Monetarism is an idea that Milton Freedman developed and expounded upon. It centers on the idea found in monetary economics that money supply changes lead to huge impacts on short term national outputs and on long term price levels. It argues that the goals of monetary policy are most effectively achieved when the money supply is carefully and appropriately expanded in line with actually output growth.
Milton Friedman started out as a believer in Keynesian economics. Later in his career, he determined that it had major problems and he began to criticize it on a variety of levels. He wrote a book with Anna Schwartz that proved to be extremely influential. In this book, “A Monetary History of the United States 1867-1960,” Friedman proposed that inflation is everywhere and always a monetary phenomenon. Because of this now generally accepted truth, he strongly recommended a policy to be practiced by the central banks, or the Federal Reserve, of maintaining supply and demand equilibrium of money. This money supply should only increase with demand and accompanying productivity growth.
The roots of monetarism come from two radically opposed concepts. The hard money policies of the end of the nineteenth century were merged with some of the monetary ideas held by John Maynard Keynes who argued for money supply that was driven by demand. Keynes concentrated on the stable value of a currency that had been threatened by a lack of sufficient money supply that then led to currency collapse. Friedman concentrated instead on price stability to control and keep down inflation. This proves to be the perfect equilibrium of demand and supply for money. Friedman took these diametrically opposed concepts and wove them together into a new theory of Monetarism.
In the 1960’s and 1970’s, this Monetarist school of thought for monetary demand being a stable function found significant traction in the work of David Laidler. Other influential monetarists include former U.S. Federal Reserve Chairman Alan Greenspan, who showed his Monetarism bias in his own policies and ideas. Some central banks have attempted to orient their monetary policy around appropriate targets for money supply. The European Central Bank is the chief of these Monetarist idea central banks.
Monetarism is not entirely without its critics. The neo Keynesians propose that money demand and supply are closely interrelated. Other conservative economists maintain that monetary demand is not predictable. Nationally known economist Joseph Stiglitz makes the case that the relationships that exist between the growth of the money supply and inflation are weak at times when inflation is actually low.