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Monetarism and Milton Friedman
1960s–1980s· Theory or school
Experts disagreeEconomists or investors genuinely disagree.
Milton Friedman's school holding that the money supply drives inflation and swings in spending, so central banks should grow it steadily.
See it on the Money & Finance map →How it works
Friedman and Anna Schwartz's A Monetary History of the United States (1963) traced booms, busts and inflation to swings in money. Friedman's dictum: 'Inflation is always and everywhere a monetary phenomenon.' He proposed money grow at a fixed few percent a year, removing discretion. In 1979 Paul Volcker's Fed adopted money-growth targets, and inflation broke at the cost of a deep recession. Velocity then became erratic, and in 1993 the Fed formally downgraded money targets.
Why it matters
It made controlling inflation the central bank's job and discredited printing money to buy lower unemployment; today's inflation targeting owes much to it.
Facts, rules and data
Friedman won the 1976 Nobel Prize. US inflation fell from 14.8% in March 1980 to under 4% by 1983. Alan Greenspan told Congress in July 1993 that M2 no longer served as a reliable guide.
Debates and risks
M2 jumped about 40% in 2020–22 and inflation followed, which monetarists cite; yet heavy QE in the 2010s did not lift inflation, so the link is debated.
Connections (4)
▸Quantity theory of money (MV = PQ) is the core of Monetarism and Milton FriedmanMainstream view
The connection
Monetarism takes the MV = PQ identity and adds a bet: if velocity (V) is fairly stable, faster money growth (M) mainly raises nominal spending and, over time, prices (P). Friedman turned that into policy: grow money at a steady few percent a year, and inflation stays low.
When and why
Irving Fisher stated the equation in 1911; Milton Friedman restated it as a theory of money demand in 1956 and built monetarism on it at the University of Chicago.
How solid is the link?
Friedman's 1956 essay 'The Quantity Theory of Money: A Restatement' explicitly presents his approach as the old theory updated; the lineage is undisputed.
Debates and risks
Velocity swung widely after 1980 and again during QE in the 2010s, so whether money growth predicts inflation closely enough to guide policy is debated.
▸Monetarism and Milton Friedman challenged Keynesian economics (John Maynard Keynes)Fact, law or data
The connection
Keynesians in the 1950s and 1960s saw fiscal policy as the main lever and money as secondary. Friedman argued the opposite: money mattered most, fiscal stimulus was weak, and discretionary fine-tuning did more harm than good. 1970s stagflation seemed to vindicate him, and central banks took over as the main stabilizers.
When and why
Chicago versus the two Cambridges, in Massachusetts and England, 1956–1980; Friedman sparred publicly with Keynesians such as Paul Samuelson and James Tobin.
How we know
The debates fill the journals and Friedman's Newsweek columns; today's 'New Keynesian' models merged both sides, giving central banks the lead role.
Debates and risks
The 2008 and 2020 crises revived big fiscal stimulus, reopening how far monetary policy alone can stabilize a deep slump.
▸Monetarism and Milton Friedman inspired the 1979 money targets of Paul Volcker and the 1979–82 inflation fightFact, law or data
The connection
Friedman argued inflation comes from too much money, so the Fed should control the money supply. Volcker adopted a version on October 6, 1979: target growth of money and bank reserves and let rates float. Rates soared and inflation broke, but the strict targets were dropped in 1982.
When and why
Special FOMC meeting on Saturday, October 6, 1979, in Washington; Friedman's ideas had spread through the 1960s and 1970s.
How we know
FOMC transcripts and Volcker's own accounts; historians note the money targets also gave political cover for very high rates.
Debates and risks
Friedman said the Fed never truly followed his rules; whether 1979–82 proved or disproved monetarism is still argued.
▸Monetarism and Milton Friedman blames the Fed for the depth of The 1929 crash and the Great DepressionMainstream view
The connection
Friedman and Schwartz argued the Fed turned a recession into the Great Depression. As about 9,000 banks failed from 1930 to 1933, the Fed neither lent freely nor added money, so the money supply fell by about a third and prices collapsed. In their view, active Fed support would have kept a bad downturn ordinary.
When and why
A Monetary History of the United States (1963), whose chapter on 1929–1933 named the period the 'Great Contraction'.
How solid is the link?
The money-supply collapse is well measured. In 2002 Ben Bernanke, then a Fed governor, told Friedman and Schwartz: 'Regarding the Great Depression. You're right, we did it. We're very sorry.'
Debates and risks
Whether falling money caused the slump or reflected it, and how much the gold standard and debt deflation mattered, is still debated.