Word: friedman
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...dealing with the reality of inflation and the possibility of recession, Nixon so far has shown a deep reluctance to intervene in the private economy. He has rejected price guidelines, personal pressures on business and labor leaders, and outright controls. His policy coincides with Friedman's fundamental ideology?a strong aversion to Government interference?and places great emphasis on lower federal spending, as well as the monetary measures that Friedman has illuminated and popularized. Manipulation of the money supply operates indirectly on the economy, but its impact is ultimately massive and touches the lives and fortunes of nearly everyone...
...intricacies of monetary theory generally seem as mystifying as the Mock Turtle's description in Alice in Wonderland of "the different branches of arithmetic?Ambition, Distraction, Uglification and Derision." Money supply can be measured in four ways, but Friedman prefers to use the total of currency in circulation plus checking accounts and time deposits in banks. The Federal Reserve controls the rate at which money supply grows or shrinks chiefly by buying or selling Government bonds. When the board buys bonds, it automatically raises the quantity of reserves available to banks; this increases the amount of credit that banks...
...Federal Reserve tinkers constantly with the money stock, much to the distaste of Friedman, who advocates a policy of moderate, steady expansion. For example, the board expands the supply during periods of peak demand, as it did to an extreme degree to help the Treasury finance its huge deficit in fiscal 1968. Through the same kind of maneuvering, the board tries to smooth the ups and downs of the business cycle. Friedman...
...Friedman's reckoning, history supports his argument. As he notes in his definitive work, A Monetary History of the United States 1867-1960, a decline in the nation's money supply has preceded every recession except one (1869-70) in the last hundred years. After World War I, for example, the Government cut its spending by an amount equal to 16% of the U.S. gross national product. On top of that, the Federal Reserve contracted the money supply by 5.2%. Says Paul McCracken: "The remarkable thing is not that there was a 1921 recession but that our economic system survived...
...Friedman blames unknowing monetary policy in large measure for the magnitude of the Depression of the 1930s. Partly because so many banks failed between 1929 and 1933, the U.S. supply of money shrank by 33%?and that compounded a worldwide economic collapse. The Federal Reserve, which took a narrow view of its responsibilities, felt itself almost powerless to reverse the tide of events. Not really understanding what should be done, it did practically nothing to offset the contraction of the money supply...