The influence of free-market economist Milton Friedman is due to his stature as a leading proponent of the theory of monetarism.

The theory holds that business cycles are determined primarily by money supply and interest rates rather than government fiscal policy. His theories first attracted national attention in the 1970s, when the combination of inflation and stagnant economic growth stagflation undercut the dominant Keynesian policies of the postwar decades. In recognition of his work on the role of monetary policy in the analysis of the course of business cycles and inflation, Friedman won the 1976 Nobel Prize in economics. An advocate of personal liberty, free markets, deregulation, and reduced government intervention in the economy, he has seen his ideas on issues as Social Security privatization, welfare reform, and school vouchers become part of national political debate. He advised U.S. presidents Nixon and Reagan, and U.K. prime minister Margaret Thatcher, who enthusiastically applied his theories of monetary control and governmental nonintervention to the ailing British economy in the 1980s. Friedman was best known for reviving interest in the money supply as a determinant of the nominal value of output, that is, the quantity theory of money. Monetarism is the set of views associated with modern quantity theory, its origins can be traced back to the 16th century and the School of Salamanca but Friedman's contribution is largely responsible of its modern formulation. He co-authored, with Anna Schwartz, A Monetary History of the United States (1963), which sought to examine the role of the money supply and economic activity in U.S. history. A striking conclusion of their research was one regarding the role of money supply fluctuations as contributing to economic fluctuations. Or, as Ben Bernanke, the Chairman of the Federal Reserve, pithily expressed it on the occasion of Friedman's 90th birthday in 2002: "Regarding the Great Depression. You're right, we did it. We're very sorry." Several regression studies with David Meiselman in the 1960s suggested the primacy of the money supply over investment and government spending in determining consumption and output. These challenged a prevailing but largely untested view on their relative importance. Friedman's empirical research and some theory supported the conclusion that the short-run effect of a change in the money supply was primarily on output but that the longer-run effect was primarily on the price level. Friedman was also known for his refinement of the consumption function, the permanent income hypothesis (1957). It is considered by some academic economists as the greatest application of his own methodological position (see below). Other important contributions include his critique of the Phillips curve and the concept of the natural rate of unemployment (1968). Each of these has implications for the effect of monetary and fiscal policy on output in the short run and the long run. Friedman's essay "The Methodology of Positive Economics" (1953) set the epistemological course for his own subsequent research and to a degree that of the Chicago School of Economics. There he argued that economics as science should be free of value judgments for it to be objective. Moreover, a useful economic theory should be judged not by its descriptive realism (hair color, etc.) but by its simplicity and fruitfulness as an engine of prediction. Friedman was the leading proponent of the monetarist school of economic thought. He maintained that there is a close and stable link between inflation and the money supply, mainly that the phenomenon of inflation is to be regulated by controlling the amount of money poured into the national economy by the Federal Reserve Bank; he rejected the use of fiscal policy as a tool of demand management; and he held

that the government's role in the guidance of the economy should be severely restricted. Friedman wrote extensively on the Great Depression, which he called the "Great Contraction," arguing that it had been caused by an ordinary financial shock whose duration and seriousness were greatly increased by the subsequent contraction of the money supply caused by the misguided policies of the directors of the Federal Reserve. "The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933.... Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government." Friedman also argued for the cessation of government intervention in currency markets, thereby spawning an enormous literature on the subject, as well as promoting the practice of freely floating exchange rates. Friedman's macroeconomic theories were soon displaced. His close friend George Stigler explained, "As is customary in science, he did not win a full victory, in part because research was directed along different lines by the theory of rational expectations, a newer approach developed by Robert Lucas, also at the University of Chicago." Friedman worked at the Treasury Department during World War II and played an important role in designing the United States withholding tax system. Before 1942, there was no withholding system; those wealthy enough to pay income taxes did so in one lump sum on March 15 of the following year. Friedman also supported various libertarian policies such as decriminalization of drugs and prostitution. In addition, he headed the Nixon administration committee that researched the possibility of a move towards a paid/volunteer armed force, and played a big role in the abolition of the draft that took place in the 1970s in the U.S. He would later state that his role in eliminating the draft was his proudest accomplishment. He served as a member of President Reagan's Economic Policy Advisory Board in 1981. In 1988, he received both the Presidential Medal of Freedom and the National Medal of Science.