Monetary Policy

Monetary Policy: How Well Does It Work?

The Federal Reserve board is responsible for the managing the money supply. In times of inflation, they tighten this supply. In a recession, they increase the money supply, stimulating growth. This video is focused on three chairmen of the Federal Reserve Board, Arthur Burns, Paul Volcker, and Alan Greenspan. First, in 1975, Arthur Burns wanted a strict money policy and did not want to open the gates. Then in 1979, Paul Volcker needed to turn around the worst recession since the Great Depression. Finally, in 1987, the stock market crashed, and the video showed how Alan Greenspan would respond to save the economy.

When Arthur Burns took over as chairman of the Federal Reserve Board, inflation was a problem and car and home sales plunged as a result. The Feds were forced to keep a tight money policy, restraining borrowers and raising interest rates. This served as a restraining hand on the economy. But as a result of this restraining hand, unemployment rose to levels that were the worst since the Great Depression. Burns was pressured to allow the money supply to grow more rapidly. He refused to allow it stating that it would not significantly relieve unemployment and that it would further accelerate inflation. He did allow moderate easing to increase the velocity of money and indicators showed signs of recovery. Later in the year, inflation fell and unemployment fell.

In 1979, inflation rose again and the Feds faced criticism. Paul Volker wanted to focus more on the long run rather than the short run. He decided not to target interest rates but rather the money supply. This would reduce growth to bring price stability. As a result, interest rates rose dramatically to record levels, and eventually reached 20%. While helping the economy, this affected small businesses most. The monetary restraint caused collapse in home construction and auto loans,