America's Money Machine

T OWARD
32.
The End of a Dream
THE END OF 1963 the New York Times reported that "a
quiet revolution has been taking place in the Federal Reserve Systern."
1 Within the preceding two and a half years, the Times announced,
"the nation's money managers have reshaped their tactics and reforged
their weapons for carrying out their responsibilities."
The nature of this "revolution," it appeared, went beyond routine
questions ofthe techniques to be employed in easing or tightening credit.
It "involved a basic shift in the concept of monetary management."
"The Federal Reserve," the Times stated hopefully, "is now following
a dynamic course, pursuing an aggressive policy of managing money."
This represented an about face from the "passive course followed in the
nineteen fifties" when the Federal Reserve "all but abdicated its responsibility
for monetary management."
This passive role, it was explained, consisted of "self-imposed restrictions
on open-market operations," of reliance upon the discount function,
and ofdisuse ofmember bank reserve requirements. These had now
been abandoned in favor of a willingness to experiment with new techniques
in response to changing conditions. "Now, for the first time," said
the Times, "flexible monetary policy is in operation."
In detailing the specifics of the new dynamism, however, the Times
account grew understandably vague. It reported that the Reserve had
relaxed its "rigid technique for conducting open market operations, and
could claim some measure of success for expanding the supply of credit
and at the same time holding up short-term interest rates to defend the
dollar." It raised the discount rate-"the first time that it had been used