To most people, the problem relating to the money supply is that their is inadequate. For most, their control of money is governed by a simple and stern rule - you stop spending when you run out.
But in the monetary world of the Federal Reserve Board, the game is played by different rules. The Fed's purpose - among other things - is to make sure that the nation has an adequate money supply: Enough to finance expansion so that new jobs are created; not so much that people spend to the point where prices skyrocket (inflation).
Only, a strange thing has happened to the Fed. Its time-tested rules don't seem to be working. And neither the Fed (nor anyone else) quite knows why.
The Fed - and many conservatives - maintains the board is doing what it should in order to stabilize the economy and financial markets. Business leaders say that Arthur F. Burns, chairman of the independent seven-member panel, is running the only anti-inflation game in town.
But the Fed has also run into criticism, most visibly from the White House, that has placed the board on a collision course with the administration. Charles L. Schultze, the President's chief economic adviser' has warned that any further tightening of the money supply could choke off the recovery. And liberal Democrats have been up in arms over the Fed's activity for some time.
The problem is, no one can say for sure which side is right. Another problem is that neither side may be.
But it is relatively safe to say that the makers and molders of monetary policy are somewhat perplexed by the difficult time they are having in controlling the money supply.
Economists inside and outside the Federal Reserve are convinced the central bank does not have as firm control of the behavior of the money supply today as it appeared to have in 1975 and 1976.
Since spring, with a brief respite in the early summer and again in recent weeks, the money supply has been growing at a pace much faster than the Federal Reserve either wanted or expected. At the same time, as the central bank took its traditional moves to dampen money growth by making money more costly, interest rates have been climbing sharply.
That performance has earned the Federal Reserve an exposed perch in a crossfire of criticism from those who fret that rising interest rates will throttle the expansion and from those who think that the burgeoning money supply will touch off a round of inflation at some point down the road.
"We've been trying to find the middle road, trying to keep the monetary aggregates from exploding without having interest rates explode. I take some comfort that we are in the middle. So long as the pressures are coming from both sides, I think we are probably doing the right thing," according to one Federal Reserve official.
"That may be so," cautioned another, "but that middle road is awfully wide and it's not so clear whether we should be driving on the right side or the left."
While Federal Reserve officials think that they have kept money and interest rates from exploding - one characterized the performance as "successful or lucky" - the results supply have been puzzling. The money supply is neither behaving nor responding to policy operations as in the past.
The administration weighed in the fray recently, warning that it would view further rises in interest rates - they have climbed by more than 150 per cent since the spring - with alarm because of the potential for killing off the economic expansion at a time when production is low and unemployment uncomfortably high.
Monetarist economist, who were giving the Federal Reserve high marks a year ago, now are highly critical, too. Excessive money growth today means serious inflation two years from now, they warn, and the 10 per cent rate of money growth that has been maintained since the spring is clearly excessive.
The Fed is used to such criticism and in the past would ignore the slings. Not only has the White House needling bothered Burns, but the difficulties in finding an acceptable center ground from which to balance interest rates and money growth have nettled Federal Reserve officials, too.
When White House press secretary Jody Powell posted a press notice to the effect that future rises in interest rates would be bad monetary policy. Burns was unable to turn his cheek. In what passes for tough words from a central banker, Burns both defended the Fed's monetary policy and told the administration to mind its own business.
Choosing the unlikely forum of a university lecture in Spokane, Burns said the seven members of the Fed's Board of Governors have no intention of either letting money growth get out of hand and fuel inflation or of being so preoccuppied with money growth as to choke off recovery in a rush of rising interest rates.
"We' constantly keep probing for that delicate balance between too much and too little money," Burns said.
He then turned briefly to the administration's criticisms - interpreted by many as an attack on the Fed and Burns, whose four-year tenure as chairman expires Jan. 31 (although his term as a member runs until early 1984.
Burns told the administration that while the Fed "always welcomes advice on how best to proceed," it is the central bank's duty to operate in the monetary area and that it will do so in ways "that promote the long-run as well as the immediate interests of the nation."
While the Fed may be acting in what it thinks are the best interests of the nation, officials admit candidly - if privately - that setting the goals of monetary policy appears to be a easier than reaching them.
In part, the fight between the Fed and its various critics is a political one, with those who fear inflation most accusing the Fed of running an easy-money policy and those who fear a slackening in the economy most finding a tight-money policy.The disagreements reflect strong differences among economists as to the importance of the money supply - defined narrowly to include checking accounts and currency in circulation, but expanded in other definitions to include savings deposits, certificates of deposit and accounts institutions such as savings and loan associations in addition to bank deposits.
Economists agree that the money supply - or at least some definition of it - is important in influencing inflation, output and employment. But the degree of importance is a matter of serious academic dispute.
The money supply is important because it represents the purchasing power in the econommy. Too little money in the economy hinders the purchase of goods and services, and if there is too much, inflation ensues as consumers and businesses are willing to spend some of that excess money to buygoods, bidding up the prices in consequence.
The trick to monetary policy, at its simplest, is to figure out how much money the economy needs and to conduct that much money. It is not quite as precise as that, of course. The Fed sets its goals as a range. At present, the Fed wants the narrowly defined money stock (or M1, as it is called) to grow in a range of 4 to 6.5 per cent, although that may be revised when chairman Burns presents the Fed's quarterly update of monetary policy goals to Congress later this week.
When the Federal Reserve decides how big the stock of money should be, it also makes some assumptions about velocity, or how hard the stock of money works. If each dollar in the economy turns over five times a year and the money stock is $330 billion (about where it is now), then the money stock can support a total output of $1,650 billion - five times $330 billion.
If velocity slows down, as it appears to have done this year, then it takes more money to support the same level of spending.
Economists used to make a sharp distinction between M1 - checking accounts and currency - and other measures that include savings deposits because only cash and checkings accounts could be used to buy goods and services. There was also a presumption that consumers and business kept cash and checking accounts with the expectation of buying something and put their excess financial assets into savings accounts or other interest-earning devices.
Daniel H. Brill, Assistant Treasury Secretary for economic policy, noted that for some reason the public seems to want to hold more cash than it did a couple of years ago, not for the purposes of buying more but simply because companies and consumers prefer having their funds in currency or checking accounts rather than tied up in certificates of deposit or stocks or bonds.
"Arthur Burns called it right," Bill said. In 1975 and 1976, a lower amount of money stock supported economic growth than otherwise might have been expected. "Is the public now returning to a desire for cash relative to gross national product (the total value of goods and services produced by the economy) that prevailed before 1975?" Bill asked.
If that were the case, then some portion of an increase in the money supply does not indicate an increase in purchasing power and should not generate as much alarm about inflation.
"I don't think we were as alarmed about the money growth as some think we were," said one Federal Reserve official. "If we were really scared, you might have seen interest rates at 8 per cent, not 6.5 per cent."
Economists postulate all sorts of reasons why the money supply seems to have a different meaning to the economy today than a year or two ago, but the bottom line, according to economists such as Brill and former Fed governor Andrew F. Brimmer - who is given an outside chance at returning to the board as chairman - is that know one really knows.
Furthermore, no one knows if the apparent change is temporary or permanent.
All this imparts a sense of caution to policy makers, the Federal Reserve included. "If you don't understand what is going on, should you do something or do nothing?" asks one senior Carter economic official who deals regularly with the central bank.
It also could present Arthur Burns himself with something of a dilemma. "What if the behavior of M1 convinces Burns that an 8.5 per cent growth rate is more acceptable than the 4 to 6.5 per cent range he has been defending because of technical shifts in the demand for money? Can Burns, a proud man, make that case without seeming to be trying to please President Carter?" asked a knowledgeable administration official.