What is monetarism?

Monetarism is an economic theory that says inflation is caused mainly by too much money in the economy. Monetarists argue governments should control inflation by limiting the growth of the money supply, rather than by managing demand through spending. It was championed by Milton Friedman and influenced UK policy in the early 1980s.

Monetarism grew as a challenge to Keynesian economics, which dominated after 1945. Milton Friedman argued that inflation is always a monetary event. He said governments could not permanently lower unemployment by accepting more inflation. Instead, steady and predictable money growth would bring stable prices and let markets do the rest. He won the Nobel Prize in economics in 1976 and was highly influential.

The 1970s, with high inflation and rising unemployment, gave monetarism its chance. From 1979 the Thatcher government set targets for money supply growth and raised interest rates sharply. Inflation fell from around 18% in 1980 to under 5% by 1983, but unemployment rose above three million. The money targets proved hard to hit and were quietly dropped by the mid-1980s. Other economists disputed it.

Pure monetarism has largely faded, but its ideas live on. Central banks still focus on controlling inflation, now usually by setting interest rates against an inflation target. The Bank of England's independence since 1997 owes something to monetarist thinking. The surge in money from quantitative easing, followed by high inflation in 2022, revived the debate. Monetarists see this as vindication of their warnings about printing money.

Where you've seen it

The UK and the US in the late 1970s and early 1980s, when governments and central banks tried to control money growth to bring down inflation.

In the UK today

Strict money supply targets were dropped long ago, but the idea that controlling inflation is central lives on in the Bank of England's independence and its 2% inflation target.