A Plan for Subduing Inflation

The difficulties of settling on a national policy for coping with inflation are compounded by a prolonged Battle of the Books among economists. Those who think of themselves as fiscalists (or Keynesians or New Economists) often underestimate the importance of changes in the rate of money-supply growth. And those who think of themselves as monetarists often overestimate the possibilities of using changes in the rate of moneysupply growth as an instrument for controlling inflation. Actually, monetary tightness pushes interest rates and unemployment up before it has any discernible effect on inflation.

In this dialogue, economist Allan H. Meltzer presents a specific plan for using a combination of monetary and fiscal restraint to subdue inflation. Meltzer is Maurice Falk Professor of Economics and Social Science at Carnegie-Mellon University in Pittsburgh. While unmistakably a monetarist, he recognizes that the federal budget (fiscal policy) heavily influences the decisions of the Fed (monetary policy).

The dialogue is a shortened version of a conversation between Professor Meltzer and two members of the FORTUNE editorial staff. Meltzer's words are printed in black, and those of the FORTUNE staffers in blue