JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This content downloaded from 139.184.14.159 on Tue, 29 Sep 2015 12:45:52 UTC All use subject to JSTOR Terms and Conditions DON PATINKINThe Chicago Tradition The Quantity Theory, And Friedman1 2 I MUST BEGIN THIS PAPER with an apology for being over a decade late; for I should have written it as an immediate reaction to Milton Friedman's by now well-known 1956 essay on "The Quantity Theory of Money A Restatement." 3 But the recent appearance of Friedman's International Encyclopedia article on the quantity theory4 (though, as will be shown in Part IV below, it differs in some relevant respects from the earlier paper) provides an appropriate, if tardy, occasion to raise some basic questions from the viewpoint of the history of monetary doctrine about the validity of Friedl This paper was written while I was visiting at M.I.T. during 1968 under a research grant from the National Science Foundation (NSF Grant GS 1812). I am grateful to both these institutions for making this work possible. I am happy to express my deep appreciation to Mr. Stanley Fischer of M.I.T. for his invaluable assistance at all stages of the preparation of this paper and particularly in the examination of the relevant literature. In addition, I have benefited from discussions with him and from his criticisms of earlier drafts. I am also indebted to my Jerusalem colleagues Yosef Attiyeh, Yoram Ben-Porath, and Giora Hanoch, whose thoughful suggestions have greatly improved the general organization of this paper, as well as the discussion of specific points. As usual, it is a pleasure to thank Miss Susanne Freund for her careful and conscientious checking of the final manuscript and its references. Needless to say, responsibility for the interpretations and views presented in this paper remain entirely my own.2 I would like to dedicate this paper to the memory of Miguel Sidrauski. His untimely death in August, 1968 was a great loss, not only to his family and friends, but to the economics profession in general and particularly to the development of monetary theory. Though I do not think Miguel had a strong interest in the history of doctrine, I hope that as a Chicago graduate he would have been interested in reading the final product of a work whose beginliings he witnessed. 3 In Studies in the Quantity Theory of Money, ed. M. Friedman [8], pp. 3-21 referred to henceforth as Quantity Theory I. In self-defense, I might, however, note that I have on previous occasions discussed in passing some of the points presented below, and that I have also emp. 81, n.8. See also the implicit criticism in Patinkin [29], p. 480b. See also pp. 60-61 below. 4 Friedman [10], referred to henceforth as Quantity Theory II. DON PATINKE is...

T he period since World War II has seen many instances-particularly in Latin America-of repeatedly unsuccessful attempts by governments to eliminate three-digit inflation, not to speak of hyperinflation. A frequent pattern has been that the governments in question adopted policies which at first achieved near-stabilization of the price level, but which then led to such political pressures that after a short time the governments resumed their expansionary inflationary policies. These failures, in turn, generated a lack of credibility of the government in the eyes of the public that further militated against the success of subsequent attempts to achieve stabilization (Bruno, Di Telia, et al., 1988; Bruno and Meridor, 1991).For this reason, Israel's 1985 stabilization program has rightly generated an extensive literature.1 Despite the failure of several earlier programs, within a period of two months, and with minimal adverse effects on employment and the real functioning of the economy, this program reduced the annual rate of inflation from close to 500 percent to less than 20 percent (corresponding, respectively, to average compounded monthly rates of 16.1 and 1.5 percent), and has maintained that situation until now (1992). The major purpose of this paper is to use this inflationary experience as an illustration of some of the simple truths of traditional monetary theory. At the same time, this experience also illustrates the advantages of a heterodox policy (that is, one that in addition 1 See, for example, Bruno

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