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Monetary and Credit Restraint in 1973 and Early 1974
Published online by Cambridge University Press: 19 October 2009
Extract
The purpose of this paper is to survey monetary policy as it unfolded from the beginning of 1973 to the spring of 1974. This is, on the whole, a relatively uncomplicated period to discuss since there was, I would judge, rather less controversy about the aims and appropriateness of monetary policy over most of this period than is often the case. In brief, monetary policy focused primarily on producing a moderate degree of restraint, one that would relieve the excess demand pressures clearly evident during at least the first part of the period. The aim in doing so was to create a climate in which inflation could gradually be brought under control. This objective suffered serious competition only briefly, when, during the early stages of the oil boycott, the potential of that situation for creating economic weakness was still very unclear.
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- Recent Monetary Policy
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- Copyright © School of Business Administration, University of Washington 1974
References
1 The paper discusses developments through mid–May of 1974, the time of writing.
2 The problems of control were aggravated more than usual in 1973 by the inaccuracy of preliminary estimates of deposits and credit at nonmember banks, a problem created by the fact that hard data on these banks are available only for call dates and have a long processing time.
3 Data through April 1974.
4 There has been discussion about what some analysts apparently regard as a disturbingly rapid decline in the “real money supply.” It is true that the rate of change of Ml deflated by changes in the consumer price index and measured over a twelve–month span reached a trough (to this writinq) of minus 3.6 percent in January of this year. Given a high and accelerating rate of inflation, with its consequences for the implicit yield on, and demand for real cash balances, it is difficult to know what, if any, analytical significance this decline may have. In any event, troughs in real Ml growth rates seem to have had little consistent relation to postwar recessions, either as to timing or magnitude. Moreover, the January 1974 trough in the growth of M2 real balances (minus 0.7 percent) was quite shallow relative to other postwar troughs in such balances. (The February 1970 trough, for example, was minus 4.6 percent.)
5 Published in the May 1974 issues of the Federal Reserve Bank of New York Monthly Review and the Federal Reserve Bulletin.
6 The numerical two–month tolerance ranges for the aggregates and the funds rate have been published (with the usual three–month lag) in the regular policy record of the Committee beginning with the January 1974 meeting.
7 Kane, Edward J., “Politicians against the Prime—the Dual Rate Fiasco,” Bankers Magazine (Spring 1974), pp. 88–96.Google Scholar
8 Kane does note the possibly suggestive point that small loans declined absolutely between May and August 1973 while large loans were expanding. However, this could be partly a seasonal problem. The percent decline in small loans between May and August of 1969 was about the same. Moreover, over the longer period of November 1972 to November 1973, small loans rose absolutely whereas they had declined over the 12 months ended November 1969.