Uzelman: The true source of inflation and the redemption of Milton Friedman

A column by Bruce Uzelman

~BW Uzelman

Milton Friedman was a prolific writer and a widely respected economic theorist in the second half of the twentieth century. His witty and sharp expression of ideas was unequalled by that of his colleagues. Friedman’s message was understandable and compelling to a considerable segment of the public of the United States – he was an American – and Canada and other nations, too. He had a public following.

Friedman was a proponent of free enterprise and minimal government activity. He quipped, “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.” Similarly, he contended, “Higher taxes never reduce the deficit. Governments spend whatever they take in and then whatever they can get away with.” That’s perhaps a little cynical, but it resonated with people then and resonates still.

Friedman’s theories became the foundation for the monetarist school of economic thought; he in turn became its leading advocate. Keynesian economists supported fiscal policy – the management of government spending levels – as the most important tool to stimulate or to slow the economy. The monetarists, in contrast, argued that monetary policy – the manipulation of the money supply – should be the primary tool to control economic variables. Freidman is credited with establishing the great influence enjoyed by the monetarists, beginning in the 1950’s and enduring for decades.

One of Friedman’s most famous quotes centered on inflation and money supply. “Inflation is always and everywhere a monetary phenomenon,” he declared, “in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” He encouraged a gradual increase in the money supply to allow for the growth of the economy, but warned a rapid increase promotes inflation.

Inflation plagued western economies from the 1960s to the early 1980s. This resulted in the influence of the monetarists waning in the 1980s and subsequent decades. But the leading monetarist remained defiant. The Federal Reserve’s failure to control inflation, Friedman said, was due to their emphasis on interest rates rather than the money supply.

All of this is pertinent to prevailing events. Economists are beginning to refocus on the money supply. Terance Corcoran writes in the Financial Post, “a new modern monetary policy is taking shape across the world.” The policy, he says, relies on older theories that had been discounted until recently. Corcoran is referring to the work of Friedman and the monetarists. He calls the new movement “neo-Friedmanism”, and credits its rise to the reemergence of international inflation. Corcoran points to two new reports, one by TD Economics and one by the International Monetary Fund.

James Marple, senior economist at TD Economics, argues, “History has shown that sustained high rates of inflation cannot occur without excessive money growth.” This statement echoes Friedman’s decades earlier. Marple produces a graph showing the sharp uptick in (M1) money supply during the pandemic followed by an abrupt deceleration in money growth in early 2021. This pattern is reflected, after a lag of several months, by a near identical sharp increase of the inflation rate followed by a sudden fall. As Friedman had asserted, “Inflation is always and everywhere a monetary phenomenon.”

The IMF paper looks at 100 inflation shocks in 56 countries since the 1970s. The paper found that, “First, [based on history] today’s economies may be in for a long inflation-fighting period.” “Second, policy consistency is key.” It is crucial, the IMF notes, to exercise both tight monetary and fiscal policies for an extended period of time. The key finding, reads the paper, is that the successful resolutions of inflation were, “associated with more substantial monetary policy tightening.” That, for the IMF, includes both raising interest rates and cutting the growth of the money supply.

The IMF report, at least in part, echoes Friedman. He supported cutting government largesse and containing the growth of the money supply. He stated, “There is only one real cure for inflation. … The government must reduce spending and print less money. The alternatives are both recession and double-digit inflation.” Friedman doesn’t offer answers to all economic problems, but has made and will continue to make a vital contribution to contemporary economic thinking. While not all economists accept monetarism, its influence is reemerging.

Friedman’s colourful commentary on government enhanced public awareness and certainly provided for popular amusement. “Nothing is so permanent as a temporary government program,” he once remarked. And, in a more serious moment, he alleged, “Inflation is taxation without representation.”


Bruce W Uzelman

I attended the University of Saskatchewan in Saskatoon.I obtained a Bachelor of Arts, Advanced with majors in Economics and Political Science in 1982.

I have maintained a healthy interest in politics throughout my adult years, and wish to put that and my research skills to work as a political columnist.

Contact: urbangeneral@shaw.ca

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