Money and Monetary Policy: An Essay in Honor of Darryl Francis

Abstract

It is a pleasure to take part in a conference honoring Darryl Francis. Recognition of his courage and leadership is long overdue. Darryl took a leadership role by encouraging the St. Louis monetarist tradition, when it was scorned and derided, by pointing to the need for more restrictive monetary policy in the late 1960s, and in continuing to make the case for lower inflation during his service on the open market committee and as President of the St. Louis Bank. The 1960s and 1970s were the Keynesian decades in U.S. economic policy. Keynesian policy views were mainstream views in the academic profession. The Council of Economic Advisers then had a more prominent role in economic policy than it has now. The chairmen of the Council in the 1960s were Walter Heller, Gardner Ackley, and Arthur Okun, all leading Keynesian economists. In the 1970s, the roster includes Paul McCracken, Herbert Stein, and Alan Greenspan, three conservative Keynesians at the time, but Keynesians nonetheless. They were followed by Charles Schultze in the late 1970s. The primary role of fiscal policy in economic stabilization was a distinguishing characteristic of Keynesian policy. I recall the fervor with which senior professors, young faculty, and bright graduate students sought to overturn Friedman and Meiselman’s (1963) demonstration that, except for the Great Depression, monetary velocity was more stable than the Keynesian investment multiplier. Similar fervor greeted Andersen and Jordan’s (1968) paper showing that changes in money had stronger and more reliable effects than budget expenditures on changes in nominal gross national product (GNP). As late as Jerome Stein’s (1976) conference volume on monetarism, these issues remained highly contentious and hotly debated. At the height of the controversy in the late 1960s and early 1970s, Darryl Francis was the principal, and usually the only, spokesman who challenged this orthodoxy at meetings of the Federal Open Market Committee (FOMC). At the time, I was aware of Darryl’s role, but I appreciate it even more now that I have access to the FOMC’s minutes for that period. I will soon give some examples suggesting that, if Darryl’s advice had been taken, we would have avoided the great inflation. The role of money in monetary policy remains an issue. The Federal Reserve recently gave up the publication of money growth estimates or targets when requirements to publish their estimates expired. The mistake occurred much earlier, when the FOMC stopped using money growth as a measure of the thrust of monetary policy. Federal Reserve history suggests that neglect of money growth is a major mistake. The Federal Reserve would have avoided mistakes such as the Great Depression and the Great Inflation if it had used money growth as an indicator of the thrust of monetary policy. Below I present some other examples and contrast the role assigned to money growth by the European Central Bank with its neglect by the Federal Reserve.