It is based on the idea the the velocity of money is constant. Monetarist advocated such a policy in the 1970's and Volcker tried it around 1980 and it a did not work so no one advocates it any more.
The idea you are referring to is known as the monetarist theory and the concept of the velocity of money. Monetarism is an economic theory that emphasizes the role of the money supply in determining economic growth and stability.
The velocity of money refers to how quickly money circulates through the economy. It represents the average frequency with which a unit of currency is used to purchase goods and services within a given period. In other words, it measures how many times a unit of money changes hands in a certain period.
The basic premise of the monetarist theory is that the velocity of money is relatively stable over time. Monetarists argue that, in general, an increase in the money supply will lead to a proportionate increase in the overall level of prices in the long run. Conversely, a decrease in the money supply is expected to result in lower prices.
During the 1970s, there was a rise in inflation, which led to concerns about economic stability. Monetarists believed that controlling the money supply growth rate would be an effective way to manage inflation and stabilize the economy. This approach, known as monetary targeting, involved setting specific targets for money supply growth and adjusting monetary policy accordingly.
In the early 1980s, Paul Volcker, who was the chairman of the Federal Reserve at the time, attempted to implement a monetarist approach to combat high inflation in the United States. The Federal Reserve significantly tightened monetary policy, aiming to reduce the money supply growth rate and, consequently, slow down inflation.
However, the outcome of Volcker's monetarist policy was not entirely successful in the short term. While inflation did eventually decrease, there were also adverse effects on the economy, including a period of high interest rates and a temporary recession. These consequences led to criticism of the monetarist theory and its practical implementation.
It is important to note that while monetarism and the idea of controlling the velocity of money may have faced criticism and evolved over time, they still hold some influence and have contributed to our understanding of monetary policy. Economic theories often undergo refinements and adjustments based on real-world experiences and new insights, and as a result, policies and approaches may change accordingly.
In summary, the monetarist theory and the concept of the velocity of money are based on the idea that the velocity of money is relatively stable and can be used to manage inflation and stabilize the economy. While the practical implementation of monetarism faced challenges, the theory has contributed to our understanding of monetary policy and its effects.