Economist A.W. Phillips published evidence of an inverse relationship between unemployment and wage inflation in the United Kingdom. Later economists and policymakers treated this relationship as a guide for managing demand—accepting a bit more inflation to get lower unemployment. This framework became a key reference point that Friedman and other monetarists later challenged.
Milton Friedman and Anna J. Schwartz published A Monetary History of the United States, 1867–1960, arguing that money supply changes played a central role in U.S. booms and recessions, including the Great Depression. The book strengthened monetarism as a research program and gave Friedman a historically grounded case against relying mainly on fiscal policy. It set the stage for a sharper critique of Keynesian stabilization policy in the late 1960s and 1970s.
Edmund Phelps argued that expected inflation matters for the inflation–unemployment relationship. His work implied that trying to hold unemployment below its sustainable level would push inflation higher as expectations adjusted. This idea directly undercut a simple, stable Phillips Curve and aligned with the direction of Friedman’s later argument.
As American Economic Association president, Friedman delivered his presidential address arguing that monetary policy has strong effects in the short run but cannot permanently buy lower unemployment. He introduced the concept of a “natural rate of unemployment,” implying that attempts to keep unemployment below that level would mainly produce accelerating inflation. This became a cornerstone of the monetarist challenge to Keynesian demand management.
Friedman’s presidential address appeared in the March 1968 issue of the American Economic Review. Publication broadened the reach of the “natural rate” argument and made it easier for critics and supporters to engage it in mainstream journals and classrooms. Over time, it helped shift professional debate toward expectations, credibility, and the limits of fine-tuning.
Arthur F. Burns became chair of the Federal Reserve Board in early 1970, in the opening phase of what later became known as the “Great Inflation.” Monetary policy in this period became a focal point for debate about whether inflation was mainly driven by excessive money growth or by other forces such as costs and supply shocks. The Burns era formed much of the real-world backdrop for Friedman’s monetarist critique.
UK parliamentary debates in the early 1970s used “stagflation” to describe the troubling mix of inflation and weak growth with high unemployment. The idea mattered because it clashed with a simple Phillips Curve story that inflation and unemployment move in opposite directions. The rise of stagflation made monetarist arguments—especially about expectations and monetary causes of inflation—more persuasive to many audiences.
President Richard Nixon announced the suspension of the dollar’s convertibility into gold, a key pillar of the Bretton Woods system. This “Nixon shock” helped accelerate the shift toward more flexible exchange rates and changed the international monetary environment in which domestic inflation was fought. The break added to economic uncertainty during a decade already facing inflation pressures.
Arab oil producers announced production cuts and an embargo against several countries, including the United States, during the Yom Kippur War. The resulting jump in energy prices contributed to higher overall inflation while also weakening growth. This kind of adverse supply shock made Keynesian demand stimulus riskier and strengthened arguments that inflation control required tighter monetary policy.
In his Nobel Prize lecture, Friedman returned to the inflation–unemployment debate and emphasized the role of expectations and the limits of keeping unemployment below its sustainable level. The lecture reinforced the view that inflation is not a long-run solution to employment problems, and that policy must account for how people adapt their expectations. It helped cement the monetarist critique in public and academic discussion.
Paul A. Volcker became chair of the Federal Reserve in 1979 with inflation a top economic concern. His appointment signaled that tighter monetary control would likely play a larger role in U.S. policy. This leadership change created the conditions for the Fed to move toward procedures more consistent with monetarist priorities.
On October 6, 1979, the Federal Open Market Committee agreed to place more emphasis on restraining monetary aggregates (such as M1 and M2) and less on targeting a specific federal funds rate. The shift reflected the belief that bringing inflation down required firmer control of money growth, even if interest rates became more volatile. This marked a major institutional turning point in the monetarist challenge to Keynesian-style fine-tuning and effectively closes the 1968–1980 arc by showing policy movement toward monetary restraint.
Milton Friedman and the Monetarist Challenge to Keynesianism (1968–1980)