Stability is Not an Accident
Money matters. When money grows too fast, inflation follows. In the worst cases, it leads to hyperinflation.
Monetarism explains why. Hanke’s Golden Growth Rate explains what to do about it.
What is Monetarism?
Monetarism is the view that money supply is the central force in shaping the economy. By extension, economic expansion, stability, and inflation can be influenced via monetary policy–changes in the money supply.
History of Monetarism
Monetarism, championed by Milton Friedman, rose in the 1970s by stressing stable money supply growth to control inflation, arguing excessive money fuels price hikes, not just government spending. Monetarism transformed how central banks think about inflation.
Learn more about the History of Monetarism
The Key Equation: Quantity Theory of Money
The Quantity Theory of Money links the money supply to the economy’s overall price level through how fast money moves via this equation:
where M = money supply, V = Velocity of Money, P = Price Level, Y = Real GDP
Learn more about the Quantity Theory of Money
Hanke’s Golden Growth Rate
We recognized that inflation is about changes in the money supply. Hence, if a country sets an inflation target, that relationship implies a correct growth rate of money to reach it. Hanke’s Golden Growth Rate provides a clear, rule-based guide for setting that rate:
where %∆P = inflation target, %∆Y = Long-Run Average Percentage Real GDP Growth, %∆V = Long-run Average Percentage Change in Money Velocity
Learn more about the derivation of the Hanke’s Golden Growth Rate
How Money Growth Translates into Inflation
Changes in the money supply do not affect the economy all at once.
They work through predictable stages and lags.
In my work, I observe a consistent pattern:
- ⏱️ First (1–9 months): excess money shows up in asset prices
- ⚙️ Next (6–18 months): economic activity begins to accelerate
- 🛒 Finally (12–24 months): inflation appears in goods and services
This lag structure explains why rapid money growth often looks harmless at first—and why inflation catches policymakers by surprise.
Hanke’s Golden Growth Rate in Practice
The Golden Growth Rate is not theoretical. I have applied it repeatedly across countries and crises to anticipate inflation, identify policy mistakes, and evaluate monetary institutions.
Anticipating Inflation
When money growth persistently exceeds its golden benchmark, higher inflation follows with a lag.
In 2021, I applied this framework to the United States and showed that the explosive post-COVID surge in broad money guaranteed higher inflation well before it appeared in the CPI.
→ Why More U.S. Inflation Is Right Around the Corner (2021)
Diagnosing Policy Mistakes
Deviations below the Golden Growth Rate can be just as damaging as overshoots.
During periods of financial stress, policies that drive money growth sharply below its golden path risk turning slowdowns into deeper and longer recessions.
→ Memo to the Fed: Money Matters (2023)
Designing Monetary Institutions
Stable monetary systems keep money growth close to its golden rate.
Hong Kong’s currency board is a clear example: disciplined money growth has delivered long-run price stability despite repeated political and economic shocks.
→ The Ever-Solid Hong Kong Dollar (2019)
Developing Economies
In countries with weak central banks, repeated overshoots of the Golden Growth Rate explain chronic inflation.
My work on Iran shows how rule-based systems, such as currency boards, can eliminate endemic inflation where discretionary policy has failed.
→ It’s Time to Smash Iran’s Endemic Inflation (2021)
