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Few American economists have wielded
as much influence on economic thought and policy as the late Milton
Friedman. He was an articulate and ardent advocate of free markets and
personal liberty. In 1962, his CAPITAL AND FREEDOM, which continues to be
in print with nearly one million copies sold, pointed the way not only to
economic but also political freedom. A year later his MONETARY HISTORY OF
THE UNITED STATES, 1867-1960, co-authored with Anna Schwartz, cast a new
light on the Great Depression and the policies that caused it. He was a
passionate critic of all versions of socialism and a fervent censor of
Keynesian economics which stands as the most influential economic
formulation of the 20th century. One of the most prolific writers of his
time, Professor Friedman wrote many pertinent economic columns in Newsweek.
His outstanding achievements earned him the NOBEL PRIZE in 1976.
It may be folly to criticize and
censure a famous author whom all the world
admires. Yet this economist has been at odds with Professor Friedman ever
since he advanced his monetarist thought. It is strange that Professor
Friedman and his fellow monetarists, who are such defenders of the market
order, should call on politicians and bureaucrats to provide the most
important economic good -- money. Granted, monetarists do not trust them
with discretionary powers, which led Friedman to write a detailed
prescription, a Constitutional Amendment; however, the Constitution is
supreme force, backed by courts and police. The amendment is a political
formula to be adopted by political authorities and, when enacted, a
constitutional prohibition of monetary freedom.
The Amendment calls for issue of
government money in the form of non-interest bearing obligations which
would not alter the nature of currency expansion,
it merely would change its technique. The stock of these obligations is
supposed to grow, year after year, without any obligation to repay, which
changes their nature from being "obligations" to being mere
government paper. The Friedman proposal would merely simplify the technique
of money issue; instead of the Federal Reserve creating and lending its
funds to the U.S. Treasury, earning an interest thereon and then returning
the interest to the Treasury as "miscellaneous receipts,"
Friedman would have the Treasury issue non-interest bearing U.S. notes.
This would save the U.S. Treasury the interest it is now paying, and
eliminate the "miscellaneous receipts" the Treasury is now
receiving.
In its search for stability, the
Friedman amendment, unfortunately, proceeds on the old road to nowhere. There
is no absolute monetary stability, never has been, and never can be. Economic
life is a process of perpetual change. People continually choose among
alternatives, attaching ever-changing values to economic goods; therefore,
the exchange ratios of their goods are forever adjusting. Economists
searching for absolute stability and measurement are searching in vain, and
they become disruptive and potentially harmful to the economic well-being
of society when they call upon government to apply its force to achieve the
unattainable.
Money is no yardstick of prices. It is
subject to man's valuations and actions in the same way that all other
economic goods are. Its subjective, as well as objective, exchange values
continually fluctuate and, in turn, affect the exchange ratios of other
goods at different times and to different extents. There is no true
stability of money, whether it is fiat or commodity money. There is no
fixed point or relationship in economic exchange. Yet, despite this
inherent instability of economic value and purchasing power, man is forever
searching for a dependable medium of exchange.
The precious metals have served him
well throughout the ages. Because of their natural qualities and their
relative scarcity, both gold and silver were dependable media of exchange. They
were marketable goods that gradually gained universal acceptance and
employment in exchanges. They even could be used to serve as tools of
economic calculation because their quantities changed very slowly over
time. This kept changes in their purchasing power at rates that could be
disregarded in business accounting and bookkeeping. In this sense, we may
speak of an accounting stability that permits acting man to compare the
countless objects of his economic concern.
Contrary to monetarist doctrine, an
expansion of the money stock of three to five percent suffices to generate
the business cycle. Economic booms and busts occur in every case of fiat
expansion, whether the expansion is one percent or hundreds of percents. The
magnitude of expansion does not negate its effects; it merely determines
the severity of the maladjustment and necessary readjustment.
Monetarists are quick to proclaim that
business recessions in general, and the Great Depression in particular, are
the result of monetary contraction. Mistaking symptoms for causes, they
prescribe policies that treat the symptoms; however, the prescription,
which is reinflation, tends to aggravate the
maladjustments and delay the necessary readjustment.
The Friedman amendment, unfortunately,
would cause the same economic and social conflicts as the present fiat
system. It would create income and wealth with the stroke of a pen, and
then distribute the booty to a long line of eager beneficiaries. The
amendment would fix the quantity of issue, but the mode of its
distribution, which confers favors and assigns
losses, would be left to the discretion of the monetary authorities. It
would enmesh them in ugly political battles about "credit
redistribution," which soon would spill over to the halls of Congress,
just as it does today.
The monetarists actually have no
business cycle theory, merely a prescription for government to "hold
it steady." From Irving Fisher to Milton Friedman the antidote for
depressions has always been the same: reinflation.
The central banker who permits credit contraction is the culprit of it all.
If there is a recession, he must issue more money, and if there is
inflation, that is, rising price levels, he must slow the increase in the
supply of money, but increase it nevertheless.
Professor Friedman himself seems to
have been aware of his lack of business cycle theory when he admitted
"little confidence in our knowledge of the transmission
mechanism." He had no "engineering blueprint," but merely an
"impressionistic representation" that monetary changes are
"the key to major movements in money income." His "gap
hypothesis," therefore, is designed to fill the gap of theory and
allow for the time it takes for all adjustments to be corrected. He seeks
to time the recession without explaining it.
The increasing importance of
government obligations as bank assets gives great confidence to monetarists;
however, it creates anxiety because government obligations merely are
receipts for money spent and savings consumed. Every budgetary deficit that
creates more government obligations consumes productive capital and thereby
hampers economic production. The growing importance of government
obligations in bank portfolios actually signals government consumption of
economic substance and wealth. To commercial banks, it means the loss of
real property securing the loans, and the addition of yet more government
promises to tax, print and pay. A banking system
built primarily on government IOUs is in a precarious condition.
What Professor Friedman called the
"dethroning" of gold was, in truth, the default of central banks
to make good on their legal and contractual obligations. Following the
example set by the United
States on August 15, 1971, central banks
all defaulted in their duty to redeem their currencies in gold. The
default, unfortunately, did not bring stability and prosperity; it opened
the gates for world-wide inflation. It made the U.S. dollar the world
currency, elevated the Federal Reserve System to the world central bank,
and inundated the world with U.S. dollars. (Cf. My Money and Freedom, Libertarian Press, 1985.)
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