The Keynesians vs. the Monetarists

November 14, 1968.  The debate between the Keynesians and the monetarists reached a milestone in an exchange between Milton Friedman and Walter W. Heller.  The Seventh Annual Arthur K. Salomon Lecture at the Graduate School of Business Administration at New York University is recorded in Monetary vs. Fiscal Policy: A Dialogue, Milton Friedman and Walter W. Heller, W.W. Norton & Company, Inc.: New York (1969).

Milton Friedman

Author (with Anna J. Schwartz) of A Monetary History of the United States, 1867-1960.

  • "... Walter has set up something of a straw man when he says that the issue is not whether money matters, but whether only money matters."  [p. 46]
  • Assuming fixed prices is an important issue.  "I have been increasingly impressed that much of the disagreement about this issue stems from the fact that an important element in the Keynesian revolution in economics was the notion that prices are an institutional datum determined outside the system."  [p. 46]
  • The interest rate is the price of credit.  The price level is the price of money.  [p. 74]
  • Key number:  the quantity of money.  [pp. 76-77] 
  • Fine tuning using monetary or fiscal policy is impossible.  "I think that the evidence of the past ten years rather reinforces it, rather shows the difficulties of trying to engage in a very fine tuning of economic policy."  [49-50]
  • Worst forecast:  The only problems inhibiting agreement on which definition of the money supply to use are Regulation Q (limit on rate on time deposits) and zero interest on demand deposits.  "The only time it makes a difference is when our silly Regulation Q gets in the way."  [pp. 76-77]   Editor's note:  These regulations are long gone.  The arguments over the proper definition of money are not.
  Walter Heller

Chairman of the Council of Economic Advisers from 1961-1964, serving Presidents Kennedy and Johnson.

  • We are all monetarists now.  "The issue is not whether money matters -- we all grant that -- but whether only money matters, as some Friedmanites .. would put it."  [p. 16]
  • The interest rate is the price of money.  "I really don't understand how the scarcity of any commodity can be gauged without referring to its price -- or, more specifically, how the scarcity of money can be gauged without referring to interest rates."  [p. 21]
  • Key number:  full employment surplus.
  • Fine tuning the economy works.  "... official economic forecasts have correctly led the President's economic advisors to urge expansionary action the early 1961 to the first half of 1965; to urge restrictive fiscal-monetary policy in 1966; to urge a roller-coaster policy in 1967, consisting of (a) fiscal-monetary ease early in the year to avert recession and then (b) a call for the surtax after mid-year to help ward off resurgent inflatin; and to urge, with ever greater intensity, prompt enactment of the surtax in 1968."  [p. 39]
  • Worst forecast:  No chance for floating exchange rates any time soon.  "... He always has an answer -- flexible exchange rates. ... floating exchange rates are not just around the corner."  [p. 27]  Editor's note:  The U.S. dropped the dollar/gold link about three years later in 1971, effectively ending the era of fixed exchange rates.

While the debate would continue for some time, the prize for winning would elude both sides.  Economic conditions in the 1970's rendered claiming credit for the growth in the 1960's less important as the economic policy debate shifted toward allocating blame for a painful mix of inflation and unemployment.

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