I think everyone know this Friedman's quote nowadays:

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output

However, things are not that simple. The US had emitted lots of money and has very little inflation. In some cases there's also a spiral effect. Some heterodox economists talk about lack of supply of goods too. And emission still applies only to the mid & long term.

To sum up, the questions would be:

  1. Can businesses be an important cause of inflation, or is it a pure monetary effect?

  2. In not-so-developed countries, there might not be much competition. Can that generate inflation?

Edited. Original question: Can anyone help me understand when that quote is true and when other factors should be considered too?

  • 2
    $\begingroup$ It could just be me, but this does read as: "please summarise the last 80 years of thinking on inflation & the money supply" which is rather broad. $\endgroup$
    – 410 gone
    Commented Nov 26, 2014 at 17:58
  • $\begingroup$ I'm disturbed by "very bad economist". It's not relevant to the question and having it here as a side note seems invective. Also: Which metric and notion of "good" are we using? Since it would likely derail the question, I removed that bit. $\endgroup$
    – FooBar
    Commented Nov 26, 2014 at 18:38
  • $\begingroup$ Besides that, I agree with EnergyNumber. Not only is the first part very broad, but its two separate questions stack together without reason. I feel that if the second question would become a separate question, it would not fall under the "too broad" problem. $\endgroup$
    – FooBar
    Commented Nov 26, 2014 at 18:40
  • 3
    $\begingroup$ I think you are misrepresenting what Friedman said. For sure, the quote you've excerpted does not imply that rapid money growth necessarily causes rapid inflation. Rather, Friedman's hypothesis is that it's not possible to have (rapid) inflation without the stock of money growing more rapidly than real output. $\endgroup$
    – Mico
    Commented Nov 26, 2014 at 20:29
  • 2
    $\begingroup$ If you separate your "question" into two (or more) questions, you might get some more specific answers. $\endgroup$ Commented Nov 26, 2014 at 23:26

4 Answers 4


The US had emitted lots of money and has very little inflation.

Are we talking about quantitative easing here? It depends how broadly you are willing to define inflation. Quantitative easing has caused asset price increases, just not consumer price inflation. Look at stock prices, which are about 50% overvalued according to some well regarded investors (e.g. Warren Buffett).

A common complaint about quantitative easing is that it is overly focused on investments and not focused enough on people (Wall Street over Main Street). It has been successful at propping up stock prices to the point that they have returned to their 2008 levels, when they were regarded as being in a bubble. Quantitative easing is heavily focused on investment assets. It doesn't seem to be getting money into the hands of consumers. Household incomes are still low.

In short, I don't believe that the current US recession has disproved Friedman's statement. The Federal Reserve has eschewed its traditional open market operations in favor of quantitative easing, which has affected investments without increasing the money supply available to consumers. A better question might be why quantitative easing is widely regarded as expanding the money supply when it doesn't seem to actually do that--at least not the kind of money supply whose expansion causes consumer price inflation.

Note: I'm sure that there is theoretical work disagreeing with Friedman's statement. I haven't tried to cover that. I was caught up in the questionable assertion that the US money supply has expanded without causing inflation. I suspect that this is too new for a consensus to have arisen. This is my thoughts on one possible explanation.

  • 1
    $\begingroup$ I don't think it's helpful to refer to asset price increases as "inflation". It's certainly not the type of inflation Milton Friedman had in mind when he made his famous dictum. $\endgroup$
    – Mico
    Commented Nov 26, 2014 at 20:55
  • $\begingroup$ Thanks for explanation about quantitative easing. Also thanks @Mico for your comment above "I think you are misrepresenting what Friedman said...". You're right about that :) $\endgroup$ Commented Nov 27, 2014 at 13:14

It obviously depends on who you ask, but many mainstream macroeconomists have basically dismissed the monetarist argument as incorrect and inconsistent with general economic theory. Here's a good break down of their arguments: http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/ (For the record, this is very close to what Krugman has argued as well, although his arguments have focused more on the ZLB issue as the primary reason why QE did nothing.)

But the easiest retort to Friedman's most famous work is that the money supply will never outpace the demand for money, simply because such a mechanism for forcing cash into the system does not exist. There are many reasons why banks and businesses might want to hold more cash. Uncertainty, expectations of deflation, rising prices...

In short, the idea that increasing the money supply causes inflation is based on some very strong assumptions (like a fixed velocity of money, the speed at which GDP will react to changes in the money supply, that there is some "natural" rate of GDP growth instead of it being completely endogenous, etc) which are probably not all true.

  • $\begingroup$ For the record, that article makes a lot of errors. The issue being misunderstood is the type of money being created - asset money/cash which mainly effects interbank liquidity, and liability money/bank deposits which can and does influence inflation. It has also been known since the 1930's that velocity of money does not affect prices btw. $\endgroup$
    – Lumi
    Commented Apr 21, 2015 at 15:28
  • $\begingroup$ I do not understand how the argument that the money supply "can never outpace demand". If I counterfeit 500 dollars and use that to buy a tv, are you saying I did not create inflation because those dollars were demanded and likely will just be spent faster anyways? $\endgroup$ Commented Dec 2, 2015 at 23:41
  • $\begingroup$ Friedman was well-aware that money supply growth does not necessarily lead to inflation. His theory of the Great Depression is that the Fed should have increased the money supply faster than it did. $\endgroup$
    – arsmath
    Commented Aug 29, 2018 at 14:24

Reading the answers above I think there is a confusion. FED does not really control the money supply in the economy. It only controls the monetary money. The majority of the stock that is available in the circulation is primarily determined by commercial banks. What we have seen recently is that the amount of credit issued by these banks is quite limited and not large enough to put inflationary pressures. More specifically, what QE does is it substituted commercial bank risky assets (e.g. mortgage backed securities) into hard cash, which is safer, hence the commercial banks are supposedly more willing to issue credit.

Regarding the question about other factors, one should consider inflation expectations. If for the past 10 years the inflation has been 2%, it is quite likely I will believe it to be the same, regardless whether it is recession or not. Hence such things as employee contracts and trade unions agreements agree upon that the next years wage increase will be 2% to mach the inflation. This translates to an increase in 2% in prices (just a crude example, but you can refer to P. Volker's fight with inflation in 1980s, when everyone was used to above 10% inflation). The point being is that people expectations about inflation are rather rigid, you can expand the money supply as much as you want, but it will not budge in the short-run.

  • $\begingroup$ Some clarifications. The Fed directly controls the monetary base which is M0 + deposits at the Federal Reserve. M0 != MB. They do not of course directly control broad money but have many tools that can great influence it. $\endgroup$ Commented Dec 5, 2015 at 2:10
  • $\begingroup$ @user2662680 Yes, you are right, thanks for spotting my mistake. $\endgroup$
    – Curious T
    Commented Dec 5, 2015 at 11:17

There actually is and has been a very good correlation between the money supply and inflation. The problem is that most people (including Friedman) who looked at this issue just considered narrow money (MB or M1). Broad money is much more important. Here is a graph with M3 and inflation:


The original poster asked: "1) Can businesses be an important cause of inflation or is it a pure monetary effect?"

We have to separate private businesses into two. Banks and non-banks. No, non-banks don't cause much inflation. Private banks on the otherhand cause the majority of our inflation (far outpacing other private companies and central banks). This is because banks are allowed to create money which in turn creates inflation. A more abstract way of looking at this is that banks engage in maturity mismatching by holding in their aggregate portfolios mismatched short term debt against long term assets. The short term debt can never be redeemed (becuause it held against long term assets), so the banks have created that which has no redemption value and only trade value (they've created liquidity/money).

If the original poster is interested in learning how the phenomenon works, I suggest reading the works of Murray Rothbard (much of which are free online).


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.