F. A. Hayek, “Testing Time for Monetarism”

First published in The Times on May 31, 1980, and supplied here in a 2022 republication, Hayek’s letter to the editor defends the monetary explanation of inflation while warning against further inflation as a means of avoiding depression. Its three paragraphs move from a disputed empirical relationship, through an expectations-based explanation, to the costs of disinflation.

Hayek responds to Wynne Godley’s challenge to William Rees-Mogg’s simplified account of the relationship between money growth and rising prices. The editorial note explains that Godley regarded the breakdown of their correlation during 1975–1980 as evidence against monetarism. Hayek argues that prices rising faster than the quantity of money do not constitute the suggested contradiction:

It is an experience as old as inflation itself that when it accelerates prices begin to rise faster than the quantity of money.

The conceptual move is to distinguish changes in the money stock from changes in people’s willingness to hold it. Expectations of further price increases alter behaviour, so the monetary explanation need not imply an invariant proportional relationship between money and prices:

This is readily explained by the circumstance that as further increases of prices come to be generally expected, people try to reduce their cash holdings and the consequent increase of the ‘velocity of circulation’ magnifies the effect on prices.

Hayek then turns from explanation to policy. He judges that past inflation has probably already made depression unavoidable, and that even additional inflation can no longer prevent it. His prescription is stark:

It is bound to last as long as we reduce the rate of inflation and the only thing we can do about it is to get it over as fast as possible.

The letter thus separates the defence of monetary causation from any promise of a painless remedy. Its relevance lies in joining an expectations mechanism to a warning about inflation’s accumulated consequences. It offers neither a quantitative test nor a developed account of why depression becomes inevitable; those limits matter when reading its forceful recommendation for rapid adjustment.