EUGENE A. LEONARD
I confess: I have not always known the truth. I am a monetarist by conversion, not birth. I was trained at Missouri as a neo-Keynesian. What changed me and taught me the truth was seventeen years at the Federal Reserve Bank of St. Louis. Converts such as I do, however, have a sense of sin and a sense of truth that birthright monetarists do not have, and in this essay I will try to give you a sense of the monetarist truth.
The thing that converted me was the evidence. Theory is one thing, but evidence is another. I became aware, for example, that in the 1960s and 1970s a rising trend in the rate of inflation was accompanied by higher rather than lower unemployment rates. Further, I saw that progressively more stimulative monetary policy over this same twenty-year period (that is, higher and higher rates of money growth) did nothing, on balance, to stimulate real economic output. Only nominal gross national product, which includes inflation, grew at a progressively more rapid rate.
Finally, and perhaps most revealing of all, was the fact that there seemed to be a strong relationship between sharp and sustained changes in money growth and business cycle behavior, to wit: each of the four recessions between 1960 and 1980 was preceded by, or coincided with, a time period of two calendar quarters or more in which the rate of money growth fell below its long-term trend. This convinced me that changes in money growth had a destabilizing influence on the economy--a rather disturbing feeling since I was working for the central bank, which was chartered in significant measure to promote stability! I came to be a believer in monetarism.
So, what is this thing we call monetarism, and what do monetarists believe?