The late, great Milton Friedman reordered thinking on the relationships between monetary policy, inflation and the economy. In essence, Friedman argued, and quite persuasively, that money supply matters. Ignore it or mismanage it and you risk trouble. Such insight had eluded the Federal Reserve early on, most notoriously during the Great Depression, which was exacerbated by the central bank’s monetary blunders.
Alas, Friedman put forth no formal treatise on the matter since he co-authored the monumental A Monetary History of the United States with Anna Schwartz in 1963. Friedman wasn’t exactly quiet in the decades since his 1963 magnum opus hit the streets. In columns, interviews with journalists and a variety of papers, the grand old chief of monetarism opined far and wide. But the paper trail is somewhat messy. In an attempt to bring some order to Friedman’s thinking during the last several decades, Edward Nelson, an economist at the St. Louis Fed, has sifted through the record and distilled what is arguably the essence of Friedman’s views since the early 1960s. Although his comments generally support his earlier findings on monetarism, Friedman wasn’t so intellectually rigid as to remain immovable when empirical evidence suggested otherwise. His thinking, in short, evolved, but mostly on tactics rather than strategy.
For the details, take a look at Nelson’s paper, Milton Friedman and U.S. Monetary History: 1961-2006 As a teaser, here are few of Milton’s observations that caught our eye in Nelson’s compilation:
“Direct control of prices and wages does not eliminate inflationary pressure. It simply shifts the pressure elsewhere and suppresses some of its manifestations. The only way to stop inflation is to restrain the rate of growth of the quantity of money.” –1966
“You can look around the world and find countries that have had very strong trade unions and no inflation… The fact is that there is little relation between trade unions and inflation.” –1970
“The best way to hold rates down in the long run is for the Fed to raise them temporarily.” –1973
“There is no way of slowing down inflation that will not involve a transitory increase in unemployment, and a transitory reduction in the rate of growth of output. But these costs will be far less than the costs that will be incurred by permitting the disease of inflation to rage unchecked.” –1974
“If you spend more on oil, doesn’t that leave you less to spend on something else? Why don’t other prices come down, or not rise as rapidly? It’s a complete fallacy to suppose that the rise in the price of oil, or of other commodities, has had any significant effect on inflation.” –1974
“If Mr. Carter tries to put his advisors’ policies into effect and succeeds in doing so—including getting the Federal Reserve System to speed up substantially the rate of monetary growth—there might be a sudden spurt in the economy and a quick reduction in unemployment. However, these good results would be temporary. By 1978 or 1979, inflation would be back in double digits and wage and price controls would be in place or in contemplation. By 1980 at the latest, unemployment would be rising sharply. As Machiavelli might say: what a way to face the 1980 election!” –1976
“[I]nflation is a lot like alcoholism. When you drink, the good effects come first, and the hangover comes the next morning. When an inflationary period [i.e., the launch of an easy monetary policy era] starts, spending goes up and employment rises along with it. By printing money at a faster rate you may be able temporarily to create an appearance of prosperity, but only so long as you fool the people. Once the public comes to realize what is going on, higher inflation means higher unemployment! Just look at the example of the U.S., Great Britain, and every other country.” –1977
“The high price of cars doesn’t cause inflation any more than a drop in the price of hand calculators causes deflation.” –1978
“The problem is not, as President Carter asserts, a lack of confidence. The problem is rather that the public is very confident that the government will produce inflation and will mismanage the economy. We do not need more confidence in bad policies. We need better policies.” –1979
“The use of quantity of money as a target has not been a success. I’m not sure I would as of today push it as hard as I once did.” –2003
“In my original support for a straight money target, I always emphasized that it was partly a case based on ignorance, based on the fact that we really did not understand sufficiently well the detailed relationship between money, income, interest rates, and the like to be able to fine-tune, that our goal should be to develop a detailed enough understanding so that we could do better than a simple constant monetary growth target. However, I believe still, as I did then, that constant monetary growth would produce a highly satisfactory price path, and, if it enabled you to get rid of the Federal Reserve System, that gain would compensate for sacrificing the further improvement that a more sophisticated rule could produce.” –2003