During the early years of monetary measurement, policymakers groped for ways to use the new data.⁷  However, during the 1960s and 1970s, as researchers and policymakers struggled to understand the sharp increase in inflation, the view that nominal aggregates (including credit as well as monetary aggregates) are closely linked to spending growth and inflation gained ground.  In 1966, the Federal Open Market Committee (FOMC) began to add a proviso to its policy directives that bank credit growth should not deviate significantly from projections; a similar proviso about money growth was added in 1970.  In 1974, the FOMC began to specify "ranges of tolerance" for the growth of M1 and for the broader M2 monetary aggregate over the period that extended to the next meeting of the Committee.⁸

In response to House Concurrent Resolution 133 in 1975, the Federal Reserve began to report annual target growth ranges, 2 to 3 percentage points wide, for M1, M2, a still broader aggregate M3, and bank credit in semiannual testimony before the Congress.  In an amendment to the Federal Reserve Act in 1977, the Congress formalized the Federal Reserve’s reporting of monetary targets by directing the Board to "maintain long run growth of monetary and credit aggregates … so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."⁹ In practice, however, the adoption of targets for money and credit growth was evidently not effective in constraining policy or in reducing inflation, in part because the target was not routinely achieved.¹⁰

Why have monetary aggregates not been more influential in U.S. monetary policymaking, despite the strong theoretical presumption that money growth should be linked to growth in nominal aggregates and to inflation?  In practice, the difficulty has been that, in the United States, deregulation, financial innovation, and other factors have led to recurrent instability in the relationships between various monetary aggregates and other nominal variables.  For example, in the mid-1970s, just when the FOMC began to specify money growth targets, econometric estimates of M1 money demand relationships began to break down, predicting faster money growth than was actually observed.  This breakdown--dubbed "the case of the missing money" by Princeton economist Stephen Goldfeld (1976)--significantly complicated the selection of appropriate targets for money growth.  Similar problems arose in the early 1980s--the period of the Volcker experiment--when the introduction of new types of bank accounts again made M1 money demand difficult to predict.¹² Attempts to find stable relationships between M1 growth and growth in other nominal quantities were unsuccessful, and formal growth rate targets for M1 were discontinued in 1987.

The Board staff continues to devote considerable effort to modeling and forecasting velocity and money demand.  The standard model of money demand, which relates money held to measures of income and opportunity cost, has been extended to include alternative measures of money and its determinants, to accommodate special factors and structural breaks, and to allow for complex dynamic behavior of the money stock.¹⁷ Forecasts of money growth are based on expert judgment with input from various estimated models and with knowledge of special factors that are expected to be relevant.  Unfortunately, forecast errors for money growth are often significant, and the empirical relationship between money growth and variables such as inflation and nominal output growth has continued to be unstable at times.¹⁸

Despite these difficulties, the Federal Reserve will continue to monitor and analyze the behavior of money.  Although a heavy reliance on monetary aggregates as a guide to policy would seem to be unwise in the U.S. context, money growth may still contain important information about future economic developments.  Attention to money growth is thus sensible as part of the eclectic modeling and forecasting framework used by the U.S. central bank.