Was Friedman Wrong?

Empirical Validation and Contradictions in the U.S. Context

The Quantity Theory of Money (QTM) remains one of the most debated frameworks in monetary economics, particularly in the context of the U.S. economy. This report synthesizes historical evidence, recent empirical data, and theoretical critiques to evaluate the theory’s validity. While QTM’s core proposition — that the price level is proportional to the money supply under stable velocity and output — finds support in long-term trends, its explanatory power diminishes during periods of financial crises, structural economic shifts, and unconventional monetary policies. The U.S. experience since the 1970s reveals both strong correlations and notable deviations, with the Great Financial Crisis of 2008 serving as a critical case study in the theory’s limitations. Emerging markets further illustrate how sovereign risk and external shocks complicate the money-inflation linkage, even in economies integrated into global financial systems.

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Introduction

The Historical Foundations of the Quantity Theory of Money

Theoretical Framework:

The QTM, formalized as MV = PT , posits that the price level P adjusts proportionally to changes in the money supply M, assuming constant velocity…