Monetarism

11 Key excerpts on "Monetarism"

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  Modern Economic Thought

  • Sidney Weintraub(Author)
  • 2016(Publication Date)
  • University of Pennsylvania Press Anniversary Collection

    (Publisher)

  253 2 5 4 RICHARD Τ. SELDEN At the other extreme, Monetarism is often equated with anti-Keynesianism. 3 But this generality is too loose. Keynesian economics has drawn criticism from many sides, not merely from those who ob-ject to its denigration of monetary policy as a stabilization tool. Milton Friedman identifies Monetarism with the quantity theory of money: What used to be called the quantity theory of money... is now called Monetarism. 4 A problem with this definition is the lack of general understanding of the content of the quantity theory. But Friedman's definition correctly emphasizes that Monetarism did not suddenly emerge in response to the severe inflation of the last decade, or even as a reaction to Keynesian economics. In this chapter I define Monetarism as comprising two beliefs: (1) that money matters—i.e., that monetary changes exert a dominant influence on general business conditions; and (2) that monetary changes can be controlled by central banks. Twenty years ago only a small minority of economists shared these beliefs. Since then a vast revolution has taken place. Monetarists now hold prominent positions in universities, in businesses, and in government—including the Federal Beserve System. Even among those who reject the label one can detect substantial shifts toward monetarist views in recent years. The scheme of organization of this chapter is quasi-temporal. After a brief exploration of the quantity theory tradition out of which Monetarism grew, the section on The Modern Quantity Theory deals with developments in the middle 1950s through the early 1960s. The focus of debate in this period was on the demand for money, monetary lags, and the relative potency of monetary and fiscal policy. In the 1960s, attention was directed increasingly toward the control-lability of monetary aggregates.

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  Making a Modern Central Bank

  The Bank of England 1979–2003

  • Harold James(Author)
  • 2020(Publication Date)
  • Cambridge University Press

    (Publisher)

  Strictly speaking, Monetarism refers to the policy of using a measure of a monetary aggregate in order to generate a policy response with the aim of controlling price developments so as to reduce or eliminate inflation. In practice, however, the concept was often used in a restricted – and in reality perhaps often even contradictory – manner, as relating to a restrictive approach to fiscal policy. In the first and general sense, monetary control looked like a profound shock to the central worldview of what the Bank of England’s John Fforde liked to describe as Britain’s ‘macro-economic executive’, because there was no obvious mechanism to force an aggregate on a system which worked by responding to banks’ demands for funds; but also because after the failure of the prices and wages policies of the 1970s, the authorities began to see price behaviour as driven by a complex social process with which they did not want to tamper. But in the second nar- rowly fiscal sense, it could be accommodated within a sort of common- sense view that was really deeply entrenched in the Treasury mindset – though it would then decidedly not provide a substantive foundation for making monetary policy. The doctrine also appealed to a government that was averse to using an explicit interest rate policy because of political concerns about the effects of high interest rates on mortgage payments in a country with a high level of homeownership. RESPONDING TO INFLATION Monetarism was a response to failure: both to the political flaws of a policy process and to the theoretical flaws of an explanatory mechan- ism. The central and correct insight of Monetarism was that the inflation of the 1960s and 1970s was driven by demand, and that there was over the long run a clear link between the growth of money and the development of prices, and no clear association between higher output and higher levels of monetary growth.

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  Economic Calculations and Policy Formation (Routledge Revivals)

  • Grahame Thompson(Author)
  • 2014(Publication Date)
  • Taylor & Francis

    (Publisher)

  CHAPTER 6

  Monetarism and economic ideology

  Grahame Thompson Abstract

  This paper looks at the economics of ‘Monetarism’. After a discussion of the conceptualization of money and the way it functions, the mechanisms by which ‘Monetarism’ analyses the relationship between the money supply and price formation are highlighted. It is argued that these are inadequate, largely because they are couched at an aggregative macro-level. A reformulation is suggested based upon the necessity to define the economic agents in the economy whose practices and processes provide the basis for the price formation and money-supply generation. The concept of a ‘money-supply’ is raised and the difficulties of defining and controlling this in a developed financial system are discussed. Finally a gesture is made towards the way in which an alternative financial mechanism might develop.

  1 Introduction

  In recent years there has been a significant growth of interest in ‘Monetarism’ both as an economic theory and as a strategy for economic policy. Such interest is by all accounts something of a world wide phenomenon, though it has tended to form a more focussed discussion in those advanced industrialized countries that are suffering particularly badly from the effects of economic recession. One such country is Britain. In May 1979 a Conservative government was elected here on a more or less explicit monetarist ‘ticket’.

  This paper looks at the economics of ‘Monetarism’.1 It takes the form of a running commentary on two recent booklets, published in Britain, that address themselves to ‘Monetarism’: Tim Congdon’s Monetarism: An Essay in Definition produced by the Centre for Policy Studies and Bryan Gould, etal. The Politics of Monetarism a Fabian Society Tract. In addition the paper looks at a recent document issued jointly by the Treasury and the Bank of England which is concerned with the issue of money supply control: Cmnd. 7858, Monetary Control published by HMSO (hereafter the Green Paper

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  Margaret Thatcher and Ronald Reagan

  A Very Political Special Relationship

  • J. Cooper(Author)
  • 2012(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Monetarists argue that the variable should be a mea- sure of the monetary base or reserve – these measures are controllable by a central bank, can be effectively monitored and influence the money stock. 5 For monetary policy to be monetarist, the monetary base must be inden- tified as the indicator, not interest rates. However, the type of money to be used is also an issue. Monetarism identified different types of money. These can be summarised fourfold: notes and coins (M0); cash and deposit Origins and Implementation 33 balances (M1); notes, coins and all bank deposits (£M3, as M1 excludes deposits dominated by foreign currencies); and all money, including depos- its, with building societies (M4). 6 In addition to identifying correctly the relevant type of money and indicators, as opposed to targets, Monetarism requires that money supply is steadily reduced in a gradualist approach and maintained despite the negative impact on employment. Commenting on the key to successfully implementing Monetarism, Milton and Rose Friedman noted: ‘The most important device for mitigating the side effects is to slow inflation gradually but steadily by a policy announced in advance and adhered to so it becomes credible.’ 7 As Thatcher and Reagan entered office, both believed that Monetarism would be at the heart of their efforts to seemingly bring capitalism back from the abyss. Monetarism was not an entirely original concept. A link between money and inflation, with prices and wages chasing each other, was an established economic theory. For example, Nigel Lawson referred to David Hume, the eighteenth-century Scottish philosopher and political economist, when explaining Monetarism in his memoirs. 8 Furthermore, not all economists who influenced Thatcher and Reagan were monetarists.

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  Exchange Rate Alignments

  • J. Mills(Author)
  • 2012(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  They also claim that inflation’s future course can be guided within narrow limits by controlling the money stock. Empirical evidence demonstrates that this contention is far too precise and greatly overstates the predictive accuracy of monetarist theories. For this amount of fine-tuning to be possible requires an unequivocal definition of money. It is one thing to recognise a situation where far too much money – or more accurately, too much credit – is being created. Monetarists are right in saying that if credit is so cheap and so readily available that speculation on asset inflation is easy or that the economy is overheating because of excess demand financed by credit creation, then the money supply is too large. This is a broad quantitative judgement. It is quite another matter to state that small alterations in the money supply generate correspondingly exact changes in the rate of inflation. Yet this is the claim which monetar- ists put forward. The claim is implausible for a number of reasons. One is the diffi- culty in defining accurately what is and is not money. Notes and coins are clearly money, but where should the line be drawn thereafter? What kinds of bank facilities and money market instruments should be included or excluded? Many measures are available in every country, depending on what is put in and what left out. None has been found anywhere or for any length of time to have had a strikingly close correl- ation with subsequent changes in the inflation rate. Often, different The Monetarist Era 173 measures of the money supply move in different directions. This is very damaging evidence against propositions which are supposed to be precise in their formulation and impact. For monetarists another major problem, referred to above, is that there can be no constant ratio between the amount of money, however defined, in circulation and the aggregate value of transactions, because the rate at which money circulates can and does vary widely over time.

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  Monetary Economics in Developing Countries

  • Subrata Ghatak, José R. Sánchez-Fung(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  The monetarists’ case is advocated strongly by a number of economists, the most promi-nent of whom is Milton Friedman. Friedman has stated a ‘modern’ quantity theory which .................................................................. 78 Monetary economics in developing countries has its roots in the ‘ancient’ quantity theory but is broader than its predecessor. Stated in a very simple way, the ‘modern’ quantity theory states that a change in money supply will change the price level as long as the demand for money is stable; such a change also effects the real value of national income and economic activity, but in the short run only. For Friedman, the stability in the demand for money is just a behavioural ‘fact’, ‘proven’ by empirical evidence. As long as the demand for money is stable it is possible to predict the effects of changes of money supply on total expenditure and income. The monetarists argue that, if the economy operates at a less than full-employment level, then an increase in money supply will lead to a rise in output and employment because of a rise in expenditure, but only in the short run. After a time, the economy will return to a less than full-employment situation which must be caused by other, ‘real’ factors. The monetarists believe that changes in money supply cannot affect the ‘real’ variables in the long run. At near full-employment point or beyond it, an increase in money supply will raise prices. Before full employment, Y rises with a rise in money supply and expenditure. The rise in Y will, then, crucially depend on the ratio of income to money supply; that is, Y/M , or velocity. With an increase in spending during a recession, Y will continue to rise until it has reached a limit where it stands in its previous ratio to M , because at that point output can no longer be increased. People will now raise their demand for money rather than spend it, and the supply of and demand for money would once again be equal to one another.

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  The Economic Thought of Henry Calvert Simons

  • G.R. Steele(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  This statement was so distinct from Keynesianism that it became necessary to invent a new label for such an idea. In 1968, Karl Brunner called it ‘Monetarism’ and the name stuck. (Foster, 1987, p. 42) It was only then that the Keynesian orthodoxy encountered the full force of the Monetarist counter-revolution. Monetarism and Fiscal Monetarism 109 8.2 The quantity theory of money Monetarism: the novelty of a new name tends to obscure its relevant an-tecedents. The basic idea is that price inflation is determined by the prior excessive growth of money. Alternatively stated, inflation is currency de-basement. However, the quantity theory of money has invited considera-ble inventiveness and embellishment since attention was first taken by the impact of money upon trade and industry. Which are the key transmission mechanisms between money and prices? Friedman’s ‘The Quantity Theory of Money. A Restatement’ (Friedman, 1956) describes a transmission based upon adjustments to portfolios of financial assets – i.e., the exact same mech-anism upon which Keynes bases his liquidity preference theory of interest rate determination. By Keynes’s presentation, with an economy at under-full employment, the liquidity preference theory of interest rate determination is held to be more plausible than the classical loanable funds theory. 2 Although the basic idea of the quantity theory of money is traceable to ancient times, an early ‘theoretically satisfactory presentation’ (Schumpeter, 1954, p. 311) is credited to Jean Bodin (1568); but it was John Stuart Mill (1848) who brought precision to the idea: If we assume the quantity of goods on sale, and the number of times these goods are resold, to be fixed quantities [ T ] the value of money [1/ P ] will depend upon its quantity [ M ], together with the average number of times that each piece changes hands in the process [ V ]’.

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  Monetary Economics

  Theories, Evidence and Policy

  • David G. Pierce, Peter J. Tysome(Authors)
  • 2014(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  transmission mechanism and the interaction of output and inflation. Instead, those who hold this view argue that the major issue currently separating monetarists and non-monetarists is a policy one, namely the role that should be assigned to monetary, fiscal and incomes policies. This view has been clearly stated by the eminent Keynesian, Franco Modighani (1977, p. 1) who, in his Presidential address to the American Economic Association, said There are in reality no serious analytical disagreements between leading monetarists and non-monetarists ... In reality the distinguishing feature of the monetarists school and the real issues of disagreement with non-monetarists is not Monetarism, but rather the role that should probably be assigned to stabilization policies. A similar view has been expressed by Laidler, a leading monetarist when it comes to propositions about the demand for money function, the relationship between money and money income and output-inflation interaction, there is a real sense in which 'we are all monetarists now'. The issues that nowadays distinguish monetarists from their opponents concern the conduct of economic policy (1981b, p. 18). What then are the monetarist propositions about the roles of monetary, fiscal and incomes policies? Basically, there are two sets of propositions: one set states what economic policy cannot do, while the other suggests what it can be used for. Let us consider them in that order. 162 Monetarism Furthermore, policy action taken at the wrong time or on the wrong scale may not only fail to achieve its objectives, but may be positively de-stabilizing. We shall consider this argument more fully in Chapter 11 (pp. 244-250). (2) Incomes and prices policies have no significant long-run effect on the rate of inflation. Monetarists have used a number of arguments to oppose the long-run use of controls over prices and incomes.

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  The Rise of Central Banks

  State Power in Financial Capitalism

  • Leon Wansleben(Author)
  • 2023(Publication Date)
  • Harvard University Press

    (Publisher)

  23

  It was thus essential for the SNB’s adoption of monetary targeting in 1974 that, in parallel to the strengthening of popular monetarist sentiments, a more technical version emerged. At the time, a decisive shift in expert discourses and practices facilitated this development. In the postwar period, Swiss macroeconomics had remained by and large descriptive and historical.24 But the situation changed during the early 1970s with the import of US scientific Monetarism. Two Swiss-born, but US-based, economists were critical in facilitating this translation process (Bockman and Eyal 2002). One was Karl Brunner, a Swiss national who had taken up a professorship at the new University of Rochester Business School in 1971 (Fourcade and Khurana 2013); and the other was Juerg Niehans, also a Swiss citizen with a chair at Johns Hopkins.25 Besides Milton Friedman, Brunner in a team with Allan Meltzer were the eminent figures in the advancement and promotion of Monetarism.26 In Switzerland, Brunner effectively served as the monopolistic translator of this US-bred economics (Brunner 1971). Despite Brunner’s and Niehans’s failures in convincing senior policymakers directly, these eminent economists exerted strong influence via another route.27 Brunner, in particular, shaped macroeconomic research by educating and training several young economists. This “young guard” (Tilcsik 2010) then went on to establish a previously nonexistent space for domestic policy expertise around and within the central bank. For instance, a number of academic economists began confronting policymakers with previously unknown technical discussions of policy and concrete proposals gauged in scientific terms. Still more critical was Brunner’s role in training economists who pursued careers inside the SNB. In 1972, Alex Galli embarked upon doctoral research to develop Switzerland’s first systematic monetary statistics for the SNB’s research division VOSTA.28 Brunner played a supportive role in Galli’s project to develop more comprehensive statistics that could support monetary policy. Kurt Schiltknecht became a second technically trained economist at VOSTA, who was encouraged by Brunner to develop money-supply forecasting and demand forecasting. Galli and Schiltknecht then went on to write the first proposal for monetary targeting for the Swiss economy. They suggested that the SNB could hit an M1 target by controlling the central bank’s provision of reserves—what is called the “monetary base” (Brunner 1968). In order to achieve the respective target, the economists used GDP forecasts and rough estimates of monetary velocity as inputs to the classic quantity formula (GDP x inflation rate = M1 x velocity). From there, they deduced via a simple money multiplier formula how much supply of M0 would be appropriate in order to meet the forecasted value of monetary demand, with the aim of reducing the inflation rate moderately over the course of the following years.29

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  Nicholas Kaldor

  • J. King(Author)
  • 2008(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Monetary policy is represented not by a given quantity of money stock but by a t given rate of interest; and the amount of money in existence will be demand-determined. Demand will vary with incomes as before, and it is possible that the rate of interest of the Central Bank ... will be varied upwards or downwards as a means of restricting credit or making credit easier, but this does not alter the fact that at any time, or at all times, the money stock will be determined by demand, and the rate of interest determined by the Central Bank. (Kaldor 1982a, p. 24; original stress ) Kaldor’s horizontal money supply curve proved to be a remarkably effective rhetorical and pedagogical device, and was soon being repro- duced in classrooms, and eventually in textbooks, around the world. The battle lines between Horizontalists and Verticalists (Moore 1988) were now clearly drawn, representing respectively the supporters of endogenous and exogenous money . Fourth, Kaldor now linked his attack on Monetarism to the more general critique of Walrasian general equilibrium theory and its meth- odological presumptions that he had begun several years earlier. As he told the Treasury and Civil Service Committee, there was a model of the economy underlying the monetarist view: ‘The monetarist propositions could be applied to an imaginary economy, such as it [sic: [ is?] postulated Figure 7.3 Kaldor’s 1981 money market diagrams Adapted from Kaldor 1982a. Interest Money Y ( Y t + 2) Y ( Y t + 1) Y ( Y t ) D ( Y ) r* M M* Money r The Scourge of Monetarism 147 in Walras’s famous model of general equilibrium’ (Kaldor 1982a, p. 42). There were many grounds for objecting to this model (Kaldor 1972a; see also Chapter 8).

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  Testing Monetarism

  • Meghnad Desai(Author)
  • 2013(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  68 Quantity Theory to Monetarism which form the core of the revival of the quantity theory. These relate to the stability of the demand for money over the long run, the relatively greater stability of the money demand function compared to the con-sumption function and hence the larger the size of the money mulitplier compared to the fiscal multiplier, the long and variable lags in the short run between changes in money stock and changes in real income and prices, the independent nature of changes in money stock and its causal primacy vis-a-vis changes in income and prices, the limits to fine tuning due to the imprecision of lags, the desirability of a fixed money growth rule with no feedback mechanism. Considerable controversy has surrounded each of these points and a large body of economic research can be cited on either side of each question. For our present purpose, we need to note that much of what was being asserted was empirical rather than theoretical. Friedman did not have, as yet, a fully fledged theory of the ways in which money affected output and prices. The empirical regularity of the relationship between money and nominal income was only strong in the secular context, the cyclical relationship being blurred and hedged by qualifications about the feedback from income to money. Even if Friedman's empirical assertions were to be admitted as true (and they were not), critics could still say that this did not amount to an explanation of how money affected economic activity. In the ranking order used by academic economists (and, I suspect, by researchers in other sciences) a theoretical model ranks much higher than 'mere' empirical evidence. Where was 'the trans-mission mechanism'? Even from the point of view of a quantity theorist, the Friedman story was incomplete. The traditional basis for the support the quantity theory has received has been that excess money (debauched currency) causes inflation and attendant economic and political crises.

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