11 April 2011

Milton Friedman on Alan Greenspan
On 31 January 2006 Milton Friedman wrote an article in the Wall Street Journal titled "He has set a standard". The article was on Alan Greenspan and the date was the former Fed chairman's last day at work.

"Over the course of a long friendship, Alan Greenspan and I," Friedman wrote, "have generally found ourselves in accord on monetary theory and policy, with one major exception. I have long favored the use of strict rules to control the amount of money created. Alan says I am wrong and that discretion is preferable, indeed essential. Now that his 18-year stint as chairman of the Fed is finished, I must confess that his performance has persuaded me that he is right -- in his own case. His performance has indeed been remarkable."

On the list of big-time blunders by economists, this must rank right up there along with Irving Fisher's "Stock prices have reached what looks like a permanently high plateau" a few days before the October 1929 crash. Of course Friedman did not live to see the remarkable disaster that Greenspan had wrought.

But that is not the subject of this blog. It is rather to ask: When Friedman spoke of "strict rules to control the amount of money created" what strict rules did he mean in practice? Indeed one can ask: What did he mean by money?

In 1987 the Fed had abandoned growth rate targets for M1. In 2000 the Fed stopped setting growth target ranges for M2. The fact is that both aggregates had ceased to have any meaningful value from the beginning of the eighties, and indeed there were problems with the aggregates going as far back as 1976 when economists began to talk about the "missing money".

In the absence of a meaningful aggregate there was of course no question of "strict rules". And of course Friedman knew that. Otherwise, he would have been able to warn Greenspan that the growth rate of money in the previous three years had been very high.

The article has a triumphal tone to it, the tone of a man who has had his life's work on money more or less brought to fruition in the person of Greenspan. A more appropriate tone would have been one of humility, of a man who had seen a lifetime of work on money come to naught, because no one any longer knew what money was.

Ben Bernanke's speech on monetary aggregates in 2006 has more details.

Category: Economics

Philip George
Understanding Keynes to go beyond him

Buy my new ebook
Contact Me
October 2022
September 2022
March 2022
January 2022
October 2021
August 2021
July 2021
August 2019
October 2018
April 2018
December 2016
October 2016
August 2016
July 2016
April 2016
March 2016
January 2016
December 2015
November 2015
October 2015
September 2015
August 2015
June 2015
May 2015
February 2015
November 2014
October 2014
August 2014
May 2014
April 2014
December 2013
October 2013
July 2013
May 2013
January 2013
November 2012
October 2012
August 2012
July 2012
June 2012
May 2012
March 2012
February 2012
January 2012
December 2011
November 2011
August 2011
July 2011
June 2011
May 2011
April 2011
March 2011
August 2010
October 2009
May 2009
June 2008
March 2008
February 2008
January 2008
December 2007
August 2007
June 2007
May 2007