Commentary
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Inflation Is a Monetary Phenomenon: The Fed Balance Sheet
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Draft commentary, awaiting the publisher. Prices rise broadly when money outruns goods, and the Fed controls the supply of money.
Friedman’s most quoted line is that inflation is always and everywhere a monetary phenomenon. People repeat it, and then they blame inflation on oil, shipping, greed or the last bad harvest. Those things move individual prices. They cannot move all prices together for years unless there is more money chasing the same goods.
The claim
A single price rises when that good gets scarce. The general price level rises when money gets plentiful. The Federal Reserve decides, within limits, how plentiful money is. That is why it, and not the weather, owns the long-run record on inflation.
The Fed publishes the proof of its own role every week. The balance sheet, reported in the Fed’s weekly balance sheet release and carried on the Gazette’s balance sheet page, shows how many securities the bank holds. When that total swells, the bank has created reserves to pay for it. When it shrinks, reserves leave the system. The line on that chart is not a mood. It is the bank’s own ledger.
The strongest case against
Critics say the link is loose. Money measures and prices have drifted apart in some periods, and a bigger balance sheet in the last decade did not bring the inflation many predicted. Reserves sitting idle at the bank are not the same as money spent in shops. That is a fair point, and it is why the claim is about money that reaches spending, not about any one line on a chart.
Why the claim still holds
The lag is long and the path is uneven, but the direction is not in doubt. Over many years, countries that let money grow faster than output got higher prices, and countries that did not, did not. The recent episode fits: a large expansion of the balance sheet, then a broad rise in prices, then a long effort to undo both.
The practical lesson is modest. Read the balance sheet before you read the excuses. If the bank wants to be judged on stable prices, it should be judged on the one thing it controls, and it should say plainly how much money it plans to supply.
This is the paper’s opinion, not a finding of the Federal Reserve.