11 April 2011
"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.