In his new book, Money Mischief,
economist Milton Friedman compares inflation to alcoholism; blames
the rise of Chinese communism, in large part, on an inadequately
controlled money supply; defines and describes MV=PT in four brief
paragraphs; tells how three Scottish chemists ruined William Jennings
Bryan's political career through their pioneering work with gold;
and relates many other anecdotes befitting the book's subtitle, Episodes in Monetary History.
As the above examples illustrate, the Nobel prize winner is one
of those rare academic scholars who is also able to convey his message
beyond the academy. His publishing career includes many books that
have been popularly successful, including Free to Choose,
which also spawned an extended television run and is now available
Of all his contributions, one of Friedman's most important is
his part in deepening the understanding of the role of money in
determining the course of events.
Region: Six Nobel laureates and 94 other economists recently
called for increased federal spending to spur economic growth, even
though it would add to the budget deficit. Among them are Arrow, Sharpe,
Klein, Solow and Modigliani. Does this collective recommendation of
world-class economists make sense?
Friedman: I do not agree with the view of the 100 economists
calling for increased spending to spur economic growth. My disagreement
is partly based on political considerations, partly on economic
considerations. From the political point of view, increased spending
may initially be designed to be temporary but few things become
more permanent than temporary spending. Hence, the economists
are in fact calling for a still higher level of government spending
yet, in my view, reducing the scope of government is our most
important single objective.
On a technical level, I believe that there is no persuasive
evidence that, given the course of monetary policy and monetary
aggregates, federal government deficits have any stimulative effect.
They have a stimulative effect only insofar as they are financed
by a more rapid increase in the quantity of money than would otherwise
However, even if I shared the view of the economists who signed
this statement that an increase in budget deficits would be stimulative,
it would be consistent with their technical view to recommend
a reduction in taxes as a way to achieve an increased budget deficit.
From their point of view, a reduction in taxes would have the
same stimulative effect as an increase in spending, yet it would
avoid the long-term adverse effect of increasing the role of government
in the economy.
Region: In a Region interview with your
friend and former colleague George Stigler, we posed a question
about the quality of the Fed's economic research efforts. Stigler
said, "I don't feel very confident commenting about that. I've
been told by Milton Friedman that one of the perversities of history
is that when the quality of the Washington staff is high, policy
is pretty poor, and in the years when policy has been very good,
the staff has been low quality. Now if you want to explore that,
you'll have to interview him." Did George Stigler understand you
Friedman: I probably said some such thing in my discussions
with George, but I've not made a systematic study. I believe that
it was based on one major phenomenon that stuck in my mind. In
my special field of interest of money, there is no doubt that
a large fraction of all of the economists who work more or less
full time on monetary research are employed by the Federal Reserve.
Many of them have made important contributions to monetary analysis
and theory going back to the 1920s, when Winfield Reiffler, Walter
Stewart and Emmanuel Goldenweiser were all contributing to understanding
monetary institutions. I have no doubt that the Federal Reserve
has made a positive contribution to monetary research, which I
suppose I ought to set off on the account as a credit against
a terribly poor policy performance. If I were to make up a balance
sheet for the Federal Reserve, I could name many credit items
on the research side, very few on the policy side.
The interesting thing to me has always been that the most important
contributions to understanding of monetary theory and monetary
institutions have not come from Washington during the decades
in which I've been active. The Federal Reserve Bank of St. Louis
in the 1950s, '60s and '70s was by far and away the pre-eminent
producer of significant monetary research within the System. More
recently, several other regional banks, including your own, have
joined them and have made important contributions. Certainly the
Minneapolis bank, with the contribution of its personnel to the
development of rational expectations, has been an important contributor
to monetary theory. All of the regional banks publish bulletinsrequired
by law I guess. Some hardly ever publish material of general interest
to students of monetary theory and policy, but most do, even if
only occasionally. It would be invidious for me to mention names
without a more careful studythough offhand, I can recollect
such articles in the bulletins of four regional banks other than
St. Louis and Minneapolis.
Region: In your early writings, you argued that deposit
insurance was a worthwhile development. Here at the Minneapolis
Federal Reserve we've taken the position that deposit insurance,
now at virtually 100 percent, has a perverse effect and should
be reformed in a way that would bring more market discipline.
Where do you stand on the question of deposit insurance?
Friedman: Circumstances alter cases and I believe that
both views are correct. Anna Schwartz and I in our Monetary
History were discussing the situation after the financial
collapse of the 1930s. We said then and believed then, and I still
do, that the Federal Reserve had failed to do what it was originally
set up to do. It had permitted a collapse of the monetary system,
it had permitted perfectly sound banks to fail by the thousands
because of liquidity problems, although it had been set up in
1913 with the objective of preventing that kind of a situation.
And we argued in the book that since the Fed had failed and showed
no sign that it was not going to continue to fail in pursuing
its function, something else was needed to perform the function
for which it had originally been established and that the Federal
Deposit Insurance Corporation would serve that function. Interestingly
enough, it did for some 40 years. From 1934 to the early '70s,
there were very few bank failures. And there were essentially
no runs on banks because of liquidity problems. So it did serve
a useful function for 40 years.
In my opinion, what destroyed the usefulness of deposit insurance
was the inflation of the 1970s for which the Federal Reserve has
to bear major responsibility. That inflation had the effect of
destroying the net worth of financial enterprises, particularly
the savings and loan institutions, which were borrowing short
and lending long. They had mortgages and the like outstanding
at fixed relatively low rates of interest. When the cumulative
inflation of the 1970s inevitably led to a rise in the interest
rates they had to pay, the result was to wipe out the net worth
of the proprietors of those enterprises. Once the net worth of
the enterprises was destroyed, deposit insurance did have a very
perverse influence. In order for deposit insurance to work, there
has to be some private personal incentive for safe banking. That
incentive was provided by the net worth of the proprietors of
financial institutions. Eliminate that net worth and deposit insurance
created a win-win position for proprietors of those enterprises
to engage in risky activities.
Region: In your new book, Money Mischief,
you discuss monetary union. What are your thoughts on Europe's
plan for one currency?
Friedman: I believe it will not come to an achievement
in my lifetime. It may in yours, but I'm not sure that's true
Region: Why is that?
Friedman: Because I do not believe that at the moment,
a single European currency is either feasible or desirable. Let
me restate that. It would be highly desirable if Europe could
have a common money, a single unified money, just as it's desirable
for the United States that we have a single unified currency.
But in order for that to be possible or desirable, you have to
have a unified currency over an area in which people and goods
move relatively freely, and in which there is enough homogeneity
of interest so that severe political strains are not raised by
divergent developments in different parts of the area.
Let me illustrate. In the United States, right now you have
much more severe economic problems in New England, in the Northeast
in general, than you have elsewhere. If the Northeast were a separate
country with a different language from the rest of the country,
with a supposedly national government, it would be very tempted
to resort to devaluation. What prevents it from doing that now
is that we are a nation with one language, one political structure,
a recognition that one region or another may have difficulties
relative to other regions. Some years ago it was the South that
had this problem.
Now come to Europe. Will there be as much tolerance for that
kind of an adjustment as between France, on the one hand let's
say, Germany, Italy, Spain, Sweden, and so forth? I'm very dubious
that those preconditions for a successful unified currency exist
on the European continent. That's looking at the ultimate.
Now consider the process you have to go through to get to a
unified currency. In order to have a truly unified currency, not
a collection of separate national currencies joined by temporarily
fixed exchange rates like the European Monetary System or the
International Monetary Fund was in its earlier days - in order
to have a truly unified currency, you either need to have no central
bank, as with a commodity currency like a gold standard for example,
or you need to have at most one true central bank: one authority
that can issue money. In the United States that authority is the
Federal Open Market Committee of the Federal Reserve System. It's
one. The Federal Reserve Bank of Minneapolis issues currency notes
on which the bank's name appears, but you can't decide how much
to issue. That decision is made in Washington by the Federal Open
In order to have a comparable situation in Europe, you have
to eliminate the Bank of France, the Bank of Italy, the Deutsche
Bundesbank, the Bank of England and so forth. You have to have
one true central bank with full authority. The plans that are
being made call for such a central bank, but it's a long cry from
calling for it and having it. After all, the Treaty of Rome, which
I believe was signed in 1957, called for eliminating all customs
and tariff barriers among the Common Market nations. They still
have not all been eliminated some 35 years later. So to call for
something is one thing, to do it is a very different thing. And
even the central bank that's called for is going to be run by
essentially a committee of representatives from France, from Germany,
from England, and so on. I cannot see that kind of institution
as having the same ability to withstand political pressures internally
in these various areas that the Federal Reserve's Federal Open
Market Committee has.
Region: The New School of Classical Economics (among
others, Sargent, Wallace, Prescott, Lucas) argues that the best
way to study economics is within the general equilibrium models.
They stress the importance of the institution's arrangements:
the rules of the game. What is your view on this approach?
Friedman: I believe that the approach has much to offer
us, but I also believe that its proponents, like all proponents
of fresh approaches, tend to carry a good thing too far. I would
say it has had too much influence up to date. It has made a real
contribution, but it is by no means the only, or necessarily even
the most useful, approach.
Region: If you were advising the Federal Reserve, what
would you say are the unsolved economic problems of the day?
Friedman: One unsolved economic problem of the day is
how to get rid of the Federal Reserve. The most unresolved problem
of the day is precisely the problem that concerned the founders
of this nation: how to limit the scope and power of government.
Tyranny, restrictions on human freedom, come primarily from governmental
institutions that we ourselves set up.
Abraham Lincoln talked about a government of the people, by
the people, for the people. Today, we have a government of the
people, by the bureaucrats, for the bureaucrats, including in
the bureaucrats the elected members of Congress because that has
become a bureaucracy too.
And so undoubtedly the most urgent problem today is how to find
some mechanism for restructuring our political system so as to
limit the extent to which it can control our individual lives.
You know, people have the image, have the idea, that somehow "we
the people" are speaking through the government. That is nonsense.
You cannot tell me that the consumers of the United States would
have approved a policy which in fact led to everyone paying about
$2,000 or more a year per automobile purchased. Yet that was the
effect of the policy of imposing so-called voluntary import quotas
on Japanese cars.
Nobody will tell me that the people of this country really favor
paying two or three times the world price for sugar. Nobody will
tell me that the people of this country believe it is desirable
to spend money to provide water to farmers at less than cost in
order to enable them to produce crops which the government buys
up in part at more than the world price and then has to dispose
as surpluses. You cannot explain those activities of government,
and there are hundreds more, as reflecting the will of "we the
people." They reflect a system in which concentrated vested interests
have been able to obtain great power and impose costs on a diffused
Region: On a recent McNeil/Lehrer interview, you made
the point that ironically we urge emerging eastern European countries
to privatize, yet here in the United States we tend to move in
the opposite direction: toward a more socialized state, and you
gave health care as an example.
Friedman: Direct government spending in the United States
amounts to about 42 percent of the national income. I'm putting
it a little elliptically. Government spending equals a sum which
equals 42 percent of the national income. In addition, there is
much spending, which is classified as private spending, effectively
mandated by the government. It would make no difference whatsoever
in your life if the antipollution equipment you have on your car
were provided to you without charge by the government but you
had to pay a tax equal to the amount that you spent on those.
You wouldn't know the difference. And yet if that were done, it
would be counted as government spending.
Numerous other private expenditures are mandated by the government
in a host of different ways. The cost of farm subsidies is included
in the 42 percent, but the higher prices you pay for agricultural
products because of the farm policy are not included in recorded
government expenditures. Yet they are in effect mandated by the
government and represent command over resources subject to government
control and direction. Similarly, building codes impose costs
that you might not privately want to engage in, wage and hour
lawsand on and on. So I believe that easily more than 50
percent of the productive resources available in the nation are
allocated by governmentsfederal, state and local. How those
productive resources are used is determined not by the private
interests of the individuals who dispose of them but by governmental
Of course, some of that is desirable. I'm not in favor of no
government. You do need a government. But by doing so many things
that the government has no business doing, it cannot do those
things which it alone can do well. There's no other institution
in my opinion that can provide us with protection of our life
and liberty. However, the government performs that basic function
poorly today, precisely because it is devoting too much of its
efforts and spending too much of our income on things which are
harmful. So I have no doubt that that's the major single problem
Region: In Minnesota, the state government handed a massive
support package to an airline to encourage it to build a facility
in the state and promise not to leave. What are your thoughts
on such state development packages?
Friedman: I believe they're terrible. If you read the
Constitution, it specifies that there shall be no tariffs or restrictions
or hindrances to trade among the states. Just as we speak of non-tariff
restrictions on international trade, I regard the kind of thing
you're talking about as non-tariff restrictions on internal trade.
I'm not a lawyer, but I would like to believe that a strict interpretation
of the Constitution would render such actions by individual states
Region: Going back to your new book, Money Mischief,
you predict in the epilogue that "the world will see more episodes
both of high inflation and full-fledged hyperinflation within
the next decade." What leads you to that conclusion?
Friedman: What leads me to that conclusion is the enormous
changes that have occurred in the economic structures of countries
around the world. Obviously, part of it was inspired by the Eastern
European countries in which I doubt very much that all of them
will get through without going through episodes of hyperinflation.
They seem to be on the verge of it in Russia right now. Similarly,
Latin America has been a great breeder of such episodes, and while
some countries in Latin America, like Mexico and Chile and maybe
Argentina, at the moment are following better economic policies,
that's by no means true of all of them.
Region: As a founding member of the Mont Pelerin Society,
what would you say was the organization's original purpose and
how has it evolved over the last four decades? (The Mont Pelerin
Society is an international organization of free-market economists
and scholars from colleges, universities and businesses; formed
in 1947 byamong othersFriedrich Hayek, George Stigler
Friedman: There's no doubt what its original purpose
was. Its original purpose was to promote a classical, liberal
philosophy, that is, a free economy, a free society, socially,
civilly and in human rights.
I believe that it has made an important contribution to that
purpose. It has made that contribution not by propaganda but by
offering a place where people of like mind could get together,
discuss their problems, and resolve difficulties they had about
both philosophy and policy.
It is hard at this distance to recall what the intellectual
climate of opinion was immediately after World War II, in the
1940s and throughout the '50s. It was a climate in which those
of us who believed in free markets and in a socially and politically
free society were a tiny, very much beleaguered minority. Collectivismeconomic,
social, politicalwas very much in the ascendancy. During
World War II, governments everywhere had largely assumed control
of the economy. And it was simply almost taken for granted that
they would have to continue to do so in the postwar period. The
origin of the meeting really goes back to Friedrich Hayek's book The Road to Serfdom, which was regarded at the time
as a strange, minority point of view. In that kind of an intellectual
environment, the opportunity to meet a group of people year after
yearable people, intellectuals for the most part, though
also people who were involved in the political, social, financial
business worldon an occasion where you didn't have to be
looking to see if somebody was trying to stab you in the back,
in which you could feel free to express your doubts and disillusionments
and the like made a very real contribution.
Region: And the Mont Pelerin Society of the 1990s, has
Friedman: The world has changed, the intellectual climate
has changed. The ideas of a very small beleaguered minority in
the '50s have become much more widely accepted, although they're
still far from being fully embedded in actual public policy. But
at the moment the Mont Pelerin Society has a renewed function:
to provide a similar opportunity for education, discussion, illumination
to people from the former Communist world.
Region: I attended a Mont Pelerin Society meeting in
Montana last year and they were expressing concern about radical
environmentalism and the role of government and were proposing
some thoughts along the line of free market environmentalism.
Friedman: That is a continuation of its traditional function.
But you should also note that last year there was a regional meeting
held at Prague which was pursuing what I've now described as its
As an amusing footnote, one of the major benefits that I personally
derived from the first meeting of the Mont Pelerin Society in
1947 was meeting Karl Popper and having an opportunity for some
long discussions with him, not on economic policy at all, but
on methodology in the social sciences and in the physical sciences.
That conversation played a not negligible role in a later essay
of mine, "The Methodology of Positive Economics," which has probably
led to more pages of subsequent print by others than anything
else I've written. It just shows how nature and science works
in wondrous ways.
Region: We understand that most often you sport an Adam
Smith necktie. What is the origin of that fine tradition?
Friedman: As I understand it the first Adam Smith necktie
was produced at the suggestion of Ralph Harris when he was teaching
at St. Andrews University in Scotland near Adam Smith's birthplace.
It then caught on and Adam Smith neckties were produced by various
groups in Britain, including the Institute of Economic Affairs
which Ralph Harris later joined and of which he became director,
now retired. In the United States, Don Lipsett started producing
and distributing Adam Smith neckties. More recently, the Fraser
Institute in Canada has also done so. So much for production.
I cannot say how the practice grew of wearing the tie, except
that somehow or other it became a mark of political ideology.
To tell an amusing incident, when I did our TV program "Free to
Choose," I wore an Adam Smith necktie whenever I wore a necktie.
The summer after it had been shown on TV, I received a letter
from representatives of a group of teachers who had been using
the program in their summer course. They sent me a necktie, saying
they had discovered in watching the program that I apparently
had only one necktie and they thought I ought to have another.
Region: Thank you Mr. Friedman.
More About Milton Friedman
Nobel prize for economics, 1976.
Currently, senior research fellow at the Hoover Institution
at Stanford University.
Following an academic career that included a stint at
the University of Minnesota in 1945-46, joined the University
of Chicago as an assistant professor of economics in 1946;
became a professor of economics in 1948 at the University
of Chicago and remains professor emeritus at the university.
Recipient of John Bates Clark medal from the American
Economics Association; founding member and later president
of the Mont Pelerin Society; president and/or board member
of many economics associations and independent think tanks.
Publications include A Theory of the Consumption
Function (1957); Price Theory: A Provisional
Text (1962); A Monetary History of the United
States, 1867-1960 (with Anna J. Schwartz, 1963); Monetary Statistics of the United States (with Anna J. Schwartz, 1970); Free to Choose (with Rose D. Friedman, 1980); Monetary Trends in
the U.S. and the United Kingdom (with Anna J. Schwartz,
Doctorate, Columbia University, 1946; master's, University
of Chicago, 1933.