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By István Tóth, Economist and business analyst
In 1797, following a bank run triggered by fears of a French invasion, the British government suspended the convertibility of Bank of England banknotes into gold. This measure remained in force throughout the Napoleonic Wars and was only lifted in 1821. Roughly two years after the suspension of gold convertibility, between 1799 and 1801, England experienced a pronounced wave of inflation. As inflation became persistent, the first major monetary-theoretical controversy in the history of economics emerged, between the bullionists and the antibullionists. The bullionists held that inflation was caused by the excessive issuance of banknotes by the Bank of England, now freed from the discipline of convertibility, that is, by an increase in the quantity of money. The antibullionists, by contrast, attributed inflation to supply disruptions caused by wartime blockades, poor harvests, and other short-term, ad hoc factors. This early nineteenth-century debate returned in almost unchanged form more than a century and a half later. In interpretations of the inflation of the 1970s, the same two camps once again took shape. In 1971, the convertibility of the US dollar into gold was terminated, bringing the Bretton Woods system to an end and resulting in rapid growth in the quantity of money, not only in the United States but across the Western world. While modern bullionists regarded monetary expansion as the primary cause of inflation, their antibullionist counterparts blamed the OPEC oil embargo triggered by the 1973 Yom Kippur War and the subsequent surge in oil prices. Another half century later, a similar debate re-emerged over the interpretation of the inflationary wave of 2022–2023. One group of economists identified the sharp increase in the quantity of money resulting from fiscal and monetary stimulus measures adopted during the Covid crisis as the main driver of inflation, while the other pointed to the rise in oil and natural gas prices triggered by the Russia–Ukraine war and to other short-term, ad hoc factors.
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Tim Congdon’s Money and Inflation at the Time of Covid, published in 2025, fits squarely into this long-running controversy. The book interprets the recent global inflationary wave through the lens of developments in the quantity of money and argues in favour of a monetary explanation of inflation. Congdon is a well-known veteran monetarist who consistently builds on Keynes’s early monetary work, above all A Treatise on Money (1930) and A Tract on Monetary Reform (1923). The immediate precursor to the volume is Congdon’s The Quantity Theory of Money: A New Restatement, published by the Institute of Economic Affairs in 2024, which originally began as the opening chapter of the 2025 book. This background makes clear that the later volume is not merely an empirical analysis of the inflationary wave of 2022–2023, but also offers a comprehensive monetary-theoretical framework. Since Congdon had already outlined the main contours of this framework in earlier works, for example in his essay “Money, Asset Prices, and Economic Activity in the U.K.” in Money in a Free Society (2011), the new book primarily elaborates this existing theoretical apparatus in detail and applies it to the post-Covid inflationary period. As the author himself states in the opening sentence of the Preface: “This book is the culmination of my career as an economist.”
In the book, Congdon develops a critique of New Keynesian macroeconomics, the roots of which can be traced back to Keynes’s General Theory of 1936. According to Congdon, the fundamental error of Keynesian theory lies in the assumption that the only alternative to holding money for economic agents is the purchase of bonds. In other words, portfolio choice is reduced to two assets, money and bonds, while other assets, above all equities and real estate, are entirely excluded from the analysis. From this simplifying assumption grew John Hicks’s 1937 IS–LM model, which Keynes himself endorsed and which, thanks to Paul Samuelson, came to dominate textbook macroeconomics for many decades from the late 1940s onwards. In this model, changes in the quantity of money affect the real economy exclusively through the bond market: via bond prices and interest rates they influence investment, through that aggregate demand, and ultimately output; output, in turn, affects inflation depending on the degree of spare capacity. According to Congdon, the consequence of this narrowly conceived transmission mechanism was that the Keynesian tradition gradually evolved into an “interest-rate-only macroeconomics,” an approach in which understanding economic and inflationary processes is reduced to movements in the interest rate alone. At the same time, the Keynesian liquidity trap directly called into question the effectiveness of this transmission mechanism, with the result that income–expenditure models inspired by the General Theory shifted their focus towards consumption and government spending. Nevertheless, since the turn of the millennium both central bank research and university teaching have been dominated by the “three-equation” New Keynesian model, which has further radicalised this earlier theoretical narrowing. The traditional LM curve disappears, as the interest rate is no longer a market-determined bond yield but a policy instrument set by the central bank. The quantity of money is thus definitively excluded from macroeconomic thinking. In the modern model, the policy interest rate affects investment, investment affects output, and the output gap affects inflation, while money and bank balance sheets play no role at all. Congdon emphasises that in this hollowed-out, purely IS-based aggregate demand model, the monetary mechanisms operating through asset prices—particularly equity and real estate prices, which are of central importance in modern economies—are entirely ignored. As a result, the real relationship between the quantity of money and economic activity cannot be captured. In the twenty-first century, the analysis of developments in the quantity of money has, absurdly, been pushed out of central bank inflation analysis, along with the examination of bank balance sheets. One striking sign of the institutional dismantling of monetary analysis was the US Federal Reserve’s decision in March 2006 to discontinue the official publication of the M3 monetary aggregate (even though it remains reconstructible from other statistical sources). According to Congdon, it was precisely this conceptual distortion that made it impossible for central banks to recognise the monetary consequences of the fiscal expansion of 2020–2021 (the CARES Act, CJRS, and so on) and of asset purchase programmes, as well as the impending inflationary turning point. The same distortion explains why, even after the inflationary wave had unfolded, central banks were unable to interpret it coherently ex post: instead of a monetary explanation, they themselves primarily invoked familiar “antibullionist” ad hoc factors, above all rising energy prices and other supply disruptions. This is hardly surprising if central banks had abandoned monetary analysis and consistently assessed inflation developments from the perspective of vaguely defined “inflationary pressures” and “price shocks” emanating from labour and goods markets.
By contrast, as early as 24 March 2020, in an analysis published by the Institute of International Monetary Research, Congdon warned that the enlarged stock of money resulting from fiscal and monetary measures adopted in response to the Covid pandemic would, with high probability, lead to a surge in inflation once the pandemic subsided, in 2021–2022. Already at that time, Congdon put forward quantitative forecasts for the expected growth of the quantity of money in the major economies (the United States, the United Kingdom, the euro area, and Japan) and, drawing on a “wartime” analogy, emphasised that episodes of extraordinary public spending had historically been followed by inflationary periods. The fact that this forecast later proved correct is particularly striking in light of the fact that, at the same time, the majority of economists—including prominent figures such as Olivier Blanchard—were predicting deflationary years rather than rising prices, and central banks were still forecasting low inflation for the coming years even in early 2021. The fastest growth in the quantity of money since the Second World War, if it was considered at all, did not give rise to serious concern. At a congressional hearing in February 2021, Jerome Powell, Chair of the Federal Reserve, publicly rejected the inflationary significance of changes in the quantity of money, portraying the quantity theory of money as an outdated historical curiosity. In a less decorous style, Paul Krugman expressed the same “antibullionist consensus” in a May 2021 column in The New York Times, where he described monetarism as a “cockroach idea” and mocked the small number of experts who were warning of the inflationary risks associated with rapid growth in the quantity of money. As one of the world’s most influential economists, Krugman did not refute the relationship between money and inflation on empirical grounds, but treated it simply as a definitively superseded position to be intellectually discredited.
What, then, is the theoretical framework that, according to Congdon, made it possible for him to predict the inflationary wave of 2022–2023 already at the end of March 2020? Congdon’s answer is unambiguous: properly understood monetarism. In other words, Congdon’s framework does not rest on a novel insight, but on a consistent rethinking of the classic insights of monetarism, drawing on Irving Fisher, Keynes’s early work, and Milton Friedman, and adapting them to the wealth and financial structure of the modern economy in order to make the macroeconomic role of the quantity of money visible once again.
The fundamental insight of monetarism is that money, as a medium of exchange, has no independent price that can vary: the price of one pound is always one pound in nominal terms. For this reason, unlike other goods, changes in the demand for and supply of money cannot be equilibrated by a change in a single nominal price in some isolated market. If an imbalance arises between the demand for and supply of money, its resolution takes place through price changes across a vast array of assets, goods, and services, in distinct but closely interconnected markets. The adjustment process unfolds in such a way that, since transactions between economic agents cannot change the value of the money supply, it is the money demand that has to adjust: agents keep spending money they do not wish to hold in various markets, or withdrawing money they prefer to hold from those markets, until a market configuration emerges in which money demand corresponds to the given money supply. Put differently, when a change in the quantity of money disrupts monetary equilibrium, wealth portfolios and nominal income (nGDP) adjust to that change until economic agents ultimately hold as much money as they wish to hold, and wish to hold exactly as much as is collectively available to them. Friedman described this mechanism of restoring monetary equilibrium, originally set out by Irving Fisher, as the most important proposition of monetary theory. At the same time, this mechanism of monetary transmission is further refined by the recognition of the Cantillon effect: newly injected money enters the economy at specific points and then spreads outward over time through particular channels. From this follows the traditional monetarist critique of Keynesian economics: the theory unnecessarily overspecifies the transmission channel through which the quantity of money affects the real economy. Instead of considering a broad range of assets, it focuses exclusively on the bond market, with the result that changes in the quantity of money are assumed to operate not through asset prices in general, but only through bond yields and interest rates. As Congdon emphasises in his book, it is particularly striking that the Keynesian macroeconomic tradition ultimately narrowed into an “interest-rate-only macroeconomics” given that, at the end of Chapter 7 of the General Theory, Keynes himself explicitly described the Fisherian mechanism of monetary transmission—which determines both incomes and wealth—as the fundamental proposition of monetary theory. Congdon’s monetary-theoretical alternative is therefore not “interest-rate-first,” but rests on an “asset-first transmission.”
Without denying the direct effects of changes in the quantity of money on goods markets, Congdon argues that disruptions to the balance between money demand and supply first make themselves felt in asset markets and only subsequently spill over into markets for goods and services, that is, income-generating markets. In fact, Milton Friedman himself described the operation of monetary transmission in much the same way. Borrowing the terminology of Keynes’s Treatise on Money (1930), which distinguishes between two major circuits of money, the effects of changes in the quantity of money first appear in the “financial circulation” and only later are channelled into the “industrial circulation.” In other words, according to Congdon, the initial and primary arena of monetary adjustment is the broadly defined market for assets. In the case of monetary expansion, economic agents—predominantly, though not exclusively, institutional investors in the modern institutional environment—attempt to adjust their asset portfolios to the increased quantity of money, that is, they seek to deploy newly created money into equities, real estate, and other assets. Congdon places particular emphasis on corporate equities and real estate as the two most important types of assets, which carry orders of magnitude greater weight in modern wealth portfolios than the bonds highlighted by Keynesian theory. However, since the quantity of money is given for the financial circulation as a whole, these portfolio adjustment attempts cannot, in aggregate, reduce the money stock, but must necessarily lead to rising asset prices. In Congdon’s framework, growth in the quantity of money affects the real economy primarily through this asset price inflation: via wealth effects it stimulates consumption, via improved corporate balance sheets it encourages investment, and ultimately it increases aggregate demand and nominal income. Newly injected money thus “trickles down” from asset markets into goods and services markets, so that consumer price inflation appears only in the final phase of the monetary adjustment process, following growth in the quantity of money with a time lag. The blindness of high theory to the asset channel is all the more remarkable given that, for practitioners in financial markets, it is commonplace that the initial effect of persistently loose monetary conditions is rising asset prices. Congdon’s model implies that, when assessing inflation prospects, central banks should look beyond output gaps inferred from labour market “tightness” in the spirit of New Keynesian theory, and incorporate developments in asset markets as an additional source of information.
At the same time, Congdon has stressed throughout his career, and reiterates forcefully in his 2025 book, that analytically sound monetarism can only be a “broad money” monetarism. For the monetary disequilibrium caused by a growing quantity of money to be resolved through adjustments in wealth portfolios and nominal income, newly created money must actually appear in markets, that is, it must enter transaction flows and generate effective demand for assets, goods, and services. Transfers between different money balances held by economic agents, by contrast, have no direct real-economic effect: they do not reflect changes in money demand, but merely represent a rearrangement of the internal composition of the broad money balance. If, for example, a household transfers part of the money held in its current account to a savings account, the household’s money demand and expenditure do not change; all that occurs is a financial transfer between money balances. Nevertheless, such reallocations do cause statistical changes in the values of particular monetary aggregates (for instance, M2 falls while M3 remains unchanged). For this reason, only developments in broad money provide reliable information for monetary analysis about genuine changes in money demand. Monetarism is not a theory of substitution between different forms of money, but the recognition that a disrupted equilibrium between the demand for and supply of broad money is restored through adjustment by the economy as a whole, insofar as money stands in a relationship of substitutability with a wide range of investment and real assets, from equities and real estate to consumer goods. According to Congdon, forecasts that relied exclusively on base money or any narrow monetary aggregate (such as M2) and later proved incorrect—including Friedman’s own predictions based on narrow money concepts—contributed significantly to the subsequent discrediting of monetarism. This distinction also helps explain the widespread failure to anticipate Covid inflation, which stemmed from extrapolation based on the experience of the 2008–2009 financial crisis. After the collapse of Lehman Brothers, central bank balance sheets and base money expanded dramatically in the United States and other advanced economies, yet inflation failed to materialise. On this basis, many economists concluded during Covid that large-scale central bank asset purchases would likewise remain inflation-free. The parallel, however, was misleading. After 2008, commercial banks accumulated the additional central bank reserves generated by bond sales as excess reserves. When commercial banks sell bonds to the central bank, this is analogous to households transferring money from savings accounts to current accounts: in substantive terms, it is a simple money transfer. Moreover, since banks’ central bank reserves are not part of the money stock of non-bank economic agents, and cannot become so, they cannot appear in goods or asset markets and therefore cannot generate inflation. In short, in the post-2008 period, relevant broad money did not increase materially, even though base money rose explosively. By contrast, during the Covid period, large-scale fiscal expansion—in the form of wage subsidies, transfers, guarantee schemes, and public credit programmes—financed through the commercial banking system with central bank accommodation, and supported by asset purchases and liquidity operations, did increase the money balances of the non-bank sector, resulting in a substantial expansion of broad money.
In his book, Congdon also addresses a frequently raised objection to monetarism, namely that the velocity of money fluctuates from year to year. It is undeniable that velocity is not constant and tends to decline in crisis periods, including during Covid. Congdon nevertheless emphasises that, from the perspective of monetary transmission, it is not the level of velocity but its change that is of decisive importance. Empirical data spanning several decades show that year-to-year changes in velocity lie within a relatively narrow range, behave well statistically, and are strongly mean-reverting: large deviations do not persist but return to the average over time, as can be seen in the post-Covid period. This statistical regularity is in fact consistent with Irving Fisher’s insight—one of the core propositions of monetarist theory—that money demand is governed by stable habits that cannot be durably overridden by changes in the quantity of money. This also implies that a temporary collapse in velocity, even if substantial, cannot neutralise the effects of growth in the quantity of money: with a delay, new money eventually appears in markets, triggering adjustment in wealth portfolios and nominal income. If the expansion of broad money persistently exceeds the growth rate of real output, the increase in nominal income will manifest primarily in the inflation component.
The facts appear to support Congdon’s model. Empirical evidence shows that in several countries there was a statistically significant positive relationship between the historically unusually rapid growth of broad money observed in 2020–2021 and the inflationary wave of 2022–2023. This is particularly striking in economies such as the United States, the United Kingdom, Canada, Switzerland, and Japan, where the magnitude and timing of monetary expansion accurately predicted the delayed rise in inflation. These cases are especially instructive because, despite their differing institutional arrangements and inflationary traditions, they displayed similar patterns: where broad money growth was stronger, inflation rose to higher levels in 2022–2023. For example, in the United States, the United Kingdom, and Canada, annual consumer price inflation reached between 8 and 11 per cent in 2022, while in Switzerland and Japan, with more moderate monetary expansion, it peaked at a much lower 3–4 per cent. Crucially, however, Congdon’s transmission mechanism rests on the claim that “too much money” first “chases too few assets” and only subsequently begins to “chase too few goods and services.” This claim is easily testable empirically, and the post-Covid empirical patterns fit well with this asset-first transmission framework. Following rapid broad money growth, widespread increases in equity and real estate prices were observed in the second half of 2020 and throughout 2021. In the United States, the S&P 500 index had risen by around 70 per cent from its March trough by the end of 2020, while the annual growth rate of the Case–Shiller house price index remained persistently in the 15–20 per cent range in 2021. Similar patterns were observed in other advanced economies, such as the United Kingdom and Canada, where house prices and equity prices began to rise even before the inflationary wave.
While post-Covid developments fit well with Congdon’s asset-first, broad-money framework, the “antibullionist” explanation offered for the inflationary wave of 2022–2023—above all the rise in energy and food prices caused by the Russia–Ukraine war—proves far more problematic. First, it is difficult to explain how the same “external shock” could have led to markedly different inflation trajectories across advanced economies. Second, the timing does not fit: in many countries, consumer prices had already begun to rise in 2021, that is, before the outbreak of the Russia–Ukraine war in February 2022. Third, a war that broke out in the winter of 2022 can hardly explain why house prices in some regions of England rose by more than 20 per cent in 2020–2021, or why the S&P 500 index reached new all-time highs by the end of 2020. Even less clear is the economic mechanism through which a supply shock could generate rallies in equity and real estate markets. Beyond these specific objections, however, the “antibullionist” explanations of inflation in terms of ad hoc factors (war, drought, and so on) rest on a shared elementary error: confusing changes in relative prices with changes in the general price level. The price level, and thus the rate of inflation, is determined by the demand for and supply of money, not by the demand for and supply of individual goods. Changes in the latter affect only relative prices. Relative price movements, such as an increase in oil prices, cannot by themselves generate inflation unless they are accompanied by growth in the quantity of money. Clarity is further obscured by the fact that in modern economies these two distinct types of price change—relative price shifts and increases in the general price level—often occur simultaneously. In reality, the two global oil price shocks of the 1970s were also associated with different inflation trajectories across countries. Relative prices shifted everywhere, as oil-intensive goods and services became more expensive and others relatively cheaper, but the rate of inflation in each country nonetheless reflected the growth of the quantity of money. In Japan, despite the oil price shock and near-total dependence on energy imports, there was no sustained inflation because monetary growth was tightly controlled. By contrast, in the United States and the United Kingdom, rapid growth in the quantity of money resulted in high and persistent inflation.
Whenever inflation accelerates in a country or in the global economy, economists tend to split into two camps. One camp explains inflation primarily by a sudden increase in the quantity of money, that is, by monetary causes, while the other attributes it to some ad hoc real shock (war, pandemic, drought, bottlenecks), typically described in technical terms as cost-push inflation. By providing an empirically grounded and theoretically coherent monetarist interpretation of the global inflationary wave of 2022–2023, Tim Congdon’s 2025 book is unlikely to put an end to the centuries-old debate between bullionists and antibullionists. This, however, reflects less on the merits of Congdon’s book than on the nature of economic debates themselves, in which prevailing views are often shaped by changing historical circumstances and institutional consensuses rather than by the definitive scientific “victory” of a particular theory. For this reason, when the next inflationary episode arrives, the opposing camps are likely to line up once again. When that happens, the “bullionists” will be able to enter the fray equipped with a revitalised and modernised version of monetarism. Congdon’s work serves as a reminder that the quantity theory of money is not a historical relic, but a theoretical tradition that remains relevant as long as there are those capable of continually reinterpreting it in the light of contemporary economic reality.
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Congdon, Tim. Money and Inflation at the Time of Covid [ [link removed] ]. Northampton: Edward Elgar Publishing, 2025. ISBN 978‑1‑03532‑896‑3.

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