History of Monetarism

Monetarism is the economic school that places money supply at the center of macroeconomic analysis. Its intellectual lineage runs from Irving Fisher's Quantity Theory to Milton Friedman's Chicago School to modern practitioners like Steve Hanke, who extends the tradition through real-time measurement and institutional design.

The Intellectual Timeline

Key Figures and Their Contributions

Irving Fisher (1867–1947)

Fisher's The Purchasing Power of Money (1911) gave the Quantity Theory its modern mathematical form: MV = PT (where T is transactions, later replaced by Y for real output). Fisher also pioneered the concept of the real vs. nominal interest rate distinction — the "Fisher effect" — which is fundamental to monetary economics.

Milton Friedman (1912–2006)

The central figure of 20th-century monetarism. Friedman's contribution was both theoretical and empirical:

• A Monetary History (with Anna Schwartz, 1963): showed the Great Depression was a monetary event caused by Fed contraction of 30% of the money supply
• The k-percent rule: money supply should grow at a constant annual rate (equal to long-run real GDP growth)
• "Inflation is always and everywhere a monetary phenomenon"— Hanke's fundamental axiom

Robert Mundell (1932–2021)

Nobel laureate who developed optimal currency area theory — the conditions under which a group of countries benefits from sharing a single currency. His work is the intellectual foundation for the euro and for Hanke's analysis of dollarization.

William Barnett (1941–)

Developed Divisia monetary aggregates — index-number methods for measuring money supply that weight components by their "moneyness." Hanke advocates using Divisia aggregates rather than simple-sum measures like M2, arguing they provide superior early warning of monetary disequilibrium.

Tim Congdon (1951–)

British monetarist who consistently applied broad money analysis to UK monetary policy. Co-authored Money in the Great Recession (2020) with Hanke, showing that a crash in broad money growth caused the global economic slump of 2008–2009.

Hanke's Contribution: State-Money/Bank-Money Analysis (SMBMA)

In 2012, Prof. Hanke introduced State-Money/Bank-Money Analysis (SMBMA) — a framework that distinguishes between two fundamentally different types of money:

• State money (also called base money or high-powered money): created by the central bank; includes currency in circulation and bank reserves at the central bank
• Bank money: created by commercial banks through the lending process; constitutes the vast majority of the broad money supply (M2, M3)

SMBMA was inspired by John Maynard Keynes' 1930 Treatise on Money, in which Keynes distinguished between "bank money" and "money proper." Despite Hanke's broader disagreements with Keynesian economics, he recognized Keynes' 1930 work as analytically superior to the later General Theory on this specific question.

The practical implication: quantitative easing (QE) by central banks creates state money, but if commercial banks simultaneously reduce lending, total broad money (state money + bank money) can actually fall — explaining why QE in 2008–2009 did not cause inflation while money supply growth in 2020–2021 did.

Monetarism Today

Central banks may change their operating frameworks — from money targets to inflation targets — but they cannot escape the basic monetarist truth: excessive money growth produces inflation, and disciplined monetary control remains the foundation of economic stability.

"Inflation is always and everywhere a monetary phenomenon." — Milton Friedman

Related Pages

• Quantity Theory of Money — The key equation of monetarism
• Hanke's Golden Growth Rate — The practical policy tool
• Home: Monetarism — Return to the Monetarism overview