Monetary Policy: Theory and Practice: Comment

Abstract

In his article, Monetary Policy: Theory and Practice [2], Milton Friedman included a section on the appropriateness of defensive open market operations. The section discusses a number of substantive issues. It also contains figures on actual Federal Reserve operations in 1980 and the share they represent Qf securities dealer operations. He used the numbers to illustrate his complaint that the Federal Reserve engages in excessive securities transactions-churns its portfoliin a misguided effort to fine tune the supply of nonborrowed reserves. While we feel that the allegation basically depends on fundamental policy issues rather than on the numbers cited, we, nonetheless, think it is desirable to set the record straight as to the magnitude of system open market operations. The figures given by Friedman seriously distort the picture as they represent about a fourfold overstatement of the size of system reserve operations. In addition, they grossly exaggerate the share of securities dealer transactions accounted for by system operations and, thereby, give a misleading impression of the importance of these operations to dealer profitability. These points will be discussed in turn, followed by some observations on the substantive issues.