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Milton Friedman on money, banking, and the gold standard

Friedman on what money is, how banks create it, and why he did not think a gold standard was the answer.

20 passages in the archive18 checked against the source2 not yet checked
  1. My conclusion is that an automatic commodity standard is neither a feasible nor a desirable solution to the problem of establishing monetary arrangements for a free society. It is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist.
    Should There Be an Independent Monetary Authority?
    Journal article, 1962, In Search of a Monetary Constitution, ed. Leland B. Yeager (Harvard University Press, 1962), pp. 219–243; reprinted in the House Banking and Currency Committee’s 1968 Compendium on Monetary Policy Guidelines and Federal Reserve Structure, pp. 205–214, p. 206 of the 1968 House reprint
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  2. In my opinion, it would be desirable for Congress to instruct the Federal Reserve to adopt this policy. That would assure that the Federal Reserve System would provide a steady and stable background for private and public economic policy, instead of being itself a source of instability as it so often has been in the past and as it is currently being at this very moment.
    Statement to the House Subcommittee on Domestic Finance
    Testimony, 1968, Compendium on Monetary Policy Guidelines and Federal Reserve Structure, Subcommittee on Domestic Finance, House Committee on Banking and Currency, 90th Congress, 2nd Session (December 1968), pp. 203–204
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  3. In order for deposit insurance to work, there has to be some private personal incentive for safe banking. That incentive was provided by the net worth of the proprietors of financial institutions. Eliminate that net worth and deposit insurance created a win-win position for proprietors of those enterprises to engage in risky activities.
    Interview with Milton Friedman
    Interview, 1992, Federal Reserve Bank of Minneapolis, The Region, Interview by David Levy, June 1, 1992
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  4. It would be highly desirable if Europe could have a common money, a single unified money, just as it's desirable for the United States that we have a single unified currency. But in order for that to be possible or desirable, you have to have a unified currency over an area in which people and goods move relatively freely, and in which there is enough homogeneity of interest so that severe political strains are not raised by divergent developments in different parts of the area.
    Interview with Milton Friedman
    Interview, 1992, Federal Reserve Bank of Minneapolis, The Region, Interview by David Levy, June 1, 1992
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  5. Another defect of the conduct of monetary policy through an independent central bank that has a good deal of leeway and power is the extent to which the policy is thereby made highly dependent on personalities. In studying the history of American monetary policy, I have been struck by the extraordinary importance of accidents of personality.
    Should There Be an Independent Monetary Authority?
    Journal article, 1962, In Search of a Monetary Constitution, ed. Leland B. Yeager (Harvard University Press, 1962), pp. 219–243; reprinted in the House Banking and Currency Committee’s 1968 Compendium on Monetary Policy Guidelines and Federal Reserve Structure, pp. 205–214, p. 211 of the 1968 House reprint
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  6. The Fed should operate entirely by deciding (and announcing) in advance the changes in the monetary base (currency plus deposits at Federal Reserve Banks) required to achieve its monetary targets. If it wishes to do so, the Fed can control the base almost precisely from week to week through purchases and sales of government securities.
    Improving Monetary Policy
    Column, 1980, Newsweek, July 28, 1980; reprinted in the Congressional Record, Extensions of Remarks, July 28, 1980, p. 20026, introduced by Representative Robert Dornan of California, who gives the column as appearing in the Newsweek issue “dated July 28, 1980”, Congressional Record, July 28, 1980, p. 20026
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  7. The Fed’s repeated failure to achieve its own targets has produced an impression that it cannot do so, that it is a helpless giant buffeted by events over which it has no control. That impression is false. The Fed’s failure does not reflect a lack of means. It reflects the Fed’s tardiness in adjusting its operating procedures to the change in its announced objectives.
    Improving Monetary Policy
    Column, 1980, Newsweek, July 28, 1980; reprinted in the Congressional Record, Extensions of Remarks, July 28, 1980, p. 20026, introduced by Representative Robert Dornan of California, who gives the column as appearing in the Newsweek issue “dated July 28, 1980”, Congressional Record, July 28, 1980, p. 20026
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  8. I then attributed the divergence of promise from performance to misunderstanding. The men who run the Fed, I wrote, have “taken the behavior of interest rates rather than the quantity of money as their guide—and this mistake has led them far astray from their intended path.”
    The Inflationary Fed
    Column, 1973, Newsweek, August 27, 1973; reprinted in the Congressional Record, Extensions of Remarks, November 7, 1973, p. 36327, introduced by Representative Robert Huber of Michigan as “Mr. Milton Friedman’s article that appeared in Newsweek of August 27, 1973”, Congressional Record, November 7, 1973, p. 36327
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  9. The Federal Reserve System has long displayed a propensity to swing erratically from one extreme to the other, from excessively rapid to excessively slow monetary growth. The propensity has seldom been more dramatically evident than in recent months, which have seen the sharpest swings in monetary growth in decades.
    Improving Monetary Policy
    Column, 1980, Newsweek, July 28, 1980; reprinted in the Congressional Record, Extensions of Remarks, July 28, 1980, p. 20026, introduced by Representative Robert Dornan of California, who gives the column as appearing in the Newsweek issue “dated July 28, 1980”, Congressional Record, July 28, 1980, p. 20026
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  10. The Fed is supposedly independent. But, as Dooley said of the Supreme Court, “It follows the election returns.” Its behavior reminds me of nothing so much as the remark attributed to a U.S. Army officer in Vietnam, “We destroyed the village in order to save it.” Similarly, the Fed refrains from using its independence because it is afraid of losing it.
    Why Inflation Persists
    Column, 1977, Newsweek (October 3, 1977); reprinted in full in the Congressional Record, Extensions of Remarks, September 29, 1977, p. 31684, introduced by Representative Parren J. Mitchell of Maryland, who gives it as appearing “in the October 3, 1977, issue of Newsweek”, Congressional Record, September 29, 1977, p. 31684
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  11. 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.
    Commanding Heights: Milton Friedman interview
    Interview, 2000, PBS, “The Great Depression,” interview conducted October 1, 2000
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  12. On interest rates, the desirable policy is to permit interest rates to be determined completely by free markets. ( … ) A free competitive market in loanable funds is no less desirable than a free and competitive market in other goods and services.
    Statement to the House Subcommittee on Domestic Finance
    Testimony, 1968, Compendium on Monetary Policy Guidelines and Federal Reserve Structure, Subcommittee on Domestic Finance, House Committee on Banking and Currency, 90th Congress, 2nd Session (December 1968), p. 204
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  13. The widespread impression that the Fed has tightened is based on the mistake of judging monetary policy by interest rates, which the Fed cannot control, rather than by the quantity of money, which it can. The quantity of money is still growing as rapidly as it has for the past four years.
    Perspective on Inflation
    Column, 1974, Newsweek (June 1974); reprinted in the Congressional Record, Extensions of Remarks, June 18, 1974, pp. 19786 to 19787, introduced by Representative Jack Kemp of New York, who calls it “his column this week in Newsweek.” The reprint gives no issue date, and the chart that ran with the column is not reproduced, Congressional Record, June 18, 1974, pp. 19786 to 19787
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  14. Just as banks all around the country were closing, the Fed raised the discount rate; that's the rate they charge for loans to banks. Bank failures consequently increased spectacularly. We might have had an economic downturn in the thirties anyway, but in the absence of the Federal Reserve System—with its enormous power to make a bad situation worse—it wouldn't have been anything like the scale we experienced.
    Interview with Milton Friedman
    Interview, 1973, Playboy
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  15. As an empirical matter, low-interest rates are a sign that monetary policy has been tight—in the sense that the quantity of money has grown slowly; high-interest rates are a sign that monetary policy has been easy—in the sense that the quantity of money has grown rapidly. The broadest facts of experience run in precisely the opposite direction from that which the financial community and academic economists have all generally taken for granted.
    The Role of Monetary Policy
    Journal article, 1968, American Economic Review 58, no. 1 (March 1968), pp. 1–17; reprinted in the House Banking and Currency Committee’s 1968 Compendium on Monetary Policy Guidelines and Federal Reserve Structure, pp. 214–224, p. 218 of the 1968 House reprint
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  16. As a matter of principle, I am opposed to independence for the Federal Reserve System. Monetary policy should be administered by a governmental agency in the regular administrative hierarchy ultimately responsible to Congress.
    Statement to the House Subcommittee on Domestic Finance
    Testimony, 1968, Compendium on Monetary Policy Guidelines and Federal Reserve Structure, Subcommittee on Domestic Finance, House Committee on Banking and Currency, 90th Congress, 2nd Session (December 1968), p. 204
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  17. True, money is only a machine, but it is an extraordinarily efficient machine. ( … ) But money has one feature that these other machines do not share. Because it is so pervasive, when it gets out of order, it throws a monkey wrench into the operation of all the other machines.
    The Role of Monetary Policy
    Journal article, 1968, American Economic Review 58, no. 1 (March 1968), pp. 1–17; reprinted in the House Banking and Currency Committee’s 1968 Compendium on Monetary Policy Guidelines and Federal Reserve Structure, pp. 214–224, p. 221 of the 1968 House reprint
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  18. The text for this paper, to paraphrase the famous remark attributed to Poincaré, is, “Money is too important to be left to the central bankers.”
    Should There Be an Independent Monetary Authority?
    Journal article, 1962, In Search of a Monetary Constitution, ed. Leland B. Yeager (Harvard University Press, 1962), pp. 219–243; reprinted in the House Banking and Currency Committee’s 1968 Compendium on Monetary Policy Guidelines and Federal Reserve Structure, pp. 205–214, p. 205 of the 1968 House reprint
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  19. The political objections are perhaps more obvious than the economic ones. Is it really tolerable in a democracy to have so much power concentrated in a body free from any kind of direct, effective political control?
    Should There Be an Independent Monetary Authority?
    Journal article, 1962, In Search of a Monetary Constitution, ed. Leland B. Yeager (Harvard University Press, 1962), pp. 219–243; reprinted in the House Banking and Currency Committee’s 1968 Compendium on Monetary Policy Guidelines and Federal Reserve Structure, pp. 205–214, p. 208 of the 1968 House reprint
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  20. Why should they also be accepted by private persons in private transactions in exchange for goods and services? The short answer—and the right answer—is that private persons accept these pieces of paper because they are confident that others will. The pieces of green paper have value because everybody thinks they have value. Everybody thinks they have value because in everybody's experience they have had value …
    Money Mischief
    Book, 1992, Ch. 2 The Mystery of Money
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