HOW MONETARISM FAILED*
The great revival of 'monetarism' in the 1970s, culminating in the adoption of the strict prescriptions of the monetarist creed by a number of Western governments at the turn of the decade--particularly by President Reagan's administration in the United States and Mrs Thatcher's in Great Britain--will, I am sure, go down as one of the most curious episodes in history, comparable only to the periodic outbreaks of mass hysteria (such as the witch hunts) of the Middle Ages. Indeed, I know of no other instance where an utterly false doctrine concerning the causation of economic events had such a sweeping success in a matter of a few years without any attempt to place it in the framework of accepted theory concerning the manner of operation of economic forces in a market economy.
The central assertion of monetarism--assiduously propagated for a number of years by a single American economist, Professor Milton Friedman of Chicago--is that an excessive increase in the supply of money, caused by the decisions of the note-issuing authority, the central bank, is the main, if not the sole, cause of inflation; that the cyclical fluctuations of the economy reflect the irregularities and aberrations with which the money supply is increased by the monetary authority, which is responsible also for distortions in the structure of production caused by imperfect anticipation of the delayed effects of increases in the money supply on prices. Since on account of unstable and highly variable 'time lags' it is hopeless to expect that the monetary authorities can prevent such instabilities by well-timed measures (or compensate for them by well-timed countermeasures), the only safe rule to follow is to secure a modest and stable rate of increase in the rate of growth of the money____________________