George Tavlas on the History of Monetarism | Capitalism and Freedom

Quick Overview

George S. Tavlas discusses the history of monetarism, emphasizing that the failure of central banks to actively manage money supply and interest rates during periods of high inflation, particularly in the 1970s and early 1980s, led to the eventual adoption of the Taylor Rule and a greater focus on inflation targeting by central banks, even though he notes his own early work on the topic was initially rejected by the Journal of Political Economy.

Key Points: George S. Tavlas served as an alternate on the Governing Council of the European Central Bank from 2013 to 2020 and was previously an advisor to the Bank of Greece during the Greek debt crisis (2008-2015). Tavlas's early academic work in 1972 on the history of monetary thought, which favored flexible exchange rates over fixed ones, was rejected by the Journal of Political Economy editor, who was an advocate for the Chicago school of monetarism. The primary lesson from the Eurozone crisis is that countries must maintain their own fiscal policies, as the lack of fiscal union made the monetary union vulnerable to crises like Greece's. The failure of central banks to actively manage money supply (M3 growth) and interest rates during the high inflation of the 1970s and early 1980s demonstrated the limitations of pure monetarism. The subsequent focus shifted to the Taylor Rule and inflation targeting as the primary tools for central banks to manage the economy, moving away from strict money supply rules. Tavlas notes that Volcker's Fed, unlike some earlier monetarists, correctly applied active monetary policy to bring inflation down during the late 1970s/early 1980s.

Context: This interview features George S. Tavlas, Distinguished Visiting Fellow at the Hoover Institution, discussing the history and evolution of monetarism in economic policy. Tavlas shares personal anecdotes from his career, including his experience at the Bank of Greece during the Eurozone crisis and his early academic struggles to publish work critical of pure monetarist doctrine, setting the stage for a broader discussion on central banking tools and historical economic challenges.