A Retrospective on Monetarism for the 21st Century

In the 1970s, persistently high inflation was triggered by the oil crisis, and was widely seen to have been exacerbated by expansionary fiscal and monetary policies of Western governments. In other words, it was argued that the precipitous increase in money supply pursued by policymakers was done in a way that either failed to increase or actually hindered economic output at the same time, and was done too quickly. This had caused the phenomenon of ‘stagflation’, in which inflation rose at the same time as economic growth falling, widely seen as an example of the principle behind both the Phillips curve and Keynesian approaches to recessions breaking down. 

 

This phenomenon triggered heightened interest and pursuit of a monetary system that could effectively address the shortcomings of Keynesian supply-side doctrine, and the reliance on an inverse relationship between inflation and unemployment. It was from this demand that widespread exploration of ‘Monetarism’, a doctrine championed by the economist Milton Friedman, was pursued. Friedman famously stated that inflation was “always and everywhere a monetary phenomenon”, a description that acted as the foundational logic behind his proposed monetary system, aptly named ‘Monetarism’. The Monetarist solution to this phenomenon was centred around the integralness of avoiding high inflation, specifically by restricting the supply of money in circulation. For example, Friedman advocated a ‘k-percent rule’, wherein monetary supply would only increase at a fixed rate each year irrespective of business cycles, and not counter-cyclically as had been advocated by Keynes. 

 

Friedman’s ideas, with the backing of his Chicago School grouping of fellow economists, gained the interest of policymakers at the onset of the 1980s, and were especially the subject of experiments in both the United States and the United Kingdom. Paul Volcker, chief of the Federal Reserve, sought to follow the Friedman rule by restricting money supply from 1979 onwards, and the Thatcher government also took that approach in tackling the high inflation which she had inherited. In both cases, a reduction of inflation was successfully achieved - for example, Thatcher saw inflation come down from 10.3% to 4.6%. 

 

But the proposition that a contractionary policy would not yield the natural result of the Phillips curve’s model did not pan out as hoped. A recession in the early 1980s saw a large hike in unemployment in countries which pursued a Monetarist approach, with unemployment more than doubling in the UK. Additionally, the foundations behind Monetarism as a theory was questioned as empirical data came in. The principle that monetary supply correlated strongly with inflation derived from a stable relationship between supply and velocity of money. While this seemed clear in the 1970s, the relationship chain broke down in the 1980s thanks to variations in demand for money, reducing the effectiveness of a fixed supply determination. With the emergence of these perceived shortcomings, Monetarism’s dramatic rise was seemingly reversed by Western governments. Though taming inflation remained important to the monetary agenda, it was pursued through inflation-targetting via short-term interest rates, flexible in response to business cycles, and counter-cyclical when needed. Monetarism’s inflation focus was simply subsumed into the new neoclassical synthesis, dominant up till today, and was nominally no longer considered a cohesive doctrine in practice.

 

But when we look at the issues of inflation, unemployment, and growth in economies today, can we really say that the current approach to monetary issues has been successful? The answer, it would appear, is mixed. 2008 showed the world the limits of Central Banks using interest rates to stimulate growth, something Friedman identified as a persistent issue in his framework - with interest rates close to zero, economies were nevertheless resistant to borrowing and investment in the cradle of a major financial crash, and a liquidity trap was triggered. With the usefulness of heightened money supply being questioned, central banks made a bold and novel decision - to engage in a process called Quantitative Easing, whereby assets held by commercial banks would be purchased by the central bank in order to provide an injection into the economy. The BoE alone burnt through £895 billion through this alone by 2021. As the economy recovered from this phenomenon, the BoE has sought to claw back this accrued debt through Quantitative Tightening - but this process has led to significant taxpayer losses, thanks to a swell in QE reserve interests being paid by the BoE in comparison to the rates at which they were purchased from commercial lenders in 2009.

 

Could a Monetarist approach have avoided this misfortune? Some have argued that the swell of money supply pursued following the Great Recession, in line with a counter-cyclical monetary approach, has created more trouble in long-term losses than the short-term relief was worth. Losses through interest discrepancies, it could be argued, is the penalty of this approach, which may have been avoided where the k-percent rule abided by. And that is not all the expansionary monetary policy has been blamed for. With the fuelling of zombie firms through artificially low rates, and distortion of asset prices, the M2 (money supply) boosting regime may not have produced the real growth needed to justify these losses. 

 

What about the monetary response to the economic implications of the COVID-19 pandemic? We may not have the long-term data to be conclusive on this, but already we are seeing trends that seem to match the Monetarist framework. An expansionary policy driven by lower rates up until late 2021 was seen as contributing to a surge in inflation to more than 11%, the cumulative effect of which has compounded the longer-term cost of living crisis. The BoE was criticised for its failure to identify the link between supply and inflation, and its reliance on flexible rate changes was seen as contributing to excessive inflation due to a perception that it was slow to act, and multiple inflation expectation adjustments thanks to model errors. The Monetarist case, once again, has played into commentator’s remarks on the perceived failings. 

 

Still, any return to the Monetarist ascendancy of the 1980s has not taken hold of policymakers yet. While the relation between money supply and inflation has remained painfully obvious, the difficulty in modelling the effects of money velocity complicates the practical introduction of the Monetarist ideal. Furthermore, the political unpopularity of Central Banks being slow to act to control unemployment during recessions may continue to hurt the practicality of a system which discourages countercyclical expansion. But if contemporary failures on inflation and long-run productivity continue to grow, and more bouts of stagflation like that which we saw at the beginning of this decade emerge, it would not be surprising to see the voices loudened for Monetarism in its full-fat form to re-emerge. A sign of this potential is the decision of President Trump to announce Kevin Warsh as the next Chairman of the Federal Reserve, who is widely seen as monetarist-leaning, and has been a loud critic of Quantitative Easing. Whether or not the Fed under Warsh does choose to diverge from the new consensus of monetary policy, and whether or not other central banks decide to follow, is yet to be seen. 

 

If this does take place, it seems likely that a resurgence in Monetarist approach could see the excesses of expansionary monetary policy, and the spikes of high inflation it has fuelled, be rolled back. It seems that the economy could see heightened efficiency. But it could also bring back anger over unemployment, and renewed difficulties in modelling money velocity. Whether these historic shortcomings would once again undermine any attempts to reproduce the Monetarist ascendance of the 1980s, is an experiment which we may yet see play out in the coming decade.

​

References

1. World History. (2025). The 1970s Stagflation Crisis: Causes, History, and Economic Impact - World History. https://worldhistoryjournal.com/2025/06/06/1970s-stagflation-crisis/.

2. ‌The Market Monetarist. (2023). This is why inflation is ALWAYS and EVERYWHERE a monetary phenomenon. https://marketmonetarist.com/2023/07/24/this-is-why-inflation-is-always-and-everywhere-a-monetary-policy-phenomenon/.

3. ‌CFI team (2024). Monetarist Theory. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/economics/monetarist-theory/.

4. Dupor, B. (2025). The Volcker Tightening Cycle: Explaining the 1982 Course Reversal. https://www.stlouisfed.org/publications/review/2025/jan/volcker-tightening-cycle-explaining-1982-course-reversal.

5. www.inflationtool.com. (n.d.). UK Historical Inflation Rates | 1956-2022. https://www.inflationtool.com/rates/uk/historical.

6. ‌Sablik, Tim. 2013. “Recession of 1981–82 | Federal Reserve History.” Federal Reserve History. Federal Reserve History. November 22, 2013. https://www.federalreservehistory.org/essays/recession-of-1981-82.

7. ‌Vacalebre, F.P. (2026). Monetarism After Friedman: What Endures, What Changed, and Why It Still Matters. https://medium.com/@fpvacalebre/monetarism-after-friedman-what-endures-what-changed-and-why-it-still-matters-168ebc15d350

8. ‌Bank of England. 2024. “Quantitative Easing.” Bank of England. Bank of England. May 10, 2024. https://www.bankofengland.co.uk/monetary-policy/quantitative-easing.

9. ‌“IPPR.” 2025. IPPR. 2025. https://www.ippr.org/articles/fixing-the-leak.

10. ‌Gabriel, Amadeus, and Gabriel A Giménez. 2023. “The Distorted Entrepreneurial Decision‐Making of Zombie Firms.” MDE. Managerial and Decision Economics/Managerial and Decision Economics 45 (3): 1230–41. https://doi.org/10.1002/mde.4065.

11. ‌Thin, Tommy. 2025. “Inflation in Retreat or the Calm before Another Storm? An Analysis of British Inflation Post-Covid - the St Andrews Economist.” The St Andrews Economist. May 16, 2025. https://standrewseconomist.com/2025/05/16/inflation-in-retreat-or-the-calm-before-another-storm-an-analysis-of-british-inflation-post-covid/.

12. Jones, Claire. 2026. “Donald Trump Nominates Kevin Warsh as Federal Reserve Chair.” @FinancialTimes. Financial Times. January 30, 2026. https://www.ft.com/content/a08f1b78-4816-4ff1-819c-e67e59c8d767.