What Is a Monetarist?
Let me explain what a monetarist is. I'm talking about an economist who firmly believes that the money supply—encompassing physical currency, deposits, and credit—serves as the primary driver of demand in an economy. As a result, you can regulate the economy's performance, whether it's growth or contraction, by adjusting this money supply.
The core reason for this belief lies in how inflation affects an economy's growth or overall health. By controlling the money supply, you can directly manage the inflation rate.
Key Takeaways
- Monetarists are economists and policymakers who follow the theory of monetarism.
- Monetarists hold that regulating the money supply is the most effective and direct method to manage the economy.
- Prominent monetarists include Milton Friedman, Alan Greenspan, and Margaret Thatcher.
Understanding Monetarists
At its heart, monetarism is an economic formula. It posits that the money supply multiplied by its velocity—the rate at which money circulates in the economy—equals nominal expenditures on goods and services multiplied by their price. Monetarists claim that velocity remains generally stable, though this idea has faced debate since the 1980s.
The most renowned monetarist is Milton Friedman, who delivered the first major analysis using monetarist theory in his 1963 book, A Monetary History of the United States, 1867–1960. In it, Friedman and Anna Jacobson Schwartz advocated for monetarism to counter inflation's economic effects. They contended that insufficient money supply worsened the financial crisis of the late 1920s, leading to the Great Depression, and that a steady money supply increase aligned with economic growth would foster expansion without inflation.
Monetarism remained a minority perspective in academic and practical economics until the 1970s financial turmoil. With soaring unemployment and inflation, the prevailing Keynesian economics couldn't account for the paradox of economic contraction alongside inflation.
Keynesian theory suggested that high unemployment and contraction would cause deflation via demand collapse, and that inflation stemmed from demand exceeding supply in an overheated economy. Events like the 1971 gold standard collapse, mid-1970s oil shocks, and late-1970s U.S. de-industrialization fueled stagflation, which Keynesianism struggled to explain.
In contrast, monetarism proposed that curbing the money supply would eliminate inflation, a vital step for economic regulation, even if it triggered a brief recession. This is precisely what Paul Volcker, Federal Reserve head from 1979 to 1987, implemented, ultimately validating monetarism among economists and policymakers.
Examples of Monetarists and Monetarism
Most monetarists rejected the gold standard because its limited gold supply would restrict money in circulation, potentially causing inflation—something they insist should be managed via the money supply, which isn't feasible under the gold standard without ongoing gold mining.
Milton Friedman stands as the most famous monetarist. Others include former Federal Reserve Chair Alan Greenspan and former British Prime Minister Margaret Thatcher.
