Monetarism: Friedman, the money supply and Volcker

The quantity theory

Monetarism builds on the quantity theory of money, often written MV = PY: money times how often it is spent equals the price level times real output. If velocity is fairly stable, faster money growth than output growth ends in higher prices (Econlib: Monetarism).

Friedman and Schwartz

Milton Friedman and Anna Schwartz's *A Monetary History of the United States, 1867-1960* (1963) argued that the Great Depression's collapse of 1929-33 came from the monetary system failing, with the Fed letting the money stock fall (NBER). In 2002, then-Fed governor Ben Bernanke told them: "Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again" (Federal Reserve). Friedman received the 1976 Nobel Prize (Nobel Prize) and argued that there is no lasting trade-off between inflation and unemployment (AER 1968).

The Volcker era

With inflation near 15% in March 1980 (Federal Reserve History), the Fed under Paul Volcker announced anti-inflation measures in October 1979 that put more weight on controlling money growth (Federal Reserve History). Tight policy helped trigger the 1980 and 1981-82 recessions, with unemployment reaching nearly 11% late in 1982, and inflation then fell (Federal Reserve History).

Critiques

• Unstable velocity. From the 1980s the relationship between money measures and spending became unreliable, so central banks moved away from money-growth targets toward interest-rate policy (Econlib).
• Keynesian view. Keynesians argue money is only one driver of demand, and that at zero interest rates more money may not raise spending (Krugman, 1998).
• Austrian view. Austrians agree inflation is monetary but object that a steady growth rule still lets new money distort prices; see the Cantillon effect.

Legacy and rebuttal

Monetarists counter that their core lessons won: central banks now accept they are responsible for inflation, and avoiding monetary collapse in crises (as in 2008) reflects Friedman and Schwartz's work, as Bernanke's speech acknowledges (Federal Reserve).

Bitcoin perspective

This section is perspective, not neutral analysis.

Friedman favored a fixed rule for money growth instead of discretion (Econlib). Bitcoin takes rules to their limit: its issuance is set in code, falling toward zero, with a cap of 21 million (MAX_MONEY). Monetarists would note that Bitcoin's own velocity and demand swing widely, which is why its price is volatile.