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Monetarist: What Is A Monetarist?

A monetarist is an economist who believes that controlling the money supply is the primary way to regulate economic growth and inflation. They believe that increasing the money supply in line with economic growth leads to growth without inflation, while restricting the money supply can reduce inflation even if it causes a short-term recession. Famous monetarists who advocated this approach include Milton Friedman, Alan Greenspan, and Margaret Thatcher.

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73 views

Monetarist: What Is A Monetarist?

A monetarist is an economist who believes that controlling the money supply is the primary way to regulate economic growth and inflation. They believe that increasing the money supply in line with economic growth leads to growth without inflation, while restricting the money supply can reduce inflation even if it causes a short-term recession. Famous monetarists who advocated this approach include Milton Friedman, Alan Greenspan, and Margaret Thatcher.

Uploaded by

Niño Rey Lopez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Monetarist

What Is a Monetarist?
A monetarist is an economist who holds the strong belief that 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.
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 say velocity is generally stable,
which has been debated since the 1980s.

The most well-known 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 argued that a lack of money supply amplified the
financial crisis of the late 1920s and led to the Great Depression, and that a
steady increase in the money supply in line with growth in the economy would
produce growth without inflation.1

The monetarist view was a minority view 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 presented by economic
contraction and simultaneous inflation.
Keynesian economics said that high unemployment and economic contraction
would lead to deflation through a collapse in demand and conversely that
inflation was the result of demand outstripping supply in an over-heated
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 in the
late 1970s all contributed to stagflation, a new phenomenon that was difficult for
Keynesian economics to explain.2

Monetarism, however, argued that restricting the money supply would kill
inflation, which would be a necessary step to regulating the economy even if it
came at the cost of a short-term recession. That is exactly what Paul Volcker, the
head of the Federal Reserve from 1979 to 1987, did.3  The result was a final
vindication of monetarism in the eyes of economists and policymakers.

Examples of Monetarists and Monetarism


Most monetarists opposed the gold standard in that the limited supply of gold
would stall the amount of money in the system, which would lead to inflation,
something monetarists believe should be controlled by the money supply, which
is not possible under the gold standard unless gold is continually mined.

Milton Friedman is the most famous monetarist. Other monetarists include former
Federal Reserve Chair Alan Greenspan and former British Prime Minister
Margaret Thatcher.

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