Review

The primary objective of recent monetary and fiscal actions is to slow the rapid rate of growth of total spending and thereby ease excessive pressure on resource utilization and prices. Total spending continues to outpace the growth of the economy’s productive potential. Real product growth has moderated somewhat, but prices have shown no signs of decelerating. Stabilization actions since mid-1968 have had little restraining effect so far on total spending and prices.

Monetary policy decisions and actions in 1968 were clouded by uncertainty about the passage of pending fiscal legislation in the first half of the year and by overestimation of the restraining impact of such legislation in the second half. As a result, monetary authorities did not take action to slow the growth of the money stock in the first half of the year when the pace of economic activity was accelerating. Furthermore, they sought to accommodate any tendency toward easing money and short-term credit market conditions in the third quarter, attempting to avoid economic “overkill,” the anticipated result of the 10 per cent surtax and $6 billion cut in planned Federal expenditures passed by Congress in late June. 

This paper considers the question of the appropriate definition of money and discusses the ways that the Federal Reserve can control the money stock consistent with achieving its short-term money market objectives. Professor Meltzer advocates the use of the growth of the money stock as an indicator of the influence of monetary actions on economic activity, and then describes the manner in which the desired growth rate of money can be achieved through the Federal Reserve’s control of the monetary base.