Money Mischief_ Episodes in Monetary History - Milton Friedman [20]
The conclusion is that substantial changes in prices or nominal income are almost always the result of changes in the nominal supply of money, rarely the result of changes in demand for money. (Chapter 8 discusses at greater length the key case of inflation.)
Conclusion*
Monetary phenomena have been subject to extensive study over centuries. A summary of some broad empirical findings from that research may help to focus the discussion of this chapter.
For both long and short periods there is a consistent though not precise relation between the rate of growth of the quantity of money and the rate of growth of nominal income. If the quantity of money grows rapidly, so will nominal income, and conversely. The relation is much closer for long than for short periods.
Over short periods, the relation between growth in money and growth in nominal income is often hard to see, partly because the relation is less close for short than for long periods, but mostly because it takes time for changes in monetary growth to affect income. And how long a time is itself variable. Today's income growth is not closely related to today's monetary growth; it depends on what has been happening to money in the past. What happens to money today affects what is going to happen to income in the future.
For most major Western countries, a change in the rate of monetary growth produces a change in the rate of growth of nominal income about six to nine months later. This is an average that does not hold in every individual case. Sometimes the delay is longer, sometimes shorter. In particular, the delay tends to be shorter under conditions of high and highly variable rates of monetary growth and of inflation.
In cyclical episodes, the response of nominal income, allowing for the time delay, is greater in amplitude than is the change in monetary growth.
The changed rate of growth of nominal income typically shows up first in output and hardly at all in prices. If the rate of monetary growth increases or decreases, the rate of growth of nominal income and also of physical output tends to increase or decrease about six to nine months later, but the rate of price rise is affected very-little.
The effect on prices, like that on income and output, is distributed over time, but it comes some twelve to eighteen months later, so that the total delay between a change in monetary growth and a change in the rate of inflation averages something like two years. That is why it is a long row to hoe to stop an inflation after it has been allowed to start. It cannot be stopped overnight.
Even after allowance for the delayed effect of monetary growth, the relation is far from perfect. There's many a slip over short periods 'twixt the monetary change and the income change.
In the short run, which may be as long as three to ten years, monetary changes affect primarily output. Over decades, on the other hand, the rate of monetary growth affects primarily prices. What happens to output depends on real factors: the enterprise, ingenuity, and industry of the people; the extent of thrift; the structure of industry and government; the relations among nations; and so on.
One major finding has to do with severe depressions. There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression. Fluctuations in monetary growth are also systematically related to minor ups and downs in the economy but do not play as dominant a role as other forces. As Anna Schwartz and I put it: "Changes in the money stock are ... a consequence as well as an independent source of change in money income and prices, though, once they occur, they produce in their turn still further effects