simply would not use money, however abundant, to buy or invest.
When such “liquidity traps” developed, the money supply proved
irrelevant and monetary policy became ineffective. Governments then
had to resort to fiscal policy – they could lower taxes or increase
expenditures – to stimulate consumption and investment.^10
In his study of the monetary history of the United States, conducted
with Anna Schwartz, Friedman maintained on the contrary that deep
recessions were primarily monetary phenomena, because they were
always preceded by a significant fall of the quantity of money in
circulation. The empirical demonstration was not without limitations
and it was often contested, but it helped Friedman claim that money
had more significance than the evolution of national income, and
argue that policy-makers should design non-interventionist rules to
guarantee a stable money supply. In a well-functioning market, a
steady quantity of money would suffice to prevent both inflation and
unemployment.^11
The economics profession received these monetarist ideas coolly.
The insistence on money, in particular, was seen more as an indication
of the “zeal and exuberance” of “Friedman and his followers” than
as a challenge that could undermine the Keynesian perspective.^12 For
the monetarist interpretation to prevail, it would take two additional
conditions. First, the view that inflation was an important problem
had to arise in the public sphere. Second, the idea that monetarism
offered the best diagnostic and the most satisfying remedies for infla-
tion had to become the dominant view.^13
Inflation did increase in the 1960s, but it was not yet perceived as a
problem on par with unemployment. At the time, wrote Herbert Stein,
(^10) David Smith,The Rise and Fall of Monetarism, Harmondsworth, Penguin,
11 1987, pp. 7–11.
Ibid., pp. 20–24; Michael Bleaney,The Rise and Fall of Keynesian Economics:
An Investigation of Its Contribution to Capitalist Development, Basingstoke,
Macmillan, 1985, pp. 135–39; Paul Krugman,Peddling Prosperity: Economic
Sense and Nonsense in the Age of Diminished Expectations, New York,
12 W. W. Norton, 1994, pp. 34–40.
James Tobin, “The Monetary Interpretation of History,”American Economic
Review, vol. 55, no. 3, June 1965, 464–85, p. 481; Bleaney,The Rise and Fall
of Keynesian Economics, pp. 137–39.
(^13) Harry G. Johnson, “The Keynesian Revolution and the Monetarist
Counter-Revolution,”American Economic Review, vol. 61, no. 2, May 1971,
1–14, p. 7.
140 Left and Right in Global Politics