Monetarism

Monetarism is a set of views concerning the determination of national income and monetary economics. It focuses on the supply and demand for money as the primary means by which economic activity is regulated. Monetary theory focuses on money supply and on inflation as an effect of the supply of money being larger than the demand for money.

What is monetarism?

Monetarism is an economic theory which focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.

Related Topics:
Milton Friedman - Inflationary

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This theory draws its roots from two almost diametrically opposed ideas: the hard money policies which dominated monetary thinking in the late 19th century, and the monetary theories of John Maynard Keynes, who, working in the interwar period during the failure of the restored gold standard, proposed a demand-driven model for money which was the foundation of macroeconomics. Whereas Keynes had focused on the value stability of currency ?- with the resulting panics based on an insufficient money supply leading to alternate currency and collapse ?- Friedman focused on price stability: the equilibrium between supply and demand for money.

Related Topics:
John Maynard Keynes - Gold standard - Macroeconomics

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The result was summarized in Friedman's historical analysis of monetary policy: Monetary History of the United States 1867-1960, which attributed inflation to excess money supply generated by a central bank. It attributes deflationary spirals to the reverse effect: failure of a central bank to support M1 during a liquidity crunch.

Related Topics:
M1 - Liquidity

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Friedman originally proposed a fixed monetary rule, where the money supply would be calculated by known macroeconomic and financial factors, targetting a specific level or range of inflation. There would be no leeway for the Fed, and business could anticipate all monetary policy decisions.

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