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Money and Economic Development
The Horowitz Lectures of 1972
Milton Friedman

FIRST LECTURE: A Survey for the Evidence of Monetarism


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.


1. Nominal income is net national product; money is currency outside commercial banks plus all deposits (time and demand) of the public at commercial banks.
2. Each rate of change is computed as the slope of a least squares straight line between the natural logarithm of the variable (income or money) and time fitted to three successive phase averages.
3. This summary is adapted from Milton Friedman, The Counter-Revolution in Monetary Theory, Occasional Paper 33 (London: Institute of Economic Affairs, 1970), pp. 22-26.
4. See my "The Optimum Quantity of Money" in The Optimum Quantity of Money and Other Essays (Chicago: Aldine Publishing Co. 1969).
5. "Government Revenue from Inflation, "Journal of Political Economy, Vol. 79 (July/August, 1971), 846-856.

Reprinted from Money and Economic Development The Horowitz Lectures 1972 by Milton Friedman, copyright © 1973

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