Last year saw the world lose one the twentieth century’s most influential thinkers in economics, Milton Friedman.

Friedman, a leading proponent of the monetarist school of economic thought, argued that there is a close relationship between the money supply and inflation. More specifically, he argued that the phenomenon of inflation is to be regulated by controlling the amount of money poured into the national economy by the Federal Reserve Bank. This is why he said that “inflation is everywhere and always a monetary phenomenon”.

Indeed, at a celebration for Friedman’s 90th birthday, the current chairman of the US Fed, Ben Bernanke, joked: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

How can he be so sure? In today’s Oz, David Uren also reminds us the extent to which Friedman’s ideas are still hotly debated and, in some quarters, are forgotten:

US Federal Reserve chairman Ben Bernanke says the quantity of money available for spending has no meaning for the course of the economy. Exactly one year ago this week, the US Federal Reserve ceased collecting figures on M3.

The European Central Bank president, Jean-Claude Trichet, by contrast, regards the money supply as “one of two pillars” in its decisions on interest rates, the other being economic analysis.

Uren warns that there are dangers in forgetting Friedman’s legacy. The domestic growth in the money supply took off in the past year, when it rose by 14.2 per cent. This growth could drive growth in asset prices “as investors [tap] the seemingly limitless supply of credit”.

Henry concurs completely with Uren’s basic conclusion — “Perhaps the Reserve Bank should give greater consideration to the role of money supply.”

Read more at Henry Thornton.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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