Allan H. Meltzer

Carnegie-Hochester

Conference

Series on Public Policy 29 (1988)

3- 10

North-Holland

KARL BRUNNER University of Rochester

The 60th birthday of an old friend and long-time close collaborator invites some retrospection. entered

our

semester.

graduate

In February 1953, 35 years ago, a new student

program

at

UCLA

at

the

beginning

In his first semester he enrolled in

of

the

my class on

spring

"Logic and

This was the beginning of my association with Allan Meltzer.

He established himself quickly as one of our best students.

Some

of his life-long character traits became visible within the first year. enjoyed the challenge of problems coping and wrestling with issues.

confronting him.

He

There was a joy of

There also appeared a willingness

probe some problems and argue about them with others.

to

These arguments did

not result from a floating sense of fun to exhibit one's cleverness tind skill of debate. Arguments always had a relevant purpose. They were a means to probe and clarify a problem. His commitment to learning and intellectual work became a life-long habit which will persist to the end of his days. There is no way of changing such a deep part of his personality. Allan Meltzer

did not move

immediately from high school and under-

graduate studies to a graduate problem in economics. detour via nonacademic pursuits.

The choice

He made first a short

of an academic avenue was

conditioned by a search both for a permanent intellectual challenge and a road in life which would yield him a deep satisfaction in his work.

The

decision to study economics was strongly motivated by a sense of concern about social and economic aspects of society.

Life with his grandmother

from the age of 6 to 10, after the death of his

ther, contributed to this

attitude.

horn he still fondly remembers-

She was a strong-minded woman

She was a strong supporter of President Roosevelt and his social programs0 ith grandparents

strongly anchored

in Judaic orthodoxy, he attended for

many years schooling in Judaic traditions.

The disputatious

al&ntiOn

to

detail, comparatively trivia7 in the general scheme of the dogmatic attitude about formal aspects of life Tess rticular tra early beliefs.

Ton

le

But there remained a basic attitude toward life and one%

way of coping with it conveyed by his grandmother. In the late 1940s he chose to pursue his undergraduate studies at Duke This was, after his youth in Boston,

University.

is first exposure to the

Be was shocked by the reality of segregation and discrimination. He

South.

joined student groups concerned about this situation. He became moreover an He later

organizer of the People's Progressive Party of North Carolinaparticipated

actively

campaign of 1948. in

observed

on

behalf

of

Henry

Wallace

in

the

presidential

He ultimately realized the futility of this mdeavor.

particular

that

important

local

campaign

He

organizations

expressed no interest in human rights and civil liberties. They were fixed to oppose the Marshall Plan as an expression of "American imperialism." also

found

peculiar

similarity

between

his

political

and

He

religious

experience: a narrow and impatient dogmatic commitment on the part of the authorities.

So he ended his political activities before the election. But

it contributed over time to a gradual reconsideration of political aspects of society* Once Allan had committed himself to the graduate program he wasted no time.

The crucial examinations were passed within two years and he was

free to attend to his doctoral dissertation. interested in the money supply process.

By this time, I had become

The absence of any analysis about

this process and of an adequate explanation of the systematic determination of a nation's moiPey stock motivated the choice of my project. my

endeavor,

and we

decided

to examine the problem

Allan joined

in the context

institutions very different from those prevailing in the United States. prepared for one year

of

He

in Paris with the purpose of studying the French

money supply process. He managed to use his time more expeditiously. His thesis was accepted in 1957.

Three and a half years after he turned up at UCLA, he accepted a

position

at

the

University

of

Pennsylvania.

His

first

exposure

to

Professional academia was somewhat disappointing. He left after one year and joined the Graduate School of Industrial Administration

(G&LA.)

at

(then) the Carnegie institute of Technology. A new life began for Allan, He arrived at

a young business school

ith a young faculty.

A contagious

climate of intellectual excitement and challenge prevailed.

Allan Meltzer

ils

at the right place.

Carnegie,

as A

it was

paper

in

e had little contact during his first years at

a per3od the

for him to establish

Jourilal of .-

dissertation i st

Political

his own

Economy

independent

based

on

his

activities.

essman

Patma

tee on 4

Banking

and Currency.

This

study

explored

securities.

the The

functioning working

of

the

this

of

dealer

market

transmission of open market operations.

market

crucially

in

government

influences

the

Allan found that, contrary to the

legends perpetuated in the textbooks, funds injected or withdrawn from the system

Via

open market operations were already widely distributed over the

system within two days. Changes in reserve requirements offer no technicai advantage for the execution of monetary pal icy. examined the

taxation of

interest payments

on

United States Treasury. He joined subsequently the Brookings

Institution on

Early in the 196Os, ATT municipal

bonds

for

the

ith David Ott

a similar study.

The

resulting

book was

published by the Brookings Institution. Around this time, in the early 196Os, Allan and I decided to pool our research efforts.

He worked at the time mostly on money demand,

attended to the money supply process.

Our collaboration was not rigidly

fixed to produce jointly authored papers. A substantial portion of our work did emerge, however, in such papers.

But our collaboration reached much

farther and was more "fundamental.11 It was based on a continuous discussion and mutual

exploration

of

books

and

articles

encountered

in our joint or separate papers.

published or

of

problems

The distance between

Los

Angeles and Pittsburgh hardly mattered.

Modern technology in the form of a

telephone overcame

developed

that obstacle.

We

at

the time

a

regular

procedure.

One

discussions.

Such discussions became a well-entrenched and enjoyable habit

particular

over the decades. schedule.

evening

each

week

was

reserved

for

our

It continues at this time, but with a much less rigid

Collaboration and discussions were reinforced in the early 1960s

by the fact that Allan spent, with his family, a sequence of summers in Los Angeles.

The

sufficiently

weekly

"resonant"

at

discussions to

induce

my

my

house

wife

to

appear

close

to

have

been

unobtrusively

all

windows so as to protect the neighborhood. Collaboration stimulus. dealer

er

experienced

of

1963

was

a

further

Congressman Patman was interested in a follow-up study on the

market

for

government

Allan

securities.

convinced

him

that

a

critical study of Federal Reserve policymaking would be more useful, Patman agreed, and we worked for one year on this enterprise

analysis, our approach to the

analysis of monetary policy, and the exploratio

of strategy and tactical

ant

procedures of Federal Reserve policies. conception

bore

little relation

to economic

5

in

These studies importantly

three studies published by Patman's Co shaped our subsequent thinking on monetary

hich resulted

analysis or the account

of

monetary policy and monetary mechanism found banking.

in

textbooks of money and

The literature on money and banking and monetary analysis did not

prepare us for an encounter with the reality of Federal Reserve Policymaking. Our first task was to understand fully the Fed's conception of the process subject to its manipulative attention. modifications introduced in the 1940s Gil

This conception, with cm

195Os, was

inherited from the

1920s. It was a conception assigning a CY+-.X~ role to free reserves. magnitude was

assigned a

dominant GY!s:~~ role.

It was

This

simultaneously

etation of the current state of selected as an indicator guiding the intr"r:j: monetary affairs and also as a target influencing the Fed's policy actions. This conception determined a pervasive and persistent misinterpretation of Our detailed

monetary affairs on the part of our monetary authcrities.

examination established that the Fed's actions and the interpretation of its actions were significantly negatively correlated.

The most dramatic

example

Great

with

tragic

consequences

was

of

course

the

Depression.

Relevant examples stretch unfortunately into the postwar period. Allan's

experiences

in

1948

and

at

the Treasury

in

1961/62

were

strongly reinforced by the Fed study. We both had uncritically accepted for a long time a "goodwill" or "benevolent dictator" theory of government. The observations made, most particularly during the 196Os, gradually affected Allan's (and my) thinking.

It struck us how little effort the Fed had

invested in understand the money pattern in the middle of

supply process.

I noticed

the 1940s at the Swiss National

a similar

Bank.

There

existed in both cases a vague doctrine totally unaffected by elementary economic analysis.

This doctrine was the ruling dogma conditioning policy

for

There

many

years.

assessments.

is

no

Clarification of

alternative strategies were, the Treasury.

evidence

of

systematic

long-term objectives

questioning

or

and explorations

of

in Allan's experience, hardly cultivated at

e did not probe these matters in our Fed study.

puzzled but blinded by the "goodwill" theory of government.

We were

We attributed

it implicitly to inadequate education in economies on the part of policymakers. The

puzsl,

stimulated thinking over subsequent years and Allan's mind

as certainly hard at mind on such ideas? actually

hy did Treasury and Central Banks fix their hy was there no internal discussion? Why was dissent

re 7r less suppressed or made somewhat uncertain and difficult?

At one of ow

innumerable discussions

ties

(foreign

policy,

e should assume that should

differ2i;tly.

6

be

expected

to

Our

major

political

research

economy

effort

attracted

an

continued

in

increasing

monetary

analysis.

attention.

The

But

questions

pondered were broadened beyond the specific issues raised by Central Banks. This

became

quite

visible

in Allan's

paper

contributed

in

1974

to

conference at the University of Chicago on the size of government. began a new line of research supplementing the work on monetary Allan

subsequently abandoned the approach taken

in his first

a

This

theory.

paper

and

developed with his colleague Scott Richard an analysis based on the median voter model.

The change in approach became most visible (and hearable) at

the occasion of my 60th birthday.

Eight friends assembled at my house.

After a good dinner we sat around a big fire in the fireplace.

Somehow

Allan and William Meckling got entangled in a hot debate about the merits of

alternative approaches to the explanation of the size and growth

government.

It was fascinating to watch the ongoing battle.

of

Allan argued

with the style of a machine gunner with sharply pointed and rapid duster shots. bear.

Bill, on the other hand, moved like a lumbering indestructible big The discussion went on until the early morning.

Allan, with Scott Richard or Alex Cukierman as co-authors, produced ovw

the following 12 years a number of interesting papers bearing on the

political economy of government. Whatever one may think about the cognitive merits of the median voter model, the studies published attend to important and noncontrived issues with an explicitly formalized structure. They also yielded testable implications inviting a searching empirical examination. Against the background of prevailing monetary policy analysis, I attribute particular

importance

behavior of Central

to

Allan's

Banks.

study exploring

It emphasizes

an

hypothesis

on

the

in particular an uncertainty

created by prevalent policymaking as a rational response to the incentives confronting a Central Bank. actual

monetary

policymaking

This analysis offers more problem

than

insight into the

approaches

based

on

time

inconsistency and reputation equilibria. Attention

to

the

emergence

and

working

developed slowly over the P96Os, expressed ney"

[1971j.

of

important

by our

institutions

paper on "The Use of

This attention merged during the 1970s with the broader

examination of aspects in the political economy of modern societ.2s. Federal Reserve "institutional

study

as a crucial

stimulus of

the gradually

Our

evolving

interest."

determined also the approach to economic policy.

The evoT

t short-run manipulation

of the

economy

7

in response

to perceived

current

The institutional and political insights gained over the

circumstances.

years made him a forceful advocate of policy as

choice among alternative

All this is closely associated

institutional arrangements.

view of economics as a science. a "palicy science."

a

Economics has always been viewed by him as

This means that economics and research in economics He remains

should have some meaningful connection with our real world.

increasingly impatient with contrived exercises apparently so fashionable in macro-economics. kind of work

His objection

is addressed particularly

hich creates a highly artificial

toward the

orld, palpably unmotivated This presents

by any real problems, in order to explore its implications.

then an obvious challenge to other scholars to demonstrate the opposite results with suitable changes in the artificial context.

The analytics may

be imposing and clever, but this is no guarantee of a meaningful economic analysis hopefully raising our understanding of the world. of

an

idea

objective.

into a

fully

Wgorized"

occasions this to

is

certainly

a

desirable

It usually involves substantial sacrifice with respect to the

range of the problems covered. refusal

theory

The translation

It appears at this stage that on too many

sacrifice almost entirely emasculates

acknowledge

any

incompletely

the

"rigorized"

problem.

analysis

or

The any

analysis not derived from "first principles" forms, in Allan's thinking, a fundamental error.

Cognitive progress moves slowly and in steps from vague

pre-analytic ideas over various levels of analytic expressions.

Each level

has its importance and contributes something to our partial knowledge.

To

reject all nonfully "rigorized" levels actually obstructs the evolution. It essentially denies at our stage potentially accessible thus would impoverish our insights. examples for our purpose. interest here.

knowledge

and

The history of science offers useful

The work of Copernicus should be of special

There is, moreover, no guarantee that we can always achieve

"full rigorization"

ithout sacrificing crucial aspects of reality.

One

may probably compare the situation, according to Allan's evaluation, to the man insisting on searching for 31is wallet W&B

d street Wright instead of

some distance a ay in the darkest corner where it The serious co

as actually dropped.

itment to an intellectual endeavor and the joy of its

pursuit does not exhaust a man's life,

e are embedded in a net

tive relations, particularly expressed by a family. as

already

his

ho

has

When I met him in

offered

ee children. air the atten his children

8

support

and

His zestful

concern to him and he enjoys his family. They all learned to fly and built their own nests.

e wish Allan many years of

including now some grandchildren.

appiness

ith his family,

ish him also good health so that

he may continue to enjoy for many years the hard pace of work which has become a habit.