An analytical approach to the West German money supply process
Abstract
Following the apparent “failure” of monetary policy to restrain growth during the 1928-29 period of excessive economic activity, and the ineffective attempts to revive the U.S. economy through the allegedly expansionary monetary measures in the early 1930s, there occurred a radical shift of preference toward fiscal policy as the most effective countercyclical vehicle. The important theoretical work of J. M. Keynes, and the successful implementation of various public works expenditure programs which created jobs and expanded income levels tended to reinforce the position among U.S. economists that changes in taxes and government spending were the most important means by which economic growth might be assured. However, the U.S. post-war economic experience following the Treasury-Federal Reserve “accord” of 1951 has gradually induced an extensive revival of interest in monetary policy as a viable instrument for influencing aggregate economic activity. Recent evidence indicates that there are significant reasons for questioning the effectiveness of fiscal policy in the context of the generally high employment economic environment which has obtained in the U.S. system during the period 1950-1971.
There have been two fundamental economic goals which have emerged as the most pervasive and difficult ones confronting U.S. policymakers since 1950. These issues have involved the sustained maintenance of an “adequate” rate of economic growth, and the avoidance of severe inflationary trends which frequently lead to disruptions of activity in various important sectors of the economy. The decade of the 1950s in the U.S. was characterized by largely inadequate rates of economic growth, several periods of exceptionally high levels of unemployment, and a generally low rate of increase in the overall price level. In contrast, the period 1961-66 exhibited a sustained expansion in Gross National Product, steadily declining unemployment, and an annual inflation rate which averaged only 1-2 percent. However, the period 1966-1971 was dominated by then unprecedented inflation rates of 4-6 percent per annum, a simultaneous slowdown in the rate of real economic growth, and a near return to the high rates of unemployment which prevailed during the previous decade. Historically large rates of price increases tended to persist within the U.S. economy despite the implementation of traditional restrictive fiscal measures which were principally designed to temporarily reduce the rate of economic growth, increase unemployment, and thereby diminish inflationary pressures.
Even the most casual analysis of the U.S. post-war economic experience reveals that the policymakers were generally unable to maintain adequate rates of economic growth, and that upon the attainment of full employment in the mid-1960s, an inflationary trend quickly developed which has proven to be largely unresponsive to traditional deflationary fiscal measures. Although it may be argued that those fiscal deflationary measures which were taken were not nearly strong enough, this commentary provides an indication of the degree of unresponsiveness of fiscal policy.