Monetary Economic Research at the St. Louis Fed during Ted Balbach's Tenure as Research Director

Article excerpt

Ted Balbach served as research director at the Federal Reserve Bank of St. Louis from 1975 to 1992. This paper lauds his contributions during that time, including the expanded influence of the Review, enhanced databases and data publications, and a visiting scholar program that attracted leading economists from around the world. Balbach is remembered fondly as a visionary leader and gracious mentor.

Federal Reserve Bank of St. Louis Review, September/October 2008, 90(5), pp. 499-504.


The monetarist movement took shape in the 1960s. The name gained usage and became trite. Basically, its adherents believed in the quantity theory of money, but in 1968 Karl Brunner named them monetarists. In today's terminology, the movement would be viewed as a network of young economists who shared the belief that the quantity of money was an important variable with explanatory power for the price level and cyclical fluctuations in economic activity. (1)

Graduate students in economics became members of a club that had two branches. One consisted of students of Brunner at UCLA. Ted Balbach was a member of this branch. The other branch centered on students of Milton Friedman, particularly members of the Money Workshop at the University of Chicago and also some who worked on the money and business cycle project at the New York headquarters of the National Bureau of Economic Research.

The two branches shared a common interest in two organizations that bridged their separate memberships. One was the Shadow Open Market Committee (SOMC), formed in 1973 under the aegis of Brunner and Allan Meltzer to advocate improved monetary policy, particularly urging the Fed to act decisively to reduce inflation, which had been accelerating since 1965 absent persistent action to tighten. Members of the SOMC, presumably individuals with monetarist leanings, came from wider backgrounds than those of the two branches. The other organization that bridged the membership of the two branches was the Federal Reserve Bank of St. Louis, which was distinguished as the first bank in the System to be headed by a president who expressed monetarist views and that had a research program (headed by Homer Jones) that featured topics of importance to monetarists. After he retired as research director of the St. Louis Fed, Jones joined the SOMC.

One example of the links between Ted at the St. Louis Fed and the SOMC is that the St. Louis commercial bank that employed Ted's wife, Rachel, paid the expenses for her semiannual trip to New York to attend SOMC meetings and report the issues that had been discussed.

We have now set the stage for Ted Balbach's appointment as the St. Louis Fed director of research in 1975. The backdrop was the struggle by leaders of the monetarist movement to uphold propositions about the relation between money and economic variables such as income, prices, and interest rates that Keynesians of that time and earlier denied. Mainstream views (especially in the Federal Reserve System) were predominantly those of Keynesians.

In the period before 1975, research activities at St. Louis had a significant influence on the debates between monetarists and Keynesians. It was exciting for monetarists to score a victory by a St. Louis research product proving a point over a contrary Keynesian position. One such episode occurred in the dispute about the importance of fiscal policy versus monetary policy for economic stabilization. The Keynesian stand was that both mattered. The monetarist position was that only money mattered. The 1968 St. Louis Fed study by Leonall Andersen and Jerry Jordan provided strong support for the monetarist position. According to their data, the response of economic activity from 1952 to 1968 was larger, more predictable, and faster for money than for the fiscal variables of budget cuts or tax changes. The result brought joy to the monetarist camp, although Keynesians were unimpressed by a single-equation triumph--only the result of a multi-equation general equilibrium model could provide credible evidence. …