Alternative Monetary Theories of Inflation: Part II
VICTOR A. CANTO AND ARTHUR B. LAFFER
Legend contends that once upon a time a big man in acceptable physical condition, but most of all a New Yorker, was confronted by four toughs on his way home after an evening on the town. Choosing discretion over valor, he ran like the blazes with his four assailants in hot pursuit. One by one, his pursuers flagged and dropped out of the macabre chase until only one remained. At this point, the New Yorker stopped, turned around, and retraced his steps, confronting each assailant one by one and beating the living daylights out of each of them.
Arguments for monetarism also are numerous and, on their surface, seem invincible. However, when confronted openly and explicitly, one by one, each of the arguments collapses under its own weight. This paper is the second in our monetary series and focuses on different variants of a common theme: M1 monetarism, M2 monetarism, and global monetarism.
The past has more influence on our analysis than any of us would care to admit. As in dominoes, we all build on what is rather than what should be. Errors, once introduced, persist. Each time a subject is broadened, the errors of the past must once again be convincingly put to rest--and put to rest to the satisfaction of the skeptics.
Virtually everyone holds to the view that money matters and most people believe that money matters a lot. Monetarists distinguish themselves from others who also believe that money matters a lot by postulating that for all practical purposes (1) the quantity of money supplied to the economy is controlled by government, and (2) the demand for money is sufficiently stable such that changes in the measured quantity of money reflect changes in supply.