For a short time administrative ceilings were also imposed on lending by Federal Reserve System member banks. Market interest rates soared. Inflation was curbed. The so-called monetarist counter-revolution, which blamed activist economic policy for destabilizing effects, sought to confine policymakers’ actions within the bounds of a set of “simple rules”.
In reality, this prescription reflected the basic postulate of the economy’s automatic return to equilibrium, which, as Keynes had underscored, was the keystone of classical economic theory. In his presidential address to the American Economic Association in September 1976, Modigliani intervened in the debate between Keynesians and monetarists, with acute arguments defending the need for both fiscal and monetary countercyclical measures.