Are We All Friedmanites Now?

The Fed is using Milton Friedman's theories to justify gigantic interventions in the world market.


One year ago, I argued in Reason that Milton Friedman's writings on the Great Depression inspired the Federal Reserve's response to the current economic crisis. Friedman held that artificially induced inflation would have prevented the ordeal of the 1930s, so I inferred that Fed Chairman Ben Bernanke's implicit goal is likewise to ramp up inflation as a cure to our present ills.

A year later, the Fed is beginning to make that goal explicit. Over the past few weeks, Bernanke and other Fed bigwigs have been dropping conspicuous hints that they plan to boost inflation and pump another round of conjured-up cash into the economy. One proposal is to inject $100 billion per month. It's being called Quantitative Easing 2 (QE2).

But why should the sequel be any more compelling than the original, which cost over $1 trillion and failed to move the unemployment rate or decisively revive the American economy?

This time, the Fed evidently believes that low interest rates and printed money no longer suffice, because—as the Chicago Fed president recently announced, and as John Maynard Keynes predicted would happen in an environment of zero interest rates—the U.S. is stuck in a liquidity trap. To get us out, the Fed is deploying its wonder-weapon: placebo inflation. Bernanke wants to start people thinking that prices will rise so that prices will rise. The Fed is planting a self-fulfilling prophecy in our heads. It's kind of trippy.

Chicago Fed President Charles Evans, one of inflation's loudest proponents, laid out the logic in an interview with the Wall Street Journal on Oct. 2:

If we could indicate to the public that we want inflation to increase toward that price stability goal [of 2 percent per year], that would serve to lower real interest rates given that short-term nominal interest rates [as set by the Fed] are close to zero.

More recently, Evans suggested temporarily coaxing inflation above 2 percent so that consumers and businesses splurge their money now, knowing that it will lose value if they hold onto it.

It's not hard to spot Friedman's posthumous hand in this business of inflationary QE2. Evans came right out with it in the Journal:

Milton Friedman looked at the U.S. economy in the 1930s and he saw low interest rates as inadequate accommodation, that there should have been more money creation at that time to support the economy…. I've come to the conclusion that conditions continue to be restrictive even though we have a lot of so called accommodation in place. An improvement would be a dramatic increase in bank lending. That would be associated with broader monetary aggregate increases. Then we would begin to see more growth and more inflationary pressures and then that would be a time to be responding.

Evans invoking Friedman is bizarre for several reasons—and not only because the theories of the late libertarian patron-saint are being trotted out to justify gigantic interventions in the world market.

• Friedman's prescription was for a period, 1929-1933, of cataclysmic double-digit deflation. Today, the U.S. is experiencing glacial-paced disinflation, if that. The inflation rate now stands at 1.1 percent, and even Evans forecasts that inflation, if allowed to run its course, would only come down to 1 percent by 2012. There is no apparent risk of imminent catastrophic deflation, and still the Fed is considering emergency inflationary measures that Friedman only proposed for a period when the money supply had contracted by roughly a third.

• Friedman made his reputation as an inflation-fighter. His philosophy of monetarism conquered Keynesianism in the 1970s by promising an end to the chronic inflation of the time, and his first laboratory was authoritarian Chile, whose inflationary chaos he helped tame.

• Anna Schwartz—the only living progenitor of monetarism and the co-author of Friedman's The Great Contraction: 1929-1933—told me last year that the Fed's policies risk runaway or even hyperinflation. Indeed, she has become one of the most outspoken critics of her would-be monk, Ben Bernanke, the very man who provided the afterword to the latest edition of The Great Contraction, which Bernanke cited as the basis for today's zero interest rates.

The Fed's avowed monetarism should give pause to people like the Tea Partiers, who are convinced that the U.S. is caught in a neo-Fabian or Leninist transformation and that QE2 is another extension of socialist planning that could plunge America into civil war. That Fed Chairman Bernanke claims to be a disciple of Milton Friedman, and that Alan Greenspan was a follower of both Friedman and Ayn Rand, suggests that the Federal Reserve, the pre-eminent economic bureaucracy in the world, is a throne of libertarianism.

It is Friedman, not Marx or even Keynes, who has had the deciding influence on the world economy of the past and present century. Don't take my word for it. Read this 2006 New York Times obituary of Friedman, entitled "The Great Liberator," in which Lawrence Summers, chief economic advisor to President Obama, wrote:

Not so long ago, we were all Keynesians. ("I am a Keynesian," Richard Nixon famously said in 1971.) Equally, any honest Democrat will admit that we are now all Friedmanites. Mr. Friedman, who died last week at 94, never held elected office but he has had more influence on economic policy as it is practiced around the world today than any other modern figure.

Friedman is dead. Long live Friedman.

Penn Bullock is a freelance writer for Village Voice Media. He lives in Florida.

NEXT: Former (First) Bush Administration Defense Official on Latest Wikileaks

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Hey Everybody! Watch me spin!!!

  2. Malt does more than Milton can to justify Fed’s ways to man.

    1. Single malt or blended?

  3. Great. It’s like that fifteen minutes I spent talking to Pinochet all over again. I’m going to get the fucking blame for something I had no part in.

  4. I just read a WSJ piece that tries to show that Friedman’s logic would have supported QE2. I am no economist, but it struck me as very odd to say that Friedman would support such inflationary measures. Glad I’m not the only one.

    1. That WSJ piece was total shit. While acknowledging “no one knows what Friedman would think” the writer still tortures a 3-2 case for QE from the dead economist. He could have easily spun it as 3-2 (or 5-0)against if he was so inclined.

      1. Well, we do know what his co-author Anna Schwartz thinks. “The Fed,” she argues, “has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.”

        “I don’t see that they’ve achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job.”

  5. we want inflation to increase toward that price stability goal [of 2 percent per year]

    It takes an enormous amount of education to think that destabilizing prices and creating inflation is a “price stability goal”.

    1. Re: Prolefeed,

      It takes an enormous amount of totally wrong and goofy education to think that destabilizing prices and creating inflation is a “price stability goal”.

      There – more accurate.

      1. With today’s education system, is there any other kind?

  6. Is that t-shirt real and if so, where do I get one?

    1. Google is your friend.…..1300781671

    2. It would be kind of cool to have libertarian faces on your t-shirt. But they all look like nerds!
      Why can’t we have someone looking like Guevara on our side? That guy knew how to sell t-shirts!

      1. There is –

        THE JACKET.

  7. Friedman was great about everything exept money & central banks.

    1. That’s kind of a big deal.

      1. well, that was unsatisfactory


        comes after the lewrockwell part.

        It’s an essay by Rothbard about Friedman’s idea of monetarism.

  8. That Fed Chairman Bernanke claims to be a disciple of Milton Friedman, and that Alan Greenspan was a follower of both Friedman and Ayn Rand, suggests that the Federal Reserve, the pre-eminent economic bureaucracy in the world, is a throne of libertarianism.

    Yeah, the last two Fed chiefs and Bill Maher. They all make Rothbard look like a statist.

  9. There needs to be a petition to play “Free to Choose” on PBS again.

    1. You can also buy the DVD set – but I agree it would be timely to have it air again.

  10. Friedman did say that the Fed went the wrong way with the money supply during the depression, but this story and others leave out a CRITICAL fact: Friedman also said that he didn’t believe that the FED should exist at all! He wanted the markets to set interest rates, not Bernanke or any other know-it-all.

    1. I seem to remember Friedman liking the Fed, or at least talking about it like it had a legitimate function.

      1. He wanted it replaced with a computer. Wanted complete elimination of any central planner’s arbitraryness.

        1. Yes.
          He thought highly of the Fed’s chairman till 1927, who died 2 years before the Depression and said the Depression might not have happened with him in charge.
          He also said that he did not favour a system which depended upon the right man being in charge, because you don’t usually get the right man in charge, you get guys like Greenspan and Bernake.

  11. Another critical fact to understand is that the government has changed the core inflation formula twice since the Carter administration in order to intentionally lowball the number.

    Replacing a prime cut steak with a hamburger and saying voila, we have no inflation is laughable, but that’s exactly the sort of crap our government does. Under the old formula inflation isn’t that low.

    What these lowlifes Bernanke and Geithner are now doing has nothing to do with what’s best for the economy, it’s 100% purely political. And in my opinion, it borders on treasonous.

    1. Re: Mike M.

      Replacing a prime cut steak with a hamburger and saying voila, we have no inflation is laughable, but that’s exactly the sort of crap our government does. Under the old formula inflation isn’t that low.

    2. Another critical fact to understand is that the government has changed the core inflation formula twice since the Carter administration

      I’ve heard this reported a couple times in the past week, but can’t seem to find any more detail on these changes. Can you cite a source or link an article with more info?

  12. Its funny, no one says a financial security that gains in value is “deflating.”

    Yet money that gains in buying power is labeled as just that. “Double-digit deflation” sounds like a great investment, unless of course you’re a debtor. And we all are debtors now.

    Personally, I’m not in the hole at all on my own books, but my sovereign share is I think deep six figures these days. Har.

    1. Unfortunately the US Government (and taxpayer) are in the hole several trillion dollars, so double digit deflation would be brutal.

      Also, anyone with a mortgage would be effed.

  13. Milt was a libertarian on everything except the economy. He forgot that inflating to match the GDP even, is still government intervention in the economy.

    1. No, his position was more on the lines of “if government is going to intervene, let’s try to get it to intervene in the least damaging way possible”.

      Libertarianism is not synonymous with anarchism.

      1. Re: Brandybuck,

        Libertarianism is not synonymous with anarchism.

        Yes, it is. Statism is statism no matter the size of the aggressor, just like stealing is still stealing no matter the amount.

        1. Uh…no. The belief that a State can exist to enforce contracts and provide for the common defense is hardly contrary to libertarian thought. It IS contrary to libertarian anarchists- but we try to keep you guys in the basement when friends come over.

          …Because, jesus…you guys are around the bend, bat-shit crazy.

          1. Thanks for illustrating a point I’m often promoting — that political alliances with minarchists are counter-productive from the perspective of free market anarchists.

  14. I know quite a few Friedmanites who, when it comes to monetary policy, are now Austrians. They still love his “Free to Choose” ideas, but reject the his scholarship on money, mainly because it’s just Keynesianism applied to the central bank rather than to the central government.

  15. From ‘Money Mischief’ by Milton Friedman (1994 edition):
    “When a country starts on an inflationary episode, the initial effects seem good. The increased quantity of money enables whomever has access to it – nowadays, primarily governments – to spend more without anybody else having to spend less. Jobs become more plentiful, business is brisk, almost everybody is happy – at first. Those are the good effects. But then the increased spending starts to raise prices. Workers find that their wages, even if higher in dollars, will buy less; businesses find that their costs have risen, so that the higher sales are not as profitable as had been anticipated, unless prices can be raised even faster. The bad effects are emerging: higher prices, less buoyant demand, inflation combined with stagnation. [The] temptation is to increase the quantity of money still faster, which produces the kind of roller coaster…” (p.214)

    “As inflation accelerates, sooner or later it does so much damage to the fabric of society, creates so much injustice and suffering, that a genuine public will develops to do something about it…” (p.217)

  16. Over the past few weeks, Bernanke and other Fed bigwigs have been dropping conspicuous hints that they plan to boost inflation and pump another round of conjured-up cash into the economy.

    Hasn’t Geitner been going around recently making international agreements that we won’t do that? I’ll have to go back and recheck what I read, but I think that’s what I’ve seen.

    1. Geithner asked the rest of the G-20 to commit to a (narrow) range of trade deficit/surplus.

      Of course, that can’t be done without massive intervention in the economy, some of which would certainly be done with central bank currency manipulation.

      The rest of the G-20 laughed at him. The Chinese representative actually interrupted his speech and chewed his ass for having the effrontery to lecture solvent nations on how to manage their affairs.

      1. I gotta find that news article I read, again. It made it sound like he had them all agreeing to his plan.

  17. Where’s shrike? He hasn’t chimed in yet to tell us how we should think about economics.

  18. The underlying assumption in this approach is that saving decreases as inflation increases. That is a flase assumption. Saving increases as uncertainty increases, which is why the 1970s had both much higher inflation and much higher saving rates.

  19. Nothing the fed does can be libertarian, except maybe if it ceased to exist. Crony capitalism does not a free market make

  20. Friedman was nothing but a neo-Keynesian dressed up with libertarian rhetoric.

    1. Print more money! Ummm… and legalize drugs!

    2. Monetarism is an offshoot of Keyenes.

    3. Damn typo.

      Anyway, Friedman was always going on about how Keynes was the greatest economist that ever lived.

  21. Print more money! Ummm… and legalize drugs!

    1. Um friedman was against just “printing more money.”

      1. You’re right. It’s “monetarism” when we do it.

        Trust us! We know how to handle the money supply!

        We’re nothing like those Keynesians! I swear!

  22. I have never understood how some libertarians can favor the existence of the federal reserve. Maybe I am just naive, but allowing a small group of people to manipulate the money supply to fund an ever-expanding empire doesn’t sound very libertarian. If anything, the Fed seems to be the biggest enabler for most of the policies that libertarians abhor. Please let me know what, if any, are the libertarians arguments for its existence.

  23. “Please let me know what, if any, are the libertarians arguments for its existence.”
    There aren’t any.
    Friedman wasn’t a libertarian.
    Jeebus, he invented the payroll deduction that lets the IRS rob you bi-weekly, instead of annually, and he was the world’s biggest central bank honk.
    He’s about as libertarian as a bear is a dog.

    1. Jeebus, he invented the payroll deduction that lets the IRS rob you bi-weekly, instead of annually

      And Nobel invented TNT, so he must have liked war.

      And Oppenheimer helped build the bomb and therefore must have loved nuclear holocausts.

      Alternatively, you’re just an unthinking fool.

    2. BUT I WANTED TO LEGALIZE DRUGS!!!!!!!!!!!!!!!!!!!!!!!!!!

  24. Central bankers throughout the world, government officials everywhere are afraid of a new Great Depression. They have therefore moved in the opposite direction: instead of the problem of too little money, we are faced with the problem of too much money. The problems of inflation that plague us today trace directly to the problems of deflation that plagued us from 1929 to 1933.

  25. Friedman got a lot right, including that business cycles and inflation are monetary phenomena. However, regarding depressions he did not focus on the inflationary policies that create overleverage and asset bubbles as did Mises, Hayek and Rothbard, but rather on the subsequent deflation that had to follow. He was right that the money supply declined by a third, but failed to understand that deflation was a neccessary correction to the inflation of the late 1920s. Hayed said that this was the one area where he disagreed with Friedman whom he generally liked. For my money, Hayek and his fellow Austrians got it right. Great men have great flows. I still admire Friedman, whose clarity of expression and obvious goodwill in debate did more to get people thinking about the benefits of free markets than perhaps any other 20th century figure.

    1. Friedman may have got a lot right but the two you cite at first are definitely not something he “got right”. If it were as simple as Friedman cited we would have tripled prices in the last two years. There is not an arithmetic relationship between money created and price rise. There is NOT an arithmetic relationship between money created and currency value. It is way more complicated than such a simplistic analysis suggests. Friedman claimed money was a “neutral veil”, which is probably the most ridiculous statement any economist has made.

      He couldnt even see the internal contradictions of money being a neutral veil and yet still being the reason for inflation.

  26. “But why should the sequel be any more compelling than the original, which cost over $1 trillion and failed to move the unemployment rate or decisively revive the American economy?”

    This is of course wrong. It’s confusing the fiscal stimlus with monetary stimulus.

    The monetary stimulus doesn’t “cost” us anything. They are creating the money out of thin air.

    Of course if inflaton picks up more than expected, that will act as a hidden tax on savers.

    But then again, that’s the whole point of this, the government is so much in debt, that they plan on inflating their way out of a portion of it.

  27. I like how this discussion has divided into two camps- the people defending Friedman by saying he wouldn’t really support QE2 and the people attacking him from the painfully fucking stupid Austrian perspective. There’s a reason Austrian economics isn’t taken seriously by anyone. Because it’s horseshit. Real economists may fondly remember and occasionally drop a quote from the titans of the profession- Keynes, Friedman or the classicals- but when it comes time to give real analysis they cite papers by academic economists who have actually done productive work in recent years. You don’t see Keynesians referring back to the General Theory for the answer to every problem. They cite Romer, Taylor, Woodford, Eggertson, Mankiw and a million other people. Likewise you don’t see the other side doing nothing but citing “A Monetary History”. They cite Lucas, Sargent, Barro, Fama, Prescott etc. To be fair, some Austrians have made sizable contributions to the field- Menger’s role in the marginal revolution comes to mind- but the Austrians who actually contributed and did something productive aren’t even on the radar of the average Rothtardian.

    With Austrians every fucking time it’s “Well Mises/Rothbard said…”
    It’s not academic, scientific economics, it’s a horseshit cult. It’s much more similar to socialists/communists constantly looking back to Marx for answers. You examine things from the perspective of a zealot with a few holy texts.

    I think the Walter Block/Friedman exchange on “Was Hayek an evil evil socialist tyrant” is case in point why modern Austrians shouldn’t be taken seriously by anyone. I quite enjoy the association of economic science with “the right”. It lets me smugly mock left wingers for their ignorant, stupid anti-market views. I fucking LOVE smugly mocking left wingers. You Austrians are trying to take that away from me and goddamnit I don’t like it.

  28. So we can now say that we have reached the peak of the Friedman bubble.

    It will burst very soon then.

    This has now become a good reason to NOT be a Friedmanite.

    Interestingly enough there are too many know nothings out there still calling our policies Keynesian, which they most decidedly are NOT.

  29. Friedman believed many things and espoused monetary policies from left to right over time.
    In his essay on ‘A Fiscal and Monetary Framework for Economic Stability’ he penned the single most relevant philosophy for today.
    It recognized not the benefits of free capital markets.
    Au contraire. It recognized that in a fiat money system the government should be the natural monopoly issuer of currency. And the government should do so without issuing debt.
    I would hope the REASONable people would today be championing the efforts for structural and systemic reforms to the MONETARY system not only of THAT Milton Friedman, but also as proposed this week by Governor Mervyn King of the Bank of England – An end to fractional-reserve banking, replaced with full reserve banking.
    Which brings up the question of how to then issue the nation’s currency.
    That is where the debate belongs.

  30. Milton’s misfortune is that his policies have been tried.

  31. Leaving aside the internacine disputes between the Friedmanites and the Austrians, I’m surprised no one has addressed the gross misconception underlying the current debate. Put simply, the notion that the fundamental problems of the U.S. economy can be traced to a lack of liquidity are pure, unadulterated horse manure. By any rational assessment, the liquidity problems in the economy ended in late 2008 – early 2009. For a long time now, investors haven’t been stowing their money under the mattress. Rather, what we have is really much more similar to a debt crisis. We’re in hock up to our eyeballs and an improvement in savings is what is fundamentally necessary to spur economic growth.

    1. @Bill Dalaslo

      You are correct in your analysis. Private debt is the problem and we do need more private debt reduction.

      Whats not clear from your analysis though is whether you realize that this money to pay off debt must come from somewhere. Where it comes from if you do the math correctly is from PUBLIC debt.

      Yes, public debt IS private savings. SO if you want IN AGGREGATE the private sector savings to rise, THEN by accounting identity the PUBLIC sector dissaving MUST rise. There is no other place for it to come from. Money can not be created by the private sector, thats called counterfeiting. ONLY through an increase in deficits can the private sector net save. In a case of neutral or surplus budgets, the private sector is either not changing their savings position or net dissaving ( as in the case of govt budget surpluses). This is Accounting 101.

      1. This is Accounting 101.

        Which obviously you failed, because your analysis completely misses the existence of foreign lending. Both the public and the private sector are in deep debt because both have availed themselves of international borrowing and lending in excess. Moreover, the existence of debt doesn’t fetishize money. The only value available is the existence of valued production. Creation of money does not change that very simple fact. Finally, in any economic accounting, capital investment is considered an alternative to government deficits.

  32. “Foreign” is part of the non govt sector. Theres no lending in the sense you mean it. Foreign sector cant create dollars and lend to us. They acquire dollars through trade and then “buy” treasuries form us, its not a loaning operation at all its a purchase.

  33. A Treasury bond is a debt instrument. If I’ve sold you an item and then loan you money with the proceeds, I have made a loan. Your commentary makes no sense whatsoever.

    1. Sorry Bill your wrong.

      When China buys a Treasury they are putting their money in a savings account that earns interest. They are not loaning us money so we can spend it. We dont need their money, we create dollars whenever we need to. The whole operation is a holdover from gold standard days when treasuries were issued so that people couldnt come and request gold for their dollars, they are a totally unnecessary operation anymore and they have NOTHING to do with funding of anyones activities. Its just a nice thing we do, letting China earn some interest on their money.

  34. Yet more misinformation from the Fed. The Fed’s inflation proponents don’t understand price stability – prices that do not change are stable prices. That means zero inflation, NOT 2% inflation.

    Their fears about the dangers of deflation are only about bad deflation, not good deflation. see

Please to post comments

Comments are closed.