"Inflation is always and everywhere a monetary phenomenon" was Milton Friedman's slogan. It was revolutionary (or counter-revolutionary) when he said it in 1970, but it's now very widely accepted. After all, we make central banks responsible for keeping inflation on target. We do not make fiscal authorities responsible for targeting inflation (unless they happen to control monetary policy too). And we certainly don't give the Competition Bureau or Industry Canada responsibility for targeting inflation (which would make perfect sense if economists believed, as many did in 1970, that inflation was caused by monopoly power).
But nobody strictly believes the full quote from Milton Friedman. I bet hardly anybody even knows the full quote. "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." Nobody believes that last bit is strictly true.
What about my own slogan (though it might easily have been Friedman's): are recessions always and everywhere a monetary phenomena? And if so, in what sense?
Robinson Crusoe doesn't use money. If Robinson Crusoe has a bad harvest, his GDP will drop. It's conceivable he might even work less, if there is less to harvest. But is that a recession?
Well, you could call that a recession if you like. But it is missing one very distinctive feature that we normally associate with recessions.
In a recession, it gets harder to sell stuff, and easier to buy stuff. It takes more effort to find a buyer, if you want to sell goods or labour; and it takes less effort to find a seller, if you want to buy goods or labour. Most economists look at an economy like that and say that goods and labour are in excess supply. In the olden days, we would say there's a "general glut".
It's the excess supply of goods and labour that makes it a recession. The fall in output and employment is merely a typical symptom of that excess supply. Less stuff usually gets sold when there's less demand than supply.
In fact, I can imagine an economy having a recession even while output was rising, even rising faster than normal. An economy could experience a general glut, and at the same time have a massive oil discovery that causes its output to rise. Unlikely maybe, but I can't see why it couldn't happen. Just have the central bank halve the money supply at the same time as oil production skyrockets. That should do it. If the discovery is big enough, the increased oil production and oil exports could be quite enough to offset the decline in the rest of GDP.
Inflation is a rising price of goods in terms of money. Because money, understood as the medium of account, is what we price goods in. I don't see how anyone could sensibly talk about inflation without mentioning money.
A recession is an excess supply of goods in terms of money. Because money, understood as the medium of exchange, is what we buy goods with. I don't see how anyone could sensibly talk about recessions without mentioning money.
We live in a monetary exchange economy. Sure, some parts of the economy are handled by barter, like production within the household, and exchanges with close neighbours. But the barter parts of the economy seem to do OK during a recession. Maybe even expand when the monetary economy falls, so people are forced to rely on their own production of vegetables, or that of their family, friends, and neighbours.
It's the monetary exchange economy that suffers during a recession. It gets harder to sell stuff for money. It gets easier to buy stuff with money. There's an excess supply of other (non-money) goods, and there's its flip-side: there's an excess demand for money.
I don't see how anyone could sensibly talk about inflation without mentioning money. I don't see how anyone could sensibly talk about recessions without mentioning money.
When it comes to inflation, we are (nearly) all monetarists now. At least in accepting the shortened version of Milton Friedman's slogan. But very few (if any) economists would accept the full version of Milton Friedman's slogan. We turn a blind eye to the bit where he adds "... in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output". OK, we say, he was wrong on that bit, but still right nevertheless. We still say that central banks' monetary policy can be given full responsibility for targeting inflation. We recognise that a change in the money supply will change the price level, other things equal. We recognise that a change in some of those other things can also change the price level, holding the money supply constant. That's OK, we say, because it is the job of the central bank to do whatever is necessary by changing the money supply to offset any changes in any of those other things that would otherwise cause inflation to vary from target.
Similarly, if we accept that recessions are always and everywhere a monetary phenomena, that does not mean that changes in the money supply are the only thing that can cause a recession. That's OK, we should say, because it is the job of the central bank to do whatever is necessary by changing the money supply to offset any changes in any of those other things that would otherwise cause a recession.
There ought to be a symmetry here. We are all (quasi-)monetarists when it comes to inflation. We should all be (quasi-)monetarists when it comes to recessions.