This essay provides the kind of concise and incisive survey that we have learned to await with anticipation from the ever-active pen of Professor Johnson. This time he is discussing the role of monetary policy as a stabilization device. The paper, originally prepared for the Canadian Royal Commission on Banking and Finance, deals mainly with Canadian problems. But the author ranges over the pros and cons of a number of issues of general interest, and there are useful comments on a variety of open questions.

IN the continuing debate about the role of money, credit, and monetary policy in our society, one of the major issues centers around the specific incidence of "tight money" on individual business firms. On the one hand, leading proponents of monetary controls as a regulatory device have emphasized the general, impersonal nature of such controls. They have argued that the impact of monetary policy is determined by the reaction of individual borrowers to changed market conditions.

Recently, in this REVIEW (J. K. Galbraith, "Market Structure and Stabilization Policy,this REVIEW, XXXIX (May 1957) I24-33) Professor Galbraith has asserted that in the case of monetary policy the "inflation can be controlled by denying credit to what are, in a general way, the least powerful firms" (page 132). Elsewhere, these least powerful firms are identified as the smaller firms (pages 131, 132, 133), and evidence concerning the distribution of bank loans by size is presented, to indicate that "while the case cannot be proven, there is a strong probability that in the last couple of years the effect of monetary policy has been to ration credit from all sources away from smaller firms in the competitive sector and to larger firms in the oligopolistic sector" (page 133).

Volume 2 of A History of the Federal Reserve covers mainly the years of inflation and disinflation, followed by a return to what is now regarded as relatively low inflation. It treats four questions: Why did inflation start? Why did it continue for 15 or more years, from 1965 to about 1982? Why did it end? Why did it not return? In this paper, I give an overview of the material that I consider in much greater detail in my book

Allan H. Meltzer, Is There an Optimal Money Supply?: Discussion, The Journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969 (May, 1970), pp. 450-453

THIRTY years have passed since anyone wrote a book exclusively—or even largely— devoted to an analysis of the supply of money. Phillip Cagan's Determinants and Effects of Changes in the Stock of Money, 1875-1960 (1965)1 would be welcome, therefore, if it did no more than intensify interest in a subject that lay dormant until recently. The book does much more, however. Cagan patiently examines the multitude of factors that influence the principal determinants of the money supply and hence the money supply itself. He then extracts from his data information about the perennial questions: Do changes in money cause the subsequent changes in output and prices? Or, is the stock of money pulled up and down by secular and cyclical changes in prices and output so that movements of money may be regarded as of little or no causal significance

MR. SYRING (1967) suggests that I relied on assertion rather than evidence or proof to support my statement that "little bias results from the exclusion of human wealth from the measure of wealth used to test the [demand-for-money] hypothesis" (Meltzer, 1963, p. 234). Further, he finds nothing in the empirical evidence to support my assumption that the ratio (d) of income from human wealth ( y h ) to the stock of human wealth ( w h ) is constant in the long run, although he recognizes that the assumption may be correct. In this note I will show that the estimated elasticities of real money balances with respect to real income and real non-human wealth are quite consistent with my assumption that d is constant in the long run. I will then discuss the more general problem that he raises, namely, whether it is possible to distinguish empirically between income and wealth as constraints on the demand for money.

The paper develops an alternative to the standard IS-LM framework. There are two asset markets and three prices—the prices of real assets, financial assets, and output. Costs of adjustment and information prevent output prices and output from adjusting instantaneously. Both the size of deficits and the method of financing affect output and prices. Some principal implications are derived. Several of these are also demonstrated, using a graph to show the interaction of asset markets, output markets, and the financing of the budget deficit. Some main implications of standard analysis are rejected. The basis for several "monetarist" conclusions is shown.

THE PROBLEM of selecting a portfolio can be divided into two components: (1) the analysis of individual securities and (2) the selection of a portfolio or group of securities based on the previous analysis. Up to now, the majority of writers have focused on the first part of the problem and have developed several, well-accepted methods of analysis.1 Little attention has been paid to the second phase of the problem. It is to this second part of the portfolio selection process that this paper is principally devoted.

This paper develops a positive theory of credibility, ambiguity, and inflation under discretion and asymmetric information. The monetary policymaker maximizes his own (politically motivated) objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth. The relative importance he assigns to each target shifts stochastically through time. His current preference trade-off is known to him but not to the public. When choosing the (state contingent) path of money growth for the present and the future, the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations. Current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker's objectives. Although expectations are rational, information is imperfect because monetary control procedures are imprecise. As a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors. The public becomes aware of changes gradually by.observing past monetary growth. Credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker. Credibility is lower the noisier monetary control and the more stable the objectives of the policymaker. Looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth. When the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero. The reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation. He leaves the inevitable negative surprises for periods in which he cares more about inflation prevention. This result provides an explanation for the Fed's preference for ambiguity, recently documented by Goodfriend (1986). The policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference. The paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation.