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Copenhagen, Denmark

The following i s at l e a s t close to what I said as a member of the panel
on Monetary and Credit P o l i c i e s in the United States at S e s s i o n 7 on Friday,
June 20, 1969 at the Monetary Conference in Copenhagen.

Milton Friedman,

P r o f e s s o r of Economics at the University of Chicago, was a lead-off speaker,
with Alfred Hayes, President, Federal R e s e r v e Bank of New York; George
W. Mitchell, member, Board of Governors of the Federal Reserve System,
and myself as panelists.

Each panelist was allowed ten minutes.

The s e s s i o n

was chaired by Edward D. Smith, President, The F i r s t National Bank of
Atlanta, Georgia.

A friend of mine, upon learning that I would participate in the panel
this morning, suggested that to ask me to do a critique of Milt Friedman's
presentation was like asking the Pope to criticize the Sermon on the Mount.
After listening to Prof. Friedman, I am convinced of m y friend's wisdom
because I don't find many areas of substantial difference with Prof. Friedman' s
It would be well, I think, to outline in the beginning four things that I
believe with reference to the formulation and conduct of monetary policy.
This should make it e a s i e r to follow the remainder of what I will have to say
this morning.
(1) The objectives of our national stabilization policy, as I understand
them, i s an optimum sustainable rate of growth in total spending, high e m ployment, and stable p r i c e s .

I see no element of incompatibility in these o b -

jectives of stabilization policy and I believe they can be attained.

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(2) As a dedicated member of the monetary school, I am convinced of
the dominance of monetary influence in stabilization policy.

Let me hurriedly

add that I believe fiscal policy to be important - not in terms of any direct
influence it might have on total spending, but because of the very r e a l influence
it has on the formulators of monetary policy.
(3) Money in the restricted sense, or M1 is the most dependable guide
to the influence of monetary policy actions. The broader interpretation of
money, or M2, would be perfectly acceptable except for the influence of
Regulation Q. Without Regulation Q influence, there a r e other monetary a g g r e gates that might be used.
(4) I prefer a discretionary monetary policy formulated and activated by
the central bank - always toward the goal of sustainable growth, high employment and a stable currency.
It seems to me that a review of recent monetary policy formulation indicates an interesting absence of discretionary policy except for the periods of the
last three quarters of 1966 and since December of 1968. Except for these two
periods, I am impressed that monetary policy in the main has been devoted to
stabilizing credit markets through interest rate and money market condition
targets, and even-keeling the United States treasury.

The combination of these

actions, it seems to me, means that the monetary policy has been formulated
to meet the needs of the t r e a s u r y - as dictated by the fiscal policies of the United
States Congress, and not a policy formulated and activated in the interest of

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national stabilization o b j e c t i v e s .

In effect, we have suborninated our i n t e r e s t

in the long r u n stability of the economy to the s h o r t - r u n r e q u i r e m e n t s of the

Stabilization objectives have been left to fiscal policy.

L e t ' s look at s e v e r a l p e r i o d s within the l a s t five y e a r s which s e e m to m e
to be excellent c a s e studies and which support m y a p p r a i s a l of r e c e n t m o n e t a r y
1964 w a s i n m a n y w a y s a m o s t d i s a s t e r o u s y e a r of our h i s t o r y .


w e r e r e d u c e d , V i e t n a m was e s c a l a t e d and no effort was m a d e to cut back on
n o n - m i l i t a r y e x p e n d i t u r e s , and the w h o l e s a l e p r i c e l e v e l gave a convincing
signal of the inflation to c o m e .

In the fourth q u a r t e r of 1964, total spending

b e g a n a r a p i d r i s e and the g e n e r a l p r i c e level began to c l i m b .

All this s e e m e d

to indicate that the i n c r e a s e d r a t e of expansion in the growth of money to an
annual r a t e of n e a r l y 4% in late 1962 was a little m o r e than could be s u s t a i n e d .
However, by m i d 1965, r a t h e r than a back off in the r a t e of expansion of money,
the annual r a t e was i n c r e a s e d to 6 1/2%.
1965 m a y be r e c o r d e d a s a y e a r of g r e a t c l a m o r for fiscal action.
Although s o m e l e a d e r s r e c o g n i z e d the need for r e s t r a i n e d fiscal policy, r e s t r a i n t
w a s not f o r t h c o m i n g .
of 1966.

The m o n e t a r y expansion continued through t h e f i r s t q u a r t e r

By the end of the f i r s t q u a r t e r of 1966, d i s c r e t i o n a r y m o n e t a r y policy

formulation a p p e a r e d and s t a b i l i z a t i o n objectives took p r e c e d e n c e over m o n e y
m a r k e t conditions and e v e n - k e e l i n g the t r e a s u r y .
"0" for t h r e e q u a r t e r s .

The M1 growth r a t e fell to

Within two q u a r t e r s of the onset of m o n e t a r y r e s t r a i n t ,

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the growth rate of total spending was reduced and the price climb slowed from
a 3 1/2% to a 2 1/2% annual r a t e . Despite the alleged strong expansionary stance
of fiscal policy, monetary restraint worked and slowed the economy.


was short-lived, however, and beginning in January of 1967, the noise of crunch,
concern for individual segments of the economy, and perhaps other considerations
returned us to a period of stabilizing credit markets and even-keeling the t r e a s u r y .
M1 growth abruptly returned to a 7% annual rate which was to endure for a
two-year period. Again, within two quarters after the change in the rate of money
growth, the growth rate of total spending spiraled and price r i s e s stepped up to
a 4% annual r a t e . With the return to an expansive monetary policy, renewed
efforts for fiscal restraint were again wide spread. It finally came in mid 1968
with passage of the surtax and agreement to reduce the rate of growth in federal

With the acceptance of fiscal restraint, great concern developed on the

part of many about the possibility of overkill and monetary policy was said to
have eased shortly thereafter.

But, as a monetary analysis Would have forecast,

overkill did not appear and the economy continued its reckless expansion.
Finally in December of 1968, monetary policy returned to stabilization

Since December of 1968 money has grown to an annual rate of 3% -

half that of the previous two y e a r s .
While a 3% rate of growth is a higher level than I would have chosen, I
still feel that if held to that level, or less, we should see early evidence of
slowing in total spending.

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While pleased at the monetary restraint that has been accomplished, I
feel that Regulation Q has impeded our efforts.

There may be some reason

for the existence of Regulation Q, but it is my judgment that it is not a reliable
instrument of stabilization policy and should not be interpreted as such.
Regulation Q needs more study and I expect it will get it.

But, I am convinced

that Regulation Q does not r e s t r i c t total credit in the economy, and on the
contrary, may well be expansive to a degree. It seems to me that Regulation
Q's only accomplishment during the present period of restraint has been undue
restraint on banks. I am well aware that monetary policy is effected through
the commercial banking system, but I see no reason why banks should not
compete freely for funds within an overall restraint on total credit.
Throughout the series of episodes I have recited, one fact stands out changes in the growth rate of money is followed within a relatively short period
by changes in the growth rate of total spending, and in the same direction.


happens irrespective of the alleged direction of influence of fiscal policy.
In addition, studies at our bank and elsewhere provide compelling evidence
that the Federal Reserve can exercise a closer control of M1 (because of Regulation Q) than of other monetary aggregates.
I believe there is growing acceptance of the view that interest rates a r e not
a good indicator of monetary influence.
Furthermore, I am convinced that over the years since World War II, our
preoccupation with money market conditions and our commitment to even-keeling

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the treasury has been more de-stabilizing than stabilizing to our inherently
stable economic system.