In Successes and Failures of Monetary Policy since the 1950s, author David Laidler provides a chronological survey of various monetary policies implemented by national governments. The lease effective, or biggest failure, of these policies is that of money targeting. (Money marketing has been the least effective of these poilicies.)
The basis for money targeting is the philosophy of Milton Friedman and his theory that inflation is “always and everywhere a monetary phenomenon.” The basic tenets of the policy are that by controlling money growth, one could control inflation. The index used for money growth is M1. The initial operating target was the reserve against private deposits. After the link deteriorated, the FOMC adopted a series of intermediate targets. Next, the FOMC expanded the index to include M2. Other problems include base drift (because the policy consistently undershot its mark) and currency exchange problems.
These issues were not constrained to the United States. Money Growth Targeting quickly spread throughout the world. The only remaining semblance of money growth targeting is in one of the pillars of the ECB. No remaining countries practice money growth targeting.
The central reason for the failure of monetary policy is defined as the breakdown of the link between money aggregates and the economy. The underlying problem, from my perspective, is two-fold. If we are to believe that much of inflation is based on the expectations of the public, and the public doesn’t fully understand money growth policy, how can policymakers develop a policy that will encourage the public to zig when they want them to zig? The policy was not very effective in incorporating the public’s expectations were one of underlying problems. The second, and perhaps better at illustrating the disconnect between money aggregates and the economy,is the public’s removal of money from the economy. The public’s adoption of “just-in-time” personal finance where the consumer has just enough “money” to meet short term obligations and all other assets are held in accounts not currently covered in the money aggregates, such as investment property, stocks, bonds, mutual funds, etc. (you lost yourself in the preceding sentence -- you spent the second half explaining just in time personal finance but you never comlpleted your thought) As more wealth and more financial transactions occur outside the money aggregates, the disconnect between the M1 / M2 and the economy become more apparent. As the public becomes more sophisticated investors, they simply remove themselves from the money supply.
