Russ Roberts (host of EconTalk podcast) claimed on his (2021-08-16) podcast:

Before he [Milton Friedman] came along, ... no one believed that inflation was mainly a monetary phenomenon.

His guest Nicholas Wapshott agrees:

until Milton, all Keynesians who ruled the ruled the roost, said that money didn't matter.

(Roberts has repeatedly made similar claims on his podcast.)

To me, the above claims seem like bizarre exaggerations of Friedman's influence and distortions of intellectual history.

My understanding is that economists had always been well aware of the importance of money on inflation.

One thing economists had not been quite as aware of was the important role of contractionary monetary policy in the Great Depression. Friedman and Schwartz (1963) brought this to most economists' attention.

Another thing was that some economists believed in was the Phillips curve trade-off between inflation and unemployment. Friedman (1968) (and others such as Phelps) helped to correct this.

What I don't think is true is that "no one believed that inflation was mainly a monetary phenomenon" or "all Keynesians who ruled the ruled the roost, said that money didn't matter".

  • 1
    $\begingroup$ "Its origins can be traced back to the writings of the philosophers Martín de Azpilcueta and Tomás de Mercado from the Salamanca School, and also Jean Bodin and David Hume... And in the 20th century Irving Fisher, one of the great economists of his time, formalised this notion by providing it with an analytical framework which became popular thanks to... Milton Friedman" A brief history of inflation as a monetary phenomenon $\endgroup$
    – Conifold
    Oct 28, 2023 at 2:57
  • 1
    $\begingroup$ For a more academic source, see Dimand, History of Monetary Economics. Ironically, Friedman was indebted not just to Fisher:"A key element of Friedman’s monetarism, money demand as a function of a small list of variables, had first appeared in Keynes’s General Theory." $\endgroup$
    – Conifold
    Oct 28, 2023 at 3:00
  • $\begingroup$ So, according to Conifold, the title "before Milton Friedman, no one believed that inflation was mainly a monetary phenomenon" is correct ... not because Friedman originated the idea, but because he popularized it. $\endgroup$ Oct 29, 2023 at 13:33

1 Answer 1


To me, the above claims seem like bizarre exaggerations of Friedman's influence and distortions of intellectual history.

My understanding is that economists had always been well aware of the importance of money on inflation.

I agree with you, and Russ Robert's statement, put in this way, is not only exaggerated but bluntly wrong (maybe he refers only to economists after Keynes).

The famous Milton Friedman's statement, that inflation is a monetary phenomenon, is a way to express the so-called quantity theory of money, also denoted as neutrality of money or by the expression money is a veil:

Nowadays "Veil of Money" and "Neutrality of Money" are shorthand expressions for the basic quantity-theory proposition that it is only the absolute price level of an economy, and not relative prices and the rate of interest, and hence real outputs, that is affected by changes in the quantity of money.$^1$

And, on the contrary of Russ Robert's statement, quantity theory/neutrality of money, was the most widespread monetary theory of Classical and Neoclassical economics, toward which Keynes addressed his criticism.

The quantity theory of money states that (in the long-medium run or also in the short run, according to different views) the quantity of money in the economy affects only the nominal variables, in particular the general price level, and not the real variables: in this sense, money is neutral.

The quantity theory of money, therefore, via the so-called equation of exchange , states that the general price level of goods and services is directly proportional to the amount of money in circulation (i.e., the money supply), and that the causality runs from money to prices. This implies that the theory can explain inflation, and that 'inflation is a monetary phenomenon'.

As a consequence, monetary policy, that is a change of the money supply by monetary authorities, is ineffective, at least in the medium-short run.

From a widespread textbook of macroeconomics:

[...in the medium run, real variables, such as production, unemployment or real rate of interest, are independent of monetary policy. The only variables that monetary policy determines are the rate of inflation and the nominal interest rate. In the medium run, a higher rate of growth of money leads exclusively to a higher inflation and higher nominal interest rates. The fact that monetary policy doesn't affect real variables [...] is defined as neutrality of money. $^2$


The fundamental pioneering work about the contemporary version of quantity theory (and a seminal work of monetarism) is the article by Milton Friedman, 'The Quantity Theory of Money. A restatement', 1956.$^3$

A review of the quantity theory of money has been made by Friedman in a subsequent article, Quantity Theory of Money, (1989). $^4$

Friedman opens his article with a quote from David Hume (1711-1796):

Lowness of interest is generally ascribed to plenty of money. But augmentation [of the quantity of money] has no other effect than to heighten the price of labour and commodities ... In the progress toward these changes, the augmentation may have some influence, by exciting industry, but after the prices are settled ... it has no manner of influence. […] (David Hume, 1752)

Therefore, it is clear also from Friedman’s article, that the quantity theory/neutrality of money, is a concept that existed well before Friedman.

In particular, the quantity theory was maintained by David Hume(1711-1796): a classical locus of these analyses is the Hume’s essay Of money , where he considers that money is neutral in the medium run, even if it may influence real variables during the transition.

‘Pioneers’ of the quantity theory of money are considered Thomas Mun (1571-1641) and Jean Bodin (1529-1596), who concentrated on the question of the abundance of gold and silver which he considered the principal and singular cause for the high prices of his era.

In the 16th century

Martin de Azpilcueta Navarro in Salamanca in 1556 and Jean Bodin in France in 1568 identified the inflow of silver from the Spanish colonies of Mexico and Upper Peru as the cause of the rise in prices and depreciation of silver throughout Europe.$^5$


But, after this more ancient works, the quantity theory of money became a widespread theory that synthetizes the monetary doctrine of classical, and neoclassical economists, well before Keynes, according to whom money is a simple medium of exchange, and does not affect real phenomena of the economic system., but determines the general level of prices.

Robert Clower writes:

“Hume’s essay provides a balanced example of what has become known as the quantity theory of money. Subsequent writers haven’t always formulated or interpreted this theory so wisely […] [Hume maintained that money doesn’t affect real economy in the long run, but can affect it in the short run, my note] and maintained that money is only a ‘veil’ […] This wrong version of Hume's theory has occupied a prominent place in the thought of traditional economists for a large part of modern history. This version underlies what we nowadays call the simple quantity theory, the central statement of which is that the total amount of means of payment rules the absolute level of monetary prices, but does not affect the real exchange ratios between the other goods. […]

Anyway, until the publication in 1936 of John Maynard Keynes’ The General Theory of Employment, Interest and Money, the most part of economists accepted without discussion that all the economic problems of practical relevance could be studied […] assuming that money is a ‘veil’ both in the long and in the short run.” $^6$

A classical economist that dealt with the quantity theory of money is the British economist Nassau W. Senior(1790-1864), in his essay On the Quantity and Value of Money (in Clower, cit.), where he analyzes the doctrine of another classical economist, John S. Mill(1806-1873).

Mill (in the spirit of Hume) made the famous statements that "the relations of commodities to one another remain unaltered by money" and that "there cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money". $^7$

Also the classical economist David Ricardo (1772-1823) made a presentation of the quantity theory in his essay The High Price of Bullion(1810) and in his work On the Principles of Political Economy and Taxation (1817).


Subsequently, the quantity theory of money was sustained by neoclassical economist as Fisher, Wicksell, Marshall, Pigou. The quantity theory was widespread and commonly accepted:

We can say that, until the 30s, the quantity theory was the theory of money for excellence, actually shared by everyone. This doesn’t mean that the consensus was unanimous: in fact, it was repeatedly criticized by many minor authors. But an alternative theory was never proposed, and all the leading economists agreed about one of the three versions of the quantity theory […]: the transactions approach, described in the work of Fisher The Purchasing Power of Money (1911); the monetary balances approach, formulated by Marshall, Walras, Wicksell, Keynes [before his own theory, my note]: and the income approach, that lead to the explicit introduction of the concept of velocity of money with respect to income in the Pigou’s work Industrial Fluctuations.$^8$

The equation of exchanges. The contemporary form of the so-called equation of exchanges, on which is based the contemporary quantity theory of money, was popularized by the American economist Irving Fisher (1867-1947) in 1911, in its work The Purchasing Power of Money.

Attempts to formulate mathematically the relations just presented verbally date back several centuries (Humphrey, 1984). They consist of creating identities equating a flow of money payments to a flow of exchanges of goods or services. The resulting quantity equations have proved a useful analytical device and have taken different forms as quantity theorists have stressed different variables. […]The most famous version of the quantity equation is doubtless the transactions version formulated by Simon Newcomb (1885) and popularized by Irving Fisher (1911):

$$MV=PT \qquad (1)$$

or, if we desire to distinguish currency from deposit transactions [here $V$ has a different meaning than in $(1)$, my note]

$$MV + M'V' = PT \qquad(1’) ^9 $$

where $M$ is the quantity of money in the economy, $V$ is the velocity of circulation of money, that is the average number of times a unit of money changes hand in the course of effecting a given period's transactions of currency, $P$ is the general level of prices, $T$ is the amount of transactions in the economy in the given period.

In the more usual modern form, the income version, introduced by Pigou (1927)$^{10}$, real income $Y$ instead of gross transaction $T$ is used:

$$MV=PY \qquad(2),$$

as national or social accounting has stressed income transactions rather than gross transactions. Equations $(1)$ and $(2)$ differ from each other because the volume of transactions in the economy includes intermediate goods and existing assets, in additions to final goods and services.

As such, equations (1), (1’) and (2) are simply identities, that say that the product of the quantity of money $M$ times its velocity of circulation $V$ (that is the money exchanged in a period) equals the value of exchanges of goods, services and securities in the period, that is the overall transactions times the weighted average of prices (or monetary income in the form $(2)$).

To sustain the quantity theory of money, and thus to consider money as a veil over real phenomena, proposing a cause-effect relationship between the quantity of money and the price level, Fisher had to assume that the velocity of circulation $V$ and the volume of trade $T$ are constant. He recognized that both fluctuate over the business cycle but they always tend to return to an equilibrium level. He writes:

We now proceed to show that (except during the transition period) the volume of trade, like the velocity of money, is independent of the quantity of money. An inflation of the currency cannot increase the products of farms and factors, nor the speed of freights or ships. The stream of business depends on natural resources and technical conditions, not on the quantity of money.[…]

We may now restate , then, in what causal sense the quantity theory is true. It is true in the sense that one of the normal effects of an increase of the quantity of money is an exactly proportional increase in the general level of prices.$^{11}$

Economists Alfred Marshall, A.C. Pigou, and John Maynard Keynes (before his The General Theory of Employment, Interest and Money, 1936) of the Cambridge school, took a slightly different approach to the quantity equation, focusing on money demand instead of money supply. They stated a version of the equation of exchange that is called the Cambridge Equation. This version of the equation is

$$M=k\times PY$$\qquad (3),

where $k$ is the fraction of income that people collectively wish to hold in the form of cash balances. Marshall’s $k$ is the reciprocal of the velocity of circulation $V$. $^{12}$

Equation $(3$ is aritmetically equivalent to equation $(2)$, but it rests on different ideas about the role of money in the economy.

Knut Wicksell(1851-1926)also sustained the quantity theory of money, even if he proposed a different transmission mechanism from money to the level of prices, called indirect transmission mechanism$^{13}$.


In conclusion, to sustain the quantity theory of money, neoclassical economists had to demonstrate that $V$ and $T$ (or $Y$) are constant, at least in the long run.

$V$ is usually considered as a reflection of payments habits, and therefore it is an institutional factor not subjected to change, at least in the short term. The key variable, however is the level of income $Y$ (or of transactions): the neoclassical economists thought that, at least in the medium-long run, the level of income is at its full employment level, so that it is a fixed variable, and a change in the quantity of money can therefore affect only the general price level $P$.

The belief that the economic system is able to adjust spontaneously toward full employment, and Say’s Law, which states that supply creates its own demand, so that failures of effective demand don’t appear in the economy at least in the long run, were the reasons why neoclassical economists believed in the quantity theory of money.

Keynes criticized the quantity theory, in particular because he maintained that it is not true that the economics system spontaneously adjusts to reach an equilibrium of full employment, but can rest in a state of unemployment. In this case $Y$ is not a fixed variable, but can change as a consequence of a change in the quantity of money (his most famous work where he exposes his theory of unemployment is the General Theory of Employment, Interest and Money 1936). $^{14}$

$^1$ Don Patinkin and Otto Steiger, In Search of the "Veil of Money" and the "Neutrality of Money": A Note on the Origin of Terms Author(s), The Scandinavian Journal of Economics, Vol. 91, No. 1 (Mar., 1989), pp. 131-146 (

$^2$ Blanchard O., Amighini A., Giavazzi F., Macroeconomics. A European perspective, Pearson, 2023, Chap. 9, sec. 2.


$^4$Friedman, M. (1989). Quantity Theory of Money. In: Eatwell, J., Milgate, M., Newman, P. (eds) Money. The New Palgrave. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-19804-7_1

$^5$ Dimand, R.W. (2010). Monetary Economics, History of. In: Durlauf, S.N., Blume, L.E. (eds) Monetary Economics. The New Palgrave Economics Collection. Palgrave Macmillan, London. https://doi.org/10.1057/9780230280854_24

$^6$ Clower R. , Introduction to Clower R. (ed.), Monetary Theory, 1969, Penguin Modern Economic Readings.

$^7$ In Don Patinkin and Otto Steiger, cit., p. 131.

$^8$ Blaug M., Storia e critica della teoria economica, Boringhieri, 1970, p. 755, (English edition: Blaug M., Economic Theory in Retrospect, Irwin-Homewood, 1968.)

$^9$Friedman, M. (1989), cit.

$^{10}$ Pigou A. C., (1927) Industrial Fluctuations. 2nd edn., London: Macmillan, 1929, reprinted, new York: A.M. Kelley, 1967.

$^{11}$ Brue l.S, Grant R.R., The Evolution of Economic Thought, Thomson, 2007, p. 311.

$^{12}$ Blaug M., ibid., p. 757.

$^{13}$ Blaug M., ibid., p. 760.

$^{14}$ Keynes J. M., The General Theory of Employment, Interest and Money, BN publishing, 2008 (first published by Macmillan Cambridge University Press)


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