The 50 Year History of the SOMC and the Evolution of Monetary Policy

The Shadow Open Market Policy (SOMC), a small committee of academic and business economists was formed in 1973 in the United States by the leading monetarist economists: Karl Brunner, Allan Meltzer and Anna J Schwartz to promote the argument that inflation was a monetary phenomenon. It fashioned itself as an “outside watchdog” of the Federal Reserve’s monetary policy setting. In the 1970s it successfully promoted the importance of sound money and influenced the debate in the U.S. Congress and the Federal Reserve about how to reduce inflation. Since the 1970s the SOMC’s policy recommendations have evolved from its strict monetarist foundations, formed by its core beliefs in sound monetary policy guided by systematic rules whose primary objective is stable and low inflation as the best foundation for healthy economic performance, transparency and accountability, and systematic and rational approaches to financial regulations. The SOMC presciently warned the Fed before two recent major policy errors: the GFC and the post pandemic inflation but its advice was unheeded. This paper surveys the contributions of the SOMC over the past 50 years to the analysis of Fed monetary policy within the context of the evolution of theories of monetary policy and the changing historical background.

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