the central bank that finely balanced competing interests and concerns. in particular, the federal reserve was given a regional structure, with twelve reserve banks that were distributed around the country and were empowered to represent sectional interests and to respond to local conditions. although wilson understood the political and practical advantages of decentralization, he also resisted some powerful proponents of a completely decentralized system by supporting the creation of a board of governors in washington to oversee and coordinate the activities of the regional reserve banks. the mandate of the federal reserve system has changed since the institution opened its doors in 1914. when the system was founded, its principal legal purpose was to provide " an elastic currency, " by which was meant a supply of credit that could fluctuate as needed to meet seasonal and other changes in credit demand. in this regard, the federal reserve was an immediate success. the seasonal fluctuations that had characterized short - term interest rates before the founding of the fed were almost immediately eliminated, removing a source of stress from the banking system and the economy. 1 the federal reserve today retains important responsibilities for banking and financial stability, but its formal policy objectives have become much broader. its current mandate, set formally in law in 1977 and reaffirmed in 2000, requires the federal reserve to pursue three objectives through its conduct of monetary policy : maximum employment, stable prices, and moderate long - term interest rates. one of my goals today is to consider the relationships among the three apparently disparate objectives of monetary policy. in particular, i will argue for what i believe has become the consensus view, that the mandated goals of price stability and maximum employment are almost entirely complementary. central bankers, economists, and other knowledgeable observers around the world agree that price miron ( 1986 ). stability both contributes importantly to the economy's growth and employment prospects in the longer term and moderates the variability of output and employment in the short to medium term. but that view did not always command the support that it does today. notably, during the 1960s and early 1970s, some policymakers appeared to believe that price stability and high employment were substitutes, not complements. specifically, some influential voices of the time argued that, by accepting higher inflation, policymakers could bring about a permanently lower rate of unemployment. 2 as i will discuss a bit later, the demise of the view that higher inflation promotes employment in favor of the modern consensus that low inflation and strong employment are complementary goals resulted from the constructive interplay between academic research and practical policymaking

experience, an interplay that significantly improved policy outcomes and economic welfare in the united states. of course, fostering this sort of interaction between academic analysis and real - world policymaking is a principal objective of the woodrow wilson school. the dual role of price stability price stability plays a dual role in modern central banking : it is both an end and a means of monetary policy. as one of the fed's mandated objectives, price stability itself is an end, or goal, of policy. fundamentally, price stability preserves the integrity and purchasing power of the nation's money. when prices are stable, people can hold money for transactions and other purposes without having to worry that inflation will eat away at the real value of their money balances. equally important, stable prices allow people to rely on the dollar as a measure of value when making long - term contracts, engaging in long - term planning, or borrowing or lending for long periods. as economist martin feldstein has frequently pointed out, price stability also permits tax laws, accounting rules, and the like to be expressed in dollar terms without being subject to distortions arising from fluctuations in the value of money. 3 economists like to argue that money belongs in the same class as the wheel and the inclined plane among ancient inventions of great social utility. price stability allows that invention to work with minimal friction. in principle, the problem of inflation could be reduced by the practice of indexing dollar payments such as interest and wages to the price level, but people seem to find indexing costly and avoid it when they can. it is interesting and instructive, for example, that the indexation of wages to prices in labor contracts has always been quite limited in the united states ; some indexation was used during the high - inflation 1970s but the practice has been substantially reduced since then. moreover, some countries that adopted indexing during high - inflation periods, such as brazil and israel, largely abandoned the practice when inflation receded. borrowers and lenders likewise seem to prefer to contract in dollar terms, although inflation - indexed financial instruments have gained wider acceptance in recent years. borrowing and lending in dollar terms, particularly for long periods, requires confidence that the purchasing power of the currency will be stable and predictable. the savings and loan crisis of the 1980s, which cost u. s. taxpayers roughly $ 150 billion, is an example of the kind of problem that can arise in the absence of price stability. an important source of the s & l crisis was