Monetarists? They're barely heard from anymore. But monetarism was the rage for much of the 1980s, when inflation was soaring. Until former Fed chairman Paul Volcker resorted to monetarism, the central bank, as it does today, focused on what some describe as the "tone and feel of the market." That often centered on interest rates. The Fed pumped money into the economy when it wanted interest rates to come down, or made less money available when it wanted rates to rise.
But beginning in the late seventies, inflation was soaring and pressure grew to take a different approach. The monetarist school, led by the Federal Reserve Bank of St. Louis, and its president, Darryl Francis, gained popularity and the Fed came under pressure to disregard all subjective measures in designing monetary policy and to simply focus on the growth of the money supply.
As a result, interest rates soared to well more than 20%, causing great pain, including decimation of the thrift industry. But inflation was finally beaten. Since then, monetarism has been largely forgotten, and few people talk about the money supply any more. The world and the markets are back to a focus on interest rates.
But there remain diehard monetarists, and the St. Louis Fed continues to be their high church. The July/August issue of the St. Louis Fed's Review hailed the monetarists by honoring Darryl Francis and printing a series of articles by once-famous economists.
