Gambling at the Fed
In order for any economic theory to be tested in the real world it must capture the sympathies of those in positions to implement it. Since most economic theories never find a following outside the musty halls of academics, the world is usually spared from becoming an economic guinea pig. An important exception was monetarism, which broke loose from the ivory towers in the 1970s.
Because monetarism is fundamentally a theory of monetary policy, it had to be adopted by the central bank in order to receive a fair trial. This is exactly what happened in the United States in 1979. The actual announcement that the Federal Reserve Board was planning to give monetarism a try was met with some surprise. Not only did this constitute a dramatic policy reversal from business as usual, but the new policy was highly controversial. Monetarism, as already described, was closely associated with Milton Friedman, who was widely perceived as something of a zealot, preaching the gospel of free markets.
With the benefit of hindsight, one can usually produce reasons for any historical event, and the case of the Fed's monetarist experiment is no exception. Economic conditions in 1979 were more than atypical, they were dismal; inflation was high despite a sluggish economy. The year would close with a 13.3 percent inflation rate for consumer goods and services and an average