What is MacroWeb?

In the months between August 1974 and May 1975, the U.S. Treasury pursued an expansionary monetary policy. The monetary expansion was only a ten-month period. During this time, the Federal Reserve dropped the federal funds rate 16 times, a total of 8%. The discount rate was also lowered during this period of expansionary policy. The discount rate went from 8 to 6%, dropping five times during that period.

What was happening during this period in history may have something to do with why the economy needed a boost. On August 8th 1974, Richard Nixon resigned as president of the United States. President Ford was sworn in a day later. The presidential scandal brought with it feelings of distrust towards our elected officials. Such events can also bring about uncertainty in the economic stability of the country. The Federal Reserve must have felt it necessary to pump up the economy to get people feeling good about the new change of command in the presidential office.

A few economic effects that came about because of the expansionary policy of this period follow. Real GDP dropped from 4084.5 to 4045.2 during the period. This results in a 2.1% drop. Inflation rose 6.4% and unemployment rose 3%. The unemployment rate was actually fairly stable before the expansionary monetary policy. The unemployment rate was 5.3% in August and had actually gone down from 5.8% in June of 1974. The unemployment rate jumped up to 9% in January of 1975. The data seems to indicate that the economy was already in an expansion before the expansionary monetary policy was pursued. The expansionary monetary policy resulted in stagflation, high inflation and high unemployment.

Who is Dave Tufte?

Copyright, David Christensen, 2001.