Monetarism
AdvancedMonetarism is a school of economic thought, associated with economist Milton Friedman, which holds that the money supply is the main determinant of nominal economic activity and inflation, and that central banks should aim for steady, predictable money growth.
Monetarists argue that inflation is, in Friedman's words, always and everywhere a monetary phenomenon. If the money supply grows faster than the economy's capacity to produce goods and services, prices will rise.
Friedman and Anna Schwartz argued in their 1963 study of US monetary history that poor monetary policy had made the Great Depression much worse. Monetarists generally prefer rules, such as a fixed rate of money growth, over active, discretionary management of the economy, believing that poorly timed interventions can cause instability.
For example, a monetarist response to high inflation would be to slow the growth of the money supply firmly and predictably.
Monetarism was influential in the late 1970s and early 1980s, when the US Federal Reserve and the Bank of England focused on controlling money growth to reduce inflation. However, the relationship between money supply and inflation proved less stable than expected, as the velocity of money changed. Most central banks now target inflation using interest rates, although monetarist ideas about the importance of money remain influential.
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