inflation, that the monetary system and the value of the dollar are not anchorless. The Fed has already established and maintained such credibility, long since. H.J. Res. 409 is not necessary for this purpose, and it is mischievous to the extent that failure to pass the resolution or to achieve its aims might be misinterpreted as indicative of inflationary policies. Mr. Chairman and members of the Subcommittee, my name is Lyle E. Gramley; I am a Senior Staff Vice President and the Chief Economist of the Mortgage Bankers Association. I am happy to have this opportunity to give you my views on H.J. Res. 409, introduced by Congressman Neal, and H.R. 3512, introduced by Congressmen Dorgan and Hamilton. I would like to begin with a brief discussion of how money and prices are related to one another. My judgments on that issue form the basis for my opinions with regard to the two bills that are the subject of these hearings. We all know that money and prices are related to one another, much more closely in the long run than in the short run. I subscribe the view that, in the long run, what happens to the stock of money determines principally the level of prices and the rate of inflation, and and not the level or growth rate of of real output. The converse of the proposition appears to be equally valid namely, that in the long run, the principal determinant of the level of prices and the rate of inflation is the growth of the stock of money. - Let me relate this theoretical proposition to reality with a concrete example. Between the early 1960s and the late 1970s, the U.S. economy went from went from price stability to double-digit inflation. There were many contributing factors to to the wage-price spiral-such as the the way in which the Vietnam war was financed, the suppression of actual inflation by mandatory wage-price controls during a period when monetary and fiscal policies were both highly stimulative, and the two oil-price shocks of 1973 and 1979. However, none of those factors, either alone or in combination, would have led to double-digit inflation if monetary policy had not been accommodative. The Federal Reserve tacitly acquiesced to higher inflation by permitting an excessively rapid growth of money and credit. The Federal Reserve put an end to the inflationary process by adopting tough anti-inflation policies between 1979 and 1982. Had that been done much earlier, double-digit inflation would have been avoided, and the wrenching of the economy needed to bring inflation down during the 1980s would have been less severe also. If monetary policy largely affects the level of prices, and only the level of prices, over the long run, then it would seem to make sense for the long-run objective of monetary policy to be the achievement of reasonable price stability. That, I believe, is the Federal Reserve's present understanding of its principal role in economic stabilization policy. I recognize fully that monetary policy in the short run has significant effects on real output and employment, effects that must be taken into account carefully in the conduct of monetary policy. There is a role for monetary policy to play in keeping the economy from getting too far off the track of a path of economic growth consistent with reasonably high output and reasonably stable prices. 2 Troubles arise when the monetary authorities push their knowledge beyond its practical limits, or when they minimize the impact that efforts to squeeze too much output from the economy will ultimately have on prices. If the monetary authorities are encouraged to take the short-run view, and downplay the long-run consequences, higher inflation is likely to be the result. To hold down inflation, the Federal Reserve often has to make decisions that are politically not very appealing. That is a major reason why the Federal Reserve's independence from the administrative branch of government needs to be preserved. Independence permits the Fed to make tough decisions, knowing that the long-run benefits of stable prices will more than compensate for the short-run pain of achieving them. Any serious infringement of the Fed's ability to conduct conduct monetary policy on a day-to-day basis would, in my judgment, be a serious loss. record as supporting H.J. Res. 409 would put the Congress on Congress on record efforts of the Federal Reserve to hold down inflation. If passed by the Congress and signed by the President, the resolution would set forth in law, for the first time, a clear statement of priorities for monetary policy. That seems to me desirable. Although I support passage of H.J. Res. 409, I would not hold out hope that its passage would greatly simplify the achievement of a noninflationary economy. As far as I am aware, no nation has found 3 |