What Is Monetarism?

Monetarism is a school of economic thought pioneered by Milton Friedman, a professor at the University of Chicago. As a result, it is also sometimes known as the Chicago school of economics.

Monetarism became enormously influential in the late 1970s and early 1980s and exerted a strong influence over economic policy formation in the major Western economies. Prior to ascendancy of monetarist thought, Keynesianism had been the dominant economic philosophy in the West since the Second World War. During this period, economic growth had tended to move in cyclical fashion, with periods of high unemployment and low inflation alternating with periods of low unemployment and high inflation. During the 1970s, this pattern broke down. The major economies experienced staglation ~ high unemployment and high inflation at the same time, and governments began desperately searching around for a new economic model to give them guidance. For many, monetarism was the answer.

The monetarists argued that inflation was determined by the amount of money in circulation, and that governments were largely powerless to affect the levels of unemployment. As a result, monetarists counselled that governments should stop targeting the level of unemployment as an economic variable and focus instead on controlling inflation by limiting the money supply.

Monetarism is the notion that money alone matters in influencing the general price level and aggregate output.