This review argues that Allan Meltzer's account of the Federal Reserve between 1913 and 1951 complements Friedman and Schwartz's in their Monetary History. Meltzer emphasizes policy making within the system, rather than the evolution of the money supply and its effects on the economy. He stresses the uncertainty of the Fed's independence before the 1951 Accord, and the effects of economic ideas, notably the real bills and Riefler-Burgess doctrines, on policy. Many virtues in the book are noted, and one weakness, namely a failure to explain why inadequate ideas became dominant within the Fed when sounder alternatives were available in contemporary monetary thought.

among the central bank, the banking system and the non-bank public in causing variations in that crucial variable, the quantity of money.They shared Friedman=s view that, no matter how it got into circulation, the effects of money would often be very much the same, but they treated this as a conclusion to be established analytically, and in a way that would reveal when exceptions might arise, rather than as an hypothesis to be maintained pending its empirical refutation.Brunner and Meltzer also took a special interest in the effects of institutional constraints on the conduct of monetary policy, and in the influence on that conduct of beliefs about the way the economy works. 2 This book is, then, the product of a distinctive brand of monetarism, and represents an important extension of a research agenda that has been active for over three decades.It emphasises two overarching issues that are of great interest to modern monetary economists: central bank independence, and the role of economic theory in conditioning agents= behaviour.It also yields lessons that many will find unfamiliar.First, the Fed=s history makes it clear that problems arising from the interaction of politics with monetary policy are not of a sort that can be solved once and for all, for example by implementing the appropriate contract between the government and the central bank; rather, the challenge was (as it still is) to design institutions that are resilient enough to cope on an ongoing basis with the tensions these problems create.Secondly, and without denigrating the importance of the beliefs of the public at large, it is policy makers who hold the centre of the stage in Meltzer=s history, and he shows that their behaviour was often conditioned not by true economic theories, but by false theories that they believed to be true, that these theories often differed among policy makers at a particular moment, and that they changed over time too.In this essay, I shall discuss some highlights of Meltzer=s treatment of these two themes, and in the final substantive section, I shall take up what seems to me to be an important element 2 That interest may be seen as a particular example of their long-standing curiosity, reflected in a number of papers that they commissioned over the years for Carnegie-Rochester conferences, about how and why particular economic ideas become embedded in particular institutions and condition their activities for long periods of time.

George Fane uses adjectives such as ad hoc, obscure, mechanistic not to mention wrong to characterize aspects of my discussion in this Review of recent British inflation; so it is safe to assume that he disapproves of it. However it is one thing to express disapproval, and another thing to justify it. Fane does not back up his assertions of disagreement with convincing arguments. To begin with I quite agree with Fane that the natural unemployment rate hypothesis, combined with an application of the adaptive expectations mechanism to the generation of the expected domestic inflation rate, will not explain recent British experience. I never claimed that it would. It is clear that, if a monetarist explanation of inflation is to be reconciled with the facts of the behavior of the price level and the unemployment rate in the British economy since 1967, two things must be shown to have happened. First it must be shown that the expected inflation rate accelerated after 1967 independently of the past behavior of the domestic price level. Secondly it must be shown that the natural unemployment rate of the British economy increased. My argument proceeded along just such lines. I pointed to several factors as being responsible for these changes. It is refreshing for a monetarist to be criticized for having adopted a multicausal explanation of a series of events and that is what Fane does. In particular he remarks that although there have been frequent changes in most of these factors during the postwar period, Laidler never considers their possible relevance on the various occasions when the natural rate hypothesis gives correct predictions (p. 722). Both assertions are inaccurate. I attributed the step-up in inflation expectations to the devaluation of 1967, and the simultaneous acceleration in the world inflation rate. The devaluation was a unique event in the post-Korean War period, and its effect on inflation expectations has been thoroughly investigated by other workers (see John Carlson and J. Michael Parkin). Data presented in my paper showed that the acceleration in the world inflation rate that began in the late 1960's was a new phenomenon, completely distinct from anything that had happened before. Moreover the effect of the world inflation rate on British inflation expectations, as well as on those in a number of other countries, was investigated in much more detail for the entire post-Korean War period by Rodney Cross and the author. Among factors affecting the natural unemployment rate, I referred to changes in unemployment benefits introduced in 1966. Since Fane seems to agree that these did affect the natural unemployment rate, there is no need to comment on this matter further. However I also referred to changes in the demographic structure of the labor force that took place in the late 1960's. J. I. Foster shows that such changes did take place, and were unique in postwar history. According to Jim Taylor's work (for example, 1972) the shake out of formerly hidden unemployment was a phenomenon that became important for the first time at the turn of the decade. Only when it comes to the matter of the role of the dispersion of demand between industries and regions during the 1973 boom is there any basis to Fane's assertion that I have failed to consider the relevance of such a factor at other periods, but even here it is worth noting that the National Institute found the data on this phenomenon striking enough to warrant extensive comment in *University of Western Ontario.

Milton Friedman has claimed that his monetary economics derives from a Chicago Tradition that, in the 1930s, offered a monetary explanation of cyclical fluctuations in general and the Great Depression in particular, an optimistic view of the power of monetary policy, and a case for governing it by rules rather than discretion. It is argued that all the elements of this tradition except the last are to be found in earlier writings of Ralph Hawtrey, Allyn Young, and Lauchlin Currie and that there is much evidence to point to a direct influence running from Hawtrey, through Harvard to Chicago.

Milton Friedman has claimed that his monetary economics derives from a Chicago Tradition that, in the 1930s, offered a monetary explanation of cyclical fluctuations in general and the Great Depression in particular, an optimistic view of the power of monetary policy, and a case for governing it by rules rather than discretion. It is argued that all the elements of this tradition except the last are to be found in earlier writings of Ralph Hawtrey, Allyn Young, and Lauchlin Currie and that there is much evidence to point to a direct influence running from Hawtrey, through Harvard to Chicago.