restricted access Labels and Substance: Friedman's Restatement of the Quantity Theory
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Labels and Substance:
Friedman’s Restatement of the Quantity Theory

Milton Friedman opened his 1956 “Restatement” of the quantity theory by claiming that his article and the four other essays in Studies in the Quantity Theory of Money were part of a distinct oral tradition of the quantity theory at the University of Chicago. His claim created a historical controversy that continues even now, forty years later. It has involved Friedman’s fellow University of Chicago alumnus Don Patinkin (1969, 1973), his Chicago colleague Harry Johnson (1971), and former Chicago student David Laidler (1993, 1998a, 1998b), as well as Thomas Humphrey (1971) and George Tavlas (1997, 1998). 1 The subjects of this protracted debate have been the appropriateness of Friedman’s use of the label quantity theory for his monetary economics and the accuracy of placing his quantity theory in the Chicago “oral tradition.” Commentators have built their case for or against Friedman’s claims by comparing Friedman’s restatement of the quantity theory with the analytical approach of earlier Chicago economists, or with Keynesian liquidity preference theory, or with monetary economics at [End Page 449] Harvard prior to the Keynesian revolution. Likewise, they have compared Friedman’s policy advice to prior recommendations offered from Chicago and elsewhere.

In these comparisons, most of the historical work has been centered on the others rather than on Friedman, for example, depictions of Chicago economics in the 1930s or 1940s or of Harvard. This article redirects this attention to Friedman and the roots of his monetary economics research program. I will examine the background for his “Restatement” in his monetary economics research, his writings in other areas as they bear on his monetary economics, and his teaching prior to 1956. My aim is to see how the 1956 article fit into Friedman’s research and teaching programs as they evolved up to his writing the “Restatement.” This will illuminate the substance of Friedman’s monetary economics, providing a more substantial factual foundation than Friedman or his critics have used to classify his work through the 1950s.

Claims and Counterclaims

Friedman made his claim about the quantity theory and Chicago in the introduction to a collection of essays written by students in his Workshop in Money and Banking, which at the time was an innovative laboratory for teaching and research. Thus the immediate context for his claim included both his research and his teaching. He said that the quantity theory was an approach rather than a well-defined theory; that its content varied widely from one time and person to another; and that the quantity theory was beginning to reemerge from the disrepute into which it fell after the stock market crash and Great Depression. He saw the quantity theory as an alternative to the Keynesian income-expenditure approach. Friedman claimed that the University of Chicago was one of the few places where the quantity theory had not been discredited. There students continued to study and write theses on monetary economics through the 1930s and 1940s. Under Lloyd Mints and Henry Simons the quantity theory

was not a rigid system, an unchangeable orthodoxy, but a way of looking at things. It was a theoretical approach that insisted that money does matter—that any interpretation of short-term movements in economic activity is likely to be seriously at fault if it neglects monetary changes and repercussions and if it leaves unexplained [End Page 450] why people are willing to hold the particular nominal quantity of money in existence.

Friedman then presented a model of the demand for money that he suggested would give the “flavor” of the Chicago oral tradition and that served as an introduction to his students’ chapters. He followed the model with a suggestion of three features that might be used to identify someone as a quantity theorist. Quantity theorists would regard the money-demand function as stable relative to other functions that might be alternatives for explaining short-term behavior of income. They would also believe that the supply of money is not wholly determined by money demand. And they would not regard money demand as infinitely elastic at some low interest rate. He thought...