Desk is attempting
to achieve a reversal in the growth trend of money.
However, from an analysis that emphasizes growth of
the base as the primary determinant of the growth of
money, the money market operating strategy again
spells considerable problems for money control.11
u These results are implied by considerable theoretical and
empirical research. For example, in a study of several large
econometric models Professor Joseph R. Zecher found the
following (where Ba denotes the net source base or non
borrowed base):
( 1 ) Although the adjustment patterns differ among
the models, all of the models imply that in the second
and later quarters after the change in B a the responses
of both the short-term interest rate and the long-term
interest rate decay rapidly.
( 2 ) Using Ba to control the term structure of in
terest rates is effective only in the quarter of the policy
action. By the second quarter most of the effect of the
policy action disappears and may actually be reversed
if income is especially responsive to changes in B a.
(3 ) A constant interest rate policy has the following
characteristics according to these models: (a ) control of
demand deposits is forfeited in the quarter in which
the policy is instituted; (b ) control of time deposits is
forfeited after the first quarter; and (c ) the sharp re
versal of the response to B a after the first quarter, and
the resulting shift in the relative influence on the short
term interest rate of the initial changes in B a and in
come, make the conduct of an interest rate policy in
succeeding quarters increasingly complicated.
See Joseph R. Zecher, “An Evaluation of Four Econometric
Models of the Financial Sector,” Dissertation Series Number
1 in Federal Reserve Bank of Cleveland Econom ic Papers
(January 1970). The models studied were two versions of a

Page 24

MARCH

1972

Conclusions
To attain its policy objectives in 1971 the FOMC
sought to use open market operations to achieve mod
erate growth rates for the monetary aggregates and
moderately declining interest rates. However, if one
looks at the pattern of interest rates or the growth of
money over 1971 both these series resemble a roller
coaster. Market rates fell early in the year, reversed
their course in February and March, then rose rapidly
until early August when they began a rapid decline
that carried into 1972. The growth of the money stock
accelerated at extremely rapid rates over the first half
of the year then decelerated at very rapid rates over
the second half of 1971.
The Committee’s intermediate objectives for interest
rates and growth of the monetary aggregates were
often in conflict in 1971. One conclusion of this article
is that the operating strategy based on allowing only
small changes in money market conditions in seeking
to avoid possible undesired movements in long-term
rates resulted in sharper accelerations and decelera
tions in the growth of money in 1971 than desired by
the FOMC. The problems of trying to implement mon
etary policy with money market conditions as the pri
mary target of open market operations had been
forcefully brought to the Committee’s attention by the
Maisel Committee Report completed in early March
1970.12 The report was not adopted formally by the
FOMC, nor has it been published. However, the gen
eral content of the Maisel Report may be obtained
from a speech by Governor Rrimmer:
In general, the issue the M aisel Com m ittee focused
on is the one already identified: if money m arket
conditions are the primary target of open market
operations, the FO M C has no clear and definitive
way of giving instructions to the M anager of the
model by Ronald L. Teigen, the Brookings model financial
section, and the FRB-M IT model group. Results similar to
the first item cited above were also obtained using the
Ando-Goldfeld model in Zecher, “Implications of Four Eco
nometric Models for the Indicator Issue,” American E co
nomic Review (May 1970), pp. 47-54, especially Table 3,
p. 50. Also see William E. Gibson, “The Lag in the Effect
of Monetary Policy on Income and Interest Rates,” Quar
terly Journal o f Econom ics ( May 1970), pp. 288-300; William
P. Yohe and Denis S. Karnosky, “Interest Rates and Price
Level Changes, 1952-69,” this Review (December 1969),
pp. 18-38; and Albert E. Burger, “The Implementation
Problem of Monetary Policy,” this Review (March 1971),
pp. 20-30.
12The Maisel Committee was a Subcommittee appointed by
Chairman Martin in the Spring of 1969 for the purpose of
exploring means of improving open market operations. The
Committee was under the leadership of Governor Sherman
Maisel and also included Presidents Frank Morris (Boston),
and Eliot Swan (San Francisco). Papers prepared for the
Maisel Committee are available in Open M arket Policies and
Operating Procedures — Staff Studies, Board of Governors
of the Federal Reserve System, 1971.

FEDERAL

RESERVE

MARCH

B A N K O F ST. L O U I S

SOMA [System Open Market Account]. If he
achieved specified goals in terms of interest rates
and other money market conditions, he had no sure
way of reaching the Commiteee’s objectives with
respect to bank credit and the money supply. The
reverse is also true. Thus, given this conflict, the
need for basic reform of the FOMC’s approach to
monetary management was indicated.1'*
Past experience with a money market operating
strategy has not led to stable interest rates and has
frequently resulted in a discrepancy between actual
and desired growth rates of money. Prolonged rapid
increases and decreases of the money stock that ac
companied this strategy, through their effects on total
spending, price expectations and consequently the de
mand for credit, have been a major factor in the
marked fluctuations in market rates during the past six
years. Also, sharp accelerations and decelerations of
the monetary base which have been necessary at times
to offset wide swings in the growth of money have in
duced short-run instability into the money market.
If the growth of the money stock in 1971 was com
pletely demand determined (no shift in the money
13Brimmer, “The Political Economy of Money,” pp. 59-60.

1972

supply), then this would imply that very substantial
shifts occurred in money demand in 1971. Although
the evidence is not conclusive on the stability of the
demand for money, there is very little evidence that
suggests it is subject to very frequent and erratic
shifts.14
During 1971 the FOMC, on balance, resolved the
conflict between their desired path for interest rates
and their desired growth paths for monetary aggre
gates by cautiously adjusting money market conditions
and hence accepting greater accelerations and de
celerations in money than they initially desired. The
resulting open market operating strategy led to a rapid
growth of the monetary base in the first half of 1971
and a rapid deceleration in the growth of the base in
the latter part of 1971. Although changes in the de
mand for money may have exerted some direct influ
ence on growth of the money stock, changes in the
supply of money induced by these marked changes in
the growth of the monetary base were the dominant
influence on the growth of money in 1971.
l4See David E. W. Laidler, T he D em and fo r M oney: Theories
and Evidence (Scranton: International Textbook Co., 1969),
pp. 105-106.

SUPPLEMENT

Federal Op en Market Committee Decisions -1971*
The Federal Open Market Committee met thirteen
times during 1971 to review and evaluate developments
in the economy, and to prescribe what objectives open
market operations should try to achieve until the next
FOMC meeting in order to further the longer-run goals
of monetary policy. The 1971 FOMC meetings are
grouped into three periods. The decisions of January
through April were conditioned by the shortfall of money
in the fourth quarter of 1970 and by an explicit desire
for lower long-term interest rates. The directives of the
May through August meetings called for more moderate
growth of monetary aggregates, although aggregates grew
rapidly during most of the period. The directives of the
September through December meetings called for mod
erate or somewhat greater growth in monetary aggregates,
yet money was almost unchanged over the period.

January Through April: Desire For Moderately
Expansive Monetary Actions
The Committee desired that monetary actions accom
modate the economic recovery which was expected to
occur in the first quarter. Early in this period, several
members of the Committee were concerned about the
“Data presented are those available to the Committee at the
particular meeting. Subsequent revisions may have occurred
in some figures.

slower than desired growth in money in the fourth
quarter of 1970 and also desired to see further declines
in long-term interest rates. Money market rates fell sub
stantially during January and February.
Beginning in February, money began to grow very
rapidly and several long-term interest rates began to
rise. At the last three meetings of this period, the Com
mittee called for accommodation of any decline in long
term rates. Proviso clauses were added to the directives
calling for an adjustment of money market conditions
should the growth of aggregates deviate significantly
from the desired paths.

January 12 Meeting
The 1970 recession was clearly in evidence at this
meeting. For example, real GNP was expected to show
a decline in the fowrth quarter of 1970, largely due to
the automobile industry strike. The unemployment rate
rose to 6 percent in December 1970, and the U. S. trade
balance was reported to have deteriorated further in
November. The fourth quarter deficit in the balance of
payments on a liquidity basis was estimated to be about
the same as in the third quarter, that is, about $3 billion.
Projections by the staff of the Board of Governors
indicated a sharp recovery would begin in the first
quarter, primarily as a result of a resumption of auto
Page 25

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B A N K O F ST. L O U I S

production. The rate of increase of real GNP was ex
pected to slow in subsequent quarters. Part of the
strength in the economy was expected to come from
residential construction and state and local spending.
Consumer expenditures were expected to increase only
moderately, apart from the anticipated return to a higher
rate of new car purchases early in the year, while
defense spending and fixed investment were not expected
to bolster economic activity over the first half of the
year.
Although money growth viewed over a longer time
period was about in line with the desired rate, a short
fall had occurred in the fourth quarter of 1970. The
Committee had desired a 5 percent rate of money
growth, compared with an actual rate of 3.8 percent.
Analysis presented to the Committee at the January
meeting indicated more easing of money market condi
tions would be necessary in order to expand Mi in the
first quarter at a 7.5 percent rate. The Committee de
cided to seek “some moderate easing of money market
conditions.” Although a proviso clause was not directly
included in the directive, the “Record of Policy Actions”
indicates that members desired enough easing in money
market conditions to be able to make up for the slower
fourth quarter growth in money.
Mr. Francis dissented from this decision. He desired
a continuation of a 5 percent growth rate of money,
which was about the average rate in the second half of
1970. With this rate of growth of money he felt that
the “longer-run performance of production and prices
would be better than if money were to expand at some
faster rate.” In addition, he desired less emphasis on
money market conditions in implementing open market
operations.

February 9 Meeting
Some renewed evidence of upward pressure on prices
was given at this meeting. The consumer price index
rose considerably in December, and wholesale prices

Page 26

MARCH

1972

rose rapidly in January, due in part to an increase in
agricultural prices.
Following the January meeting both long- and short
term interest rates fell, which was thought to reflect the
reports of weak economic activity and market expecta
tions of lower rates which had been buttressed by reduc
tions in the prime lending rate and the discount rate. It
was noted at this meeting that money had increased less
in January than had been expected earlier. The Policy
Record stated that open market operations had been
aimed at somewhat easier money market conditions ini
tially after the January meeting, and then sought more
easing as money fell short of Committee expectations.
Even with the slow January increase, growth of money
was expected to be at about a 6 percent annual rate in
the first quarter, assuming the prevailing money market
conditions were maintained. Although the Committee
agreed to “accommodate further declines in long-term
interest rates,” the February “Record of Policy Actions”
reported that members of the Committee differed in
their views concerning objectives for money and short
term credit markets and monetary and credit aggregates.
Some members continued to want more easing in money
market conditions, while other members wanted these
conditions unchanged in view of the recent and prospec
tive rapid growth of monetary aggregates other than
money and the undesirable consequences of lower short
term rates for international capital flows. Also, some mem
bers expressed a desire for less emphasis on short-run
fluctuations in money in the period ahead.
The Committee directed open market operations to
“be conducted with a view to maintaining prevailing

FEDERAL

RESERVE

MARCH

B A N K O F ST. L O U I S

Y ie ld s on Selected Secu rities

1972

maintained, and that a more rapid rate could be ex
pected in the second quarter.
Various views were expressed in regard to the empha
sis that should be given monetary and credit aggregates
and on the appropriate rate of growth for these aggre
gates. Some members were concerned about the pro
jected rapid growth of aggregates in the second quarter.
Others “stressed the uncertainties attached to the projec
tions . . . and indicated that they were not disturbed by
the near-term outlook for the aggregates.”
T h e directive called for “maintaining prevailing money
m arket conditions while accommodating any downward
movements in long-term rates.” A proviso clause was also
included stating that money market conditions should
be modified if it appeared the expected growth paths
were not achieved for monetary and credit aggregates.

April 6 Meeting

1970

1971

U . B o n d B u y e r's a v e r a g e in d e x o f 2 0 m u n ic ip a l b o n d s , T h u r s d a y d a ta
L a te s t d a » a p lo tt e d : w e e k e n d in g D e c e m b er 31, 1971

money market conditions while accommodating addi
tional downward movements in long-term rates.” In ad
dition, the Committee added a proviso clause stating that
it desired to have money market conditions “promptly”
eased if growth of monetary aggregates fell below their
desired paths. “The Committee also agreed that its
objectives for interest rates would be facilitated if, to
the extent feasible, needs to supply reserves were met
by purchases of longer-term Treasury securities.”
Mr. Francis dissented from the February directive for
reasons similar to those at the previous meeting. Namely,
he preferred a 5 percent growth rate for money and
less emphasis on money market conditions in imple
m enting monetary policy.

March 9 Meeting
Yields on new issues of corporate and municipal bonds
began to rise in early February, although short-term
rates continued to fall. Several Committee members
expressed concern about the increases in long-term rates.
T h e desirability of renewed declines in long-term rates
was generally agreed upon, but it was also recognized
that “further sizable declines in short-term interest rates
would not serve a useful purpose.” Some members in
dicated a desire to have some modest increase in short
term rates in view of recent large capital outflows and
the expected rapid growth of monetary and credit
aggregates.
At the M arch meeting it was noted that M i, M 2 and
the adjusted credit proxy grew more rapidly in February
than had been expected at the previous meeting. Analy
sis presented at the March meeting indicated Mi would
grow at about a 7 percent annual rate in the first quarter
of 1971 if prevailing money market conditions were

Real GN P was reported at this m eeting to have risen
substantially in the first quarter,- however, unemploy
ment moved back up to 6 percent. Slower real GNP
growth was still expected in the second quarter, pri
marily due to slower growth in sales of motor vehicles
and a decline in defense expenditures. T h e outlook for
the second half of 1971 was clouded by the possibility
of a steel strike, but assuming a strike of no more than
60 days, projections indicated the growth of real GNP
would be somewhat higher than the anticipated growth
for the second quarter.
The U. S. foreign trade account showed only a small
surplus in January and February. T h e deficit in the
balance of payments , on the liquidity basis was expected
to be much larger in the first quarter than in the second
half of 1970, while on an official setdements basis the
first-quarter deficit in the payments balance was ex
ceptionally large. These deficits were bolstered by heavy
capital flows of interest-sensitive funds.
Following the M arch meeting, short-term interest
rates began to rise. F o r example, 3-month Treasury bill
rates rose about 4 0 basis points. After rising considerably
in previous weeks, yields on new corporate and municipal
bonds fell after the M arch meeting, then later on began
to advance again. Both Mi and M 2 were reported to
have increased considerably more than had been ex
pected at the previous meeting, while the adjusted credit
proxy grew less rapidly than was expected. It was
estimated that M i grew at about an 8 percent annual
rate in the first quarter, M 2 at a 17.5 percent rate, and
the adjusted credit proxy at an 11 percent rate. In
response to the “considerably faster than expected”
growth of M i and M 2 , some “slight finning of money
market conditions” was sought after the M arch meeting.
Under the assumption of maintaining prevailing money
m arket conditions, analysis indicated M i would grow
even faster in the second quarter than the 8 percent in
the previous quarter. Growth of various tim e deposits,
however, was expected to slow substantially, leading to
moderation in the growth of M 2 and the credit proxy.
T h e Committee agreed that open market operations
should be aimed at “attaining temporarily some minor
Page 27

FEDERAL

RESERVE

MARCH

B A N K O F ST. L O U I S

U.S. Balance of Payments and Components
(+) S u rp lu s; (-) D e ficit

1972

Federal funds rate advanced from about around 3% per
cent following the March meeting to about 4*4 percent
in the first part of April and remained there until the
end of April. “Subsequendy, however, despite largescale, reserve-supplying operations by the System, the
Federal funds rate advanced to a range around \Vz
per cent.”

May Through August: Moderating the
Growth of Monetary Aggregates and the
Rise of Long-Term Interest Rates
Evidence of economic recovery was presented during
the meetings of this period, with retail sales and housing
starts among the strongest indicators. Unemployment,
however, remained around the 6 percent level, and
there was little evidence of an abatement of inflationary
pressures.
The directives of each meeting during this period
called for “moderate” or “more moderate” growth in
monetary aggregates. However, except for August, the
Committee modified this objective in each directive by
stating that “developments in capital markets” should be
taken into account. This modifying clause might be inter
preted as meaning to minimize upward pressures on
long-term rates as firmer money market conditions were
sought in order to moderate growth of aggregates.

May 11 Meeting

Note: The net liquidity balance is the sum of the net current account, net long-term private capital, net nonliquid
short-term private capital, allocations of special drawing rights, and net errors and omissions. The official
settlements balonce is the sum of the above accounts plus net flows of liquid private capital.
Latest data plotted: 3rd quarter preliminary

firming in money market conditions.” Some members
wanted this firming in order to narrow the difference
between short-term interest rates here and abroad so
as to moderate capital outflows. The Committee stated
its desire to have “more moderate expansion in the mon
etary aggregates in the second quarter than had occurred
in the first,” that is, less than 8 percent.
Two members dissented from this directive, favoring
in both cases “more firming of money market condi
tions” than implied in the Committee’s directive. Mr.
Hayes thought there was a “need for moving toward
somewhat higher short-term interest rates in light of the
international financial situation” as well as the “risk of
excessive growth in the money stock.” Mr. Kimbrel
thought “higher short-term interest rates would be de
sirable mainly to hold growth in the monetary and
credit aggregates to a moderate pace in order to avoid
a rekindling of inflationary expectations.”
The “Record of Policy Actions” for the May 11 meet
ing states that initially after the April meeting “some
what firmer conditions in the money market”were sought.
Then as aggregates, primarily M1; grew faster than ex
pected, “some slight additional firming was sought.” The

Page 28

Preliminary Commerce Department figures indicated
that real GNP had increased at a 6.5 percent annual rate
in the first quarter, after declining at a 3.9 percent rate
in the fourth quarter of 1970. More moderate growth in
real GNP was expected in the second quarter.
The deficits in the balance of payments were de
scribed as “extremely large” for the first quarter. These
deficits were attributed to short-term capital outflows
resulting from the differential between interest rates
here and abroad as well as speculation concerning
changes in exchange rates. Heavy flows of dollars into
European currencies, such as the German mark, were
reported in the first few days of April, but had subsided
during the next three weeks. In early May several
countries, including Germany, Switzerland, the Nether
lands, Belgium, and Austria, suspended sales of their
currencies for dollars; the German mark and Dutch
guilder were floated; and the Swiss franc and Austrian
schilling were revalued upward.
Short- and long-term interest rates rose sharply fol
lowing the April meeting. Growth of the money stock
was revised upward for March, bringing Mi to a 9 per
cent annual rate in the first quarter. Assuming money
market conditions similar to those prevailing during most
of April, analysis indicated MT would increase at about
a 9 percent annual rate in the second quarter. Even
with somewhat firmer money market conditions, Mi
was expected to grow at about an 8.5 percent rate in
the second quarter.
Members of the Committee expressed concern about
both rapid growth in monetary aggregates as well as

FEDERAL

RESERVE

B A N K O F ST. L O U I S

MARCH

U nem ploym ent Rate
P e rce n t

P e rce n t

S e a s o n a lly A d ju s te d

6 1

*
3

1963

1964

1965

1966

1967

1968

1969

1970

1971

S o u rc e : U .S . D e p a rtm e n t o f L a b o r

1972

conditions. W ith somewhat firmer conditions, little change
was expected in the second quarter growth rate of
money, and a reduction of only about one percent was
expected in the third quarter projections. Projections
for the growth of money at the late June m eeting were
similar to those of the early June meeting.
At both of these meetings, members continued to
express concern about the rapid growth of aggregates
and the rise in interest rates. W ith regard to monetary
aggregates, at the early Ju n e m eeting the Committee
stated its desire to seek “somewhat slower growth over
coming months than appeared likely to eventuate if pre
vailing money market conditions were m aintained.” The
directive of the late June m eeting also called for more
moderate growth in monetary aggregates. W ith regard
to interest rates the Committee stated at both meetings
that a sharp firming of money m arket conditions should
be avoided, so as to minimize upward pressures on
long-term interest rates.

Late st d a ta p lo tte d : D e ce m b er

July 27 Meeting
the marked increases in long-term interest rates. Because
of these concerns, the Committee decided neither to
revert to the money market conditions which prevailed
in April, nor to seek a sharp firming in money market
conditions considered necessary to attain a sharp reduc
tion in the growth of aggregates in the second quarter.
Initially, the Desk was instructed to maintain prevailing
money market conditions in view of even-keel consid
erations. Thereafter, if significant deviations from the
expected paths for the aggregates occurred, money mar
ket conditions were to b e firmed, but in a cau tiou s
manner “with a view to avoiding undue reactions in
capital markets.” Because of uncertainties prevailing in
domestic financial and foreign exchange markets, the
Account M anager was given more than usual discretion
in carrying out open market transactions.

Ju ne 8 and 29 Meetings
Short-term interest rates continued to increase during
May and June, a trend begun in M arch. Yields on new
issue corporate bonds were, on average, about the same
in late June as in early May, while yields on municipal
bonds were somewhat higher.
A t the early Ju ne meeting, it was reported that the
money stock, as well as other aggregates, increased in
May at substantially more rapid rates than had been
expected at the May meeting. At the late June m eet
ing, preliminary data indicated money was growing
rapidly in June, but less rapid than in May. Thus in
view of this rapid growth, open m arket operations were
directed towards “somewhat firmer conditions.” The
Federal funds rate advanced from about 4 Vi percent at
the tim e of the May m eeting to about 5 Vs percent at the
time of the late June meeting.
At the early June m eeting projections indicated that
money would increase at about a 12 percent annual rate
in the second quarter, and around 10 or 11 percent in
the third quarter, assuming unchanged money market

Preliminary Commerce D epartm ent estimates indi
cated that real GNP increased in the second quarter at
about half the rate of the first quarter. Projections by the
staff indicated that real GNP would slow somewhat in
the third quarter, but would accelerate in the fourth
quarter. W holesale industrial and consumer prices in
creased “substantially” in June. I t was noted that these
price measures had risen at a faster rate in the second
quarter than earlier in 1971.
T h e U .S. balance-of-paym ents deficit for the second
quarter was described as “extraordinarily large.” This
deficit reflected partly the capital outflows, which re
sulted more from expectations of a further realignment
of currencies and less from interest differentials than in
the first quarter, and partly a deficit in the trade balance
compared with a surplus in the previous quarter. R e
newed tensions in foreign exchange markets were also
noted in July.
Short-term interest rates generally rose after the June
29 meeting, while long-term rates changed litde on bal
ance after rising in the second quarter. T h e money stock
rose at an 11.5 percent rate in the second quarter, com
pared with a 9 percent rate in the first quarter. Growth
of other monetary aggregates (M , and the bank credit
proxy) were noted to have decelerated in the second
quarter.
Analysis presented at the Ju ly m eeting indicated
money would expand at about a 9 percent annual rate
in the third quarter and at a much slower rate in the
fourth quarter. T h e Committee agreed m o re m o d e ra te
growth of aggregates remained the appropriate objec
tive. However, even-keel considerations were noted as
a constraint on open market operations until the next
meeting. Also, as in several previous meetings, develop
ments in capital markets were to be taken into account.
W ith these short-term objectives, the Account Manager
was again given more than usual discretion in conducting
open market operations.
Page 29

FEDERAL

RESERVE

BANK OF

ST. L O U I S

August 24 M eeting
T h e President’s New Econom ic Program was an
nounced on August 15, leading to a tentative reappraisal
of the econom ic oudook by the staff. Expectations of a
faster growth in real G N P in the rest of 1971 were
enhanced when the President announced the new pro
gram. T h e rate of advance of prices was expected to
slow, thus reducing somewhat the current-dollar GN P
for the remainder of the year. T h e balance-of-payments
deficit was noted to be increasing sharply after mid-year,
and was described as “massive” in the first half of August.
Analysis presented at this m eeting indicated money
growth “would m oderate somewhat in August and Sep
tem ber and would slow substantially further in the fourth
quarter,” assuming prevailing money market conditions
were maintained. It noted that because of the new pro
gram, projections for growth of aggregates were subject
to sizable errors. T h e Com m ittee decided in view of the
difficulties in assessing the impact of the New Econom ic
Program on econom ic activity, that a “marked change
in the stance of policy would b e prem ature.” However,
the Committee agreed to seek growth in aggregates
“well below” the rates of previous months.

September-December: Cautious Move
Toward Restoring Money Growth
In the remainder of 1971 there was a reversal of
trends for interest rates and monetary aggregates. Inter
est rates fell considerably from mid-August 1971 to midJanuary 1972, while the money stock exhibited almost
no growth. During this period the Com m ittee desired
to have m oderate growth in monetary aggregates, but
also desired that the easing of money market conditions
necessary to achieve this growth be made in a cautious
manner. L ater in this period, as the substantial reversal in
the growth of the aggregates becam e more apparent, some
w hat more emphasis was placed on achieving renewed
moderate growth in aggregates.

Septem ber 21 and October 19 Meetings
At the Septem ber meeting the outlook for real GNP
was for a “significantly slower” rate of increase in the
third quarter than the estimated 4 .8 percent rate in the
second quarter. Projections for the fourth quarter in
dicated growth of real GN P would accelerate and price
increases would moderate, partly in response to the New
Econom ic Program.
Staff projections reported at the O ctober m eeting were
optimistic for the first half of 1972. Real GN P was ex
pected to grow at, or slightly below, the expected fourth
quarter rate. This projection was based on an expected
growth of consumer spending and business capital out
lays. Projections of real GN P for both the fourth quarter
of 1971 and the first half of 1972 were “appreciably
faster” than those before the announcement of the New
Econom ic Program.
Short- and long-term interest rates fell immediately
following the President’s announcement. T h e downward
trend in interest rates, in general, continued through

Page 30

MARCH

1972

the O ctober 19 meeting. At these meetings it was noted
that both M i and M 2 had grown at slower rates in
August and Septem ber than had been anticipated.
Analysis presented at the Septem ber m eeting indi
cated that M i and M 2 would grow in the third quarter
at rates well below those of the second quarter. I f pre
vailing money market conditions were maintained,
money growth was expected to “slow further in the
fourth quarter.” A t the O ctober m eeting, analysis sug
gested that money would increase in the fourth quarter
a t about the same rate as the third, and that money
growth was likely to accelerate in the first quarter of
1972.
Directives issued at these two meetings called for
“m oderate growth in monetary and credit aggregates.”
T h e Septem ber meeting also contained a modifying
clause specifying that developments in the capital market
should be taken into account. Although the Committee
recognized the need for easing money m arket con
ditions in order to achieve this m oderate growth of
aggregates, the Committee at both meetings wanted to
avoid an “aggressive” or a “marked” easing in order to
achieve moderate growth of money in the near-term .
One reason given for avoiding an aggressive easing
of money market conditions was “to minimize the risk
of rekindling inflationary expectations.” A second reason
given was that in view of the rapid growth of money
in the first seven months of the year, “a marked easing
designed to stimulate faster growth in the near term
would not be warranted.” A gradual easing of money
market conditions was undertaken by the D esk following
the Septem ber and O ctober meetings.

November 16 Meeting
Price indexes showed a marked improvement for
Septem ber and October, reflecting the price-wage freeze.
Staff projections of real GN P growth for the fourth
quarter of 1971 and the first half of 1 9 7 2 w ere reduced
slightly from the projections presented at the previous
meeting. Following the O ctober m eeting, m arket interest
rates continued to decline.
Money declined slightly in Septem ber and October.
Growth of M i was anticipated to resume in D ecem ber
and accelerate in the first quarter of 1972, assuming
money m arket conditions were maintained similar to or
somewhat easier than those prevailing. It was expected
that M 2 would grow somewhat faster in th e fourth
quarter than the 4 .5 percent rate in the third quarter.
The uncertainty surrounding the transition from Phase
I to Phase II of the President’s New Econom ic Program
and the international situation was recognized by the
Committee as adversely affecting consumer confidence.
Some members felt that persistence of weak performance
in the monetary aggregates m ight add to this uncertainty.
Some members continued, however, to warn against “un
duly aggressive action to stimulate monetary expansion.”
T he Committee directed that “somewhat greater
growth” of monetary aggregates should be attained over
the months ahead. T h e Com m ittee recognized that “ap
preciably easier money m arket conditions” m ight be
necessary in order to achieve this growth.

FEDERAL

RESERVE

B A N K O F ST. L O U I S

D ecem ber 14 Meeting
Commerce D epartm ent estimates of real GNP growth
were revised upward to 4 percent for the third quarter.
Growth of real GNP appeared to be somewhat faster in
the fourth quarter as well. The rates of increase in prices
and wages were sharply lower during the “freeze” period.
M oney changed little in November and, on balance,
no growth in money occurred from August to November.
Some short- and long-term interest rates rose slightly
following the November meeting, but most rates began
to decline again before the D ecem ber meeting. Follow
ing the November meeting, the Federal funds rate fell
from about 4 % percent to about 4 % percent at the time
of the D ecem ber meeting.

MARCH

1972

Analysis indicated that easing of money market con
ditions would likely be required to achieve moderate
growth of M i in D ecem ber and January. T h e weakness
of M i and total m em ber bank reserves over the pre
vious four months was of “considerable concern” to
some of the Committee. Some members urged “more
aggressive actions” be taken, while others desired a
“more cautious and gradual” approach. T h e Committee
agreed, however,
. . . to promote the degree of ease in bank reserve
and money market conditions essential to greater
growth in monetary aggregates over the months
ahead.

This article is avaliahle as Reprint No. 76

Page 31

Has Monetarism Failed? —The Record Examined
Speech by DARRYL R. FRANCIS, President,
Federal Reserve Rank of St. Louis,
Refore the Indiana Association of Certified Public Accountants,
Southern Indiana Chapter, Evansville, Indiana, February 23, 1972

I AM PLEASED to have this opportunity to discuss
with you some of the problems of economic stabiliza
tion. As government grows larger, it becomes both a
potential stabilizer and destabilizer of the economy.
Individuals bear higher and higher costs of economic
instability, particularly in the form of unemployment
and inflation. It thus becomes imperative that the
economic profession, along with policymakers, investi
gate all alternative theories of stabilization and con
sider all available policy recommendations.
In recent years, doctrinaire and political bickering
have clouded the use of a scientific approach to eco
nomic stabilization and have hindered the considera
tion of some actions which may offer acceptable solu
tions. Recent attacks on monetarist views of economic
stabilization are a case in point, and I would like to
examine the merit of these attacks.
For a number of years, I have accepted the descrip
tion of economic behavior which is summarized by
the “monetarist tradition” and, since my appointment
to the presidency of the St. Louis Federal Reserve
Bank in 1966, I have advocated stabilization policies
consistent with this tradition. I would like to empha
size that my stance is not merely a belief, but an out
growth of empirical observation and testing. This does
not mean that I necessarily accept all the tenets or all
the pronouncements of monetarists. But the work and
research that has been done at our Bank for the
past thirteen years has produced overwhelming evi
dence which has helped to confirm my views of the
functioning of our economy and of the proper conduct
of economic stabilization efforts.
Attacks on monetarist positions are not new, but
recently they have become particularly strident, al
though no more precise than in the past. Examples of
such criticism can be found in both the widely read

Page 32

popular press and professional publications. Paul A.
Samuelson, a prominent economist and Nobel prize
winner, said in a N ew sw eek column last summer
(August 2, 1971), and I quote:
There are monetarists advising the President who
genuinely believe that the rapid growth in the money
supply so far in 1971 is bound to lead to rapid rates
of money and real growth, far beyond w hat the bulk
of the forecasters expect. All the President needs is
patience. This raises the question as to why the
President has confidence in such advisers. It is no
secret that the forecasting ability of monetarism is
selling at a huge discount on the markets of informed
opinion.

And again in a DePaul University publication, Issues
in Fiscal and Monetary Policy: T he E clectic E con
omist Views The Controversy, Samuelson states:
. . . in none of the modern sciences would it be re
spectable to believe in the pseudopositivism which
prevails among the monetarists. I t makes one
ashamed for one’s science, and provides us with still
another reason why the peculiar tenets of mone
tarism have to be rejected .1

Federal Reserve Board Governor Andrew F. Brim
mer, in a paper entitled “The Political Economy of
Money: Evolution and Impact of Monetarism in the
Federal Reserve System,” delivered at the EightyFourth Meeting of the American Economic Associa
tion on December 27, 1971, concludes:
. . . I am convinced that it would be a disastrous
error for the Federal Reserve to try to conduct mone
tary policy on the basis of a few simple rules govern
ing the rate of expansion of the money supply. In
l“Reflections on the Merits and Demerits of Monetarism,” in
Issues in Fiscal and Monetary Policy: An E clectic Economist
Views the Controversy, ed. James J. Diamond (DePaul Uni
versity Press, 1971), p. 21.

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the first place, I find serious deficiencies in the theo
retical and empirical analysis on the basis of which
the monetarists reach their conclusions and policy
recommendations. Put quite simply, they have not
demonstrated convincingly that the relationship b e
tween the money supply and econom ic activity is
especially close.

An article in the Business W eek magazine of Decem
ber 11, 1971, states:
F or the second year in a row, the monetarists fol
lowed their theory to an erroneous conclusion. They
expected the economy to be stronger than it was, and
they were looking for a pronounced subsidence in
inflation.

As mixed and oblique as these criticisms are, they
nevertheless have received a great deal of attention
in the popular press and are instrumental in molding
public opinion.
The criticisms mentioned here, as well as those ap
pearing elsewhere, seem to make two separate and
distinct points: one, that the monetarist description of
economic behavior, that is, theory, is incorrect, and
two, that monetarist policy recommendations have
been followed in recent years and have not pro
duced the desired results. These two assertions have
led many to conclude that the monetarist view should
no longer be given serious consideration in economic
stabilization efforts.
I think it is time to take a hard look at the record
and let you draw your own conclusions. The record I
wish to discuss is that compiled by the Federal Re
serve Bank of St. Louis. Although firmly in the mone
tarist camp, it may not represent all monetarist
thought nor all of its policy recommendations.
In order to provide some background for the ex
amination of the record, I shall first briefly describe
the body of thought referred to as the “monetarist
tradition” and the stabilization policy implications
generated by this view. Next, I shall discuss the record
of economic predictions emanating from St. Louis
research as a test of the validity of the monetarist
view of economic processes. Then, I will examine the
public record of monetary policy decisions to ascer
tain the extent to which monetarist recommendations
were put into effect. Finally, I will offer some prog
nostications about the future of stabilization policy.

Monetarist Approach to Stabilization
Monetary Goals
Let us now review the “monetarist tradition.” The
monetarist view is not new — it can be traced back at
least as far as David Hume in the 17th century and

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1972

has its roots in all accepted theories of economic be
havior. Recent interest in this view is primarily a
reaction to the thirty-year dominance of Keynesian
thought and the depression-oriented policies which
held sway during that period.
In capsule form, the monetarist view is the follow
ing. In the long run the growth of output and employ
ment is determined by the growth of resources of a
society. The price level is simply the rate at which
money can be exchanged for this output. The trend
growth of prices is determined by the trend growth
of money stock relative to growth in output. Thus, the
rate of inflation and the value of total nominal spend
ing are dominated by the quantity of money supplied.
Deviations from a trend rate of growth of money,
however, cause short-run deviations in output and
employment. A departure of the money stock from a
given trend affects spending within approximately one
year. If this change in money growth is sustained, it
will result in a change in the rate of inflation which
will be fully manifested in approximately five years.
During this period of adjustment to a new rate of
inflation, output and employment growth will be
changed. But once the adjustment is completed, out
put and employment will resume their longer-run
growth paths.
The implications of this behavior are more complex
than is apparent at first glance. A sustained increase
in the growth rate of money will generate inflation and
inflationary expectations. An attempt at slowing infla
tion by reducing the rate of money growth will de
crease output and employment temporarily, but given
inflationary expectations, insistence on higher wages
and prices will remain for some time. Thus, a response
in spending will result in a decline in output and
employment but not an immediate decline in the price
level. This is the way in which inflation and larger
unemployment can and do exist simultaneously for
some time.
The policy implications of this view are relatively
simple. Since the time lags of the response of total
spending, output and the price level to a monetary
shock are of various lengths, with some being relatively
long, monetary policy should not be used for “fine
tuning” the economy. An attempt to increase output
in the short run by accelerating the growth of money
will result in inflation; an attempt to reduce inflation
by decelerating the growth of money will, in the short
run, result in unemployment and continued inflation.
One might infer from this that monetary policy is
totally ineffective. On the contrary, it is extremely
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effective, but its use as a short-run stabilizing tool
produces costs in terms of lost employment and output
and undesired price level movements. On the other
hand, its long-run effects are powerful and tend to
minimize these costs.
By pursuing a steady and moderate growth of
money, we can assure that inflation and expectations
of inflation do not develop. This would assure that
inflationary premiums on wages, prices and interest
rates do not interfere with any adjustment process.
Other policies can more appropriately be used to cor
rect short-run fluctuations in output and employment,
and they will be much more effective if expectations
of price level movements do not interfere. Thus, the
fundamental policy implied by monetarist thought is
a steady trend rate of monetary growth. It must be
noted that this rate may be chosen to produce no
inflation whatsoever or some predetermined rate of
inflation, if so desired.

Monetary Tools
In order to produce this relatively stable growth,
monetary authorities must be able to control the
money stock. It is our view that the money stock can
be controlled by regulating its ultimate source — one
of the several variants of the monetary base. Much
criticism is leveled at the monetarists with respect to
this facet of the theory. But this control mechanism
is not unique to monetarist thought. Irrespective of
whatever theory of income determination one sub
scribes to, regulation of the money stock can best be
accomplished by producing desired movements in the
monetary base.
Unfortunately there are critics who contend, with
little empirical evidence, that the money stock cannot
be controlled with any precision. Therefore, they con
clude that monetary policy can make little contribu
tion to economic stabilization efforts. These critics
usually assume that controlling interest rates is synon
ymous with controlling the money stock. Such a state
ment is equivalent to saying that the amount of beef
sold can be affected by the regulation of the price of
pork. There is no doubt that they are interrelated,
but precision is definitely lacking. Since the monetary
base is almost totally dependent on Federal Reserve
policies, and since it is very closely correlated with
the money stock, the regulation of both is possible
and feasible.
To sum up, the monetarist view, as developed and
tested at the Federal Reserve Bank of St. Louis,
implies a monetary policy which is directed towards

http://fraser.stlouisfed.org/
Page 34
Federal Reserve Bank of St. Louis

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1972

a relatively steady growth of the money stock con
trolled through regulation of the monetary base.

The Validity of St. Louis Hypotheses
I will now examine the validity of the allegation
that the monetarist concept of economic behavior
bears little relationship to reality. All our behavior can
be described by some kind of theory. For example,
we are told that by pressing the accelerator pedal in
an automobile we can increase its speed. A descrip
tion is given to us which relates the pressure on the
accelerator to injections of gas, other internal workings
of a car and all external conditions. This constitutes
a theory.
Now how do we know whether the theory is true or
false? Essentially, we go out and test two hypotheses:
one, that the speed of the car will indeed increase if
the accelerator is pressed, and two, that it won’t. Our
test consists of actually pressing the accelerator and
observing the response. The result which occurs with
the greatest frequency would determine the theory to
be accepted, and until proven otherwise, we would
behave accordingly.
The point of all this is that economic theories are
tested in the same manner. We accept or reject a
hypothesis on the basis of its ability to predict, as
compared with some alternative hypothesis. If mone
tarist theory predicts total spending, prices and output
as well or better than other theories, then it may not
be rejected as an appropriate description of such
economic behavior. The crux of the matter, then, is
the success of the theory in the explanation and
prediction of those selected variables.
With this background, let us examine the predic
tions that were generated by the monetary research of
the Federal Reserve Bank of St. Louis. The success
of these predictions will help us to evaluate the valid
ity of our view of economic processes.
In order to avoid the usual innuendos that accom
pany debates about forecasts, I will restrict myself to
predictions which are of public record, that is, pub
lished materials. Until 1969 the Federal Reserve Bank
of St. Louis did not have a formal forecasting model,
but some earlier publications of the Bank did include
qualitative predictions, analyses and recommendations
which were made on the basis of the monetarist
tradition.
In December 1966 we suggested that despite the
restrictive monetary actions of the last eight months
of 1966, the lagged effects of the rapid monetary
expansion of late 1965 and early 1966 would cause

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inflation to continue. The price level rose by 3.2 per
cent from 1966 to 1967.
In April 1967 we predicted that the restrictive mon
etary actions of 1966 would cause a decline in output
in late 1967, while the rapid monetary expansion of
early 1967 would put additional fuel into inflation in
1968. The rate of growth in output declined from 4.4
percent in the middle of 1967 to a 2.8 percent rate
in the last quarter of 1967. The rate of increase in the
price level accelerated to 4.6 percent per annum in
the fourth quarter of 1968.
In September 1967 we predicted that the rapid
monetary expansion of 1967 would cause inflation to
continue unabated even if the proposed surtax were
adopted. The surtax went into effect in July 1968,
and inflation continued at a 4.7 percent rate through
1968.
Our first forecast based on a formal model was
published in April 1970, although it was made earlier
in the year.” At that time, the predictions for 1969
were made on the basis of data in existence prior to
1969, and the following two years were forecast on
the basis of information available in 1969.3 During a
period of a forecast there occur many unforeseen
natural, political and economic events which affect
behavior and which inject errors into a forecast. Thus,
most of the economic forecasters update their informa
tion to take account of these external shocks. But
since the monetarist approach assigns pervasive, but
not total, importance to the growth rate of money
stock, our forecasts must be based on various assump
tions concerning this growth.
Since a 6 percent growth figure most closely ap
proximates the actual rate of increase in the money
stock during the last three years, I shall use forecasts
associated with that rate. As an alternative, I have
chosen the so-called “consensus” forecast.4 It is a con
sensus of many economists, espousing many different
theories and many different methods of prediction.
Historically, it has been consistently more accurate
than the individual forecasts which make up the con
sensus, and I would like to make my case with the
2Leonall C. Andersen and Keith M. Carlson, “A Monetarist
Model of Economic Stabilization,” this Review (April 1970),
p. 7.
:iEven though 1969 was “predicted” in 1970, the forecast was
made strictly on the basis of data available through 1968, and
no adjustments of known events were included. For example,
if this Bank had been making quantitative predictions in
1968, this would have been our prediction.
4J. A. Livingston, American Banker, December 1968, 1969 and
1970.

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1972

strongest alternative. Obviously, this choice does not
permit us to reject other views of economic behavior,
but it provides a strong test of whether the mone
tarist view should be rejected, as it has been by many
observers.
At this point I apologize for the liberal use of
numbers that I have to resort to. But the point must
be made with comparative prediction figures. So if
you will bear with me, I shall make these comparisons
for the years 1969, 1970 and 1971. The forecasts of
our model are selected so as to be consistent with the
consensus frame of reference.
In the GNP forecasts, the predictions and actual
figures are for the fourth quarter of the respective
years. For the last quarter of 1969 we predicted a
GNP level of $957 billion. Our forecast was $9 billion
above the actual level, while the consensus forecast
was $8 billion too low. For the fourth quarter of
1970 our prediction was $997 billion, or $9 billion too
high. The consensus was $19 billion above the actual
figure. For the end of 1971 the St. Louis prediction
was $1077 billion. It overshot its mark by $4 billion,
compared with a $7 billion shortfall by the consensus.
T a b le I

The Record of Prediction
S t. Lo u is1

C o n se n su s-

A c tu a l

1969

G N P ( B il l io n s ) 3
Prices4
U n e m p lo ym e n t5

$ 9 5 7 .2
4 .1 %
3 .5 %

1970

GNP
Prices
U n e m p lo ym e n t

$ 9 9 7 .2
4 .6 %
5 .4 %

$ 1 0 0 7 .0
4 .0 % ( 5 .6 )
4 .6 %

$ 9 8 8 .4
5 .7 %
5 .9 %

1971

GNP
Prices
U n em p loym ent

$ 1 0 7 6 .9
4 .0 %
5 .7 %

$ 1 0 6 6 .0
4 .0 % ( 3 . 3 )
5 .6 %

$ 1 0 7 2 .9
3 .4 %
5 .9 %

1St.

Louis

predictions were made

$ 9 4 0 .0
3 .5 % ( 6 . 0 ) 4
4 .1 %

“A

$ 9 4 8 .0
5 .1 %
3 .6 %

M onetarist M odel,"

this

R eview (A p ril 1 970 ), pp. 18-19. These predictions are based on the
assumption o f 6 percent money growth.
2Consensus predictions are from J. A . Livingston, A m erica n B a n k er,
December 30, 1968, December 29, 1969 and December 28, 1970.
3G N P predictions and actual figures are for the fourth quarter of the
year.
4Rate o f change o f prices for St. Louis predictions is the change in the
G N P deflator from fourth quarter to fourth quarter, and the “ actual'’
figure is G N P deflator. Consensus’ price predictions are for the con
sumer price index from December to December. Actual consumer
price index changes are in parentheses.
6The St. Louis predictions and the actual rate are for the fourth
quarter, while the consensus prediction is for December.

For the unemployment rate, our predictions and the
actual rates are for the fourth quarter of the respective
years, while consensus’ forecast is for December. We
predicted that the unemployment rate would be 3.5
percent in late 1969, while the consensus said 4.1 per
cent, and the actual rate was 3.6 percent. For the
end of 1970 we projected 5.4 percent, consensus 4.6
percent, and the actual was 5.9 percent. For the end
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of 1971, we forecast 5.7 percent, consensus 5.6 per
cent, and the actual was 5.9 percent.
In predicting the rate of increase in price levels,
I will use the rate of change in the GNP deflator
from fourth quarter to fourth quarter, while the con
sensus used a December to December change in the
Consumer Price Index. Our predictions must be com
pared with the corresponding actual GNP deflator and
the consensus’ forecasts widi the corresponding actual
Consumer Price Index. For 1969 we projected a price
level change of 4.1 percent, while the actual was 5.1
percent. Consensus projected 3.5 percent, while the
actual was 6 percent. For 1970 our prediction was
4.6 percent and in reality prices rose by 5.7 percent,
consensus forecast an increase of 4 percent, while
the actual rate was 5.6 percent. For 1971 we predicted
an increase in prices of 4 percent and the actual was
3.4 percent, while the consensus predicted 4 per
cent and their actual change was 3.3 percent.
You can see that St. Louis predictions were con
sistently closer to actual figures, except in the 1971
price prediction, where they were the same, and in
the 1969 GNP forecast, where the consensus did a
shade better. Please also remember that the St. Louis
forecast for each of the last three years was reported
in April 1970, while the consensus’ was made in
December of each preceding year.
Given this record, I cannot see how the monetarist
view can be rejected as having “. . . not demonstrated
convincingly that the relationship between the money
supply and economic activity is especially close.” I
have deliberately chosen as an alternative hypothesis
a consensus of many views. By using the generally
accepted criterion of acceptance or denial of hypoth
eses, we cannot reject all other views as being false,
but we certainly cannot reject the view that the rela
tionship between the money supply and economic
activity is at least as predictable as the relationships
incorporated in these other views. The existing record,
I believe, supports this beyond a shadow of a doubt.
It has not been proven that the growth of money
stock is all that matters. On the other hand, I believe
that there is overwhelming evidence that policymakers
can disregard money growth only at the peril of their
policies.
I would like to stress that a forecast which is based
on the influences of money stock does not automati
cally produce correct predictions. One recent example
was a monetarist forecast of a 1971 GNP of $1,065
billion, while the actual GNP turned out to be $1,046.8
billion. Our methods, which we have consistently ap

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B A N K O F ST. L O U I S

1972

plied since 1969, predicted a 1971 GNP of $1,046
billion.5 This prediction was made in early 1970.
I also would like to call to your attention that our
forecasts have been better for longer periods than for
quarter-to-quarter movements. However, I believe that
stabilization efforts are best implemented over a
longer-time horizon.

The Success of Monetarist Recommendations
Have Monetarist Policies
B een Im plem ented?
Let us now examine the second criticism implied by
many current writings — that policy recommendations
arising out of the monetarist view have been followed
and have produced an untenable situation consisting
of simultaneous inflation, unemployment and interna
tional crises.
Before proceeding further, let me review the mone
tarist policy recommendations. As described earlier,
there are only two —that the money stock should
grow at a steady, moderate rate and that this rate of
growth can be best produced by controlling the growth
rate of the monetary base. The money stock does
not have to grow at an absolutely constant rate week
after week, but an average rate within a quarter must
be within agreed-upon tolerances.
Let us now consider if these recommendations were
accepted and enacted by policymakers. Evidence must
be produced that such was the case, if the claims of
our critics are to have any validity. So let us again
look at the record.
In terms of long-term growth, or a trend if you
please, the money stock grew at a 1.7 percent rate
from first quarter 1952 to third quarter 1962, at a 3.7
percent rate from third quarter 1962 to fourth quarter
1966 and at a 6.1 percent rate from fourth quarter
1966 to second quarter 1971. This can hardly be con
sidered a steady long-run growth.
Moreover, there have been substantial short-run
variations in the rate of monetary expansion since
1968, a period when monetarist policies supposedly
were followed. The yearly rate of growth during 1968
was 7.4 percent with a quarterly range between 5.6
and 8.8 percent. During 1969 it was 3.9 percent with
a range of 1.6 to 7.3 percent. Then, during 1970 it
grew at a 5.1 percent rate with quarterly growth
ranging between 4.2 and 6.6 percent. And in 1971 the
course of monetary expansion diverged the most from
monetarist prescription. Average growth was 6.6 per
son the basis of 6 percent money growth.

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cent with a quarterly range of 0.4 to 11.3
percent. I think the record shows con
clusively that the monetarist recommen
dation of steady monetary growth was
not put into effect.

Has There Been An Attempt to
Implement Monetarist Policy
Recommendations?

MARCH

T a b le

1972

Directive Targets
M o n e y M a rke t
C o n d itio n s
A lo n e

M o n e y M a rk e t
C o n d itio n s an d
B a n k Reserves

Bank
Reserves
A lo n e

Bank
C re d it

M o n e ta ry
B ase

1967

P rim a ry
Proviso

15
0

0
0

0
11

0
0

1968

P rim a ry
Proviso

17
0

0
0

0
16

0
0

1969

P rim a ry
Proviso

14
0

0
0

0
14

0
0

As mentioned earlier, the second major
1970
P rim a ry
5
8
0
0
0
2
Proviso
0
0
2
0
recommendation is that growth of the
P rim a ry
1971
2
11
0
0
0
money stock be controlled through man
Proviso
3
0
0
0
0
agement of some version of the monetary Source: Board o f Governors of the Federal Reserve System, Annual Report, 1967-1970 Fed
eral Reserve Bulletin, 1971
base. This base, which consists of the
Federal Reserve Press R elease: “ Record o f Policy Action s” o f FO M C , Feb. 7, 1972
reserves of commercial banks and cur
rency held by the nonbank public, is almost totally
count Manager at the New York Federal Reserve Bank.
determined by the buying, selling, and lending
This operating directive in recent years has generally
transactions of monetary authorities. These trans
been divided into specification of a primary target to
actions are solely the prerogative of policymakers.
be achieved, and into a proviso clause which states
The relation between the monetary base and the
the conditions under which the primary target is to
money supply, on the other hand, is determined by
be modified. It does not state, however, the specific
the behavior of the public, banks, and the Treasury.
point at which the proviso clause becomes effective.
The bone of contention between competing theories
The monetary variables used as primary or proviso
is the stability of this relationship. Our evidence con
targets have usually been expressed as the following:
money market conditions, which refer to interest
cludes that this relationship is relatively stable and
rates, member bank borrowings and the net reserve
predictable.
position; bank credit, that is, the amount of bank loans
On the other hand, the critics argue that it is not.
and investments; and bank reserves and monetary
They contend that the money stock cannot be con
aggregates, which refer to a conglomeration of
trolled because it depends primarily upon economic
reserves, money stock and the level of bank credit.
activity rather than upon the actions of policymakers.
Thus, the critics may argue that monetary authorities
Again, we turn to the record to judge the validity
tried to control money but were unsuccessful.
of the ciritics’ position. I shall consider actions of the
past five years only, a period during which the re
But our discussion at present is not concerned with
sults of monetarist research received some promin
whether changes in the monetary base do indeed
ence, and during which it is alleged that monetarist
cause desired changes in the money stock, but whether
policy prescriptions were tried.
the policy recommendations of the monetarist view
have been put into effect or at least attempted.
During the years 1967, 1968 and 1969, the Com
Namely, have policymakers attempted to regulate the
mittee met 46 times and issued a primary directive
level of the monetary base or even some reasonable
to maintain or change money market conditions 46
facsimile as a means of controlling monetary expansion?
times. The proviso clause which modifies these in
structions was stated 41 times in terms of bank credit
As a background for examining this issue, let me
and only once in terms of “money.”
summarize the process of implementing monetary
policy. The monetary policy of the United States is
Since early 1970, all of the released instructions
formulated by the Federal Open Market Committee
issued have stated that the goals of monetary policy
(FOM C) of the Federal Reserve System and imple
are to achieve desired growth patterns of money stock,
mented by the Manager of the System Open Market
monetary aggregates or bank reserves; but the specific
Account. Thus, the monthly instructions by the Fed
directive of what to use as the operating target by the
eral Open Market Committee to the Manager is where
Account Manager to achieve these goals has never
policy decisions can be found and evaluated.
been consistent with monetarist recommendations.
FOMC instructions consist of a general statement
of goals and a specific operating directive to the Ac

Neither some form of the monetary base nor some
form of bank reserves has been used as the sole operat
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ing target. In spite of apparent concern with the growth
of monetary aggregates, the FOMC continued the use
of money market conditions either as a sole target or in
conjunction with bank reserves. The monetary base,
the target suggested by our research and recommended
frequently, at no time appeared as a primary target
or in the proviso clause.
If the above evidence is not sufficient to convince
you of the nature of the operating strategy of the
FOMC over this period of time, let me quote from the
analysis of Governor Brimmer:
They (th e views of the members of the F O M C )
would also probably contain enough common ele
ments relating to operating tactics to add up to a
pattern of behavior which can be described as the
pursuit of a money market strategy in the conduct
of open market operations.6

In view of the behavior of the money stock and
the record of policy implementation for the past five
years, I need only to let you draw your own con
clusions as to whether monetarist recommendations
were put into effect and whether the current economic
situation is due to the following of “monetarist policies.”

Conclusions
I started this discussion by giving you some exam
ples of criticism of the monetarist view. This criticism
has been heeded by many policymakers and by the
public in general, and therefore has been reflected in
recent stabilization actions. Some of the critics allege
to be scientific in their pronouncements, but refuse
to apply the scientific criterion for acceptance or de
nial of monetarist hypotheses. Since the generally ac
cepted criterion is the ability of a theory or hypothesis
to predict actual events, I invite you to examine the
record of predictions compiled by the St. Louis version
of monetarist research and compare it with alterna
tive views. The evidence is overwhelming that the
monetarist view cannot be rejected.
The question of whether monetarist policy recom
mendations have been implemented can be judged on
two criteria: one, has the money stock grown at a
moderate rate and with the stability prescribed by
6Andrew F. Brimmer, “The Political Economy of Money: Evo
lution and Impact of Monetarism in the Federal Reserve Sys
tem” (Paper presented at the Eighty-fourth Annual Meeting
of the American Economic Association, December 27, 1971).

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1972

monetarists, and two, have the policymakers attempted
to implement such a prescribed growth rate but failed
to succeed because the control mechanism is unreli
able? One has only to look at the growth rates of
the money stock over the past four years to see that
monetarist recommendations were not implemented.
It is also amply apparent that the recommended con
trol mechanism for the stabilization of the money
stock has not been used. Under these circumstances
it is difficult, if not impossible, to suggest that mone
tarist policy recommendations have been put into
effect and have thus produced the current economic
predicament.
I am convinced that future stabilization of our
economy depends heavily upon a moderate and stable
growth of the money stock. But if the pronouncements
of critics of the monetarist view are heeded, the result
will most likely be erratic fluctuations in the money
stock caused by attempts to “fine tune” the economy.
Such fluctuations will necessarily cause periods of
inflation and will be frequently accompanied by un
acceptable levels of unemployment.
If monetarist recommendations are put into effect
immediately, we are not going to have an immediate
solution to all economic problems currently plaguing
us. As I have noted previously, inflationary pressures
develop slowly and recede slowly. In 1971 these pres
sures began to decline, but were accompanied with a
high rate of unemployment. If we can have enough
patience to allow a moderate and steady growth rate
of the money stock, unemployment will gradually de
cline and we will be assured that future external
shocks to the economy will be absorbed with minimum
cost. If, on the other hand, we use monetary policy
to wipe out slack in the economy in the short run,
there could very well be continuous economic fluctua
tions, and perhaps fluctuations with a consistently
larger amplitude.
Thus, this response to the critics is not a defense
of a doctrinaire point of view, but a plea to the
policymakers and their advisers to re-examine the
evidence regarding the validity of the monetarist
view. In our economy’s present situation, all alterna
tives must be explored if our citizens are not to run
the risk of having to pay a massive economic price
in terms of lost output and employment and con
tinued inflation.

FEDERAL

RESERVE

BANK O F ST

LOUIS

MARCH

1972

WORKING PAPERS
S IN G L E COPIES of the following working papers are available to persons
with a special interest in these research areas, and any discussion or comment
would be welcomed by each author. For copies write: Research Department,
Federal Reserve Bank of St. Louis, P. O. Box 442, St. Louis, Missouri 63166.
Number

Title of Working Paper

Release Date

The Three Approaches to Money Stock Analysis
(Now available in our Reprint Series as No. 24)

July 1967

Chapter on Agribusiness Prepared for American
Institute of Banking Textbook Agricultural Credit

Aug. 1967

Monetary Policy and the Business Cycle in Post
war Japan (Revised)

April 1968

The Influence of Fiscal and Monetary Actions on
Aggregate Demand: A Quantitative Appraisal
(Revised)

March 1969

The Development of Explanatory Economic Hyphotheses for Monetary Management

Nov. 1968

A Model of the Markets for Consumer Instalment
Credit and New Automobiles

Jan. 1969

A Summary of the Brunner-Meltzer Non-Linear
Money Supply Hypothesis (Revised)

May 1969

The Market For Deposit-Type Financial Assets

March 1969

Impact of Changing Conditions on Life Insurance
Companies

March 1969

Adjustments of Selected Markets in Tight Money
Periods

June 1969

A Study of Money Stock Control

July 1969

Empirical Test on the Effect of Changes in Money
Supply in Developing Economies

May 1970

Historical Analysis of the “Crowding Out” of Pri
vate Expenditures by Fiscal Policy Actions

January 1971

Money Stock Control and Its Implications for
Monetary Policy: Technical Appendices

October 1971

The Influence of Current and Potential Competition
on a Commercial Bank’s Operating Efficiency

January 1972

1
2
3
4

5
6
7

Page 39

SU BSC R IPTIO N S to this Bank’s

e v ie w

are available to the public without

charge, including bulk mailings to banks, business organizations, educational
institutions, and others. For information write: R esearch Department, F ederal
Reserve Bank o f St. Louis, P. O. Box 442, St. Louis, Missouri 63166.