The term monetarism refers to an economic theory which centers around control over the amount of money in circulation.
The concept of monetarism stems from economic policies which favor control over the amount of money in circulation while minimizing government intervention. Monetarism is an opposing theory to supply-oriented Keynesianism in which government and political intervention are central.
Economies are best understood as cycles: Individuals make their skills and capital available to enterprises in exchange for salaries and interest. Enterprises use the available skills and capital to create goods and offer services which they then sell to individuals. Money acts as the medium for the transfer of salaries, interest and payment for purchases.
It is up to central banks to determine the amount of money is available within an economic cycle. According to monetaristic principals, the amount of money in circulation should grow at the same rate as the corresponding economy. However, when too much money is in circulation, the cost of goods rises to match the high supply of money. When this occurs on a broad scale, it is known as inflation. Too much inflation is harmful because it results in inefficient distribution of available resources, reduces purchasing power and favors borrowers at the cost of savers.
Monetarism is one of the most influential schools of thought in economics. The theory gained popularity in the 1960s through one of its most important proponents, Milton Friedman.
Friedman and other monetarists were convinced that free markets are self-regulating. They were also highly skeptical of government intervention in economics. From a monetaristic perspective, governments are only responsible to maintain the basic frameworks under which economies can function, and should not otherwise intervene in economies. Monetarism rejects any government intervention in economies. According to monetarists, government intervention by means of government spending and tax policies throws off the balance of supply and demand in free markets which results in economic instability.
A long-term success monetaristic theory is that it grounded the importance of price stability into economics as a whole. Maintaining price stability is now the primary goal of many central banks around the world, including the Swiss National Bank (SNB). The SNB aims to keep annual inflation rates to between 0% and 2%.
