Monetarist

What is a 'Monetarist'

A monetarist is an economist who holds the strong belief that the economy's performance is determined almost entirely by changes in the money supply. Monetarists postulate that the economic health of an economy can be best controlled by changes in the monetary supply, or money, by a governing body.

The key driver behind this belief is the impact of inflation on an economy's growth or health and the idea that by controlling the money supply one can control the inflation rate.

BREAKING DOWN 'Monetarist'

At its core, monetarism is an economic formula. It states that money supply multiplied by its velocity (the rate at which money changes hands in an economy) is equal to nominal expenditures in the economy (goods and services multiplied by price). While this makes sense, monetarists say velocity is generally stable, which is up for debate. 

The most well-known monetarist is Milton Friedman, who wrote about his beliefs in the book "A Monetary History of The United States, 1867 - 1960." In the book he, along with Anna Schwartz, argued in favor of monetarism as a combat to the economic impacts of inflation. They argued that a lack of money supply was a cause of the Great Depression. 

Monetarists v Gold Standard

Most monetarists opposed the gold standard in that the limited supply of gold would stall the amount of money in the system, which would lead to inflation, something monetarists believe should be controlled by the money supply, which is not possible under the gold standard unless gold is continually mined. 

Monetarists view got further credibility when the gold standard collapsed in 1972. As unemployment and inflation soared, Keynesian economics, which was often contrasted to monetarism, was unable to explain the way out of the economic puzzle. On one hand Keynesian economics said high unemployment called for reflation - an increase in the money supply, and on the other hand, rising inflation called for a Keynesian disinflation strategy.

Other monetarists include former Federal Reserve Chairman, Alan Greenspan, and former U.K. Prime Minister, Margaret Thatcher.