Does the Money Supply Still Matter? Yes!

Commentary Since mid-2022, most money supply measures have been contracting. Despite this, total spending continues to advance at a relatively strong pace. The apparent disconnect between money and spending raises a crucial question: does money still matter? In their book, A Monetary History of the United States to 1960, Milton Friedman and Anna Schwartz provide extensive evidence of how monetary policies had destabilized the economy. The authors urged the Federal Reserve to pursue a more cautious stable policies to promote stability. While Mr. Friedman’s preferred money measure (M2) has become a less reliable guide to monetary policy, alternative money measures show money continues to be a powerful force driving the economy. Unfortunately, Fed policy mistakes led to the financial crisis of 2008–09 and more recently to soaring inflation. To promote a more stable policy, the Federal Reserve should stop setting arbitrary targets and allow financial market to determine interest rates....