Monetarist: Meaning, Overview, and Examples

What Is a Monetarist?

A monetarist is an economist who believes that the money supply significantly affects demand in an economy. They argue that changes in the money supply can regulate the economy’s performance, including its growth or contraction.

The key driver behind this belief is the impact of inflation on an economy’s growth or health. Monetarists believe that by controlling the money supply, one can control the inflation rate.

Key Takeaways

• Monetarists are economists and policymakers who subscribe to the theory of monetarism.
• Regulating the money supply is the most effective and direct way of regulating the economy.
• Famous monetarists include Milton Friedman, Alan Greenspan, and Margaret Thatcher.

Understanding Monetarists

Monetarism is an economic formula that states that the money supply multiplied by its velocity is equal to nominal expenditures in the economy. While this makes sense, there has been some debate about the stability of velocity since the 1980s.

Milton Friedman is the most well-known monetarist. In his 1963 book, "A Monetary History of The United States, 1867–1960," Friedman argued in favor of monetarism as a way to combat the economic impacts of inflation. He believed that a lack of money supply amplified the financial crisis of the late 1920s and led to the Great Depression. He also argued that a steady increase in the money supply in line with economic growth would produce growth without inflation.

The monetarist view became more prominent during the financial troubles of the 1970s. Keynesian economics, which was the dominant economic theory at the time, struggled to explain the simultaneous occurrence of economic contraction and inflation. Monetarism offered a solution by advocating for the restriction of the money supply to combat inflation, even if it meant a short-term recession.

Paul Volcker, the head of the Federal Reserve from 1979 to 1987, implemented monetarist policies to control inflation, which earned monetarism recognition and support from economists and policymakers.

Examples of Monetarists and Monetarism

Monetarists opposed the gold standard because they believed that the limited supply of gold would lead to inflation. They argue that inflation should be controlled by regulating the money supply, which is not possible under the gold standard unless gold is continually mined.

Milton Friedman is the most famous monetarist, along with former Federal Reserve Chair Alan Greenspan and former British Prime Minister Margaret Thatcher.