The Monetarist Mistake

But the realignment of the rich, developed countries around the monetarist policies promoted by economists like Milton Friedman, which began around 1970, broke with all that. Not long after, the dollar was detached from the gold standard.

As open economies, Belgium and the Netherlands have both been interested in developing the internal market, while differing in their methods. Belgium followed the mainly French monetarist school, while the Netherlands shared Germany s preference for economic convergence before committing to exchange rate parity.

The analogy popularized by the great monetarist economist Milton Friedman was that the central bank could always deal with deflationary problems by dropping money from a helicopter. But, in the real world, not everyone is underneath the helicopter when it makes the drop.

According to Eichengreen, the Great Depression and the Great Recession are related. The inadequate response to our current troubles can be traced to the triumph of the monetarist disciples of Milton Friedman over their Keynesian and Minskyite peers in describing the history of the Great Depression.

Indeed, we understood that monetarist cures were likely to prove insufficient that sovereigns need to guarantee each others solvency and that withdrawing support too soon implied enormous dangers. We knew that premature attempts to achieve long term fiscal balance would worsen the short term crisis and thus be counterproductive in the long run.

It is this relationship between inflation and unemployment that lies at the heart of all controversies about monetary policy and central banking. And almost all modern economic models, including those used by the Fed, are based on the monetarist theory of interest rates pioneered by Milton Friedman in his 1967 presidential address to the American Economic Association.

The bad news is that the vast majority of market analysts, still clinging to the old monetarist framework, will accuse the Fed of falling behind the curve by letting US unemployment decline too far and failing to anticipate the threat of rising inflation. The Fed should simply ignore such atavistic protests, as it rightly did last week.

Belgium followed the mainly French monetarist school, while the Netherlands shared Germany s preference for economic convergence before committing to exchange rate parity. Once President Valéry Giscard d Estaing and Federal Chancellor Helmut Schmidt made the joint Franco German proposal for the Economic and Monetary Union (EMU), both Belgium and the Netherlands worked together to achieve that common goal.

In economics, Friedman revived and developed the monetarist theory that the quantity of money in circulation is the main determinant of how economies perform. In his masterpiece A Monetary History of the United States, 1867 1960 (written with Anna Schwartz), he famously attributed recessions, including the Great Depression of the 1930 s, to a decline in the money supply.

In economics, Friedman revived and developed the monetarist theory that the quantity of money in circulation is the main determinant of how economies perform. In his masterpiece A Monetary History of the United States, 1867 1960 (written with Anna Schwartz), he famously attributed recessions, including the Great Depression of the 1930 s, to a decline in the money supply.

But I do think that this discussion is the most important debate in the field of macroeconomics since John Maynard Keynes wrestled with similar questions in the 1930s. For Keynes, the answer was clear, and it was something close to what is being argued by Summers and Krugman indeed, his conclusions are what transformed him from a monetarist into a Keynesian.

The world has undergone massive economic deregulation, prescribed by the monetarist doctrine supported by the conservative forces dominant in the developed countries of North America, Europe, and the Far East. This economic tsunami has come to us from the United States there is nothing in it for Europe, but the right wing forces in all our countries, which have coalesced into the majority that governs Europe, have rallied to its support.