There has been a drastic change
in the past quarter century in attitudes towards the role of money
in the economy. If we go back to the end of World War II, beginning
in the mid 1940s, the Keynesian revolution was undoubtedly dominant.
It was widely believed that the quantity of money was a rather unimportant
magnitude, and that the quantity theory of money had about as much
relation to economics proper as astrology has to astronomy.
In the 25 years since then, there has been a drastic shift. One
very good indication of the extent of that shift is that in just
the past six months, two full-length books have been published that
are devoted to quasi-popular presentations of the relations between
money and other economic magnitudes. One is by Beryl Sprinkel, entitled
Money and Markets; a second, which came out more recently yet, is
by James Meigs, entitled Money Matters. As you can see, Meigs’
title is very clever since it has two completely different meanings.
The appearance of these books reflects a substantial rise in interest
and acceptance of the doctrines that have come to be called monetarism.
I don’t myself particularly like that unlovely title, but
it has stuck and so I will stick with it.
The central notion of monetarism is that money matters for both
short-term economic fluctuations of the economy and for inflation,
the trend of prices. Part of the central notion—the feature
that distinguishes it most from the Keynesian approach—is
that what matters is the quantity of money—the number of dollars,
or number of pounds in the form of money—and not interest
rates, money market conditions, credit conditions and the like.
I want to cover three things in this lecture: first, the evidence
that has produced so drastic a change in economic attitudes. What
evidence has been accumulated in the past quarter century that led
first the economics profession and then more generally the world
at large to shift away from almost exclusive emphasis on the role
of fiscal policy in affecting the economy, and to attribute a great
deal of emphasis to the role of money? Even economists like Professor
Tobin who profess to be non-monetarists have in fact changed their
views drastically over the past 25 years and today assign the quantity
of money a far greater role than they would have earlier. Compare,
for example, the first edition and the 8th or 9th edition of the
leading economic principles book. Look in the index of both editions
under “Money” or “Quantity theory of money”
and read the entries referred to in the text, and you will see how
great has been the change in views over the past 25 years.
Second, since I cannot present this evidence in full in the course
of a single lecture, I want to suggest the flavour of the evidence
by presenting some slides which give a small sample of the evidence.
Third, I shall end by stating what I regard as the key propositions
of monetarism, that is, I shall spell out more fully the notion
that money matters for economic fluctuations and inflation and that
what matters is the quantity of money.