A Program for Monetary Stability

MONETARY PROBLEMS—a by-product of the indirect system of exchange—have long plagued the nations of the world. History is replete with instances in which such problems led not only to economic instability and uncertainty, but to political crises as well. In our own American experience there has hardly been a period when the economy was not beset by one type of monetary ill or another.

Consider, for example, the more important monetary disturbances of our own time, viz., those of the last 30 years or so. Our legacy from the financial collapse of 1929 was a monetary and banking system which was virtually defunct. Though some progress was made in shoring up our monetary and banking institutions after 1933, this of itself was inadequate to help us escape the deflation and mass unemployment which persisted throughout the 1930’s.

For the decade of the 1940’s, of course, the pendulum swung to the other side of the arc. Following the outbreak of World War II, and particularly after our direct involvement in 1941, an attempt was made to hold the line against inflation. This attempt achieved at best only partial success. Support by the Federal Reserve System of the prices of government securities, wartime military expenditures, the postwar investment boom, and the postwar pent-up demand for consumer goods backed by liquid assets acquired during the War combined to produce a rise in prices throughout the War and early postwar period.

Although inflation subsided somewhat after 1948, it was intensified by the outbreak of hostilities in Korea in the period after 1950. During the latter part of 1953, and throughout 1954 and 1955, prices remained relatively stable. But in 1956, the inflationary rise received a new stimulus. Caused largely by another investment boom, the inflationary movement had such momentum that it caused prices to rise even in the face of the 1957-1958 recession.

Professor Friedman’s objective in this third of the Moorhouse I. X. Millar Lecture Series is certainly not one of finding a formula which will eradicate all uncertainty and instability attending monetary disturbances. For these, as he puts it, are “unavoidable concomitants of progress and change.” However, it is possible to attenuate further the amplitude of our fluctuations by modifying, and in some cases completely revamping the monetary and banking arrangements currently in force in the United States. Specifically, this is the task to which Professor Friedman addresses himself.

This classic is organized as follows:

Chapter One. The Background of Monetary Policy

Why Should Government Intervene in Monetary and Banking Questions?

The Historical Background

The Period From 1837 To 1843

The Contraction of 1873-79

The 1890’s

The Contraction of 1907-08

Under the Federal Reserve System

Conclusion

Chapter Two. The Tools of the Federal Reserve System

Tools of Specific Credit Policy

Eligibility Requirements

Control Over Margin Requirements

Control Over Consumer Installment Credit

Control Over Interest Paid by Banks on Deposits

Tools of Monetary Policy

The Sufficiency of Open Market Operations

Rediscounting

Variation in Reserve Requirements

Conclusion

Chapter Three. Debt Management and Banking Reform

Debt Management

Banking Reform

Defects of Present Banking System

Possible Remedies

How 100% Reserves Would Work

Transition to 100% Reserves

The Relation of 100% Reserves to Debt Management

Why Interest Should Be Paid on Reserves

How Interest Payments on Reserves Might Be Determined

Conclusion

Chapter Four. The Goals and Criteria of Monetary Policy

International Monetary Relations

Internal Monetary Policy

Conclusion

Summary of Recommendations