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Money and Economic Development
The Horowitz Lectures of 1972
Milton Friedman

SECOND LECTURE: Monetary Policy in Developing Countries

Monetary Policy and Inflation

From the long-run point of view, the problem of monetary policy reduces primarily to the desired rate of inflation and the best way to obtain that rate. This is so for reasons which I discussed in my first lecture: first, because monetary policy is concerned primarily with the quantity of money, not with the terms and availability of credit; second, because inflation is always and everywhere a monetary phenomenon.

Inflation always and everywhere reflects a more rapid increase in the quantity of money than it does in output. Of course, the reasons for the increase in the quantity of money are not always the same, but nothing will produce sustained inflation unless it produces a more rapid increase in the quantity of money than in output, and nothing will stop inflation unless it causes an end to an unduly rapid rise in the quantity of money. Hence, if we’re going to talk about monetary policy, we are in effect going to talk about policy towards inflation.


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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