Chapter 3: What Objectives for Monetary Policy?
Benjamin M. Friedman INTRODUCTION The overﬂow crowd packed into the House of Representatives’ largest hearing room fell into a hush as the chairman of the Federal Reserve Board, Mr F. Milton, made his entrance and took a seat at the witness table, accompanied by the vice chairman, Mr L. Robert, and the Federal Reserve System’s chief economist, Mr P. Edward. The US economy had been spiralling downward for ten months. With 26 million people out of work, unemployment had reached 17 per cent of the labour force. Industrial production had declined 23 per cent from the previous peak. Both corporate bankruptcies and home mortgage defaults were running at record rates for the post-World War Two period. Of the nation’s 7000 commercial banks in operation a year earlier, 1429 had failed. The chairman of the House Banking Committee, Mr P. Wright (D, Tex.), called the hearing to order, welcomed the three witnesses, and sombrely invited Mr Milton to present his opening remarks. ‘Thank you, Mr Chairman,’ Mr Milton began. ‘I am pleased to report that during the past year US monetary policy has been outstandingly successful. Overall inﬂation has again been exactly 1.0 per cent, and prices other than for food and energy have risen by just 0.9 per cent. My colleagues and I are here to accept this committee’s congratulations and those of the American people.’ Such a situation is, of course, unthinkable. The purpose of any economic policy is to advance a nation’s economic well-being, meaning...
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