Milton's monetarism vs Keynes


Milton Friedman, who died back in 2006, was the leading exponent of 'monetarism' of his age. He believed that price inflation – the biggest economic worry of the 1960s and 1970s, which the prevailing Keynesian orthodoxy seemed unable to control – was 'always and everywhere a monetary phenomenon'.

In other words, when governments created too much money, its value dropped, and our money bought less. That is, too much money led to rising prices.

His great 'restatement' of this 'Quantity Theory of Money' came out in 1956, though it was only one of countless books and articles that he wrote on the subject. He was a tireless and effective communicator of the idea, and eventually he won round the economic establishment, who even made him President of the American Economic Association in 1968. (His Presidential Address was another uncompromising monetarist classic, called 'The Role of Monetary Policy'.)

It takes longer to win round politicians, but by the 1980s Ronald Reagan in the US was convinced, and Margaret Thatcher in the UK too. Her adoption of monetarist principles (though she strayed from Friedman's policy prescriptions) finally got Britain's raging postwar inflations under control. Before Mrs Thatcher took office, inflation had been a hugely disruptive 26%. Now the target rate is 2%, and until recently, it has been at that low level for years.

Indeed, by now, Friedman seems to have convinced the world. I came across an interesting set of charts produced by the Federal Reserve Bank of Cleveland, by which it is possible to chart world inflation over a number of years. The last two decades shows the whole picture.

In the mid 1990s, average world inflation – not the maximum, just the average – was nearly 30%. Today, sure there are (or were) some Zimbabwe-style outliers, but the average rate of inflation of the world is a tenth of that, round about 3%. The picture tells a clear story. Milton Friedman won the argument on monetary policy and inflation. And the Keynesians, I'm afraid, lost.