Allan Meltzer responds to the article by Thomas Mayer and Patrick Minford, ‘Monetarism: A Retrospective’ that appeared in World Economics, Vol. 5, No. 2 (April–June), 2004, pp. 147–185.

When World War II ended, the United States took the lead in providing political stability, rules for freer trade, and international financial stability. The ‘Pax Americana’ worked extremely well. During the postwar years, more people in more countries increased their living standards by larger amounts than in any period in recorded history. In order to continue the global growth, increased liberty and human progress of the last 60 years, Allan Meltzer argues that new arrangements are called for to provide the public goods that progress requires. Developing these new arrangements is the major challenge to US leadership as the engine of world progress in the new century.

Japan has gone from very successful policies that promoted growth without inflation to a long period of slow growth, recessions and deflation. The Bank of Japan’s policies are a major reason for deflation. Although the Bank has purchased foreign exchange, it counteracts the inflationary effects of its purchases via sterilization. This forces deflation to continue. Currently, there is a ‘dialogue of the deaf’. The government wants faster growth but does not reform the banking system; the Bank makes bank reform a condition for ending deflationary policies.