(FORTUNE Magazine) – Many in Washington, on Wall Street, and in the media have proclaimed the death of monetarism. The obituaries rest largely on the divergence between money growth and inflation. We monetarists believe that the rate of money growth is the primary determinant of long-term inflation, and we have been predicting higher inflation for several years. But inflation is down, and some economists think it has been wrung out of the system entirely. If a central tenet of monetarist thought is no longer true, the critics ask, how can the theory survive? Monetarism is dead politically. But the wisdom that monetarist theory provides about the effects of various economic policies is as valid as ever. The perception that it has gone awry reflects oversimplification of monetarist theory by the press and by politicians who have always opposed the policies monetarists advocate. Monetarists never said that money is all that matters. Like most economists, we agree that inflation is determined by a thousand and one factors. But they are not equally important. The most important by far, the rate of growth of the money supply, determines what might be called the underlying rate of inflation, which is revealed over a long time. By controlling the rate of money growth, the Federal Reserve can hold underlying inflation around zero or raise it to hundreds of thousands of percent a year, as the German central bank did in the Twenties. But the thousand other factors, consisting of a wide variety of random events, can affect inflation temporarily. Their importance varies enormously from time to time, lifting inflation above or pushing it below the underlying rate. With random, powerful events influencing prices, there will never be a consistent, predictable relationship between money growth and short-run inflation. Most of these factors are temporary, but two longer-lasting ones have influenced inflation over the past 12 years. These are the changes in oil prices and in the strength of the dollar. The collapse of the dollar in the late Seventies lifted inflation above the underlying rate. By 1980 the falling dollar and the second oil shock had pushed inflation to nearly 10%, substantially above the underlying rate of about 7%. The same forces have worked in reverse in the Eighties. The drop in oil prices and the increase in the exchange value of the dollar drove inflation below the underlying rate, which is now around 7%. Monetarist predictions of rising inflation proved wrong simply because we are as bad as everyone else at predicting exchange rates and oil prices. The effect on inflation comes not from the levels of the dollar or of oil prices, but from changes in those levels. Changes in either direction -- driving inflation up or down -- eventually run their course. After more than four years of strength, the dollar reversed direction last year, and it is already pushing up inflation. We just can't see the effect on prices at the moment. That's because the free fall of oil prices has more than offset the weakening dollar's effect and has pushed the consumer price index down even further. We can rest assured that the decline in oil prices will not continue forever. When it stops, the underlying inflation will emerge with full force. . The temporary divergence between monetary growth and inflation does not invalidate the central monetarist proposition. The long-run association between money and prices, expressed by underlying inflation, still holds. Rapid money growth, which we have had since mid-1982, ultimately will result in matching inflation. Some economists, including some Fed governors, say that a change in the behavior of what is called monetary velocity has destroyed the usefulness of monetarist analysis. Velocity is the speed at which people spend money once they get it. Largely because of financial innovations, the velocity of M1 (currency plus checkable deposits) has increased an average of about 3% a year during the postwar years. Changes in velocity determine the amount of money necessary to support a given amount of economic activity at a given price level. If velocity rises 3% a year, it takes just 1% M1 growth to finance a 4% increase in real GNP with stable prices. THE CRITICS of monetarism note that velocity has declined over the past few years and is unpredictable from quarter to quarter or from year to year. They are right. But the argument doesn't destroy monetarism's usefulness. The decline in velocity occurred because spiraling inflation yielded to disinflation. Lower inflation makes it cheaper to hold cash balances, so people hold larger ones, thus bringing a decline in velocity. The same thing happened at the end of the German hyperinflation in 1923 and in Switzerland when that country shifted to a noninflationary monetary policy in 1973. But the drop in velocity is a one-time event that should not affect the long-term trend. There also is nothing new about the instability and unpredictability of velocity in the short run. Scholars, including monetarists, know that quarter- to-quarter changes in velocity are unpredictable. Some economists conclude that this instability loosens and possibly destroys any reliable connection between money and inflation. They are wrong. Because the trend in velocity is relatively stable over the long run, the fundamental relation between money and prices holds. Even so, Chairman Paul Volcker and others at the Fed use the instability of velocity as a reason to dismiss monetarist policy prescriptions. Most monetarists would prefer a policy of steady money growth at the rate consistent with stable prices and the long-term growth in real GNP. The Fed argues that it can do better with an activist policy of constantly adjusting / money growth to changes in economic conditions. The very unpredictability emphasized by the Fed actually argues against activist policy. A successful activist policy depends on detailed knowledge of those thousand factors that are temporarily affecting prices and velocity, and on detailed knowledge about the economy's short-run responses to policy changes. No one can ever know all that. And experience with flexible policy should convince anyone that manipulating money growth without that knowledge produces more problems than it solves. The Fed's flexible policy drove the U.S. economy into the Great Depression in the Thirties and into prolonged inflation in the mid-Sixties. YET MANY POLITICIANS and economic columnists have been calling for more Fed activism than ever before. All those appeals come down to asking the Fed to pursue a more inflationary policy in hopes of temporarily spurring economic growth. The arguments for pumping out more money can be wildly inventive. Take the oil situation. Many people have been arguing that the Fed can safely apply more stimulus now because the drop in oil prices reduces inflation. But many of those same people also wanted more stimulus when oil prices were rising in the Seventies. Back then they argued that faster money growth was needed to counteract the depressing effect that oil price increases were having on the economy. They apparently have one rule of thumb: whatever happens, raise money growth. The monetarist prescription of stable and predictable noninflationary policy is much more likely to foster sustained economic growth. But it has considerably less political appeal than an activist policy. Indeed, since it deprives political entrepreneurs of the chance to manipulate money growth for near-term benefits, it has no political appeal at all. That probably is the greatest reason for the political death of monetarism. It will remain dead at least until the consequences of its demise gradually emerge and inflation accelerates again. Unless the Fed changes its ways or we are blessed with another bout of extraordinary good luck, that should happen sometime next year.