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Monetarism
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Monetarism is a system built around the idea that economic growth can be facilitated by having the money supply grow at a slow, steady rate. The observations of Milton Friedman and his colleague, Anna Schwartz, were that over long periods of time the economy grew at about 2½% a year, which meant it would need 2½% more money supply to serve its needs for monetary liquidity. The reasoning more or less suggested that booms and busts could be tamed by having the Federal Reserve increase the money supply at that slow, steady rate. Instead of the economy overheating in some periods, which would mean it would have to cool down to recession levels, it would avoid the extremes of the business cycle. Much of the impetus for the hypothesis grew out of the assumption that the Great Depression was caused by the Roaring Twenties, when the economy grew rapidly as did the money supply. When the stock market crashed in 1929, it was assumed a bubble had burst, leading to the depths of economic contraction and a collapse of the money supply.
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Monetarism is an economic school of thought that stresses the primary importance of the money supply in determining nominal GDP and the price level. The "Founding Father" of Monetarism is economist Milton Friedman. Monetarism is a theoretical challenge to Keynesian economics that increased in importance and popularity in the late 1960s and 1970s. In fact, the tide was so strong that in 1979 the Federal Reserve switched its operating strategy more in line with Monetarist theory, though they subsequently abandoned the strategy in 1982 for a number of reasons.
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Monetarism has had a major impact on the thinking of political leaders and the conduct of economic policy during the last decade. These two volumes trace the origin and development of monetarism from the work of David Hume and Irving Fisher through to the very recent research by eminent contemporary economists including among others Milton Friedman, Robert Lucas, Rudiger Dornbusch and Thomas Sargent. Wide-ranging and comprehensive in scope, the book covers both the theoretical and empirical aspects of monetarism as well as its implications for economic policy.
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Monetarism had it's heyday in the early 1980's, when economists, governments and investors eagerly jumped at every new money supply statistic. In the years that followed... monetarism fell out of favor with economists, and the link between different measures of money supply and inflation proved to be less clear than most monetarist theories had suggested. Many central banks today have stopped setting monetary targets and instead have adopted strict inflation targets.
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The debate over whether Old Chicago Monetarism was properly a theory has gone on intermittently for thirty years. Don Patinkin (1969, 1972) and Harry Johnson (1971) denied that this Chicago School oral tradition existed. They saw a set of macroeconomic policies advocated by Simons, Knight, Viner, and company that made sense, but that were ad hoc, free-floating, and at best tenuously connected with their underlying monetary theory. In Patinkin and Johnson's view, Old Chicago Monetarism was a retrospective construction by Milton Friedman (1956). In their view, Friedman used "Keynesian" tools and insights to provide a retrospective post-hoc theoretical justification for policy recommendations that had little explicit theoretical base at the time, and to construct for himself some intellectual antecedents.
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Monetarism is hard to define because it is not the doctrine of a school that is sharply differentiated from the rival Keynesian and new classical schools. While some ecconomists are clearly monetarists, others take intermediate positions that make it more or less arbitrary whether to call them monetarists. The basic theoretical propositions of monetarism, that changes in the quantity of money (defined as currency plus at least checkable deposits) play the central role in the determination of nominal income. differs only in degree from the view held by most Keynesians that changes in th~e quantity of money are a major (and in the long run the dominant) determinant of changes in nominal income. There is little disagreement between Keynesians, monetarists and new clac+A economists about long run equilibrium. But while new classical economists think that this equilibrium is reached rapidly, and Keynesians think it is reached slowly, monetarists take an intermediate position.
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Monetarism