If the past is any guide, when the Federal Reserve meets next week, of one thing we can be sure. The Fed will continue to adhere to a strictly data-dependent monetary policy. It will also continue to ignore the unusually large swings in money supply growth over the past few years. By doing so, the Fed will be choosing to ignore two fundamental teachings of Milton Friedman.

The first of those teachings was that monetary policy operates with long and variable lags. By this, Friedman meant that the full effects of monetary policy generally occurred only after twelve to eighteen months had elapsed. The second teaching was that inflation is always and everywhere a monetary phenomenon. By this, Friedman meant that high inflation could not be sustained without the money supply increasing at a rapid rate. He also meant that prolonged deflationary periods, like the 1930s, were generally associated with a money supply contraction.

One reason the Fed should be paying much more attention to monetary policy’s........

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