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Nixon's difficulties are complicated by the fact that the Republican Administration and the Democratic-controlled Congress have hit an impasse on fiscal policy. The President has trimmed $7.5 billion from the federal budget that he inherited from Lyndon Johnson and ordered reductions in Government construction. Congress has consistently voted this fall to raise federal spending above the levels that the White House wants. Last week Nixon announced that he would impound appropriated funds, if necessary, to keep the Government from running an inflationary deficit in fiscal 1971.
The President's struggle with Congress has been greatly intensified by the fight over the tax-reform bill (see THE NATION). It started out with some sensible and overdue reforms, but many were gutted by irresponsible actions in the Senate. The 1969 bill that the Senate passed last week is loaded with so many tax reductions—as well as a costly 15% increase in social security benefits—that the President has threatened to veto it. "I intend to use all the powers of the presidency to stop the rise in the cost of living," said Nixon at a press conference shortly before the Senate acted. "If I sign the kind of bill which the Senate is about to pass, I would be reducing taxes for some of the American people and raising prices for all the American people. I will not do that."
How Monetary Policy Works
In dealing with the reality of inflation and the possibility of recession, Nixon so far has shown a deep reluctance to intervene in the private economy. He has rejected price guidelines, personal pressures on business and labor leaders, and outright controls. His policy coincides with Friedman's fundamental ideology—a strong aversion to Government interference—and places great emphasis on lower federal spending, as well as the monetary measures that Friedman has illuminated and popularized. Manipulation of the money supply operates indirectly on the economy, but its impact is ultimately massive and touches the lives and fortunes of nearly everyone.
The intricacies of monetary theory generally seem as mystifying as the Mock Turtle's description in Alice in Wonderland of "the different branches of arithmetic—Ambition, Distraction, Uglification and Derision." Money supply can be measured in four ways, but Friedman prefers to use the total of currency in circulation plus checking accounts and time deposits in banks. The Federal Reserve controls the rate at which money supply grows or shrinks chiefly by buying or selling Government bonds. When the board buys bonds, it automatically raises the quantity of reserves available to banks; this increases the amount of credit that banks can extend to borrowers. When the board sells bonds, the process operates in reverse and borrowing tends to become difficult.
The Federal Reserve tinkers constantly with the money stock, much to the distaste of Friedman, who advocates a policy of moderate, steady expansion. For example, the board expands the supply during periods of peak demand, as it did to an extreme degree to help the Treasury finance its huge deficit in fiscal 1968. Through the same kind of maneuvering, the board tries to smooth the ups and downs of the business cycle. Friedman