Tight Money and the New Economics

Abstract

SINCE the start of the year, the economy has been unwinding from the great credit squeeze of 1966-the most severe and disruptive of modern times. Various excesses and imbalances, which first triggered a tight money policy, have now brought us at least temporarily to a period of substantial readjustment and slower growth in business activity. One of the great ironies of contemporary economic developments is that such an episode should have occurred in the era of the new economics, which generally contemplated a more active role for fiscal and other public policies and less reliance on monetary policy in promoting full employment without inflation. What went wrong? Even more important, what can we learn from last year's experience that will aid in future problems of economic stabilization? And finally, what are the implications regarding future swings in the cost and availability of money? To attempt even tentative answers to these questions will require some assessment of the new economics' -especially, whether there are inherent defects in the doctrine, or whether it was simply badly applied last year. Similarly, it may be pertinent to inquire as to whether monetary restraint was carried too far, in an effort to compensate for the failure of fiscal policy to contribute adequately to an anti inflationary program.