Money Supply Targeting - Philosophical Concept | Alexandria
Money Supply Targeting, a macroeconomic strategy, proposes that a central bank should set targets for the growth rate of the money supply to control inflation and stabilize the economy. Often linked to monetarism, a school of thought championed by Milton Friedman, it’s a system easily confused with other monetary policies, often wrongly seen as a simple, mechanical solution to complex economic woes. Yet, its rise and fall are shrouded in complexities and shifting economic landscapes.
The intellectual seeds of Money Supply Targeting can be traced back to the mid-20th century. Although variations of the concept certainly predate it, a discernible policy articulation emerges with the rise of monetarism in the post-World War II era. Friedman's "A Monetary History of the United States, 1867-1960," published in 1963, provided significant historical context and analytical support for the idea that changes in the money supply had a strong hand in economic fluctuations. This period saw Keynesian economics dominating policy thinking, so Friedman and his monetarist cohorts were seen as intriguing, sometimes controversial, outsiders.
Money Supply Targeting gained prominence in the 1970s and early 1980s, a period marked by high inflation and economic instability. Central banks, including the Federal Reserve under Paul Volcker, adopted money supply targets in an attempt to curb inflation. However, the relationship between money supply and inflation proved more complex than initially assumed. Financial innovation and deregulation blurred the definition of money and weakened the correlation between monetary aggregates and economic activity. The world was changing in ways that pure monetarism struggled to capture, leading to difficulties in achieving the set targets.
Today, Money Supply Targeting has largely been abandoned as a primary policy tool by most central banks, replaced by inflation targeting or other more flexible approaches. Yet, its legacy endures. It played a pivotal role in shaping macroeconomic thought and policy during a critical period of economic history. The brief dominance of Money Supply Targeting serves as a cautionary tale about the limitations of rigid policy rules in a dynamic and evolving economy, and continues to be a treasure chest of inquiry in economics courses today: Was it the right remedy tried at the wrong time, or a fundamentally flawed approach? The search for answers leads us to a labyrinth of debates, data, and enduring questions about how best to navigate the capricious currents of the economic sea.