The Monetarist view of history, as I noted in a recent post, is quite popular. The conventional wisdom on the Great Depression is that the Gold Standard forced contractionary monetary policies and the Great Contraction caused the recession. An open economy version of Milton Friedman’s story. The dominant view on the recovery from Great Depression, due to Christina Romer, is that the non-sterilized inflows of gold led to an increase of money supply. And the money supply brings the recovery. Forget the New Deal, that made things worse in the Monetarist alternative reality.
Krugman, that has otherwise done a great job of showing the anti-Keynesian bias in current discussions of the budget, also seems to have an inner Monetarist. He tells us in a recent post on taxes that: “the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)”
I guess we call endogenous money MMT (Modern Monetary Theory) now. If you print money and people spend, and there is capacity, there should be no inflation, but lower unemployment. Also, as people spend, firms tend to adjust capacity to demand. So the capacity limit is endogenous. The limit that most economies encounter is the balance of payments. As the economy grows and it imports more, eventually the current account deficit becomes too large, and depreciation fuels inflation.
But my concern is why even Krugman buys the notion that money causes prices. A graduate student told me that monetarism is a simple story that is ideologically convenient. That is true, but not ideologically convenient for progressives like Krugman. In his case and other progressives like him (there are even Marxists with Monetarist proclivities!), it seems, that the reasons have to do with the ability to convince people that certain events can only be explained by Monetarist ideas. That suggests to me that the power of institutions (universities, journals, press) that reproduce acceptable knowledge is incredible strong. Institution building should be at the top of the agenda for progressives.