The Woodrow Wilson Presidential Library in Staunton, VA, contains an exhibit entitled “The Federal Reserve: Wilson's Enduring Legacy: A modern industrial nation must have a money supply that can expand and contract with the economic cycle.” There is a quotation from a 1913 address by Wilson to Congress: “We must have a currency, not rigid as now, but readily, elastically responsive to sound credit. … And the control of the system of banking must be public, not private, must be vested in the government itself” [italics added]. The aggregate demand management of stop–go imparted the same procyclical bias to money that had existed under the real bills doctrine. However, it did so with an inflationary bias.

Chapters 23–5 identify the empirical regularities that characterize the almost 20-year stop–go period following 1964. The Fed, not private markets, produced “inflation shocks.” Inflation is a monetary phenomenon in that high rates of money growth preceded increases in inflation. Contrary to Taylor (1999), the inertia in the interest rate that made monetary policy inflationary preceded inflation rather than followed it.

To use historical experience to decide between the competing hypotheses of Fed as inflation creator and inflation fighter (Chapter 22), one needs to understand how the monetary regime affects the predictive relationship between money and prices. In case 1, the central bank accepts responsibility for inflation, possesses credibility for its inflation target, and pursues a strategy consistent with achieving the target.