Finally, let me summarize what I regard as the key propositions
1. There is a consistent though not precise relationship between
the rate of growth of the quantity of money and the rate of growth
of nominal income. If the quantity of money grows rapidly, so will
nominal income and conversely. That is the proposition on which
most of these charts I have shown you bear most directly. I suspect
that, after seeing those charts, you will have little doubt that
it is a correct proposition.
2. This relation is not obvious to the naked eye over short periods,
because it takes time for changes in monetary growth to affect income
and how long it takes is itself variable. The rate of monetary growth
today is not very closely related to the rate of income growth today.
Today’s income growth depends rather on what has been happening
to money over a past period.
3. On the average, a change in the rate of monetary growth produces
a change in the rate of growth of nominal income about six to nine
months later. This is an average. Sometimes the delay is longer,
sometimes shorter. But I have been astounded at how regularly an
average delay of six to nine months is found under widely different
conditions. I have studied the data not only for the United States
but also for Israel, for Japan, for India, and for a number of other
countries. Some of our students have studied it for Canada and for
several South American countries. Whatever country you take, you
almost always get a delay of about six to nine months between the
change in money on the one hand and the change in income on the
4. The changed rate of growth of nominal income typically shows
up first in output and hardly at all in prices—that point
is brought out by Chart 10. If
the rate of monetary growth is reduced, for example, then about
six to nine months later, the rate of growth of nominal income and
also of physical output will decline. However, the rate of price
rise will be affected very little. There will be downward pressure
on the rate of price rise only as a gap emerges between actual and
5. On the average, the effect on prices comes some nine to fifteen
months after the effect on income and output, so the total delay
between a change in monetary growth and a change in the rate of
inflation, averages something like 15 to 24 months. That works both
ways. A speeding up of the rate of monetary growth tends to have
its effect on inflation 15 to 24 months later; a slowing down of
monetary growth has its effect on inflation 15 to 24 months later.
That is why it is a long road to hoe to stop an inflation that has
been allowed to start. It cannot be stopped over night. That is
really the main reason why you shouldn’t let one get started.
6. Even after allowance for the delay in the effect of monetary
growth, the relation is far from perfect. There is many a slip 'twixt
the monetary change and the income change.
7. In the short run, which may be as much as five or ten years,
monetary changes affect primarily output. Over decades, on the other
hand, the rate of monetary growth affects primarily prices. What
happens to output over the longer period depends on real factors:
the enterprise, ingenuity and industry of the people; the extent
of thrift; the structure of industry and government; the nature
of competitive institutions; the relations among nations, and so
8. It follows from the propositions I have so far stated that inflation
is always and everywhere a monetary phenomenon in the sense that
it is and can be produced only by a more rapid increase in the quantity
of money than in output. However, the reason for the rapid increase
in the quantity of money may be very different under different circumstances.
It has sometimes reflected gold discoveries, sometimes changes in
banking systems, sometimes the financing of private spending, sometimes—perhaps
most of the time—the financing of governmental spending.
9. Government spending may or may not be inflationary. It clearly
will be inflationary if it is financed by creating money, that is,
by printing currency or creating bank deposits. If it is financed
by taxes or by borrowing from the public, the main effect is that
the government spends the funds instead of the taxpayer or instead
of the person who would otherwise have borrowed the funds. Fiscal
policy is extremely important in determining what fraction of total
national income is spent by government and who bears the burden
of that expenditure. By itself, fiscal policy is not important for
inflation. What is important is how the spending is financed.
10. A change in monetary growth affects interest rates in one direction
at first but in the opposite direction later on. More rapid monetary
growth at first tends to lower interest rates. But later on, as
it raises spending and stimulates price inflation, it also produces
a rise in the demand for loans which will tend to raise interest
rates. In addition, rising prices introduce a discrepancy between
real and nominal interest rates. That is why throughout the world
interest rates are highest in those countries that have had the
most rapid rise in the quantity of money and also in prices—countries
like Brazil, Chile, Korea and Israel.
In the opposite direction, a slower rate of monetary growth at first
raises interest rates but later on, as it reduces spending and price
inflation, it lowers interest rates. That is why interest rates
are lowest in those countries that have had the slowest rate of
growth in the quantity of money —countries like Germany and
This point needs little stress in Israel where linked bonds are
common and where the Bank of Israel recently offered a development
loan which incorporated an expectation that inflation would be at
least 6 per cent a year for the next five years. Since the Bank
of Israel controls the money supply, this is one prediction it can
surely make true if it wishes!
The two-edged relationship between money and interest rates explains
why monetarists insist that interest rates are a highly misleading
guide to monetary policy.
Those are the key propositions of monetarism, viewed as part of
positive economics. The policy implications that can be drawn from
these propositions are by no means unique. Some people who accept
these propositions draw the conclusion that monetary policy should
be used as a sensitive fine tuning instrument to adjust the economy.
Other people, like myself, draw a very different conclusion. We
think that the looseness of the relationship, the ignorance about
the details of the relationship, means that the most important thing
is to keep monetary policy from doing harm and that that can best
be done by producing a steady growth in the quantity of money. I
shall discuss those issues more fully in the second lecture. Thank