Carpe Diem

As the Fed celebrates its centennial, Milton Friedman explains why the Federal Reserve should be abolished

The Federal Reserve Act that created the US Federal Reserve Bank was passed almost 100 years ago on December 23, 1913. As the Federal Reserve prepares to celebrate its centennial this year, what would Milton Friedman say? In the 1994 video above, Milton Friedman explains why he thinks the Fed should be abolished. Reason? It has a “very poor record, and it’s done more harm than good.”

40 thoughts on “As the Fed celebrates its centennial, Milton Friedman explains why the Federal Reserve should be abolished

  1. Friedman was an enabler for the ‘efficient’ government gradualists who helped prevent solutions from ever being taken. The Fed should be abolished because central planning does not work and because it is not constitutional. End of story. No utilitarianist angst is required.

  2. Well, fun post, but in this clip Friedman does not suggest an alternative.nMaybe he does later, and I would like to see that.

    What Volcker has said is that private-sector operators in financial system are willing to take risks that may injure the whole system (think Long Term Capital Management, or AIG, or Lehman, or Bear Stearns).

    People like to leverage, like to speculate, like to hit the Big One and land in Fat City.

    And if a guy levers 100-to-1 and bets wrong? Too bad, on to the next job. He does not spend the rest of his life in slavery and his wife and family too. The system can bomb….

    BTW, I think Friedman is right that the Fed was too tight in the Great Depression, and I am sure Friedman would say the Fed is too tight now…..but I still don’t see a practical, working alternative to a central bank….

  3. I stated before:

    U.S. per capita real GDP grew at a faster rate after the Fed, in 1913, than before (although large economies tend to grow more slowly than small economies), in large part, because the Fed became increasingly better at smoothing-out both short-term and long-wave business cycles.

    Boom-Bust cycles are inefficient both in the boom and bust phases, because resources aren’t employed efficiently.

    Also, you can’t blame the Fed for the financial crisis, because Congress created the moral hazard of directing and recycling money into the housing market.

    You can blame the Fed for easing the money supply a few months too late in 2007, given the Fed works in the future economy. However, the Bush tax cuts in early 2008 gave the Fed time to catch-up easing the money supply.

    • Recessions in the Industrial Revolution – 1871-1914

      Period – Percent Decline of Business Activity

      1873-79 – 33.6%
      1882-85 – 32.8%
      1887-88 – 14.6%
      1890-91 – 22.1%
      1893-94 – 37.3%
      1895-97 – 25.2%
      1899-00 – 15.5%
      1902-04 – 16.2%
      1907-08 – 29.2%
      1910-12 – 14.7%
      1913-14 – 25.9%

      Recessions in the Information Revolution – 1982-2007

      Period – Percent of Contraction

      1990-91 – 1.4%
      2001 – 0.3%

      • The Long Depression

        “The National Bureau of Economic Research dates the contraction following the panic as lasting from October 1873 to March 1879.

        At 65 months, it is the longest-lasting contraction identified by the NBER, eclipsing the Great Depression’s 43 months of contraction.

        In the US, from 1873–1879, 18,000 businesses went bankrupt, including hundreds of banks, and ten states went bankrupt, while unemployment peaked at 14% in 1876, long after the panic ended.”

        ******

        The Depression of 1893

        “The Depression of 1893 was one of the worst in American history with the unemployment rate exceeding ten percent for half a decade.

        During this period population grew at about 2% per year, so real GNP per person didn’t surpass its 1892 level until 1899.

        The depression, which was signaled by a financial panic in 1893, has been blamed on the deflation dating back to the Civil War, the gold standard and monetary policy, underconsumption, a general economic unsoundness, and government extravagance.”

    • U.S. per capita real GDP grew at a faster rate after the Fed, in 1913, than before (although large economies tend to grow more slowly than small economies), in large part, because the Fed became increasingly better at smoothing-out both short-term and long-wave business cycles.

      This is not true. The greatest growth came in the 19th century when there was no Fed. And it was the Fed that created the Great Depression (along with Hoover/FDR meddling) when it added liquidity in the second half of the 1920s in order to allow the British to get back on the gold standard without devaluing their money.

      The Fed has been an enabler for military adventurism and the welfare state and has been responsible for the weak capital formation in the United States.

      Boom-Bust cycles are inefficient both in the boom and bust phases, because resources aren’t employed efficiently.

      Boom and bust cycles are created by the manipulation of the interest rates and credit markets. The Fed has been busy blowing bubbles ever since it was created. If anything, it is far worse today.

      Also, you can’t blame the Fed for the financial crisis, because Congress created the moral hazard of directing and recycling money into the housing market.

      Congress could not do much without the Fed’s easy credit policies. This is why Congress and the Fed hate the idea of a hard money system that limits their wealth transfer programs.

    • Where are the Security Traders of CDO’s and CMO’s as well as the feeders into these systems? Where do the originating brokers and bankers fit into moral hazard? Are you saying Congress handled issues improperly after the initial market failure from moral hazard? I have felt, being involved in this mortgage industry and, since I had an unwillingness to live in this world as a profiteer, that, on a daily basis, the immoral nature of profits through selling faulty instruments, most time using coercive means to do so, to sell these tainted mortgage instruments, I came in last in the financial benefits. My conscious is clear but I economically suffered. The first government failure was to not oversee these instruments by oversight in the first place.

      It’s like raising your child. Do well from day one and the child may grow up well. Try to intervene on the 30 year old drug addicted, crime profiteering son, and, yes, as a parent you are a failure. The earlier the intervention, the less probable the failure. Wait until market failure to fix a problem and you will certainly have government failure.

  4. Remarks by Governor Ben S. Bernanke
    March 2, 2004

    Money, Gold, and the Great Depression

    “Countries on the gold standard were often forced to contract their money supplies because of policy developments in other countries, not because of domestic events. The fact that these contractions in money supplies were invariably followed by declines in output and prices suggests that money was more a cause than an effect of the economic collapse in those countries.

    Perhaps the most fascinating discovery arising from researchers’ broader international focus is that the extent to which a country adhered to the gold standard and the severity of its depression were closely linked. In particular, the longer that a country remained committed to gold, the deeper its depression and the later its recovery.

    If declines in the money supply induced by adherence to the gold standard were a principal reason for economic depression, then countries leaving gold earlier should have been able to avoid the worst of the Depression and begin an earlier process of recovery. The evidence strongly supports this implication. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which stubbornly remained on gold.

    The finding that leaving the gold standard was the key to recovery from the Great Depression was certainly confirmed by the U.S. experience.”

    • Contracting the money supply in the face of recession is asinine in all cases. In the 1930′s it turned a recession into the Great Depression. The US contracted the money supply 30% in the early 1930′s, using the reasoning that the gold flooding into the US seeking safety was “money”, and the Fed needed to contract the money supply to balance the effect of incoming gold.

      Whether nations were forced to contract their money supply because of the the actions of other nations is questionable at best. I’d say it was asinine.

  5. Milton Friedman has been all over the map on his monetary theories. He was the one who (back in the 60′s & 70′s) was calling for the Fed to provide for a constant (he even specified 4% per annum) growth in monetary reserves regardless of the other ups and downs in economic activity. He was obviously campaigning for the position of Chairman of the Fed but Nixon had other ideas.

    Later, in the 90′s, a grumpy and disillusioned Milton Friedman was telling us how evil all parts of Govt could be and that the Fed should be abolished.

    In his later years Milton Friedman even told us that medical doctors should not be licensed by the states; the free market should sort out the good doctors from the bad doctors.

    It is time to close the book on Milton Friedman.

    • Milton Friedman has been all over the map on his monetary theories. He was the one who (back in the 60′s & 70′s) was calling for the Fed to provide for a constant (he even specified 4% per annum) growth in monetary reserves regardless of the other ups and downs in economic activity. He was obviously campaigning for the position of Chairman of the Fed but Nixon had other ideas.

      The monetarists are not much better on economic issues than the Keynesians.

      Later, in the 90′s, a grumpy and disillusioned Milton Friedman was telling us how evil all parts of Govt could be and that the Fed should be abolished.

      He was right. Government is evil and the Fed should be abolished. The problem is that he spent a lifetime trying to make evil more efficient and effective and never had the courage to call for a free market in money.

      In his later years Milton Friedman even told us that medical doctors should not be licensed by the states; the free market should sort out the good doctors from the bad doctors.

      This is true. There is no reason why doctors can’t be accredited by private companies that do not limit their numbers as the AMA does. There is no reason why certain procedures that can be done by nurses have to be funnelled through a GP or why pharmacists can’t make certain decisions without a doctor.

    • Milton Friedman has been all over the map on his monetary theories.

      No, he hasn’t been. He wanted to abolish the Fed. If the Fed couldn’t be abolished for political reasons, then he favoured taking away all of its discretion and replacing it with a mathematical model that would steadily increase the money supply. Whether you agree or disagree with the wisdom of taking so much power away from the asshats at the Fed, Friedman was consistent.

      Friedman was spot on with regard to the insanity of occupational licensing. Do you choose your doctor based on the fact that the state licensed him or do you do your due diligence by asking your friends and acquaintances for recommendations, thus treating them as private certifiers? I personally don’t labour under the delusion that doctors are even marginally competent, let alone actually any good just because the state gave them a license.

      • I agree with your “do your own due diligence” approach.

        Am I safe in assuming you’d be under no similar delusions if they were certfied by a private company?

        If so, what’s the alternative if no Govt. licensing and no private licensing?

        • I absolutely trust private certifiers.

          The incentives and goals are totally different.

          Occupational licensing exists primarily to protect existing participants from competition and to grow associated bureaucracies. There are no ill consequences for state licensing organs if one of their licensees proves to be a total incompetent. In fact, usually, the agency expands its power if there is a big scandal. The state agencies also have no competition, so the regulators and licensing agencies can be as incompetent and corrupt as they want and there will be no ill consequences, save maybe the occasional embarrassment.

          A private certifier lives and dies by its recommendations. It has no power to limit competition either in its own space or for the companies for which it is certifying and it can only remain in business if the market trusts it. Thus, even if the certifier is paid for certification by the company (or professional) it is cdertifiying, it has no incentive to lie. If a recommended product is found to be awful, the public loses faith in the certifier, its ratings become less prestigious and demand for its services falls as demand for its more honest competitors rises.

          Note that the market already understands this. Private certification from Consumer Reports to the Chartered Financial Analyst certification are in high demand. People already understand that state licensing is meaningless on the question of quality.

          • Your point about private certifiers made me think of our beloved rating agencies (Moodys, S&P) who seem to have been throwing darts at a dartboard – still live despite horrendously misguided ratings.

            I have a hard time making the leap of faith that privitization (although it looks good on paper) would not succumb to the same corruption and incompetencies over time. I believe power corrupts and moving it from one group to another does not alleviate it, no matter how it’s incentivised.

            I guess the last 10-12 years have shot my faith in humanity a bit…

          • Your point about private certifiers made me think of our beloved rating agencies (Moodys, S&P) who seem to have been throwing darts at a dartboard – still live despite horrendously misguided ratings.

            Your example is wrong. The rating agencies have a protected oligopoly and are not operating in a competitive free market.

          • The credit ratings agencies are private in name only and do not compete with each other in any meaningful way.

            The three are NRSROs (Nationally Recognized Statistical Ratings Organizations), a designation conferred by the SEC.

            Only NRSRO ratings are acceptable to the SEC to meet a firm’s capital requirements. Thus, they are effectively organs of the state and not meaningfully different from a state licensing board or regulatory agency.

            If we had real private certification, the market would decide which agency is trustworthy instead of being forced to accept whatever the SEC shoves down its throats.

            I believe power corrupts and moving it from one group to another does not alleviate it,

            And that’s why private certification is superior – the certifiers are not endowed with power. The are slaves to the market – as they should be.

            I have a hard time making the leap of faith that privitization (although it looks good on paper) would not succumb to the same corruption…

            I didn’t ask you to make a leap of faith. I gave your reasons for the superiority of a private system and referenced evidence that such a system is already valued by the market. If you think I’m wrong, then please explain where my logic is flawed. Preferably and explanation that doesn’t require me to rely on the mush of faith.

          • moe-

            that’s not quite the example you take it to be.

            the ratings agencies were a federally mandate oligopoly.

            if you issued a bond, you HAD to get one or more of them to rate it.

            as they had no actual need to demonstrate the value of getting rated in the first place, they were not constrained by the need to provide a valuable service. they were more like the IRS than a private company.

            accreditation should be voluntary.

            i do not even have an issue with government ratings so long as they are voluntary, not mandatory.

            so, you CAN get a hairdresser’s license if you view it as valuable, but you do not have to.

            doctors, lawyers, etc all ought to be the same. make it all like iso 9000.

          • I’m not looking to argue, i’m interested in opinions that differ from mine.

            “And that’s why private certification is superior – the certifiers are not endowed with power. ‘

            Of course a certifier has power, private or public – they have the power to certify; which is what the recipient needs to conduct their business. Explain (or show evidence) how this is not power.

            I get your point on the ratings agencies. However, Consumer Reports does not certify – any more than the Good House Keeping Seal of Approval signifies “certification”. No one needs Consumer Reports to grant them a license to do business.

          • Of course a certifier has power, private or public – they have the power to certify; which is what the recipient needs to conduct their business. Explain (or show evidence) how this is not power.

            The certifier does not have a monopoly and has no power to stop anyone from obtaining certification from a rival. The certifier also has no power to force the public to accept those it deems competent as competent. The power comes from the consumers who make the ultimate purchasing decisions, not the certifiers who operate in a competitive marketplace.

          • Moe,

            I see our problem. This is where we’re talking past each other: “No one needs Consumer Reports to grant them a license to do business.”

            In a world of private certification, nobody would need a license to do business. Consumers would rely on either their own expertise or on certifiers for information about a product or service’s effectiveness and safety. Much as people do now, really.

            I know of very few people who don’t seek out either word of mouth recommendations or consult consumer reports when making almost any kind of decision. I ask around for the best doctors, check consumer reports when buying a car (it has never let me down) and various technology publications when buying TV’s for my home. Unlike licensing boards, the certifiers explain their criteria to the consumer in more or less plain English (and they have ever incentive to do so). Do you have ANY idea what a state licensing board requires? I don’t. What I do know is that a doctor whose license is revoked for gross incompetence in one state can move to another and get a license from that state. That doesn’t exactly inspire confidence in me.

          • i do not even have an issue with government ratings so long as they are voluntary, not mandatory

            Oh, I do. There’s not a doubt in my mind that the government will spend $100 to do a job worth $0. Imagine a typical government bureaucratic trying to issue a certification on your car. When you’ve stopped laughing at the image that conjures in your head, consider that there is no reason to force taxpayers to fund the care and feeding of useless bureaucrats.

        • Now, imagine he completed some elite private training program with a reputation for churning out awesome pilots. Wouldn’t you feel better about flying with him? I would.

        • Thank you for this lesson. Basing money supplies on precious metals has provided failures after initial causes of failure in an economy. In my mind, initial failure comes from other arenas such as moral failure, industrial detraction caused by a war ending or dependence on trade from unstable foreign nations on a necessary resource. The solution to solving a contracting economy in better handled by a regulated money supply that can be expanded or contracted to meet the economy’s needs at the time.

          • Thank you for this lesson. Basing money supplies on precious metals has provided failures after initial causes of failure in an economy.

            Really? If you actually look at history rather than buy an unsupportable narrative you will find that it is fiat currencies that create failure after failure because no economic calculation is truly possible in a fiat world. The time of the classical gold standard was one of the greatest amount of international trade and the highest increase in the standard of living for most people. The gold standard was not abandoned because economies failed but because politicians wanted to wage wars without direct taxation to pay for them.

            In my mind, initial failure comes from other arenas such as moral failure, industrial detraction caused by a war ending or dependence on trade from unstable foreign nations on a necessary resource. The solution to solving a contracting economy in better handled by a regulated money supply that can be expanded or contracted to meet the economy’s needs at the time.

            Regulated money supply? You mean by the people that suffer from the same moral failure? Who determines what the economy needs? Where does the data come from? How are those with the power to determine what is needed kept in check so that they do not use that power for political purposes?

  6. Buy a cheap PC and have that PC grow the supply of money at about as fast as nominal GDP–6% annually should do the trick.

    Instead of constantly fixing, adjusting, tweaking and fine- tuning, a steady 6% would do the job better than what we have seen for the past century.

    The fire the PC.

    • You don’t want the money supply to grow at the same rate as GDP. If you are to put money supply growth on autopilot, the least harmful method would be to grow it at the rate of population growth.

  7. So some of the posters (above) agree that the free market will sort out good doctors from bad doctors (say, brain surgeons) and state medical licensing boards serve no public purpose??

    Would you say the same for commercial airline pilots? How about a little creative destruction to make us all better off.

    • BigEd

      Do you believe the FAA has a greater interest in passenger safety than commercial airlines? Which one is trusting a pilot with a multimillion dollar airplane filled with potential multimillion dollar lawsuits? Which one faces possible bankruptcy through loss of business if they fail to use only highly qualified and competent pilots?

      What does the FAA lose if they certify a pilot who shouldn’t really be allowed to fly a plane? Do you think anyone even loses their job?

      In the absence of government mandated licensing, I suspect that airlines would require pilots to demonstrate their competence in some way they found reassuring.

      Note that current FAA licensing hasn’t prevented licensed pilots from boarding and flying aircraft while drunk, or from falling asleep and overflying their destination.

      When you take your car to a mechanic or dealer for repairs I doubt that you check the certifications of the person who will actually work on your car, but instead trust the business owner to use only qualified people. If he doesn’t, and you are unhappy, you may take your business elsewhere next time. That’s the power of the market.

    • What Ron said.

      Also, the state hands out pilot licenses. Would you put your family in an airplane piloted by a rookie who just got his license? I’m guessing the answer is “no” (unless you really hate your family. In that case, imagine someone you love). But, why not? The state gave him a license! He’s all cool.

      State licensing is pretty meaningless. If it weren’t, there wouldn’t be so many idiot drivers on the road.

    • And then moral hazard rears it’s ugly head again. I suppose your favorite sporting events have no referees and death is not punishable as long as it exists on the field. If you enjoy sports, the referees are a part of the game. In games, which all economic endeavors exist in this framework, referees are a necessary element.

      Assuming that the winner will trickle down enough earnings to offset the adversaries laying dead is not an acceptable approach and will not provide enough funds to make up for the losses. Further, having the winner pay the most for the refs(Standard and Poors) is not acceptable. You have created a ripe environment for the bacterial infection known as Moral Hazard.

      So, maybe government should not do the oversight, but you have no acceptable answer for early intervention in curtailing a crises? In late intervention, we fall back on the term Market Failure, inevitably followed by Government Failure. Government will always be blamed first and Business second. Neither assignment of blame ranking is important. Due to late intervention, all share blame and ranking to an state of equality.

      However, early intervention to bad products or services are necessary. The costs today in the CDO and CMO faulty security instruments have rippled well beyond the initial $2 trillion. However, due to lack of self restraint, Business is not trusted and rightly so. It will take time for Financial Institutions to garner trust and other Businesses are guilty just be being within reach one another. Folks blame government for not turning things around as if they are God themselves. No, they will fail. Only because the oversight did not happen sooner.

      The game must be refereed to be fair. The way of thinking regarding Doctors, the Federal Reserve and so many issues that have raised their ugly heads in the last 30 years is not good economic thinking which is the problem I have with the Chicago School and Austrian School of Economics. I still am not sure how to referee games without great expenditure and who is to do the oversight. Moody’s,, Fitch and Standard and Poor’s failed at an extreme level. So who referees?

      Without a thoughtful, multiple paged analysis of an alternative, we are left with Government. The Stock Markets failed due to Moral Hazard in the the 20′s with margin calls (a form of risk layering-in the wrong direction) leading up to 1929. Then came deregulation and risk layering with Junk Bonds and Sub-prime Loans, with the inevitable Market Failure due to Moral Hazard. Again, both failures occurred in financial markets.

      Friedman ignored both dilemmas and the suffering that it cost. Trying to decide how to rise out of the Depression is not the primary effort. It is tertiary effort as no one addressed the primary effort needed. Friedman did not do a good job at seeing the devil on one shoulder and the angel on the other shoulder. Angels seemed to exist everywhere for Friedman. This is not the peripheral vision I expect out of a thoughtful economist.

  8. “There is no reason why certain procedures that can be done by nurses have to be funnelled through a GP or why pharmacists can’t make certain decisions without a doctor.”

    The last time I checked both RNs and pharmacists were subject to state licensing requirements.

    • BigEd

      You answered your own question. State licensing is required by law, so nurses and pharmacists are not *allowed* to make decisions without a doctor, but there is no good *reason* for it to be that way.

      In the case of pharmacists. who do you think your doctor calls when he needs advice on what medicine to prescribe for you? The pharmacist is the go-to expert.

      • First off: Read up on what’s required to become a doctor versus a pharmacist.

        Then ask yourself:
        How many times a year do you visit your pharmacist? How often does he or she run tests on you?
        How much does your pharmacist know of your medical history?

        In “CERTAIN’ instances maybe a pharmacist can add value over a doctor – what % of the time? small.

        • Moe,

          Depending on the issue, the circumstances and a whole pile of different concerns and preferences, you may choose to take up an issue with your doctor. Nobody will stand in the way of your doing so.

          But if you should decide that a pharmacist is sufficient and you’re willing to bear any risks, then why should the state decide that you have shell out hundreds of dollars for the doctor to write a script?

          And, yes, pharmacists are actually very knowledgeable about drugs, interactions, contraindications and all that important kind of stuff. Very often much more so than the physician. It’s kind of their expertise. It’s very tough for doctors to stay on top of all developments in technology, research, and pharmacology without relying on experts in those fields. And pharmacists don’t prescribe willy-nilly either. If they believe the situation to be beyond their expertise, they will tell you to go to the doctor. Nobody wants to kill their patients.

        • Moe

          Perhaps I wasn’t clear. the point was about state licensing.

          Did you mean that I should read up on what’s required to become a state licensed pharmacist vs a state licensed doctor?

          Actually, other than the hands-on stuff, the educational requirements aren’t all that different.

          My example was meant to point out that while a pharmacist isn’t allowed to sell you certain medications without a doctors OK, the doctor may confer with the pharmacist to determine what to prescribe, at which point the doctor stamps his blessing on a sale the pharmacist already knew was the correct product.

    • The last time I checked both RNs and pharmacists were subject to state licensing requirements.

      So? They are still prohibited from taking part in procedures that they are fully qualified for because the AMA is protecting doctors from competition. In a world where health care was competitive private institutions would perform the certification and consumers would have choices about who performs procedures that they pay for.

  9. Actually, monetarism has a very poor record, and it’s done more harm than good, which is why real economists don’t take Milton Friedman seriously.

    You have to be utterly clueless to seriously entertain Milton Friedman’s k% money growth rule.

    -Pingry

    • Yes, “serious” economists, when not spewing forth a long string of fallacies, are all too busy with QEternity, doin’ the twist and allocating capital like good little central planners.

      I’m guessing you consider yourself a “serious” economist and that you need to repeat that you are a “serious” economist often because it is not self-evident.

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