The Recent Surge in Money Growth: What Would Milton Friedman Say?

The M2 money supply has grown by almost 40% since 2019. This number by itself raises the strong possibility that we have entered a new and remarkable era in United States monetary history. But what would Milton Friedman say? Friedman's most famous work, his Monetary History of the United States, co‐authored with Anna Schwartz, provides a narrative account of events that links volatility in the money supply to economic instability, particularly during the Great Depression of the 1930s. And many of his subsequent articles focused on the role played by excessive money growth in generating the inflationary, boom‐bust cycles of the 1970s. An examination of these writings leaves little doubt that Friedman would be quite concerned about the recent surge in M2. Toward the end of his career, however, Friedman saw that the tight statistical links between money, output, and inflation that formed the basis for his lifetime's work had started to weaken. These same shifting correlations led other monetary economists and Federal Reserve policymakers to downplay the importance of changes in the money supply and to emphasize instead the role of interest rates in transmitting the effects of monetary policy to the broader economy. This paper takes a fresh look at the data, extended through the present, with the help of insights gleaned from Friedman's writings. It finds that when the sharp reduction in the velocity of money is accounted for, the historical relationships between money, output, and inflation that Friedman originally discovered reappear, even in the most recent data. These findings confirm what surely would be Friedman's concern: that unless the Federal Reserve moves decisively to wind down and reverse its large‐scale asset purchases and raise its target for the federal funds rate, higher inflation will persist.