Forty Centuries of Wage and Price Controls

Inflation Results When Money Increases Faster Than Output

(Sources: CPI, Monthly Labor Review; GNP, Economic Report of The President; Money Supply (M2), Federal Reserve Bulletin).

The above chart illustrates the close connection, since 1960, between the U.S. Consumer Price Index and the ratio of money to output using the broad M2 measure of money (M2 equals currency in the hands of the public and all bank deposits less large certificates of deposit). The close connection noted above has been traced back by economists through at least the last 400 years of recorded economic history.

For a full explanation of this and related phenomena see David I. Meiselman’s chapter “Worldwide Inflation: A Monetarist View,” in The Phenomenon of Worldwide Inflation, edited by David I. Meiselman and Arthur B. Laffer, (Washington, D.C.: The American Enterprise Institute, 1975).

See also Chapter Three (“Monetary Correction”) in Milton Friedman’s latest book, Tax Limitation, Inflation and the Role of Government (Dallas: The Fisher Institute, 12810 Hillcrest Road, Dallas, Texas, 75230,1978). This chapter was originally published in Fortune, July 1974.