Brimmer: Empnusis on Money Supply Dangerous
(The (nlloicinci is enrolled from 'I'\ dcral Reset no Governor Brimmer's speech Pec. 27 to the American Economic Association at New Orleans)</br></br>I conclude that, the years of debate over the best way to conduct monetary policy in the United States have been productive. The Federal Reserve has learned a great deal about monetary management, and it is in a much better position to perform its duties.</br></br>There remains the question of my own attitude to the issues in the controversy. Of course, let me say immediately that 1 recognize that an excessive growth of bank credit .and the money supply does facilitate the propagation of inflation.</br></br>Rut 1 am convinced that it would bo a disastrous error for the Fcdcrnl Reserve to try to conduct monetary pol- icy on the basis of a fow simple rules governing the rate of expansion of the money supply. In the first place, 1 find serious deficiencies in the theoretical and empirical analysis on the basis of which the monetarists reach their conclusions and policy recommendations.</br></br>Put quite simply, they have not demonstrated convincingly that the relationship between the money supply and economic activity is especially close. Or, more importantly, they have not convincingly shown that money is more a cause than it is an effect of economic activity. While fluctuations in monetary conditions have undoubtedly contributed to economic instability on some occasions in the past, non-financial factors (such as wars, variations in the rate of business investment, and changes in consumer spend-ing/savings behnvior) have also been a principal source of fluctuations in output and employment.