Monetarism

Monetarism is a school of macroeconomic thought, associated with Milton Friedman and Anna Schwartz, that stresses the role of the money supply in determining economic outcomes, particularly inflation. It builds on the quantity theory of money, which holds that the price level is tied to the amount of money in circulation relative to output.

Friedman and Schwartz's A Monetary History of the United States (1963) argued that the Federal Reserve's failure to prevent a collapse in the money supply turned a downturn into the Great Depression. Monetarists favor steady, rule-based money growth rather than discretionary adjustments, and argue that "inflation is always and everywhere a monetary phenomenon." The approach gained influence during the stagflation of the 1970s, when Keynesian policies seemed to fail, and informed Federal Reserve Chairman Paul Volcker's fight against inflation, though the Fed ultimately moved away from targeting money growth because the relationship between money and prices proved unstable.

Monetarism's legacy is the broad acceptance that central banks are responsible for controlling inflation and that monetary policy matters for the business cycle. Critics argue its policy prescriptions proved hard to implement; supporters see its principles in inflation targeting. It remains a reference point in debates about quantitative easing and central-bank independence.