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Brad Bateman and others are right to highlight the problems associated with
defining the word 'monetarism'. Because of this, considerable care needs to
be taken when describing what happened in the UK under Margaret Thatcher as
a 'monetarist experiment'.
For instance, in spite of the instinct of Lady Thatcher, the authorities
never attempted to control the supply of money by controlling the reserve
base of the banking system (as the North American and Swiss schools of
monetarism argued they should), and they only paid lip service to
controlling the demand for money. They did attempt some control over the
counterparts of broad money through overfunding, but this led to all sorts
of problems. Operating on the counterparts of broad money is peculiar to
the UK and is best considered as a supplement to demand-side control.
In short, as I have argued in a recently published book written with Gordon
Pepper ("Monetarism Under Thatcher: Lessons for the Future", Edward Elgar
and Institute of Economic Affairs, 2001), the experiment in the 1980s was
mainly an exercise in political monetarism.
Perhaps a fifth area of investigation (following Robert Leeson's existing
four) is to determine whether the implementation of monetarism anywhere in
the world has ever matched Friedman's expectations. Unlike Keynes, who did
not live to see some of the atrocities his disciples carried out in his
name, Friedman has had many opportunities to comment on some of the
practical implementations of monetarism.
Consider the case of the UK. There is one important piece of evidence that
Friedman gave to the Treasury and Civil Service Committee's, "Memoranda on
Monetary Policy" in 1980, when he was very clear that he was unimpressed
with the decision by the UK authorities to use fiscal policy as a means of
influencing interest rates for a given money target:
'I could hardly believe my eyes when I read, in the first paragraph of the
summary chapter [of the Green Paper "Monetary Control"], 'the principal
means of controlling the growth of the money supply must be fiscal policy -
both public expenditure and tax policy - and interest rates'. Interpreted
literally, this sentence is simply wrong. Only a Rip Van Winkle, who had
not read any of the flood of literature during the past decade and more on
the money supply process, could possibly have written that sentence.'
Friedman's reservations were also shared by other monetarist economists,
who supported monetarism in principle, but were dismayed to find that the
Thatcher government merely intended to continue the political monetarism of
the previous (Labour) administration, rather than undertake a radical
reform and implement monetary base control (a la Friedman). Many of these
initial supporters in the UK were also turned off monetarism by the savage
recession that accompanied the first two years of the Thatcher government.
In the UK case, it is also worth investigating why some key economists, who
had excellent monetarist credentials, were shunned in 1980 when they argued
that monetary policy was too tight. Equally, why monetary base control was
never implemented in the UK is a fascinating story, and is probably largely
the result of the vested interests of the UK banking system.
As for the US monetarist experiment under Paul Volcker - as another
contributor has already noted - this is a misnomer. Monetarism under
Volcker was also demand-side control of the monetary base. The Fed had
developed an equation for bank reserves and used it to forecast banks'
demand for reserves. They then altered interest rates by the appropriate
amount to bring banks' demand for reserves into line with the target for
reserves. Because of the lag before changes in the Federal Funds rate
affects banks' demand for reserves, the mechanism was bound to be unstable
and wild fluctuations in both interest rates and reserves could be
expected. Poole (1982) gives an authoritative description.
On a final note, there is often loose talk (and writing!) that describes
everything that Lady Thatcher did in the economic sphere as 'monetarist'.
This is simply not the case, and the term 'economic Thatcherism' or
'Thatcher's economics' is far better (although more clumsy). On the
economic front, the 1980s were a time when a cocktail of political
monetarism, supply-side economics and public choice theory was applied to
the UK economy.
Michael J. Oliver
Bates College
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