MainstreamFrom 1956
Monetarism
What causes inflation, and what should a central bank do?
The 30-second version
Milton Friedman's message: inflation comes from too much money, and central banks rather than governments should keep it steady. Its money-supply targets failed in practice, but its core idea won: today's independent, inflation-targeting central banks are its legacy.
Big questions it works on
Go deeperKey ideas, thinkers, evidence and where it stands today
Key ideas
- Inflation is “always and everywhere a monetary phenomenon” (Friedman).
- The quantity theory: MV = PY.
- There is a natural rate of unemployment; trying to push below it only raises inflation (Friedman, 1968; Phelps, 1967).
- The Great Depression was worsened by the Federal Reserve letting the money supply collapse (Friedman and Schwartz, 1963).
Key thinkers
Milton Friedman (Nobel 1976), Anna Schwartz, Karl Brunner, Allan Meltzer
What it got right
It predicted the 1970s stagflation by stressing expectations. Central-bank independence and inflation targets owe a lot to it.
Main criticisms
The link between money and spending broke down in the 1980s, and the US and UK abandoned money-supply targets. The disinflations under Volcker and Thatcher came with severe unemployment.
Evidence worth knowing
In 2002 Ben Bernanke, then a Fed governor, told Friedman on his 90th birthday that he was right about the Depression and that the Fed was sorry.
Where it stands today
Absorbed rather than defeated. Central banks target inflation through interest rates, not the money supply.
Family line
Reacting against Keynesian fine-tuning.