Abstract

Monetarism’s Muddles

This paper treats the theory of monetarism in both its theoretical and applied aspects, including its nebulous concept of the money stock, its uncorroborated assumptions of money velocity, its erroneous causal train of money and the price level, its neglect of the tic between pay hikes and the price march, and its follies in advocating rigid money supply policies, and denying the need for central bank monetary discretion, in an interdependent world economy where adventitious money and interest rate policies in one big country, such as the United States, are rather instantly transmitted to affect other economies, such as Germany. Western economies have been reeling under the triple distaser of zooming prices, excessive unemployment, and extravagant interest rates by virtue of the monetarist policies of our times. Stagflation and slumpflation are literally new and strange experiences engendered by doctrinaire monetarism which has been impervious to the implications of the persistent pay escalation, managed a bit better in Germany than elsewhere because of the presence of “gastarbeiters” and a more cooperative attitude of trade unions. But the relations will have to be formalized through Incomes Policies so that central banks can devote their full energies and formidable monetary instruments to cope with output levels, interest rates, and foreign exchange rates, without fear and trepidation of inflationary impulses.