Can We Bank on the Federal Reserve?

Was Greenspan a bubble blower? Should Bernanke stay the course? Five experts judge the powers and perils of the world's mightiest central bank.

Brian Doherty from the November 2006 issue

(Page 6 of 6)

Friedman: I would prefer the Fed to follow a much simpler course: to take as its operating magnitude not the federal funds [interest] rate but the quantity of money. Pick whatever definition it wants—M2 [one of many measures of the money supply, including currency, savings, demand deposits, and certain liquid time deposits] is a good definition. I'd just as soon the Fed announce it will increase M2 by 5 percent per year, year after year, month after month. But they are not going to do that.

Reason: Why won't they do what you suggest?

Friedman: They don't want to become irrelevant. It's human nature. You would do the same thing if you were there, and I'm afraid even I would.

Reason: But it would be preferable to abolish the Fed entirely and just have government stick to a monetary growth rule?

Friedman: Yes, it's preferable. And there's no chance at all of it happening.