The Triumph of Monetarism?
📄 Summarized from the full manuscript · Human-reviewed for faithfulness before publication
In brief
Whatever happened to monetarism? This essay traces the idea from Irving Fisher's original quantity theory through four successive "subspecies" -- First Monetarism, Old Chicago Monetarism, Classic Monetarism, and Political Monetarism -- to its collapse as a policy doctrine in the 1980s, when targeted monetary aggregates stopped predicting nominal spending (Goodhart's Law). De Long's answer is that monetarism did not really disappear: its durable analytical content -- policy rules, the natural rate of unemployment, monetary policy's relative potency, the limits of stabilization -- was simply absorbed into "New Keynesian" economics, while only its stripped-down, most politically simplified and empirically false version (that velocity is always stable) actually failed.
What this paper finds — and why it matters
This essay traces the 20th-century arc of “monetarism,” from Irving Fisher’s original turn-of-the-century quantity theory through the discipline’s late-1990s split between “New Classical” and “New Keynesian” research programs, asking why monetarism as a labeled school essentially disappeared even though De Long argues most of its substance did not. He distinguishes four successive subspecies. First Monetarism (Fisher’s own quantity-theoretic tradition) is judged to have failed chiefly because it lacked a sophisticated business-cycle theory, a gap that helped drive Keynes away from quantity theory altogether. Old Chicago Monetarism (the pre-war Viner-Simons-Knight “oral tradition”) stressed that velocity was unstable and that fractional-reserve banking made the money supply hard to control – though De Long treats the long-running dispute over whether this was ever a coherent “theory,” rather than retrospectively systematized policy views, as beside the point. Classic Monetarism – Friedman’s mature postwar synthesis – combined durable empirical and analytical contributions (stable money demand even under hyperinflation, the limits of stabilization policy given uncertain lags, the case for rule-based policy, the natural-rate-of-unemployment hypothesis, and the demonstrated potency of monetary policy) with an institutional-reform program (100 percent reserve banking plus constant money growth) that, De Long notes, never took hold as financial deregulation moved the other way. Political Monetarism, the simplified doctrine that briefly became official Federal Reserve and Bank of England policy in the late 1970s, went further than Classic Monetarism by treating velocity as simply stable and the money stock as a sufficient statistic for nominal demand – and it is this subspecies, De Long argues, that “crashed and burned” in the 1980s as Goodhart’s Law took hold and targeted aggregates lost their predictive power. De Long’s overall claim is that five analytical “planks” he associates with New Keynesian economics – nominal rigidities as the central business-cycle friction, the relative potency of monetary over fiscal policy, analyzing cycles around trend rather than below potential, evaluating policy through rules rather than case-by-case, and recognizing firm limits on what stabilization policy can achieve – all originate substantially in Friedman’s Classic Monetarism, so that the intellectual content of monetarism survives pervasively today even though the label itself, tainted by Political Monetarism’s empirical collapse, does not.
Summary of a classic paper, AI-assisted and human-reviewed. See the linked original for the authoritative claims and full conditions.
Questions & answers
Q1. What is De Long’s central thesis about what became of monetarism?
De Long’s core claim is that “much of this current of thought is still there, but its insights pass under another name” – monetarism’s substance survived into what is now called New Keynesian economics, even as the term “monetarism” itself faded (p. 83, 89). He frames the puzzle explicitly: monetarism achieved “both intellectual and policy triumph” in the late 1970s – intellectually as the NAIRU grew large and the fiscal multiplier shrank in textbooks, and in policy as the Fed and Bank of England both announced they would target the money stock rather than interest rates – yet “today monetarism seems reduced from a broad current to a few eddies” (p. 83). His resolution is to disaggregate “monetarism” into four historically distinct subspecies with different fates, rather than treat it as one doctrine that simply rose and fell.
Q2. What was “First Monetarism,” and why does De Long say it fell short?
First Monetarism is Irving Fisher’s own quantity theory – the equation-of-exchange tradition that “fueled the intellectual fire that became known as monetarism” – and De Long judges that, notwithstanding sophisticated individual contributions like Fisher’s (1933) “Debt-Deflation Theory of Great Depressions,” “the business cycle theory of this first subspecies of monetarism was by and large not as subtle, and not as sophisticated” (pp. 85-86). He traces how this shortcoming exasperated contemporaries, quoting Keynes’s 1923 Tract on Monetary Reform dismissal that standard quantity-theoretic analysis is “a misleading guide to current affairs” because “in the long run we are all dead” (p. 86) – exasperation De Long presents as part of what pushed Keynes toward the non-monetarist General Theory.
Q3. What did “Old Chicago Monetarism” actually claim, and why is its status as a “theory” disputed?
Old Chicago Monetarism – the Viner-Simons-Knight “oral tradition” – held that velocity was not stable (it rose in booms and fell in slumps because inflation and deflation change the opportunity cost of holding money) and that fractional-reserve banking without deposit insurance made the money stock hard for the central bank to control, since fears of illiquidity could move both the deposit-reserve and deposit-currency ratios (pp. 87-88). Whether this amounted to an actual “theory” was disputed for decades: Don Patinkin (1969, 1972) and Harry Johnson (1971) argued it was “a retrospective construction by Milton Friedman,” an ad hoc set of policy views given post hoc theoretical grounding, while Friedman and Tavlas (1997) defended it as a genuine, if unwritten, “oral tradition.” De Long declines to adjudicate, stating flatly that “in my view there is nothing of substance at stake in such debates” (p. 88).
Q4. What is “Classic Monetarism,” and which parts of it does De Long say endured versus failed?
Classic Monetarism is Friedman’s mature postwar synthesis, laid out across Essays on Positive Economics (1953), Studies in the Quantity Theory of Money (1956), A Program for Monetary Stability (1960), and “The Role of Monetary Policy” (1968), and De Long identifies several of its empirical and analytical strands as durable – stable money demand functions even under extreme hyperinflation (Cagan, 1956), the limits stabilization policy faces from uncertain lags (Friedman, 1953a), the case for robust policy rules (Friedman, 1960), the natural-rate-of-unemployment hypothesis (Friedman, 1968), and the demonstrated potency of monetary policy (Friedman and Schwartz, 1963) (pp. 89-90). By contrast, the “Program for Monetary Stability” component – 100 percent reserve banking to eliminate multiplier fluctuations, paired with a constant money-growth rule – “has not flourished over the past half century,” since “the tide, instead, has flowed in the direction of the deregulation of the financial sector” (p. 90).
Q5. What political-economy strand did Classic Monetarism also carry, and how does De Long connect it to later macroeconomics?
A second strand of Classic Monetarism reflected a Chicago School “fear and distaste for the state,” treating a stable money-growth rule and a constrained central bank as tools to limit discretionary government power, since an unconstrained central bank “could fail” through incompetent appointees or “could succeed” in pursuing sectional political interests rather than the public interest (p. 90). De Long states that “a large chunk of this strand of monetarism shapes macroeconomists’ thoughts today, mostly as transmitted through Kydland and Prescott (1977)” (p. 90) – explicitly tracing the distrust of discretionary policy embedded in the later time-inconsistency literature back to this Classic Monetarist source.
Q6. What distinguished “Political Monetarism” from Classic Monetarism, and why did it collapse?
Political Monetarism went further than Classic Monetarism by asserting that velocity simply was stable, rather than merely stabilizable through institutional reform, making the money stock “a sufficient statistic for forecasting nominal demand” that let central bankers “close their eyes to all economic statistics save monetary aggregates alone” (p. 91). It was this doctrine, not Classic Monetarism, that the Fed and Bank of England briefly adopted as explicit policy in the late 1970s, and De Long argues it is what “crashed and burned in the 1980s”: once central banks targeted a particular aggregate, “whatever monetary aggregate was being targeted by a central bank turned out to be the one with the lowest correlation with nominal income” – Goodhart’s Law – and velocity in fact turned unstable in the 1980s “not in any manner simply correlated with the rate of money growth” (p. 92).
Q7. What five “planks” does De Long attribute to New Keynesian economics, and how does he trace each to the monetarist tradition?
De Long lists five propositions he says structure New Keynesian thought: (1) nominal-adjustment frictions are the key cause of business-cycle fluctuations in employment and output; (2) monetary policy is normally a more potent stabilization tool than fiscal policy; (3) cyclical fluctuations are best analyzed as movements around a sustainable trend rather than as shortfalls below potential; (4) policy should be evaluated via its implications as a general rule, not episode by episode; and (5) any sound stabilization framework must recognize the real limits on what such policy can achieve (pp. 84-85). He then traces each to Friedman’s own earlier work – rule-based, robust policy analysis to Friedman (1953a, 1960); the “stabilization not gap-closing” limit to Friedman (1968); monetary policy’s demonstrated potency to Friedman and Schwartz (1963) and Friedman and Meiselman (1963); and the New Keynesian treatment of aggregate supply to Friedman’s discussion of the “missing equation” in Gordon (1974) – concluding “it is hard to find prominent Keynesian analysts in the 1950s, 1960s, or early 1970s who gave these five planks as much prominence in their work as Milton Friedman did in his” (p. 85).
Q8. If the substance survived, why does the profession talk about “New Keynesians” rather than “New Monetarists” today?
De Long frames this as largely a question of historical labeling rather than of substantive intellectual defeat: the version of monetarism that visibly and empirically failed in public view was Political Monetarism’s oversimplified claim that velocity was simply stable, and that failure “crashed and burned” the label, even though the analytically serious Classic Monetarist content had by then already been absorbed into the mainstream (pp. 91-93). His closing assessment is that “under normal circumstances, monetary policy is in fact a more potent and useful tool for stabilization than is fiscal policy,” that nominal-adjustment frictions really are key business-cycle causes, and that the natural-rate hypothesis “has strong empirical support in U.S. data” – so that “we may not all be Keynesians now, but the influence of monetarism on how we all think about macroeconomics today has been deep, pervasive, and subtle” (pp. 85, 93).
Key terms in this paper
Definitions below follow the paper's own usage.
- First Monetarism
- De Long's label for Irving Fisher's own turn-of-the-century quantity theory (Appreciation and Interest, 1896; The Rate of Interest, 1907; The Purchasing Power of Money, 1911), which "fueled the intellectual fire that became known as monetarism" but, in De Long's assessment, "fell down on the question of understanding business cycle fluctuations in employment and output," a weakness that helped provoke Keynes's break from quantity-theoretic analysis in the Tract on Monetary Reform (1923) and later The General Theory.
- Old Chicago Monetarism
- the pre-World War II "Chicago School oral tradition" of Viner, Simons and Knight, which stressed that the velocity of money was unstable -- rising in booms, falling in slumps, because inflation and deflation change the opportunity cost of holding money -- and that fractional-reserve banking without deposit insurance made the money supply hard for the central bank to control, since bank-run fears could swing both the deposit-reserve and deposit-currency ratios; De Long notes its very status as a coherent "theory" (versus an ad hoc set of policy views later systematized by Friedman) was disputed for decades by Patinkin and Johnson against Friedman and Tavlas, a debate De Long says has "nothing of substance at stake."
- Classic Monetarism
- the mature postwar Friedman synthesis (Essays on Positive Economics 1953; Studies in the Quantity Theory of Money 1956; A Program for Monetary Stability 1960; "The Role of Monetary Policy" 1968), combining empirically durable strands -- stable money demand even under hyperinflation (Cagan 1956), the limits imposed on stabilization policy by uncertain lags (Friedman 1953a), the case for robust policy rules (Friedman 1960), the natural-rate-of-unemployment hypothesis (Friedman 1968), and the potency of monetary policy (Friedman and Schwartz 1963) -- with an institutional-reform strand, the "Program for Monetary Stability" (100 percent reserve banking plus a constant money-growth rule), that De Long says "has not flourished over the past half century" as the financial sector deregulated instead.
- Political Monetarism
- the simplified, politically potent doctrine that dominated central-bank rhetoric in the late 1970s (the Federal Reserve and Bank of England both announced they would target monetary aggregates rather than interest rates), which claimed -- more strongly than Classic Monetarism -- that velocity simply *was* stable (not merely stabilizable by institutional reform) and that the money stock was therefore "a sufficient statistic for forecasting nominal demand"; De Long argues this subspecies, not Classic Monetarism, is what "crashed and burned in the 1980s" once Goodhart's Law took hold and whichever aggregate a central bank targeted lost its correlation with nominal income.
- Goodhart's Law (as invoked)
- the empirical regularity, invoked but not derived by De Long, that once a central bank begins targeting a particular measure of the money stock as a policy instrument, that aggregate's previously reliable statistical relationship with nominal income breaks down; De Long cites it as the mechanism by which Political Monetarism's targeting experiments of the late 1970s failed empirically in the 1980s.