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Milton Friedman on Monetary policy and the Federal Reserve

Under a clean floating rate, there cannot be a foreign exchange crisis. There may be internal crises, as in Japan, but they would not be accompanied by a foreign exchange crisis. The reason is simple: Changes in exchange rates absorb the pressures that in a pegged regime lead to crises. The foreign exchange crisis that affected Korea, Thailand, Malaysia, and Indonesia did not spill over to New Zealand or Australia because those countries had floating exchange rates.

Context. From an article on the East Asian financial crisis, which he traces to three elements: stagnation in Japan, the pegging of exchange rates to the U.S. dollar by national central banks, and the existence and policies of the International Monetary Fund. Earlier, he defines clean floating as a regime in which the central bank does not intervene in the market to affect the exchange rate.

How Asia Fell
Column, 1999, The Times (London), October 12, 1998, as “Clear Lessons to Be Learnt from the East Asian Episode”; reprinted with minor editorial changes in Hoover Digest 1999 No. 2
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Milton Friedman, “How Asia Fell” (The Times (London), October 12, 1998, as “Clear Lessons to Be Learnt from the East Asian Episode”; reprinted with minor editorial changes in Hoover Digest 1999 No. 2, 1999). https://miltonfriedman.org/quotes/clean-floating-rate-no-foreign-exchange-crisis-1998

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He also said

  1. Second, the IMF has been a destabilizing factor in East Asia, not so much because of the conditions it imposed on clients, whether good or bad, as by sheltering private financial institutions from the consequences of unwise investments. It is not too much to say that, had there been no IMF, there would have been no East Asia crisis, though countries might have had internal crises—as with Japan, whose troubles cannot be blamed on the IMF.

    Context. From an article on the East Asian financial crisis, which he traces to three elements: stagnation in Japan, the pegging of exchange rates to the U.S. dollar by national central banks, and the existence and policies of the International Monetary Fund. This is the second of the two points with which he concludes; the first is that a developing country should prefer either a truly fixed rate with no national central bank or a floating rate plus a national central bank to a pegged exchange rate.

    How Asia Fell
    Column, 1999, The Times (London), October 12, 1998, as “Clear Lessons to Be Learnt from the East Asian Episode”; reprinted with minor editorial changes in Hoover Digest 1999 No. 2
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  2. The true minimum-wage rate is zero—the amount that an unemployed person receives from his nonexistent employer. This minimum-wage rate will not be affected by the new law. Rather, the law will increase the number of persons who receive a wage rate of zero.

    Context. From a Newsweek column opposing the 1972 bill to raise the federal minimum wage. A congressman had it reprinted in the Congressional Record the week it appeared.

    Legislating Unemployment
    Column, 1972, Newsweek (1972; the Record gives no issue date, only “the current issue”); reprinted in the Congressional Record, Extensions of Remarks, June 28, 1972, p. 23100, introduced by Representative Sherman P. Lloyd of Utah under the heading “Observations on the Compulsory Minimum Wage”, Congressional Record, June 28, 1972, p. 23100
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  3. The Federal Reserve system had been established to prevent what actually happened. It was set up to avoid a situation in which you would have to close down banks, in which you would have a banking crisis. And yet, under the Federal Reserve system, you had the worst banking crisis in the history of the United States. There's no other example I can think of, of a government measure which produced so clearly the opposite of the results that were intended.

    Context. Asked what actually caused the Great Depression, in a PBS interview for the series Commanding Heights. He had just distinguished the ordinary recession of 1929 from its conversion into a major depression by bad monetary policy.

    Commanding Heights: Milton Friedman interview
    Interview, 2000, PBS, “The Great Depression,” interview conducted October 1, 2000
    Checked against the sourceRead the transcript

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