Editing Monetarism (section)

==Description==
Monetarism is an economic theory that focuses on the [[macroeconomics|macroeconomic]] effects of the [[supply of money]] and [[central banking]]. Formulated by [[Milton Friedman]], it argues that excessive expansion of the money supply is inherently [[inflation]]ary, and that monetary authorities should focus solely on maintaining [[price stability]].

Monetarist theory draws its roots from the [[quantity theory of money]], a centuries-old economic theory which had been put forward by various economists, among them [[Irving Fisher]] and [[Alfred Marshall]], before Friedman restated it in 1956.<ref name=Dimand>{{cite book|last1=Dimand |first1=Robert W. |chapter=Monetary Economics, History of |title=The New Palgrave Dictionary of Economics |date=2016 |pages=1–13 |doi=10.1057/978-1-349-95121-5_2721-1 |chapter-url=https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_2721-1 |publisher=Palgrave Macmillan UK |isbn=978-1-349-95121-5 |language=en}}</ref><ref>Milton Friedman (1956),  "The Quantity Theory of Money: A Restatement" in ''Studies in the Quantity Theory of Money'', edited by M. Friedman.]</ref>

===Monetary history of the United States===

[[File:Money_supply_during_the_great_depression_era.png|400px|thumb|right| Money supply decreased significantly between [[Black Tuesday]] and the [[Emergency Banking Act|Bank Holiday in March 1933]] in the wake of massive [[bank runs]] across the United States.]]
Monetarists argued that central banks sometimes caused major unexpected fluctuations in the money supply. Friedman asserted that actively trying to stabilize demand through monetary policy changes can have negative unintended consequences.<ref name=Blanchard>{{cite book |last1=Blanchard |first1=Olivier |last2=Amighini |first2=Alessia |last3=Giavazzi |first3=Francesco |title=Macroeconomics: a European perspective |date=2017 |publisher=Pearson |isbn=978-1-292-08567-8 |edition=3rd}}</ref>{{rp|511-512}} In part he based this view on the historical analysis of monetary policy, ''[[A Monetary History of the United States|A Monetary History of the United States, 1867–1960]]'', which he coauthored with [[Anna Schwartz]] in 1963. The book attributed inflation to excess money supply generated by a central bank. It attributed deflationary spirals to the reverse effect of a failure of a central bank to support the [[money supply]] during a [[Market liquidity|liquidity]] crunch.<ref>{{cite book|first=Michael D.|last=Bordo|date=1989|title=Money, History, & International Finance: Essays in Honor of Anna J. Schwartz|chapter=The Contribution of ''A Monetury History''|page=[https://archive.org/details/moneyhistoryinte0000unse/page/46 46]|department=The Increase in Reserve Requirements, 1936-37|isbn=0-226-06593-6|publisher=University of Chicago Press|access-date=2019-07-25|chapter-url=https://archive.org/details/moneyhistoryinte0000unse/page/46|citeseerx=10.1.1.736.9649}}</ref> In particular, the authors argued that the [[Great Depression]] of the 1930s was caused by a massive contraction of the money supply (they deemed it "the [[Great Contraction]]"<ref name=FriedmanSchwartz>{{cite book|author1=Milton Friedman|author2=Anna Schwartz|title=The Great Contraction, 1929–1933|url= https://books.google.com/books?id=-lCArZfazBkC&q=%22Regarding%20the%20Great%20Depression%20You're%20right%20We%20did%20it%22|year=2008|publisher=Princeton University Press|isbn=978-0-691-13794-0|edition=New}}</ref>), and not by the lack of investment that Keynes had argued. They also maintained that post-war inflation was caused by an over-expansion of the money supply. They made famous the assertion of monetarism that "inflation is always and everywhere a monetary phenomenon."

===Fixed monetary rule===

Friedman proposed a fixed ''monetary rule'', called [[Friedman's k-percent rule]], where the money supply would be automatically increased by a fixed percentage per year. The rate should equal the growth rate of real [[GDP]], leaving the price level unchanged. For instance, if the economy is expected to grow at 2 percent in a given year, the Fed should allow the money supply to increase by 2 percent. Because [[Discretionary policy|discretionary monetary policy]] would be as likely to destabilise as to stabilise the economy, Friedman advocated that the Fed be bound to fixed rules in conducting its policy.<ref name=IMF/>

===Opposition to the gold standard===
Most monetarists oppose the [[gold standard]]. Friedman viewed a pure gold standard as impractical. For example, whereas one of the benefits of the gold standard is that the intrinsic limitations to the growth of the money supply by the use of gold would prevent inflation, if the growth of population or increase in trade outpaces the money supply, there would be no way to counteract deflation and reduced liquidity (and any attendant recession) except for the mining of more gold. But he also admitted that if a government was willing to surrender control over its monetary policy and not to interfere with economic activities, a gold-based economy would be possible.<ref>{{Cite web|url=http://www.fff.org/freedom/0399b.asp|archive-url=https://web.archive.org/web/20121114140436/http://fff.org/freedom/0399b.asp|url-status=dead|title=Monetary Central Planning and the State, Part 27: Milton Friedman's Second Thoughts on the Costs of Paper Money|archive-date=November 14, 2012}}</ref>