Brief Review

Money Mischief: Episodes in Monetary History, by Milton Friedman, New York: Harcourt Brace Jovanovich, 274 pages, $19.95

Milton Friedman's latest book, mainly an integrated compilation of previously published pieces, will attract those who are neither terrified by monetary theory nor bored by monetary history. But the reader who hopes to gain greatly from the presented erudition and wisdom will have to screw his courage to the sticking point and pay close attention, for the seeming simplicity is always sophisticated and sometimes subtle.

Money is important to the working of an economy. For an economy to work well, the amount of money must be limited and not change abruptly. Through all history, monetary control was persistently provided by directly or indirectly linking money to a commodity. Now, the world is experimenting with control by "government restraint rather than [relying] on the cost of acquiring a physical commodity."

Even in the days of commodity-linked money, there was a role of circumstance and happenstance, of myth and misconception. The historical decisions to adopt a gold or silver or bimetallic standard, and to decree the governmentally pegged prices of the metals, reflected misinformation, illusion, faulty prediction, political tactics, and discoveries of metallic ores and of chemical processes of ore refinement more than rigorous, dispassionate economic analyses.

Monetary arrangements and policies which superficially appear very similar can be, Friedman illustrates, fundamentally different or generate quite opposite effects in different circumstances, with luck—good or bad—partly determining the circumstances. (In 1979, Chile pegged its currency to the dollar in order to control inflation, but disaster struck when prices of both the dollar and oil greatly rose; in 1985, Israel followed basically the same policy and prospered as the dollar and oil happened to fall.)

Conversely, the unfamiliar, even the seemingly bizarre, may not differ in substance from the customary. (We are amused by the islanders of Yap acknowledging as wealth a large, carved stone lost in an ocean storm and now resting unseen under water; but we attach value to gold, seen by few, stored in Fort Knox.) The apparently trivial act or obscure stipulation can carry great weight indirectly and in the long run, with political as well as economic repercussions. (A cavalier political decision by FDR to "do something for silver" led first to major deflation in China in the 1930s and then hyperinflation in the 1940s, both contributing to the success of communism.)

While monetary systems "just grow" and "cannot be constructed," they "can be altered and affected in all sorts of ways," so it behooves us to walk carefully and mind our monetary manners.

Friedman has long been dubious of gold standards and their institutionally pegged exchange rates. Still, he acknowledges the inflationary potential of "irredeemable paper (fiat) money," even if recent fiscal and financial market developments and changing public perceptions have made "inflation…less attractive as a political option." Here, he not only accepts a commodity standard as a legitimate arrangement, he evinces sympathy—on the criterion of long-term price level stability—for commonly maligned bimetallism, which could moderate swings in money supply by occasional alternation between de facto gold and silver standards.

But for today's world, he prefers floating exchange rates, even if, realistically, the float is "dirtied" by central bank intervention.

Any monetary system can either function well or fail. The possibility of monetary mischief will always exist. In economic activity, as in political activity, our performance and fate will be determined less by constitutional provision and institutional procedure than by clarity of mind and discipline of soul. Predominant presence or aberrant absence of qualities of character—commitment, courage, integrity, propriety, cultivated sense—will largely prevail.

In an age of common moral and intellectual unconsciousness, that is a sobering conclusion.