Monetarism

There are many economic schools of thought, each containing interconnected theories on just how the economy works. Monetarism is one of these schools of thought, with the central theory being that economic growth is based on the amount of money flowing in the system.

As Milton Friedman—the father of monetarism (for the most part)—argued, monetarism is taking the belief that more money in the economy means increased demand for buying stuff, which drives economic growth, which increases employment and GDP. Because demand is growing faster than supply, prices go up. In other words, inflation happens.

Monetarists believe that the central bank of a nation’s economy should steadily increase the money supply as nominal GDP rises, bit by bit, to maintain price stability and control inflation. This is the basis for the Quantity Theory of Money in Monetarism, which is money supply times the rate it’s spent (per year) equals nominal expenditures (price times quantity). Monetarists also generally believe that interest rates should be used to either encourage investment and spending, or to encourage saving.

Monetarism contrasts with Keynesian economics, another leading school of (macro)economic thought. Unlike Monetarists, Keynesians don’t think the velocity of money is or should necessarily be constant, and that economic growth isn’t from money supply, but from aggregate demand of goods and services. The chicken or the egg of macroeconomics.

They also differ since Keynesian economics is more on board with government intervention than monetarists, who generally propose free market economics with minimal government intervention. Monetarism isn’t as popular as it was in the '80s, especially among central banks and federal governments.