Milton Friedman

QE Phooey, Milton Friedman Thought There Shouldn't be a Federal Reserve at All


There are nearly a fiat trillion's worth of interesting and complicated issues of history, theory, fact, and fair emphasis built into the recent debate over whether or not Milton Friedman would have approved of current Federal Reserve policy. See Paul Krugman, Rand Paul, and James Pethokoukis on various aspects of this. Krug and Petho say yes, Paul implies no.

If we are to just evade those complicated questions and just fall back on the notion that Milton Friedman really understood exactly how a nation's monetary policy should be run, let's revisit what he told me in one of his last interviews for our November 2006 interview feature on the Federal Reserve. (It also stars Ron "end the Fed" Paul.)

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.

In other words, saith Milton Friedman: end the Fed! Even though he thinks no one was listening. More have been since 2006, thanks to his fellow panelist in our interview roundtable, Ron Paul, father of Rand.

The very fact this debate is raging puts the lie to Krugman's notion that Friedman is now an "un person." More important than what a living Friedman would say now (which I think would be tied up in complicated questions about whether or not Japan '90s really is in every meaningful way equivalent to USA '00s/10s and whether QE was necessary to prevent deflation) is whether or not current Federal Reserve policies have been a) in any way stymied by this so-called gross misunderstanding of Friedmanite wisdom (I mean, we have had QE) or b) or have actually done the economy any long term good without creating possible future dangers.

I wrote earlier this year on Friedman's gradual radicalization toward more libertarian stances on monetary policy and most other things.