Monetarism is a collection of opinions based on the belief that the total amount of money in the economy is the most crucial factor in economic growth.

Monetarism & Milton Friedman

Specifically, Monetarism connects to the economist Milton Friedman, who argued based on the concept of cash. Therefore, Federal authorities must keep the amount of money available constant and expand it each year to accommodate the natural growth in the economic system.

Additionally, Monetarism is a concept in economics which states that the source of money in the economy is the main driving force of economic expansion. When the availability of funds within societies grows, the need to purchase goods or services goes up. The boost in demand for goods and services stimulates job growth, which brings down the rate of unemployment and affects economic growth. However, the increasing demand will ultimately become more extraordinary in a long time than the available supply, leading to imbalances in the market. The lack of supply, caused by more demand than supply, can force prices to increase, leading to inflation.

Money Policy & Monetarism

Money policy, a financial device employed in Monetarism, alters interest rates to manage the amount of money available. For example, when interest rates increase, people are more inclined to save money than invest, thus reducing or decreasing the number of funds available. On the other hand, when interest rates reduce in a monetary system that is expanding, the cost of borrowing is reduced, which means that people can borrow greater and put their money into investing, stimulating the economy.

Because of the consequences of inflation through the growth in the cash supply, Milton Friedman, whose job was to formulate the idea of Monetarism, argued that one should implement the monetary policy by paying attention to the growth rate of the cash source to maintain price and economic stability. In Milton Friedman’s book, A Monetary History of the United States 1867 – 1960, Friedman proposed a fixed growth rate, referred to as Friedman’s K-percent rule. The K-percent rule suggested that cash flow should increase at a constant rate dependent on nominal GDP growth and be the same percentage each year—this way, the cash supply will be expected to grow moderately. Consequently, companies will be able to anticipate shifts in the collection of cash every year. Changes in the money supply mean that the economy will constantly grow, maintaining the inflation rate to a low level.

The Quantity Theory of Money

The central concept behind Monetarism is the Quantity Theory of Money, which states it is the case that the amount of money that can accumulate multiplied speed at which money spent each year is equal to the trivial costs in the marketplace.

Theorists from the monetarist school believe that speed is regular, suggesting that money supply is the most crucial element in Growth in GDP or economic growth. Economic growth is an aspect of economic activity, as and inflation. If the rate of change is consistent and predictable, then any increase (or maybe a reduction) in the amount of money will cause an increase (or possibly a decrease) in the cost or amount of goods and services offered. A rise in price levels means that the number of services and goods produced will be constant. In contrast, growth in the number of products manufactured implies that the standard cost will remain steady, according to Monetarism. Variations in the supply of money will impact cost levels across the long and economic output in the short term. Therefore, changes in the quantity of cash available will instantly affect production, employment, and prices.

The idea that velocity is constant is an issue for Keynesians. They believe that it is not appropriate to anticipate speed because the economy is subject and volatile to continuous instability. Additionally, Keynesian economics asserts an aggregate requirement as the key to economic development. Also, it is in favor of central banks’ efforts to pump more cash into the economy to stimulate interest. Finally, as previously mentioned, it contradicts the monetarist view and claims that such actions could result in inflation.

The Rise of Monetarism

Monetarism advocates argue that controlling an economy with fiscal policy is not a good choice. The increased government intervention can interfere with the function of a market-based economy that is entirely free. Additionally, it can result in large deficits, a rise in sovereign debt, and high interest rates, eventually leading to a state of instability.

The rise of Monetarism was evident in the 1980s’ first decade when economists, investors, and even governments jumped on each new statistic on the quantity of money in circulation. However, in the decades that followed, Monetarism slipped out of popularity among economists. Also, Monetarism found the connection between different inflation methods and methods for calculating money supply to be less precise than what most theories of monetarists had suggested. In the end, numerous central banks have stopped setting goals for monetary growth and instead have established strict inflation goals.