Abstract

Destabilizing Factors in Contemporary Monetary Policy

This paper reviews the contemporary history of monetary policy in the United States. Official statements by the Chairmen and the Board of Governors of the Federal Reserve System are used as primary source material. These statements reflect certain theoretical precepts and principles, and attempt to justify the policy actions taken by the Federal Reserve during the ten-year period, 1964- 1974. Federal Reserve policies and the principles supporting them are subjected to critical analysis in this paper, with the purpose of determining how the relatively stable monetary economy of the early 1960s became the unstable economy of the early 1970s. It was found that political factors weighed heavily in determining central bank actions, and that appropriate economic arguments were then adduced to rationalize the policies taken. The controversy over “money market indicators” (interest rates) versus “the aggregates” (monetary stocks) as guides to policy is a significant reflection of this pattern of central bank behavior. The compatibility of an easy money policy with the wage-price freeze of August 15, 1971 is another example of political domination of monetary policy. Other subsidiary principles of Federal Reserve policy are also examined for their destabilizing influences. The most serious indictment of these policies lies in the fact thatthe Federal Reserve made inflation control by monetary means look difficult, if not impossible, and thus encouraged ubiquitous interventions by the federal government that, continue to hamper economic productivity and jeopardize economic freedoms in other sectors of the economy.