The Chicago Approach to the Business Cycle Is No More Than a Recrudescence of the Fisher-Hawtrey Purely Monetary Theory of the 1910s and 1920s

Along with the renewed emphasis on business cycles, the late 1960s saw the emergence of the  “monetarist” Chicago School, headed by Milton Friedman, as a significant competitor to the Keynesian emphasis on compensatory fiscal policy. While the Chicago approach provides a welcome return to the pre-Keynesian emphasis on the crucial role of money in business cycles, it is essentially no more than a recrudescence of the “purely monetary” theory of Irving Fisher and Sir Ralph Hawtrey during the 1910s and 1920s. Following the manner of the English classical economists of the nineteenth century, the monetarists rigidly separate the “price level” from the movement of individual prices; monetary forces supposedly determine the former while supply and demand for particular goods determine the latter. Hence, for the monetarists, monetary forces have no significant or systematic effect on the behavior of relative prices or in distorting the structure of production. Thus, while the monetarists see that a rise in the supply of money and credit will tend to raise the level of general prices, they ignore the fact that a recession is then required to eliminate the distortions and unsound investments of the preceding boom. Consequently, the monetarists have no causal theory of the business cycle; each stage of the cycle becomes an event unrelated to the following stage.

—Murray N. Rothbard, introduction to the 2nd edition of America’s Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2008), xxxii-xxxiii.