L’émergence du monétarisme

L’émergence du monétarisme

The first and most important lesson that history teaches about what monetary policy can do-and it is a lesson of the most profound impor-tance-is that monetary policy can prevent money itself from being a major source of economic disturbance. This sounds like a negative proposition: avoid major mistakes. In part it is. The Great Contraction might not have occurred at all, and if it had, it would have been far less severe, if the monetary authority had avoided mistakes, or if the mone-tary arrangements had been those of an earlier time when there was no central authority with the power to make the kinds of mistakes that the Federal Reserve System made. The past few years, to come closer to home, would have been steadier and more productive of economic well-being if the Federal Reserve had avoided drastic and erratic changes of direction, first expanding the money supply at an unduly rapid pace, then, in early 1966, stepping on the brake too hard, then, at the end of 1966, reversing itself and resuming expansion until at least November, 1967, at a more rapid pace than can long be maintained without appre-ciable inflation.

L’origine

onetarism is a macroeconomic school of thought that emphasizes (1) long-run monetary neutrality, (2) short-run monetary nonneutrality, (3) the distinction between real and nominal INTEREST RATES, and (4) the role of monetary aggregates in policy analysis. It is particularly associated with the writings of MILTON FRIEDMAN, Anna Schwartz, Karl Brunner, and Allan Meltzer, with early contributors outside the United States including David Laidler, Michael Parkin, and Alan Walters. Some journalists—especially in the United Kingdom—have used the term to refer to doctrinal support of free-market positions more generally, but that usage is inappropriate; many free-market advocates would not dream of describing themselves as monetarists.

An economy possesses basic long-run monetary neutrality if an exogenous increase of Z percent in its stock of money would ultimately be followed, after all adjustments have taken place, by a Z percent increase in the general price level, with no effects on real variables (e.g., consumption, output, relative prices of individual commodities). While most economists believe that long-run neutrality is a feature of actual market economies, at least approximately, no other group of macroeconomists emphasizes this proposition as strongly as do monetarists. Also, some would object that, in practice, actual central banks almost never conduct policy so as to involve exogenous changes in the MONEY SUPPLY. This objection is correct factually but irrelevant: the crucial matter is whether the supply and demand choices of households and businesses reflect concern only for the underlying quantities of goods and services that are consumed and produced. If they do, then the economy will have the property of longrun neutrality, and thus the above-described reaction to a hypothetical change in the money supply would occur.1 Other neutrality concepts, including the natural-rate hypothesis, are mentioned below.

Short-run monetary nonneutrality obtains, in an economy with long-run monetary neutrality, if the price adjustments to a change in money take place only gradually, so that there are temporary effects on real output (GDP) and employment. Most economists consider this property realistic, but an important school of macroeconomists, the so-called real business cycle proponents, denies it.

Continuing with our list, real interest rates are ordinary (“nominal”) interest rates adjusted to take account of expected INFLATION, as rational, optimizing people would do when they make trade-offs between present and future. As long ago as the very early 1800s, British banker and economist Henry Thornton recognized the distinction between real and nominal interest rates, and American economistIRVING FISHER emphasized it in the early 1900s. However, the distinction was often neglected in macroeconomic analysis until monetarists began insisting on its importance during the 1950s. Many Keynesians did not disagree in principle, but in practice their models often did not recognize the distinction and/or they judged the “tightness” of MONETARY POLICY by the prevailing level of nominal interest rates. All monetarists emphasized the undesirability of combating inflation by nonmonetary means, such as wage and PRICE CONTROLS or guidelines, because these would create market distortions. They stressed, in other words, that ongoing inflation is fundamentally monetary in nature, a viewpoint foreign to most Keynesians of the time.

Finally, the original monetarists all emphasized the role of monetary aggregates—such as M1, M2, and the monetary base—in monetary policy analysis, but details differed between Friedman and Schwartz, on the one hand, and Brunner and Meltzer, on the other. Friedman’s striking and famous recommendation was that, irrespective of current macroeconomic conditions, the stock of money should be made to grow “month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent, whereX is some number between 3 and 5.”2 Brunner and Meltzer also favored monetary policy rules but recognized the attractiveness of activist rules that relate money growth rates to prevailing economic conditions. Also, they typically concentrated on the monetary base, adjusted to reflect changes in reserve requirements, whereas Friedman was more concerned with M2 or M1 and, indeed, sought major changes in banking legislation, such as 100 percent reserve requirements on deposits, designed to make the chosen aggregate precisely controllable.

Friedman’s constant-money-growth rule, rather than other equally fundamental aspects of monetarism, attracted the most attention, thereby detracting from the understanding and appreciation of monetarism. In particular, this led to the comparative neglect of Friedman’s crucial “accelerationist” or “natural-rate” hypothesis, according to which there is no long-run trade-off between inflation and UNEMPLOYMENT; that is, the long-run PHILLIPS CURVE is vertical. The no-trade-off view was also promoted by Brunner and Meltzer. Accordingly, it might be argued that the two fundamental monetarist propositions are (1) that cyclical movements in nominal income are primarily attributable to movements in the stock of money, and, (2) that there is no permanent trade-off between unemployment and inflation. Together, these lead to monetariststyle policy positions.

Monetarism’s rise to intellectual prominence began with writings on basic monetary theory by Friedman and other University of Chicago economists during the 1950s, writings that were influential

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