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Friedman and free banking

Today is the centenary of Milton Friedman’s birth. (He died on November 16, 2006.) To honor it, Julio Cole, a professor at Francisco Marroquín University in Guatemala, compiled a bibliography of Friedman’s scholarly writings earlier this year. An earlier bibliography, which adds many of his newspaper articles and other more ephemeral writings, exists in The Essence of Friedman, an excellent collection edited by Kurt Leube.

Friedman’s ideas on monetary policy changed over time. He began as a convinced Keynesian. Then, of course, he became the leader of the monetarist school, and wrote with Anna Schwartz the groundbreaking Monetary History of the United States, 1867-1960. The most influential aspect of the book was how it changed the views of economists about what caused the Great Depression—and, by implication, many other economic disasters. Friedman and Schwartz blamed the Federal Reserve System, and to consider how completely their argument has been accepted it suffices to recall that Ben Bernanke, who at the time was a Federal Reserve governor though not yet the chairman, remarked at a 90th birthday celebration for Friedman, “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.”

Late in his career, Friedman switched from advocating a constant growth rate for M2 to a quite different approach: freeze the monetary base and deregulate financial institutions, including letting them issue currency (“Monetary Policy for the 1980s,” originally in John Moore [editor], To Promote Prosperity: U.S. Domestic Policy in the Mid-1980s, 1984, reprinted in the Leube volume.)

A bit later, in 1986, he discussed free banking in an article with Anna Schwartz, “Has Government Any Role in Money?” (Journal of Money, Credit and Banking, also reprinted in the Leube volume). Friedman and Schwartz cited Larry White’s work on free banking in Scotland, but claimed that the experience of the United States before the Civil War is much less favorable to the case for free banking. I think they understated the influence of the different legal frameworks in various states on the shape the U.S. banking system took, and therefore understated the extent to which the U.S. banking system was far less free than the Scottish system.

Friedman ended up being close to the free banking position as far as his ideas for contemporary policy were concerned, though not in terms of his interpretation of the history of the system. Friedman's later views remain obscure, even among monetary economists, compared to his middle-period advocacy of targeting M2, the view he held at the time he was awarded the Nobel Memorial Prize in economics.


  1. Friedman's later views remain obscure, even among monetary economists, compared to his middle-period advocacy of targeting M2, the view he held at the time he was awarded the Nobel Memorial Prize in economics.

    This always seems to be the case, doesn't it? Another great economist whose later work is often disregarded is John R. Hicks; Hicks, incidentally, also reformed some of his earlier views (e.g. "repudiating" IS/LM; neo-Austrian capital theory; etc.). Like with Hicks, you rarely see Friedman's later work cited by "mainstream" economists.

  2. It's safe to say that Friedman could be all things to all people.
    And certainly in truth that his ideas changed much over time.

    While an early supporter of the works of Simons etc. on public money, he later went on to champion the free market in capital.
    I rather place his Fiscal and Monetary Framework as his really best proposals for stabilizing the money system.
    To say that Friedman had abandoned Keynesian is one thing, but he maintained adherence to his stable money proposals throughout.
    Writing in 1992 as a Preface to the reprinting of his A Program for Monetary Stability, he continued to advance the ideas put forward by Simons and Fisher for full-reserve banking and also included advancing his proposal for a nominal 3 to 5 percent annual growth in the M1 money supply, through government issuance.

    Nobody owns Friedman.
    His writings stand on their own.

  3. Can you explain why Friedman would be in favor of freezing the monetary base, as opposed to a pure free banking system? Did he not think there were sufficient checks to prevent inflation?

    1. In a fiat regime, you can't "just" have free banking: there has to be some rule concerning control of the outstanding stock of base dollars. A frozen base is such a rule–and the one that most thoroughly does away with any role in money supply adjustments for the former central bank.

  4. Friedman more actively endorsed free banking in some of his later interviews, which shouldn't be that hard to track down.

  5. Free banking would just make things more hard in an already complex financial system. Wrapping the value of currency around an underlying commodity, one with no specific value, would not make it of more value.

    1. Indeed. Money simply represents the concept of value: Numerized Purchasing Power. If the token representing value becomes valuable in itself, it won't be used as money e.g. when a silver coin is worth more than its face value. When the market value of a vault-stored commodity changes, so does the purchasing power of its paper proxy and prices would have to adjust.

  6. If I remember correctly he, Milton Friedman, and Anna Schwartz, seemed to suggest in the 1986 piece that, indeed, government did NOT have any role in money. I will have to re-read it, but, his reservation seemed to be that there were no roadblocks to free money and banking and that banks were totally content with the current system, not lobbying to change the status quo. I believe there were, and still are, substantial roadblocks to, under current law, establishing an alternative system that would compete with the US dollar and the FR banking system. And, to think that the big established and privileged banks would lobby for a change to the current system is quite naive. Any future changes will come over the objections of the banking establishment, not with their cooperation.

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