What Is a Monetarist?
A monetarist is an economist who holds the strong belief that the money supply—including physical currency, deposits, and credit—is the primary factor affecting demand in an economy. Consequently, the economy’s performance—its growth or contraction—can be regulated by changes in the money supply.
The key driver behind this belief is the impact of inflation on an economy’s growth or health, and the idea that by controlling the money supply, one can control the inflation rate.
Key Takeaways
- Monetarists are economists and policymakers who subscribe to the theory of monetarism.
- Monetarists believe that regulating the money supply is the most effective and direct way of regulating the economy.
- Famous monetarists include Milton Friedman, Alan Greenspan, and Margaret Thatcher.
Unveiling the Concepts: Understanding Monetarists
At its core, monetarism is an economic formula. It states that money supply multiplied by its velocity (the rate at which money changes hands in an economy) is equal to nominal expenditures in the economy (goods and services) multiplied by price. While this makes sense, monetarists assert that velocity is generally stable, a point debated since the 1980s.
The most famous monetarist is Milton Friedman, who wrote the first serious analysis using monetarist theory in his 1963 book, A Monetary History of The United States, 1867–1960. In the book, Friedman along with Anna Jacobson Schwartz argued in favor of monetarism as a way to combat the economic impacts of inflation. They contended that a lack of money supply amplified the financial crisis of the late 1920s and led to the Great Depression. According to them, a steady increase in the money supply in line with economic growth would produce growth without inflation.
The monetarist viewpoint was a minority in both academic and applied economics until the financial troubles of the 1970s. As unemployment and inflation soared, the dominant economic theory, Keynesian economics, was unable to explain the current economic puzzle of economic contraction and simultaneous inflation.
Keynesian economics posited that high unemployment and economic contraction would lead to deflation through a collapse in demand. Conversely, it stated that inflation was a result of demand outstripping supply in an overheated economy. The final collapse of the gold standard in 1971, the oil shocks of the mid-1970s, and the beginning of de-industrialization in the United States during the late 1970s, all contributed to stagflation, a new phenomenon that was difficult for Keynesian economics to explain.
Monetarism, however, argued that restricting the money supply would curb inflation, which would be necessary to regulate the economy even if it came at the cost of a short-term recession. This approach was validated by Paul Volcker, the head of the Federal Reserve from 1979 to 1987. The result was a final vindication of monetarism in the eyes of economists and policymakers.
Celebrating Monetarists: Examples and Influence
Most monetarists opposed the gold standard, arguing that the limited supply of gold would restrict the amount of money in the system, leading to inflation. Monetarists believe that inflation should be controlled through the money supply, which isn’t feasible under the gold standard unless gold is continually mined.
Milton Friedman is the most famous monetarist. Other notable monetarists include former Federal Reserve Chair Alan Greenspan and former British Prime Minister Margaret Thatcher.
Related Terms: inflation, economist, money supply, Keynesian economics, stagflation, gold standard.
References
- Milton Friedman and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. Princeton University Press, 1963.
- Federal Reserve Bank of St. Louis. “The Great Inflation”.
- Federal Reserve Bank of St. Louis. “Paul A. Volcker”.
