There is probably no other proposition in economics that is as well established as this one. This is an extraordinary embarrassment to the economics profession, which not only joined with Friedman in blowing up the dollar's connection to gold, the unit of account, but also celebrated Friedman and his monetarism with a Nobel Prize. The Europeans are still trying to erect a Euro monetary system around the proposition that money's primary role is as a medium of exchange, which elevates the importance of income over wealth. Unless they fix the Euro to gold, or to a dollar that is fixed to gold, they will never succeed. Inflation occurs when the dollar or any other paper currency loses value relative to gold.
Deflation occurs when a currency gains in value relative to gold.
Here in 1980, the gold price was going through the roof and so were interest rates, yet the money supply the Fed was targeting in accordance with monetarist principles did not show any growth. In each case, the monetarists will say there is an explanation of why the correlations are all wrong. Those who assume gold as a constant, as a unit of account, will always find monetary inflations and deflations following gold up and down, with lags varying according to the maturities of debt in the economies involved. Return to top of page.