VOL 69 NO. 2 AN APPRAISAL OF THE NON-MARKET-CLEARING PARADIGM period or the pre-World War I era. However, tions are unclear to me. However it might be it also seems that the important change worth remarking, from the standpoint of the monetary structure has been a reduction in adjustment costs implied by a shift in mone- the short-run variance of money, rather than tary structure, that an analysis of expecta a move toward an activist feedback policy by tional changes associated with a structural the monetary authority. Specifically, the ten- shift cannot usefully be separated from an dency to increase the money stock at a higher analysis of the changes in the underlying rate in response to a recession-which is a variables that led to the shift in structure. In pattern that appears to originate in the Ful particular, there is no reason to believe that Employment Act period following World expectations about money growth and infla War 1l-does not seem to have contributed to tion are either more or less flexible than the enhanced economic performance underlying structure that generates the actual The effects of the shift to greater year- values of money growth and inflation. There- to-year stability in money indicates the poten- fore, one would not predict that a shift to a tial real effects of changes in the underlying new monetary environment--such as those monetary institutions. The evaluation of this that occurred in the past concerning the particular change (i. e, a comparison of the monetary role of gold or the Federal gold standard money process before World Reserve-would involve an adjustment period War I with today's fiat standard managed by in which expectations lagged behind the the Federal Reserve)involves a complicated changes in"reality. "A shift in the United tradeoff. In my view the benefits of greater States to an institution that delivered a lower year-to-year stability in todays output and average growth rate of money would not employment have been bought with two imply a transition period of unusually high major costs. The first of these concerns the unemployment monetary education during the early years of The interpretation of the Great Depre the Federal Reserve, a process that is doubt- is a key matter dividing policy activitists from less still continuing. The monetary errors of nonactivist. The activist view is that the the interwar period-which seem to be much Great Depression was a symptom of an inher more extreme than those that would have ently unstable private economy that exper arisen under the pre-World War I regime- ienced large gyrations in output and which can be credited with much of the costs of the tolerated prolonged periods of higl Great Depression, as well as with those of the ployment. Governmental activism 1937-38 contraction. Although the gold stan- middle and late 1930's--notably, the high dard was not"ideal, "it did require less levels of public expenditures--are thought to knowledge by the government or anyone else have been helpful in restoring some measure about how the aggregate economy worked. of economic prosperity The second cost of the monetary change is the The alternative view is that the great hronic inflation of the present environment. Depre is in large part a product of Further attained by moving to a monetary institution monetary policy of the Federal Reser pt governmental mistakes; specifically, the ine that first, and most importantly, delivered Further, the governmental interventions asso- even greater year-to-year stability in the ciated with the New Deal, including the money supply, for example, by constraining volume of public expenditures and direct the monetary authority to achieve an approx- price regulations, retarded the recovery of the imately constant growth rate for M,, and economy, which was nevertheless rapid after second, that attained an average monetary 1933. The sharp increase in reserve require growth rate below the roughly 6-7 percent ments was primarily responsible for the 1937- annual rate for M, that is implied by the 38 recession present structure. The precise design of the I do not presently see a fully satisfactory new governmental institution and, more " equilibrium"or"disequilibrium"story of mportantly, the political-economic process the Great Depression. With respect to one that leads to changes in this or other institu- type of equilibrium model that has been