Why Milton Friedman Changed His View on Rule-Based Monetary Policy (After initially rejecting the gold standard)

Richard Ebeling emails:

Dear Bob,

I participated in the March 1, 2016 “Libertarian Angle,” webinar sponsored by the Future of Freedom Foundation, with the Foundation’s president, Jacob G. Hornberger, on the topic: “The History of Economic Thought, Part 7: “Milton Friedman and the Monetarist Challenge to Keynesian Economist.”

In this segment, the focus is on Milton Friedman’s Monetarist alternative to the Keynesian Revolution. Greatly influenced by some earlier members of the “Chicago School” of Economics, especially Henry Simons, Milton Friedman attempted to design “rule-based” policy proposals in place of the Keynesian insistence upon wide and extensive discretionary governmental fiscal and monetary policy to “control” aggregate output and employment in the economy.

Thus, Friedman proposed “automatic stabilizers” over government spending to battle periods of falling output and employment, rather than arbitrary deficit spending. And in the arena of monetary policy he proposed a “monetary rule” of an “automatic” annual increase in the money supply not open to government discretionary manipulation. As part of this analysis he rejected a traditional gold standard and argued for a rule-based government paper money standard.

His main contributions to monetary theory and policy grew out of his 1963 monumental study, “A Monetary History of the United States, 1865-1960,” in which he demonstrated that virtually all boom-bust periods have been caused by discretionary monetary expansion.

In the years, however, after winning the Nobel Prize in 1976, Friedman recanted many of his own views on monetary policy, concluding that following their own short-run interests, governments and bureaucracies would never follow a monetary “rule” in the long run. And given the history of government monetary mismanagement over the twentieth century, the United States economy would have been far better if the gold standard had not been abandoned – though he was not willing to endorse a return to any any gold-backed money.

A brilliant advocate of the individual freedom and the free market, in matters of monetary and macroeconomic policy, Friedman was unable to escape from the idea that it was the duty and responsibility of governments to manage monetary and fiscal affairs to stabilize the economy, even if by “rules” rather than Keynesian-like discretion.

Best,
Richard