Here's something for those of us who are economic history nerds. (HT to Bill Polley.)
Those of us who were around in the late 1970s can remember a day in October, 1979 when the Fed changed its approach to monetary policy and took a hard stand against inflation. The idea was to focus on monetary aggregates via bank reserves, instead of targeting interest rates. It was, in effect, a return to one of the ideas of Irving Fisher. His equation M*V = P*Q (or P*T), is an important identity linking money growth to prices. (And, obviously, it is the title of this blog.)
There are a couple of Federal Reserve Bank publications that examine that important decision. This first one from the Federal Reserve Bank of San Francisco is, by far, the more concise - amounting to a handful of pages. This second, from the Federal Reserve Bank of St. Louis, is more comprehensive and, at over 80 pages, may be preferred by the wonkiest among us - the same group that has been waiting patiently for the second volume (now scheduled for two separate books) of Allan Meltzer's History of the Federal Reserve.
Fisher's idea is still a handy classroom tool for explaining the connection. The equation state that the money supply (M) multiplied by the velocity (V) or number of times the money supply turns over equals prices or the price level (P) times the level of goods and services transactions (Q or T, depending on your preference). By use of some simple algebra, it becomes (M*V)/Q = P. And we see that money multiplied by its velocity, divided by the output gives us prices. And if we examine the change in MV relative to the change in Q, the result is change in P (inflation). If the change in money is greater than the change in output, there is upward pressure on prices. Change in output greater than the change in money results in downward pressure on prices.
It is the relationship illustrated by Fisher's equation that is causing a lot of concern about the result of current monetary policy, and has many pundits speculating about the Fed's exit strategy from the current accommodative (easy money) stance.
Regardless, if you would like to know more about the mechanics of monetary policy at the time of the last major bout of inflation, these publications may make a good place to start.
I look forward to your comments.