Henry Hazlitt, “Where the Monetarists Go Wrong” (1976)

The supplied file is a reprinted article and volume contribution by Henry Hazlitt, originally appearing in The Freeman. Its scope is Hazlitt’s sustained critique of Friedmanite monetarism, organized through topical sections on inflation, currency quality, velocity, price indexes, and political control of money. The central thesis is double-edged: monetarists are valuable anti-inflation allies because they insist that money matters, but their mechanical quantity theory and their proposed statutory rule for fiat-money growth are theoretically crude and politically dangerous.

The simplistic form of the quantity theory of money that they hold is not tenable; but they are overwhelmingly right in insisting on how much "money matters," and they are right in insisting that in most circumstances, and over the long run, it is the quantity of money that is most influential in determining the purchasing power of the monetary unit.

Hazlitt first distinguishes the valid insight that monetary quantity strongly affects purchasing power from the invalid claim that the relation is simple, constant, and proportional. Against the older quantity theory associated with Davanzati, Fisher, and modern monetarists, he argues that money cannot be treated as an algebraic counter automatically exchanging against a fixed stock of goods. His core conceptual move is to replace mechanical proportionality with market valuation.

The market value of money, like the market value of goods in general, is determined by supply and demand. But it is determined at all times by subjective valuations, and not by purely objective, quantitative, or mechanical relationships.

The article’s structure develops this claim step by step. In “Three Stages of Inflation,” Hazlitt argues that prices may first lag behind monetary expansion, then roughly track it, and finally outrun it when confidence collapses and people rush to spend depreciating money. The decisive factor is not the present quantity of money alone, but expectations about what government will do next.

So far as quantity is concerned, it is the expected future quantity of money, rather than the immediately existing quantity, that determines the exchange value of the monetary unit.

In “Quality Affects Value,” Hazlitt adds that the character of a currency—its issuer, credibility, redeemability, and political prospects—matters as much as its stock. Devaluation, abandonment of gold, and wartime currency collapse can affect prices before any new money is issued. The middle sections then attack the apparent precision of monetarist formulas, especially Fisher’s MV = PT. For Hazlitt, “velocity” is often an ex post explanation of discrepancies rather than an independent cause.

Strictly speaking, money does not "circulate": it is exchanged against goods.

This leads to his critique of the price “level.” Inflation’s damage lies not in a uniform rise of all prices, but in uneven changes among wages, debts, contracts, profits, and goods prices. That unevenness redistributes wealth, distorts calculation, misdirects production, and produces unemployment or malemployment. Hazlitt therefore rejects both indexing schemes and planned “creeping” inflation: once anticipated, inflation is built into interest rates, wage demands, and contracts.

The final movement turns from theory to institutions. Hazlitt reviews Friedman’s shifting preferred monetary-growth rules to show that no fixed percentage can be known in advance to stabilize prices. More importantly, once the rule is placed in legislation, it becomes vulnerable to electoral pressure. In recession or unemployment, politicians will demand faster money growth, and the “rule” will become a political bidding mechanism.

The fatal flaw in the monetarist prescription, in brief, is that it postulates that money should consist of irredeemable paper notes and that the final power of determining how many of these are issued should be placed in the hands of the government—that is, in the hands of the politicians in office.

The essay’s relevance lies in this fusion of hard-money argument, subjective-value theory, and suspicion of political discretion. Hazlitt does not deny monetary causation; he denies that fiat money can be made safe by a clever formula. The closing implication is that sound money requires institutional restraint stronger than a legislated growth target: the problem is not merely choosing the right quantity of money, but removing arbitrary monetary power from political hands.