TOWNSHEND, VERMONT—Three prominent economists, Peter Ireland, Stephen Miran, and Nouriel Roubini, have just published a paper intended to influence Kevin Warsh, the new chair of the Federal Reserve who previously studied under Milton Friedman while at Stanford. Miran, a former chair of the White House Council of Economic Advisers and former Fed governor, and his colleagues seek to revive Friedman’s famous doctrine, monetarism, defined loosely as a focus on the money supply, but now dressed up in the grass skirts of a Divisia index.
As it happens, I am the sole survivor of those involved with monetary oversight at the US House of Representatives Banking Committee from 1975 forward, when monetarism was in full bloom. Ireland, Miran, and Roubini make reference to language I remember well: the 1977 statutory instruction that the Fed “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
That wonderful phrasing actually goes back to early 1975, and was the work (mainly) of two hard-core monetarists on the House Banking Committee staff. Both were University of Chicago PhDs and disciples of Friedman. Both were also Democrats, and both were named Bob: Weintraub and Auerbach.
I joined the staff shortly after the oversight resolution passed and was the odd person in the trio, a student of the British Keynesian Nicholas Kaldor and the progeny of that famous Friedman adversary, my father, John Kenneth Galbraith.
Our joint objective was to oblige the Fed to report regularly to Congress, and specifically to us. Until then, the Fed was under no mandate to do so, and its procedures were opaque. The core instrument, the federal funds rate, was a secret—the markets had to guess. But money and credit growth could be discussed, so that went into the statute. The Fed could be (and was) asked to report on target ranges for growth of the various aggregates, consistent with its forecast for real (inflation-adjusted) GDP, inflation, and employment.
The money-targeting language was (and is) operationally meaningless. “Commensurate” is not the same as “proportionate,” and “long run” allows for deviation from any stated course. The language simply directs the Fed to pursue a policy to keep production on par with potential, which is exactly what the operative language on employment, prices, and interest rates specifies. But it was crucial as politics, and my monetarist colleagues were satisfied.
There followed another dance, concerning the base for each money and credit target range. The Fed initially wanted to roll the base forward every quarter, folding its misfires into history. That was, of course, ridiculous. Eventually, we specified—and the Fed accepted—an annual process, with a mid-year check-in, which became the “Humphrey-Hawkins” procedure. Regular Fed reports to Congress have continued ever since.
The reporting requirements did not prevent the money-supply numbers from wandering from their target ranges, year after year. They ultimately helped drive home the futility of setting money-growth targets.
Since that era, the Fed has moved (as Ireland, Miran, and Roubini observe) from the brief and violent Paul Volcker period of money targeting, to a vague form of “inflation targeting,” and now to direct control (price-fixing) of short-term interest rates, combined with elaborate public statements. The money supply numbers have fallen into disuse, while the public-facing central bank—a trend-setter for the world—has spawned a cottage industry of semanticists who scrutinize every colon, semi-colon, and comma in the “forward guidance.”
Warsh is right, in my opinion (so, too, Ireland, Miran, and Roubini), to cut back the verbiage, leaving the monetary necromancers temporarily unemployed. As we worked to establish back in 1975, the Fed is a “creature of Congress,” and the responsibility for oversight rests with Congress. The Fed should say less, and Congress should ask more.
Ireland, Miran, and Roubini go further, to endorse a “soft monetarism” in which the growth rates of a money index—the various aggregates weighted by relative degrees of liquidity, Divisia-style—are used to assess inflationary pressures. But there are two difficulties with this. First, as they acknowledge, the link from money to inflation depends on reasonably stable “velocity”—not an easy assumption to defend. If the velocity of money isn’t stable—and it certainly wasn’t during the COVID-19 pandemic or on many other occasions—the “quantity theory” cannot be used to inform policy.
The second problem is one I have dealt with at length in other work. The essential point is that used cars, existing homes, and other capital assets (like stock prices) are not correctly included in the “inflation” measure that Friedman and other quantity theorists put into their equation. The monetarists were concerned with the prices of newly produced goods, not those things that the public already owns and trades back and forth with itself.
But prices of new goods did not rise the way those of used cars and houses did in the “quasi-inflation” of 2021 and 2022. Ireland, Miran, and Roubini are therefore wrong to link the increase in the money supply caused by COVID-19 relief to “inflation” in the theoretically correct sense of that term. How to define and measure inflation properly would be an excellent topic for one of those working groups Warsh has been assembling.
In short, while the Divisia index may help to measure money, velocity is still unstable, and inflation is still mis-measured. So, monetarism, soft or not, will stay dead.
The most doctrinaire monetarist in Congress during the 1970s was another Democrat, Senator William Proxmire, who had obliged the Fed to send regular letters whenever the growth of M1 (the most liquid form of money) was below 2% or above 6%—Friedman’s preferred guideline at the time. Shortly after I left the House Banking Committee in early 1981 to become executive director of the Joint Economic Committee, the Fed’s congressional liaison, Don Winn, stopped by to ask if they could stop sending those letters. I happily agreed. I did not inform Proxmire, who never noticed.
Copyright: Project Syndicate, 2026.
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