Gold Bugs Had the Best Monetary Rule

April 4 (Bloomberg) -- Ever since the U.S. severed the lastremnant of the dollar’s link to gold in 1971, economists havebeen searching for a new rule for monetary policy. The GreatInflation of the 1970s only reinforced the notion that rulestrump discretion. But what sort of rule exactly?

Milton Friedman wanted to replace the Federal Reserve witha computer that would increase the stock of money by a fixedamount, month in, month out. Paul Volcker, who was appointed Fedchairman in 1979, introduced a money-supply target. The targethe chose -- “non-borrowed reserves” -- has no relationship toanything the Fed cares about, be it inflation, employment oroutput. That said, it provided the cover to push the fed fundsrate as high as 20 percent without actually specifying aninterest-rate target.