Hamish McRae: Strategist whose ideas shaped half a century

Milton Friedman was the dominant economic mind of the second half of the 20th century. He gave the intellectual leadership that enabled the world to fight the runaway inflation and rising unemployment of the 1970s and 1980s and hence paved the way for the long period of low inflation and growth that most of the developed world, including Britain, is now experiencing. His support for the market mechanism (as opposed to government direction) as a guide for developing an economy also had considerable influence on Chinese economic policy from the late 1970s onwards and so in some measure he had a role in setting the groundwork for the present Chinese boom.

Friedman is often bracketed with Maynard Keynes - or in a sense set against him - as one of the two economists who had most influence on government policies. Keynes, working from Cambridge, emphasised the importance of fiscal policy, in particular the use of public spending to promote growth when the market had failed to do so. Friedman, working from Chicago, emphasised monetary policy and in particular the need to curb the growth of money supply if inflation was not to run out of control.

Actually the two would probably have agreed on much of their analysis. The primary distinction was the circumstances in which they were working. Keynes, a generation older, developed policies to cope with the disruption of two world wars, including the inter-war depression. It was a period when markets were unable to cope with the pressures that were loaded on to them. Friedman developed the policies to cope with the very different post-war conditions. In particular he tackled the economic disruption of the 1970s, when the post-war fixed exchange rate system, developed at the Bretton Woods conference in 1944 and in which Keynes had played a major role, broke down.

Fixed exchange rates had supplied a key discipline. When they were replaced with floating rates, governments responded to each downturn in the economic cycle by trying to pump up their economies with more public spending and by cutting interest rates. But this led to ever-higher inflation. Friedman saw that inflation in the region of 15 to 20 per cent a year would destroy the whole Western economy, and reshaped the monetarist theories that had been abandoned in the aftermath of the Second World War to cope with this.

The idea that if you wanted to control inflation you had to control the supply of money was adopted, explicitly or implicitly, by just about every central bank in the world, including the Bank of England.