objective. He saw control over the money supply as the key target. But by mid-1993, Greenspan's congressional testimony revealed his own disappointment with the state of monetary theory.(7) He conceded that the "historical relationships between money and income, and between money and the price level, have largely broken down, depriving the [monetary] aggregates of much of their usefulness as guides to policy." The chairman went on to point out that the so-called "P-star" model that links a long-run relationship between M2 and prices has also broken down (Greenspan, 1993, p. 8). Long before this time, Milton Friedman and most monetarists had conceded as much, and many returned to the drawing boards for new designs. Indeed, Chairman Volcker had given up his monetarist experiment ten years earlier. Disillusionment with the monetarist model was based on the failure of velocity to remain constant. Every new wave of financial innovations, new instruments, new financial institutions, and new congressional legislation have all played havoc with the stability of the monetarist model and eroded its usefulness as a guide to central bank operations and shattered its reliability as a predictor of the economic results. The laws of money and credit may, unfortunately, be valid for only the shortest time periods, as they are constrained by very specific institutional parameters. The institutional structures themselves will bend under stress and give way entirely to new emerging structures and new technologies. Those upheavals of the real world can quickly embarrass the brightest and most knowledgeable central bankers. In the end, they are dealing with the creative genius of financial entrepreneurs - Schumpeter's model of creative destruction - not the immutable laws of physics. Yet, despite these theoretical "breakdowns," in his 1993 testimony, Greenspan suggested still another theoretical strategy. The Fed should assess the equilibrium term struc...
