Members of the Monetarist School, such as Steven Hanke and John Greenwood, have been vocal about their belief that the Federal Reserve is not supplying enough money, leading to a potential recession in 2024. They argue that the Fed’s contraction of M2 since March 2022 is too tight from a Friedmanesque perspective. Despite Milton Friedman’s admission that the quantity theory of money was flawed, his disciples continue to cling to this theory, much to his detriment.
The idea that government-created central banks must constantly adjust the money supply for economies to thrive seems to be a misconception held by many free-market believers. This belief implies that without central planning, economies would cease to function. However, the reality is that the absence of money supply should not be a concern for any individual or entity, as money serves as a medium of exchange rather than a basis for economic activity.
In contrast to the views of monetarists, the exchange of goods and services is the foundation of economic transactions, with money serving as a facilitator of these exchanges. The notion that a lack of money could cause a recession is fundamentally flawed, as the circulation of money is a byproduct of economic activity rather than a precursor. Production and trade inherently generate money without the need for constant intervention by monetary authorities.
The concept of a “money supply” controlled by central banks overlooks the natural relationship between production and money circulation. In a functioning economy, money is generated as a result of production and exchange, with financial instruments serving to facilitate these transactions. Monetarists’ focus on monetary policies as a solution to economic woes fails to address the underlying issues of production and demand within the economy.
Ultimately, the belief that government intervention is necessary to control the quantity of money in circulation reflects a misunderstanding of the relationship between production and money. In reality, individuals and businesses engage in economic transactions based on mutual trust and agreement on the value of goods and services. As long as production continues, money will naturally flow through the economy, highlighting the self-regulating nature of market dynamics in ensuring the availability of money for transactions.
