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<p>The article traces the long intellectual journey of monetary theory from the classical Quantity Theory of Money to today's interest-rate-centered central banking, and examines whether a money-growth-oriented perspective is experiencing a comeback.</p><p>The Quantity Theory — in its simplest form claims that a rising money supply leads to proportionally higher prices —has roots in 16th-century observations about New World silver flooding European markets. Irving Fisher later formalized it mathematically, while Wicksell's insights about interest rates foreshadowed modern policy rules. Keynesian thinking then displaced it after the Great Depression, emphasizing demand management over money supply for several decades.</p><p>Monetarism, led by Milton Friedman, revived the theory in the 1960s and 70s, arguing that inflation is everywhere and advocating rule-based money-growth targets. Many Central Banks, notably Switzerland and Germany applied this with success against post-1973 inflation. However, financial innovation in the 1990s destabilized the empirical link between money growth and prices, prompting most central banks to shift toward interest-rate rules — above all the Taylor rule, which adjusts policy rates in response to inflation and output gaps with no explicit reference to monetary aggregates.</p><p>The 2008 financial crisis and subsequent quantitative easing (QE) strained this framework. Despite massive balance-sheet expansion, inflation initially stayed low — but the post-COVID surge in money supply was followed by a sharp inflation episode that neo-monetarist economists, particularly Tim Congdon, argue vindicates the Quantity Theory's core logic. His updated version stresses broad money aggregates, monetary equilibrium, and transmission through asset prices and credit channels.</p><p>The article concludes that monetary theory moves in cycles: quantity-based thinking fades when interest-rate models perform well and returns when they falter. Systematic monitoring of monetary aggregates remains indispensable as a diagnostic tool — even if central banking is ultimately, as Jürg Niehans put it, as much an art as a science.</p>

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From the quantity theory of money to modern monetary policy

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  • 发表日期：

    2026年7月29日

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  • Erwin W. Heri

摘要

The article traces the long intellectual journey of monetary theory from the classical Quantity Theory of Money to today's interest-rate-centered central banking, and examines whether a money-growth-oriented perspective is experiencing a comeback.

The Quantity Theory — in its simplest form claims that a rising money supply leads to proportionally higher prices —has roots in 16th-century observations about New World silver flooding European markets. Irving Fisher later formalized it mathematically, while Wicksell's insights about interest rates foreshadowed modern policy rules. Keynesian thinking then displaced it after the Great Depression, emphasizing demand management over money supply for several decades.

Monetarism, led by Milton Friedman, revived the theory in the 1960s and 70s, arguing that inflation is everywhere and advocating rule-based money-growth targets. Many Central Banks, notably Switzerland and Germany applied this with success against post-1973 inflation. However, financial innovation in the 1990s destabilized the empirical link between money growth and prices, prompting most central banks to shift toward interest-rate rules — above all the Taylor rule, which adjusts policy rates in response to inflation and output gaps with no explicit reference to monetary aggregates.

The 2008 financial crisis and subsequent quantitative easing (QE) strained this framework. Despite massive balance-sheet expansion, inflation initially stayed low — but the post-COVID surge in money supply was followed by a sharp inflation episode that neo-monetarist economists, particularly Tim Congdon, argue vindicates the Quantity Theory's core logic. His updated version stresses broad money aggregates, monetary equilibrium, and transmission through asset prices and credit channels.

The article concludes that monetary theory moves in cycles: quantity-based thinking fades when interest-rate models perform well and returns when they falter. Systematic monitoring of monetary aggregates remains indispensable as a diagnostic tool — even if central banking is ultimately, as Jürg Niehans put it, as much an art as a science.