FIRST LECTURE: A Survey
for the Evidence of Monetarism
The drastic change in the role assigned money has been produced partly by experience during the past few decades, partly by scholarly work.
Let me turn first to experience. The most important element was widespread
disillusion with the predictions derived from Keynesian theory. In
general, in all areas, people vote against and not for. Almost all
elections are decided by which candidate people are against rather
than which they favour. Very much the same thing is true in science.
No new theory or new approach has a chance until for some reason people
are disillusioned with an earlier theory. The experience that was
most important in producing widespread disillusion with the Keynesian
theory consisted of three elements: first, the failure of a great
post-war depression to occur, as was widely predicted at the end of
the war. That depression kept being expected but it never occurred.
Second, the widespread failure of cheap money policies. The Keynesian
analysis led to the view that the small role which monetary policy
had was to keep interest rates low. Country after country tried this
policy. In every country it failed, and the idea of a cheap money
policy had to be abandoned.
Third, instead of the widely feared depression, inflation emerged
as the pre-eminent problem of the post-war period—partly as
a consequence of cheap money policies.
All three of these elements of Keynesian thought are expressed succinctly
in a talk on post-war monetary and economic problems given in 1945
by Emanuel A. Goldenweiser, at the time Director of the Division of
Economic Research of the Federal Reserve Board. Herewith a few excerpts:
first, he dismissed inflation as something "we are likely to
escape in this post-war period"; he then said, "A much more
serious and lasting problem will be finding jobs." Finally, on
monetary policy, he said: "This country [that is the U.S.] will
have to adjust itself to a 21⁄2 per cent interest rate as the
return on safe, long-time money." Well, it would be hard to find
three predictions in the course of a single talk that have been more
clearly falsified by subsequent experience. Inflation turned out to
be the problem. We did not have a lasting problem of finding jobs,
and we certainly did not have to adjust ourselves to a 21⁄2
per cent interest rate.
This disillusion with the predictions that were drawn from the Keynesian
theory in the immediate post-war period was strongly reinforced, at
least in the United States, by a number of episodes during the 1960s.
At the time of the tax cut in 1964, when acceptance of the new economics
and of the Keynesian revolution was at its height, everything looked
rosy. But shortly, the rosy glow faded, because the U.S. entered a
period of inflation, which, in turn led to a number of almost controlled
experiments that pitted monetary policy against fiscal policy in 1966
and 1967, again in 1968, and again in 1969 and 1970. In each case,
monetary policy went in the opposite direction from fiscal policy
and in each case monetary policy dominated the outcome. Those episodes
probably did more than anything else to persuade the public at large
to pay more serious attention to monetarism and to give less credence
to the approach that had come to be designated the New Economics,
and that relied almost entirely on fiscal policy as an instrument