The Dollar and the Policy Mix
|This paper had its origin in a presentation I made at a US Treasury Consultant’s Meeting in February 1972, the day John Connally was confirmed by the U.S. Senate as Secretary of the Treasury.
Connally became famous for his quip to Europeans that “the dollar is our currency but your problem” but his enduring fame as Secretary revolves around his role in taking the dollar off gold in August 1971, bringing to an end the Bretton Woods arrangements of fixed exchange rates rates anchored to the gold-convertible dollar.Robert Mundell
The “Keynesian” cure for recession was to stimulate demand, and the cure for inflation was to curb demand, but it was obviously impossible to do both at the same time.
This led Robert Mundell to propose, in 1971, that the job of ending inflation be assigned entirely to monetary policy (similar to what is now called “inflation targeting”), while the toolkit of fiscal policy should be expanded to include a microeconomic focus on the supply side–i.e., through tax incentives, privatization and deregulation to enhance potential supply.