Monetarism

"The first and most important lesson that history teaches about what monetary policy can do -- and it is a lesson of the most profound importance -- is that monetary policy can prevent money itself from being a major source of economic disturbance."
(Milton Friedman, "The Role of Monetary Policy", American Economic Review, 1968: p.12)

"I think I had best begin by making my own position clear - I regard "monetarism" as a terrible curse, a visitation of evil spirits, with particular unfortunate, one could almost say devastating consequences on our own country, Britain."
(Nicholas Kaldor, Origins of the New Monetarism, 1981: p.1)

(A) The "Chicago Plan"

Monetarism was at the height of its influence on economy policy-making in the late 1970s and early 1980s and, although it has waned considerably since, many aspects of its influence still remain in the modern policy-making. As can be expected, at the heart of Monetarist economic policy recommendations is the use ofmonetary policy, by which we mean the conduct of open market operations, discount window restrictions, etc. by the Central Bank in order to influence output and prices. In contrast, early Keynesians have tended to stress the role of fiscal policy in stabilizing the macroeconomy - a position reinforced by the famous 1959 Radcliffe Committee report on British monetary reform, which engendered an intra-Keynesian debate on the role of monetary policy (see Kaldor (1960, 1982) for a review).

Early Chicago economists such as Henry C. Simons (1934, 1936, 1948) and Lloyd Mints (1945, 1950) had recommended the use of monetary policy for price stability - in lieu of other tools, such as fiscal policy, the gold standard, commodity reserve currencies, etc. which were being proposed in the 1930s. In particular, following the conventional monetary disequilibrium cycle theories of the day, they believed that a lot of the fluctuations in money supply intensified uncertainty and worsened the cycle. What they tended to recommend was a strong Central bank with complete control of the supply of money to the point of requiring 100% reserve requirements on deposits. They sought to endow the Fed with a monetary policy stabilization mandate restricted to stabilizing the price level -- all combined with highly flexible and competitive labor and goods markets that would permit quick adjustment to equilibrium. These policy stance was referred to by contemporaries as the "Chicago Plan" (cf. A.G. Hart, 1935).
 
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