Economic Review

In the fall of 1979, the Federal Reserve announced a new set of operating procedures designed to enhance the control of M1. During the three-year period in which these procedures were in effect, however the United States experienced its most volatile money growth rates in the post-war era.

Economist Robert Hetzel investigates this apparent paradox in this article. He provides a historical account of the important monetary policy actions taken during the period in question and finds first of all that the announced procedures were not consistently applied. He also argues that the procedures were poorly designed to achieve the goal of M1 control. He concludes that the way in which the new procedures were implemented contributed in part to the variability in interest rates and monetary aggregates during this period.