Milton Friedman and Monetary Freedom

Milton Friedman, free banking, monetary economics
Milton Friedman with  Cato's Ed Crane and Jim Dorn

Although I don't call myself a Friedmanite or a monetarist (or anything else), and many of my opinions on monetary economics are ones that he rejected, I'm a huge Milton Friedman fan.  I regard him as the most influential champion of free market economics after Adam Smith, and as one of the greatest monetary economists of the last century.  He is certainly among the dozen monetary economists of any era from whom I have learned the most.  Finally, in my own dealings with him I found him to be an upright and generous man, as well as one who gave me a great deal of encouragement and support when I most needed it.

Consequently it distresses me to see Friedman attacked, and especially so when the attacks come from persons who share my fondness for monetary freedom.  One such attack came my way two weeks ago, in the shape of a complaint about a Cato email notice commemorating what would have been Friedman's 103rd birthday, on July 31.  The writer, a free-market gold standard advocate, and a generally pleasant and mild-mannered fellow, called "Chicago School" monetary economics "a virulently anti-free market conception that has institutionalized our unstable…monetary system,"  and said that, in leading it, Friedman "did us and the world an unfathomable disservice."

Alas, far from being rare, harsh opinions about Friedman are easy to come by among the more uncompromising critics of government intervention in monetary affairs.  Ludwig von Mises, another of my monetary economics heroes, may have started the trend when, according to Friedman himself, he stormed out of a debate at the first (1947) Mont Pelerin meeting after calling its other participants, Friedman among them, "socialists."  Some years later, in 1971, Murray Rothbard reached a similar verdict, this time in print, though he substituted "statist" for "socialist."  (That  Friedman was more of a statist than Rothbard himself was certainly true.  But who, in 1971, wasn't?) Today more than a few "End the Fed" libertarians still accept Rothbard's judgement.*

My first personal encounter with Friedmanophobia took place in 1988.  Thinking that The Freeman might review it, I had sent a copy of The Theory of Free Banking  to the Foundation for Economic Education.  But instead of getting a review, I got a terse letter from Hans Sennholz, FEE's director at the time, who was also a well-known champion of monetary freedom.  In the letter Sennholz lashed out at me for having had the brass gall to send him a book that expressed approval for some of Friedman's ideas, while also offering some (mild) criticisms of "The Master."  ("The Master," in case you don't know it, was von Mises.)  Of course I was taken aback, and all the more so since I considered myself, back then, much more a Mises than a Friedman fan.

Even now I'm sure I'm as aware as any of Friedman's toughest critics of the various forms of government intervention in the monetary system he favored at one time or another.  Throughout most of his career Friedman categorically favored a managed fiat standard over a gold standard.  He also favored (as was only natural given that first preference) flexible over fixed exchange rates.  Finally, for much of his career he dismissed free banking as the equivalent of legal counterfeiting.  These are all, needless to say, positions that are objectionable, if not obnoxious, to persons who believe that unhindered markets are more capable than governments are of producing orderly and reliable monetary systems.

But there is another side to the ledger that Friedman's more radically free-market critics seem to overlook.  Two items especially deserve notice.  Although he favored fiat money, Friedman was an unflinching and relentless opponent of monetary discretion.  We also have him (and Anna Schwartz, another of my economist-heroes), to thank for the fact that the Great Depression is no longer considered proof of the inherent instability of free markets.**

Friedman's more strident critics also seem unaware of how his monetary ideas changed over time, evolving in a way that fans of either the gold standard or free banking ought to find gratifying.  Much of this evolution appears to have taken place during the mid-1980s.  In various articles written then, Friedman admitted having erred in treating fiat money as a less expensive alternative to gold.  He also renounced his previous defense of central banks' currency monopolies, conceding that there was in fact no good reason for prohibiting commercial banks from issuing their own paper notes.  Instead of recommending a constant growth rate for the money stock, as he had in the past, he switched to arguing for a constant or "frozen" monetary base, which was tantamount to recommending that the Fed's monetary and discount window operations be altogether shut down.  Finally, he publicly declared himself in favor of abolishing the Fed on numerous occasions.  Think what you will of Friedman's later opinions, you will go blue in the face trying to convince me that they are those of a "statist."

Finally, had it not been for Milton Friedman, I and other academic (or formerly academic) proponents of monetary laissez-faire would be an even more pathetically forlorn bunch than has actually been the case.  For setting a handful of "Austrian" economists aside, the list of academic economists, including economists working for central banks and other financial regulatory authorities, who have shown a willingness to take free banking ideas seriously, and to treat their authors courteously, even allowing some of their articles to get published in mainstream academic journals, consists overwhelmingly of prominent "Chicago-School" monetary economists, if not of Friedman's own students.  Had it not been for Friedman and his students, in other words, there would almost certainly not be a Modern Free Banking School of any academic standing today.***

One of those students — and yet another of my monetary economics heroes — is David Laidler, who wrote me just recently.  Like that other recent correspondent David was passing on some of his thoughts about Milton Friedman on the 103rd anniversary of his birth, in the shape of a copy of his speaking notes for a talk he gave on "Milton Friedman's Intellectual Legacy" at Canada's Institute of Liberal Studies.  David has kindly allowed me to make those notes available here.  As David's appraisal of Friedman is, like all of his work, both thoughtful and well-written, I urge everyone to read it.

In fact, I disagree with only one sentence in David's otherwise excellent talk.  This occurs when David says that, starting in the 1980s, "Milton's…inclination was to drift toward 'free banking'."   That doesn't sound right to me, for "drifting" was hardly Friedman's style.  Instead, I'm inclined to believe — and Friedman himself claimed — that he moved toward free banking quite deliberately, upon finding that the predictions of its theorists conformed better to observed reality than his own earlier views did.

I hope that David would not disagree.


* An amusing illustration of this — though one of admittedly doubtful evidential value — consists of a straw poll taken on the Ron Paul Forum in which 16 out of 28 participants held that Friedman was either "a statist leaning libertarian, or a flat out statist."  (Since I eat vegetables now and then, I suppose I must be a "radical vegetarian-leaning carnivore.")

**In America's Great Depression, originally published in the same year as Friedman and Schwartz's  Monetary History of the United States, Murray Rothbard also blamed the Great Depression on the Fed, basing his arguments not on monetarist ideas but on the Mises-Hayek theory of the business cycle.  But regardless of the the different theories, it was Friedman and Schwartz's work rather than Rothbard's that was primarily responsible for reversing the tide of opinion, especially among academic economists.

***I also owe a particular debt to Dick Timberlake, a Chicago-trained monetary economist who had Friedman among his teachers.  It was Dick who brought Larry White to the University of Georgia and who later, with Larry's help, got me a job there.  Dick has been yet another hero to me, as a monetary economist certainly, but also in lots of other ways.

  • daubigny

    Sad, isn't it, when intelligent people—tired of thinking, wanting to follow and belong, trade reason for religion, become "true believers" and attack those who break with their cults. Jungians, Freudians, Keynesians, Randians, Rothbardians, Von Misites (or whatever they call themselves) … if only they would see themselves for what they are. Not scientists, not artists: cultists.

  • Walker Todd

    I share George Selgin's views here on Friedman (I believe them to be accurate). I also was a friend of Anna Schwartz (it's her 100th birthday year), and she was more gold-tolerant all along than Friedman. The problem with disrespecting Friedman today is that, without him, any effort toward a better monetary arrangement would be much farther behind than it is today. A good analogy would be trying to reap the fruits of the American Revolution without the actions of all those Dead White Males who actually made it happen. George's monetary heroes list is similar to my own, in other words. — Walker Todd, Chagrin Falls, Ohio

  • Jeffrey Rogers Hummel

    Outstanding post, George! My own intellectual evolution with respect to Milton Friedman mirrors yours in many respects. Although I took my first economic courses from Hans Sennholz (one of
    the best teachers I ever had), when I finally read Milton’s and Anna Schwartz’s magisterial Monetary History in graduate school, it was immediately clear that their analysis of the money stock and the Fed’s impact on it was far more sophisticated and insightful than Murray Rothbard’s in America’s Great Depression. As time passed, what impressed me even more than Milton’s gradual
    transition toward free banking was his incredible technical facility across the entire range of economic topics. I cannot possibly recount the numerous times that, while exploring the details of some difficult economic question, I’ve gone back to read Friedman and discovered that he got it absolutely right, often before anyone else and sometimes in stark contrast to many contemporary
    economists. And Milton was also helpful in my own career, encouraging me to write my book on the Civil War, subsequently serving as the one economist on my history dissertation committee, and securing my year appointment as a National Fellow at the Hoover Institution.

    Let me add a word about the two of Milton’s students you mentioned. Were you aware that David Laidler in June was awarded the 2015 Thomas Guggenheim Prize for the History of Economic
    Thought? ( As for Dick Timberlake, he has always been an amazingly enthusiastic and helpful proponent of my own work.

  • Andrew_FL

    I've always liked Milton Friedman, but that anecdote of his about Mises had the opposite effect on me than I think he intended it to have on people. I've always found it endearing. Maybe it's my contrarian personality.

    There is little doubt in my mind, opinions of Rothbardians notwithstanding, that Friedman is one of history's great economists. More importantly than that he's one of history's greatest communicators of economics. How many people today embrace free market ideals essentially because of him? Way more than do so because of Rothbard.

    And I say this as an avowed Austrian purist.

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  • joebhed

    ""Friedman's more strident critics also seem unaware of how his monetary
    ideas changed over time, evolving in a way that fans of either the gold
    standard or free banking ought to find gratifying. ""

    Also, Dr, Selgin, the monetary reformers.

    We rather harken, than cower, back to Friedman's ideas of a fixed by rule public money system ……. as a source for national economic stability, you know, like a sovereignty ought to operate its own money system.

    My Dad said that Friedman saw the essential need for a level playing in money, in order for free enterprise to succeed; in other words, against unbridled financial capitalism. …. and the un-level, wealth-concentrating playing field we have today..

    And, whilst his freer capital markets theories made him both famous and a marked man for critics from every econ-political angle, his 1997 publication of A Program for Monetary Stability showed Friedman still favoring the same method certain for solving problems of either monetary, financial or economic instability.

    Government issue of sovereign fiat money by rule(law).

    I wonder if he would have thought Kucinich's NEED Act from 2011 was on the mark.


  • Nick_Rowe

    Very good and sensible post, George.

    • George Selgin

      Thanks, Nick.

  • Better than worshipping authorities would be attending to data. When have free monetary systems afforded stability? Not very often. The 1800's in the US were a monetary disaster, with overlending and money creation alternating with bank failures. Your mania for "free markets" is highly destructive.

    • Andrew_FL

      Burk, the notion that the US of the 1800's had a "free monetary system" has been debunked so many times that you literally could have found a post explaining precisely why your argument is wrong in the current list of recent posts. You might consider actually reading the literature on the topic before shooting your mouth off.

      • At least there is some data here, from a much free-er system than the jack-booted thuggery of the Fed that we have now(!) You seem to be pining for a system that has never occurred and provides no data at all. It is an impractical dream, that private issuers have any more incentive towards stability than public issuers do. Bitcoin is only the most recent, disastrous, example. "Decent money", indeed!

        • Never occurred. No data at all. Impractical dream.
          Except that we have some historical examples… And they have been analyzed… By economists with their eyes open. See, for example:

          • Thanks for all the replies. It seems to boil down to the Scotland example. This was not very free, since everyone adhered to the gold standard, or bi-metal. We are not going back to that, unless you haven't noticed, since it has its own severe problems of elasticity. So that is not a possible future. The future we are looking at is one where bankers can create credit based on their capital, or beyond, as subject to regulation and/or bank runs, solvency problems, business conditions, monetary policy, etc. The recent S&L and Lehman/WaMu problems were examples of bankers running wild in the simplest terms, being feted by the business press by creating huge profits out of bad loans, which had to be cleaned up by someone else, all due to insufficient regulation and oversight. The temptation to gain in the short term is far too strong to allow free banking. Imagine how many Ayr banks there would be today without any oversight.

          • George Selgin

            You mix issues up here, Burk. One is, have there been stable unregulated systems in the past; the other is, can we have something like them again. Concerning the first, which has been at issue, Scotland is only the best known case; the references included others as well. As for gold, that (or silver) was the money of the time; so of course banks were bound to issue claims to it, just as they must now issue claims to fiat money. There is no regulation at play part from ordinary law of contract and negotiable instruments.

        • George Selgin

          Burk, quit bluffing; quit pretending to know more than you do. You aren't fooling anyone.

          The wise and manly thing for you to do now is to quit the charade and start actually learning about the topics you've been spinning tales about.

          On genuine "free banking" systems versus banking in the antebellum U.S., you can start with this other post of mine:

          Will Luther supplies some links to studies ("data") on genuine free banking systems below. There is also a book edited by by Kevin Dowd including numerous case-studies called The Experience of Free Banking.

          If you read this literature you will perhaps no longer be inclined to spout-off nonsense about how systems of the sort I "pine" for have "never occurred" and would be unstable etc. At very least you will no longer have to continue talking through your hat.

    • George Selgin

      Burk, it is persons like yourself, who repeat the tired old canard that the U.S. monetary system of the 1800s was unregulated, who could use some more exposure to the data!