Friedman's Money

In your June 1979 issue, Mr. David Rhoads attributes to me views that I do not hold and never have held. He implies that, according to my views, the failure of prices to rise at the same percentage rate as a particular definition of the money supply contradicts the quantity theory of money. He implies also that I believe that a definition of money can be obtained on an abstract level.

The fact is that the quantity theory of money requires a stable demand function for money—not a stable velocity, not equality between the percentage change in the quantity of money and the percentage change in prices. Indeed, the typical pattern in an inflation is rather different. Let me quote from my book Dollars and Deficits, published in 1968:

Generally, when inflation has started after a period of roughly stable prices, people initially do not expect prices to continue rising. They regard the price rise as temporary and expect prices to fall later on. In consequence, they tend to increase their monetary holdings and the price rise is less than the rise in the stock of money. Then, as people gradually become wise to what is going on, they tend to readjust their holdings. Prices then rise more than in proportion to the stock of money. Eventually people come to expect roughly what is happening and prices rise in proportion to the stock of money. [P. 24]

In addition, in a book written jointly with Anna J. Schwartz (Monetary Statistics of the United States), we have discussed extensively the problems of definition. We point out that in our opinion the appropriate definition is to be determined empirically through the closeness of the relation of any given monetary aggregate and the variables that are of interest, rather than by such a consideration as whether one item or another is to be regarded as "a temporary abode of purchasing power."

Our own conclusion was to use M2 rather than M1, but that is subject to change as circumstances change. It may well be that one of the broader totals that Mr. Rhoads considers is preferable to either M1 or M2, but unfortunately his article gives no evidence that would enable one to judge whether that is the case or not. Certainly equality between percentage rates of growth is not such evidence. The quantity theory of money is part of a subtle and sophisticated body of economic theory. It is distressing to see it treated in so oversimplified a way.

Milton Friedman
Stanford, CA

Mr. Rhoads replies: It's difficult to see how Dr. Friedman could have read so much of himself into my article. My propositions and interpretations were spelled out before I even mentioned his name.

The references to Dr. Friedman's work were not intended to imply that my conclusions were his. And admittedly, the things I did cite may have been tangential, perhaps even contrary, to the main thrust of his work; but they've been helpful to me and I wanted to acknowledge them.…

If I oversimplified in my four-page article, it was the honest mistake of a simple man…and I confess to being that. I'm not so simple as to demand a perfect, unvarying correlation between two entities that are supposed to be associated in theory (e.g., money and prices)—and I'm unable to find where I might have implied such an expectation in my article. At the same time, I'm not so complex that I'd ignore a good correlation that just happens along. Mostly, though, simplicity merely makes me uncomfortable with official monetary measures that not only stray from a demonstrable association with prices, but that actually run counter to each other for long periods of time.

Apparently I'm not alone in my simple concerns. The Fed is now reporting up to M5; it's experimenting with an M1+; and it's exploring a large cluster of other new and improved money definitions. Private investigators have gone even further in their searches—some have stretched all the way to M12. And now the Fed's refusing to make any dramatic changes in the money supply until it's confident that it understands just what the money supply really is. Under these circumstances, a simplified version of monetary ideas for investors promised to be useful even if it tended to oversimplify "a subtle and sophisticated body of economic theory."

I didn't mean to imply any particular belief in abstract definitions of money. But I did want to acknowledge some of Dr. Friedman's excellent asides (written jointly with Anna J. Schwartz in A Monetary History of the United States) such as: "that common and widely accepted medium of exchange (money) is, at bottom, a social convention which owes its very existence to the mutual acceptance of what from one point of view is a fiction.…Money is a veil."

That idea alone could lead one to suspect that our monetary measures aren't working because they're measuring the wrong veil. People in the marketplace obviously expect their money to serve a store-of-value function whether we economists do or not. And if we're to understand market behavior, it makes sense to incorporate people's expectations in our studies.

Finally, I can understand how my article might disappoint someone who's looking for a balanced, academic dissertation on alternative money supply measures; but I make no apologies for not having presented one, since that's not what I set out to do. Instead, I had hoped to describe our investment environment—to present a systems overview of the interaction of debt, prices, and government meddling in the economy—in a way that would make that environment more understandable, manipulable, and less dangerous for investors.

On Debt

Of greatest interest to me in your financial issue [June] are the articles by Donald Kemmerer and David E. Rhoads, but for opposite reasons. Kemmerer's recommendation of dual currency is extremely valuable. This was also proposed by me in my Introduction to the Tripartite System: A Monetary Program for Americans (1974, 1975).

Rhoads's citation of the fact that the consumer price index has increased 46 percent in the last five years while the money supply as measured by M1 has increased by only 31 percent is significant and deserving of explanation. But his attribution of that discrepancy to debt is manifestly insufficient. Of greater importance is the public's anticipation of future inflation. A distinction must be drawn between monetary depreciation, which is the genus of which inflation (the untoward increase in the money supply) is but one species, though it initiates the whole process. Anticipation of future inflation is another species. Competition from other currencies and, where relevant, repudiation of the currency are also species.…

Rhoads's attempt to explain the discrepancy between money supply growth and the cost of living is unconvincing. For instance, he speaks of there being $4.41 of debt per dollar of real production. Even if we accept his figure, it is still true that most of the debt is payable over a term greater than the approximately five years necessary to reduce it to nothing.

Consider his breakdown of the debt in "Chart B." That part which does not involve an increase of the money supply has very little direct effect on the cost of living. Much of government debt is unfunded, and out of that mass, only current payments have much effect on prices. In nonfarm mortgages—of which residences, multi- and single-family, are major components—most of the increase in prices is attributable to anticipation of future inflation, as any realtor can tell you. Prices in the commercial and financial field depend on an adjustment between the income stream and tax considerations; whatever portion of the price stems from a discounted expectation of future appreciation rests almost entirely on an anticipation of future inflation. Much of the debt actually contributes to lower prices. Consumer debt very often results in lower unit prices; counting on it, automobile manufacturers can expect larger sales volume than otherwise, thereby securing the efficiencies of mass production. Corporate debt provides for long-term investment in modern plants and equipment which tends to lower unit prices, despite interest payments.

This does not mean that the mountain of debt cannot collapse. Of course it can. A severe enough energy crisis can (and I believe will) do the job of disabling America, with or without the debt.

Peter F. Erickson
Portland, OR

Not Fond o' Fonda

The Hazlett article [July], revisiting Jonestown in all its ghastly horror, stated its theme of Socialist glorification and communal bliss, only to be repudiated by the "personalities" who gave Jones his public endorsement. Not enough stress was placed on the fact that over 275 children were delivered by the state of California into this madman's hands through its system of guardianship and state caretaking. The answer to the liberal's cry, "We can't let them starve!" has been answered. No, the State can ship them off to Guyana where they will be fed cyanide.

Jane Fonda has much to contemplate: her support of Viet Cong satraps has caused American soldiers to be tortured when they did not lick her boots. Her involvement in the greatest Energy Lie of the 20th Century, Three Mile Island, will lower the standard of living of hundreds of thousands of people, if propaganda-filled congressmen are stupid enough to heed her lies. But the Fonda endorsement of Reverend Jones, probably the most insane paranoid to hit California since Charles Manson, will be a testament to her skill of character analysis.

That's three strikes, Jane. You are out.

Howard McConnell
Evanston, IL

How Movements Move

Murray Rothbard may be the leading libertarian theorist and system builder, but he can be decidedly wrong about important issues. In his June Viewpoint he argues that (1) ideas have the power to move mountains, (2) but such ideas must be embodied in a self-conscious movement, and apparently (3) self-conscious movements can move mountains. He extends this argument to concrete applications in Nicaragua and Iran. I believe that his notions in this article about social transformation are doubtful at best, that his argument about the power of ideologically self-conscious movements is misleading and potentially dangerous, and that his applications of these ideas to modern historical analysis are obviously wrong.

Analysis of the moving forces in history is a fascinating, but always speculative, venture. The more interesting efforts trace specific phenomena or motivating factors throughout certain periods, i.e., the supply of money, technology, spirituality, incidence of liberty, etc. Rothbard is not original in his insistence that ideas have consequences, but his revelation that embodiment in a self-conscious movement is necessary seems unsupported by historic example. Specific self-conscious movements have achieved results, but their independent importance in history is insignificant. If the results are at all memorable, it is because of their relation to a greater force or their resistance to a weakening institution or tradition. The consequences of Adam Smith's or Charles Darwin's ideas, on the other hand, were not effected through self-conscious organizations.

Rothbard's emphasis on the importance of self-conscious movements in history is authoritarian and Leninesque. Libertarians who do not work with the Libertarian Party and those with peculiar interests, such as with space technology, may someday be branded "revisionists" or distractive to the "self-consciousness" and be chased out for not following the party line.

It is unclear to me how movements can be truly self-conscious. As an example, the American revolution involved self-interested militia whose goals were not really common but simply individually consistent. They were not uniting to obtain liberty as an economic public good; they were individually seeking to improve their own lives. They (we) were fortunate to have had a few moderately libertarian leaders, but the militia man in the snow probably did not "hold these truths to be self-evident.…"

Rothbard's applications to recent history were wrong before they went to press. The hapless Nicaraguan coalition that lacks "a positive idea and unified leadership" were threatened today, by a Carter lackey, with OAS intervention. In Iran there has been no mountain moved. The shah has merely learned what King George learned in 18th-century America: piecemeal liberalization, in lieu of absolute oppression, can get out of hand.

Bryan Bernstein
Zionsville, IN

DC-10 Prescience

In these days of the DC-10 flap…Thanks for a soundly researched, well-written, and timely article on the FAA [Jan.]. Bob Poole's piece is absolutely first-rate!

Don Cochran
Honolulu, HI

How Could You, Reason?

Regarding "Unattachment" in the July issue: I was appalled to find an article in REASON which called for more State activity in our lives. At first I thought it was a joke, but the author's conclusion even called for President Carter to appoint a commission to study how to solve our problem of unattachment.

I don't need REASON to read of such socialistic schemes—I can read of it in most other media.

Any further articles that call for the same or more government in our lives will surely cause me to cancel my subscription.

Jerry W. Richmond
Ramona, CA

The Editors Reply: We thought it was obvious that Charles Maling's article was a satire on government meddling to "solve" unemployment.

Don't Strike—Quit

I enjoyed Ms. De Soubiese's article, "Surviving the Blackboard Jungle" [May], but I disagree with her on two points. First, a strike is not the only weapon teachers have. My wife and I were public school teachers for several years, and we experienced exactly the same agonies as Ms. De Soubiese. But we didn't strike, we quit. We acquired different job skills and found a different way to earn a living, in the private sector of the economy, I'm proud to say. Consequently we have no sympathy for a teacher, or anyone else, who hates what he's doing but continues to do it.

Second, calling the students animals is unforgivable; it's an insult to animals. Seriously, animals generally behave quite rationally, but there is very little rational behavior in a public school. I prefer to call the students barbarians. However, this does great injustice to some of the students. There are a few, albeit sometimes very few, who are gentle, civilized individuals.…They cope as best they can, which means many of them finally relent and join the barbarians. The moral and intellectual rot spreads.

Now that we've heard about the plight of the teachers, how about an article devoted to the plight of the students? Believe me, it's a true horror story, and the libertarian movement had better pay attention to it. I cannot conceive of any greater obstacle to liberty than the effects the public schools are having on the children.

Rick Maybury
Roseville, CA

Moral Truths

Seldom has REASON published an article which so brilliantly portrays the truth of reality as does "Surviving the Blackboard Jungle" [May]. Concentrating on the essence of public education, Ms. De Soubiese destroys the platitudes of the "experts," exposing the lies they use to control the educational system. Her article has far greater implications for individuals interested in the pursuit of Truth, however; for in whatever endeavor one participates in pursuing one's goal, one must "never fail to make a moral judgment—it's the only way to remain sane."

I do have one criticism of the article, for "society" will never do anything about the "problems" discussed, and as a "writer/teacher" Ms. De Soubiese can do "very little"; but as human beings who desire to pursue the perfection of our species we can accomplish immense achievements in education and all areas of importance to humans. Accepting the false idea that "society" can somehow recognize a problem will prevent individuals from acting to improve their lives.

Only by making moral judgments in every area of one's life will individuals be able to effectively combat the prevailing beliefs in America today. Only if individuals in every walk of life consistently identify moral truths will it become clear to all that, as Tibor Machan declares in his June editorial, "Altruism has nothing to give it intellectual support." Indeed, it is a false idea which is exposed when we join with thinkers like Ms. De Soubiese and act upon our observations of reality.

James W. Henderson
Chicago, IL

Teachers Should Quit

In this free land, Theresa Hale De Soubiese can quit and go into more productive work than what she covers in "Surviving the Blackboard Jungle" [May]. Going on strike is a cop-out. She wants to keep her profits without taking the burdens.

I hope you didn't publish the article to tell us how savage are some schools? Everyone in government, including everyone in the public schools, takes his profits from the rest of us by force, at the point of a gun. He passes mandatory attendance laws to maximize his profits, since it is evident that such laws do not improve education at all. More than half of his victims get little or no education, according to the US Office of Education's 1976 report, but are forced to sit for a dozen years having useless syrup poured over them hoping some will stick.

Why, then, should the slaves not rebel? They are being taught that they have the right to rob others for their educations, clothing and food, fun and games—why should they not just attack everyone if they enjoy it? Isn't this a free country?

The obvious response is that the teacher should quit and get into other work. If enough quit, the message will get through. To stay on under these conditions marks the complainer as a liar, since she stays there and thus the work is not intolerable.

Thomas S. Booz
Plantation, FL