In the article “the Triumph of Monetarism,” the author Brad Long delineates the differences and similarities between monetarism and Keynesianism, arguing essentially that New Keynesianism is an implicit endorsement of monetarism because they both arise from the same foundations/assumptions.  We can understand New Keynesianism as asserting five major propositions.  1) Frictions within the pricing adjustment mechanisms cause business cycle fluctuations.  2) Monetary policy is generally better at stabilizing that is fiscal policy.  3) There is first a general long run trend, and business cycles are variations around that trend, rather than something completely different. 4) We should use policy rules, rather than being so idiosyncratic about decisions.  5) Stabilization policy will always be limited.  Monetarism, in its simplest form, says that the stock of money is most important determinant of interest rates and prices within the course of the business cycle.  However, the author spends the majority of this article explaining the variants of thought within the monetarist tradition, beginning with Irving Fisher. 

This is not simply Hume’s basic quantity of money theory, but rather the application of that basic model to function as a policy tool.  What was most significant about this “first monetarism” is not so much the theory itself, but rather the critiques and ideas that were born from the debate other “subspecies” monetarists like Keynes and Friedman.  In fact, monetarism of this sort was considered “useless” by Keynes, because it was only oriented to long run equilibrium, and “in the long we’re all dead.”

Chicago Monetarism was more sophisticated because it concentrated on the velocity money and the function of banks as multipliers of the money supply.  About the great depression, the Chicago school blamed the monetary and fiscal policies that “had “permitted banks to fail and the quantity of deposits to decline.”  Therefore, their policy prescription was to expand the money supply and run a big deficit.  There are a couple major cannons of Chicago Monetarism.  1) The velocity of money was not constant.  They believed this because inflation and deflation raised and lowered the demand for money (because the returns to investment go down and up).  During booms and busts people would spend or hoard respectively, causing a further variant on the velocity.  2) The control of the money supply was not straightforward or easy.  With a fractional reserve system and no deposit insurance, banks will be unsure about deposit demand and there will be huge swings in the deposit-currency ratio—these two things determine the money multiplier.  This means that aggregate indicators are important to old Chicago types.

Classical Monetarism is classical in the sense that we “classically” understand the world in terms of this school of thought.  Born from the Chicago tradition, this basically asserted that the government has some influence over spending and business cycle stabilization, as we see evidence for in the Volker Chairmanship during the 1970’s, when he ended inflation and facilitated growth using monetary policy (and some psychology).  The author also talks about “political monetarism,” but it’s boring and kind of silly, so I’ll end my post now. 

“The Triumph of Monetarism?” by J. Brad de Long, 1999 from Monetarism Webpage at http://cepa.newschool.edu/het/schools/monetar.htm