What is Monetarism?
Monetarism is an economic doctrine tied above all to Milton Friedman. Its central claim is that the amount of money in an economy drives its prices. Create money faster than output grows, and inflation follows. In the short run, swings in the money supply can also push growth and jobs up or down. Monetarists conclude that central banks should follow a simple, steady rule rather than steer by the latest data. It became a banner for the pro-market shift that began in the 1970s, since it challenged the Keynesian view that governments should manage demand.
Core beliefs
- Too much money chasing too few goods causes inflation.
- Money affects output for a while, but in the long run it mostly affects prices.
- Policy acts with long and uncertain delays, so tuning it month to month often backfires.
- Central banks should follow a clear rule, such as a set rate of money growth.
- Government spending and tax changes are a poor tool for steering the economy.
- Over time, higher inflation does not buy lower unemployment.
History
Its base is the old quantity theory of money, which Chicago economists rebuilt after 1950. Its landmark study was A Monetary History of the United States (1963) by Friedman and Anna Schwartz, which argued that the Federal Reserve let the money supply collapse after 1929 and so deepened the Great Depression. In 1968 Friedman, and Edmund Phelps independently, argued that holding joblessness under its natural level would just speed up inflation. The stagflation of the 1970s seemed to prove them right. In 1973 Karl Brunner and Allan Meltzer formed a panel of outside critics of the Fed, the Shadow Open Market Committee. Friedman won the Nobel prize in 1976. Germany's Bundesbank had already used money targets, and in 1979 Paul Volcker's Federal Reserve moved toward them. Britain under Margaret Thatcher followed in 1980. Both later dropped strict targets once money and spending stopped moving together reliably.
Variants
Friedman's version called for a set yearly rate of money growth, sometimes called the k percent rule. Brunner and Meltzer paid more attention to credit, banks and the design of institutions. Over time, the mainstream took in parts of monetarism through inflation targeting. A newer group called market monetarists, active since the 2000s, would have central banks aim at total spending in the economy, known as nominal GDP.
Criticisms
Keynesians say monetarism ignores how much weak demand matters and how long slumps can last, and that central bank action loses grip when rates are close to zero. Others note that in the 1980s the stable tie between money and spending came apart, which made targets hard to hit. The deep recessions in both Britain and America in the early 1980s, with high joblessness, are blamed on tight money. Supporters answer that the pain was the price of ending runaway inflation, and that it worked.
In practice
Monetarist ideas lay behind the Volcker squeeze on inflation in America, Britain's Medium Term Financial Strategy, and the money targets of the German and Swiss central banks. Most countries gave up strict targets for money by the end of the 1980s. Even so, its stress on price stability, central bank independence and clear rules lives on in the inflation targets that many central banks adopted from the 1990s. The doctrine takes no side on most social issues, which is why its 12-axes scores on Morality, Religion and Culture sit near the center.