Opening of section I, "What Monetary Policy Cannot Do," from the 1968 AEA presidential address.
From the infinite world of negation, I have selected two limitations of monetary policy to discuss: (1) It cannot peg interest rates for more than very limited periods; (2) It cannot peg the rate of unemployment for more than very limited periods. I select these because the contrary has been or is widely believed, because they correspond to the two main unattainable tasks that are at all likely to be assigned to monetary policy, and because essentially the same theoretical analysis covers both.
The two negations are the spine of the monetarist case against the fine-tuning consensus of the 1960s. A central bank that holds interest rates down by buying bonds expands the money stock, raises inflation, and — through the Fisher effect — eventually drives nominal rates higher than where they started; a central bank that holds unemployment below the natural rate by the same means buys a transitory gain at the cost of an accelerating price level. Friedman’s claim is symmetrical and deliberately deflationary of ambition: the instruments that look like levers on real magnitudes are, past a short horizon, levers only on nominal ones. The address pairs this with its positive counterpart — that monetary policy can prevent money itself from becoming a major source of disturbance, and can provide a stable backdrop — but the negations are what broke with the prevailing view.