Milton Friedman

Quotes From

A Monetary History of the United States, 1867-1960 (1963)

• The use of the gold-exchange standard did mean, however, that there was less leeway in the adjustments among countries—the rough equilibrium could not be quite so rough as under the full gold standard. The gold-exchange standard rendered the international financial system more vulnerable to disturbances for the same reason that the rise in the deposit-reserve ratio rendered the domestic monetary system more vulnerable: because it raised the ratio of claims on the relevant high-powered money—in this case, ultimately, gold—to the amount of high-powered money available to meet those claims. #
• The Federal Reserve System therefore began operations with no effective legislative criterion for determining the total stock of money.#
• For every dollar created by the government, several dollars can be created by the banking system, since only part of the extra dollars of high-powered money go into circulation, and part go into bank reserves. In effect, as it were, the government engages in a sharing arrangement with the banking system whereby the two divide between them the amount the public is willing to lend at zero interest rate (or in the case of deposits bearing interest, at an interest rate below that on other types of loans) and also the proceeds of the implicit tax on money balances involved in a price rise. The sharing formula, Le., the number of dollars the banking system can create per dollar created by the government, depends on the banks’ reserve ratio (in terms of high-powered money) and the public’s deposit-currency ratio. The public’s shift to currency reduces the share of the banking system and increases the share of the government, which thereby acquires resources with less of an increase in the money stock.#
• There seems to be no necessary relation between the direction of movement of prices over a period covering several business cycles and the corresponding secular rate of growth of real output. Apparently the steadiness of the price movement is far more important than its direction.#
• Cyclical fluctuations in credit quality, arising out of fluctuations in the standards used by lenders to assess risk and by borrowers to assess the prospects of ventures, may well play a part in the cyclical process. But it is the fluctuations, not the level of credit quality, that play a part; and it is fluctuations in the standards, not in the ex post outcome, that alone are a separate contribution of the credit mechanism toward the amplification of disturbances. Fluctuations in the ex post outcome without a change in standards are a consequence of other forces, and will have their impacts in turn elsewhere; they involve simply the transmission of impulses through the credit mechanism. In the 1929-33 episode, changes in the ex post outcome were far more dramatic than in the standards adopted.#
• The composition of Federal Reserve assets matters only as it may affect the attitudes of banks or other participants in the money market.#
• In retrospect, it probably would have been better either to have permitted the gold-standard rules to operate fully, once something like an international gold standard was adopted, or to have replaced them completely by an alternative criterion. The compromise of disregarding minor movements but reacting to major ones may have promoted stability during the twenties but, if so, only at the cost of great instability at either end of the decade. The result was that the policy, as carried out, achieved neither the internal objective of domestic stability nor· the external objective of a stable international gold standard.#
• The difficulties giving rise to financial panics in earlier periods resulted much less from the absence of elasticity in the total stock of money than from the absence of interconvertibility of deposits and currency.#
• Velocity tends to rise during the expansion phase of a cycle and to fall during the contraction phase#
• The impairment in the market value of assets held by banks [during the Great Depression], particularly in their bond portfolios, was the most important source of impairment of capital leading to bank suspensions, rather than the default of specific loans or of specific bond issues.#
• Because there was an active market for bonds and continuous quotation of their prices, a bank’s capital was more likely to be impaired, in the judgment of bank examiners, when it held bonds that were expected to be and were honored in full when due than when it held bonds for which there was no good market and few quotations. So long as the latter did not come due, they were likely to be carried on the books at face value; only actual defaults or postponements of payment would reduce the examiners’ evaluation. Paradoxically, therefore, assets regarded by the banks as particularly liquid and as providing them with a secondary reserve turned out to offer the most serious threat to their solvency.#
• Until the establishment of federal deposit insurance in 1934, there was no more sensitive indicator of the state of public confidence in the banks than the deposit-currency ratio.#
• Perhaps the best description of the role of gold in the United States since 1934 is that, rather than being the basis of the monetary system, it is a commodity whose price is officially supported in the same way as the price of wheat, for example, has been under various agricultural programs. The major differences are that the support price for agricultural products is paid only to domestic producers, the gold-support price to foreign as well as domestic; the agricultural products accumulated are freely sold at the support prices to anyone, the gold only to certain foreign purchasers and not to any domestic ones. In consequence, the gold program has set a floor under the world price of gold in terms of dollars.#
• it takes some seven months for banks to adjust to an unanticipated discrepancy between their actual and desired reserve positions produced by a change in their actual position, and some three years for banks to carry through a thoroughgoing revision of their actual reserve position as a result of a change in the desired position. #
• It seems likely that any direct effect of price control [on the velocity of money] was less important than the unavailability to consumers of automobiles and other consumer durable goods, after wartime cessation of their production in 1942, and than the restrictions imposed on construction and on private capital formation. Both consumers and business enterprises were prevented from using their funds to purchase kinds of goods they regard as increasing their wealth, which ordinarily absorb a large fraction of increases in income and an especially large fraction of transitory increases. The blocking of these channels of spending induced consumers and business enterprises to increase the stock of other assets—in particular, as it turned out, money and government securities—to a much higher level than otherwise, relative to income. #
• The difference [in government finance between the two World Wars] was largely formal. Perhaps half the World War I increase in loans to customers was secured by government obligations; in World War II, the banks purchased the securities directly.#
• It is an elementary economic truism, applicable to the money market as elsewhere, that one cannot simultaneously control both the price and the quantity of a good without some explicit rationing mechanism. If the price is fixed, the quantity must be permitted to be whatever is consistent with that price, and conversely.#
• The tax on money balances implicit in inflationary money creation was a much more productive tax in World War II than in World War I, because of the lower velocity prevailing during World War II than during World War I (Table 24, line 3). Money balances averaged 45 per cent of one year’s national income in 1914-20, 69 per cent in 1939-48. A 1 per cent tax on money balances—if we ignore the reflex influence of the tax on the amount of money balances held—therefore yielded 0.45 per cent of a year’s national income in World War I, 0.69 per cent, or about 1 times as much, in World War II.#
• A rise in prices can have diametrically opposite effects on desired money balances depending on its effect on expectations. If it is interpreted as the harbinger of further rises, it raises the anticipated cost of holding money and leads people to desire lower balances relative to income than they otherwise would. In our view, that was the effect of price rises in 1950 and again in 1955 to 1957. On the other hand, if a rise in prices is interpreted as a temporary rise due to be reversed, as a harbinger of a likely subsequent decline, it lowers the anticipated cost of holding money and leads people to desire higher balances relative to income than they otherwise would. In our view, that was the effect of the price rises in 1946 to 1948. #
• Failure has marked every attempt we know of to find a systematic relation between the quantity of money demanded in the United States and either the current rate of change in commodity prices or a weighted average of the past rates of change in prices, taken as an estimate of the rate of change expected to prevail in the future. Yet Cagan has found a close relation for other countries for periods marked by substantial price movements. The most plausible reason for the difference, in our view, is the small size of price changes in the United States except in wartime periods. . . . The looked-for effect may have been too small in magnitude to be revealed by such blunt tools as multiple correlation analysis and the simple expectational model involved in taking a weighted average of past occurrences as an indicator of the future.#
• There is a long lag between the occurrence of substantial price rises and the development of widespread expectations of further price rises.#
• Before 1914 a rise in interest rates could raise the stock of money only through a rise in the deposit-reserve ratio or through the attraction of capital and thereby gold from abroad. After 1914, a rise in interest rates could also raise the stock of money by inducing banks to borrow more heavily from the Federal Reserve System.#
• The distinction [between demand deposits and time deposits] became of major importance to banks (and so reliable data became available on a continuous basis for the two categories separately) only after 1914, when the Federal Reserve Act introduced differential requirements for demand and time deposits.#
• Though national bank notes were nominally liabilities of the banks that issued them, in effect they were indirect liabilities of the federal government thanks to both the required government bond security and the conditions for their redemption.#
• The existence of two kinds of money would presumably increase, other things being the same, the money balances people would want to hold, i.e., would tend to make the velocity of the combined money total lower than if all elements of the money stock were perfect substitutes. #
• The sharp rise in the stock of money from 1868 to 1872 was primarily a consequence of the spread of deposit banking#
• The forces making for economic growth over the course of several business cycles are largely independent of the secular trend in prices.#
• Silver agitation had its major economic impact through this effect on expectations rather than through the direct contribution that silver purchases made to the expansion of the money stock.#

“The Methodology of Positive Economics” (1953)

• A fundamental hypothesis of science is that appearances are deceptive and that there is a way of looking at or interpreting or organizing the evidence that will reveal superficially disconnected and diverse phenomena to be manifestations of a more fundamental and relatively simple structure. . . . If a class of “economic phenomena” appears varied and complex, it is, we must suppose, because we have no adequate theory to explain them.#

Capitalism and Freedom (1962)

• Any end that can be attained only by the use of bad means must give way to the more basic end of the use of acceptable means.#
• That majority rule is an expedient rather than itself a basic principle is clearly shown by the fact that our willingness to resort to majority rule, and the size of the majority we require, themselves depend on the seriousness of the issue involved.#
• If one were to seek deliberately to devise a system of recruiting and paying teachers calculated to repel the imaginative and daring and self-confident and to attract the dull and mediocre and uninspiring, he could hardly do better than imitate the system of requiring teaching certificates and enforcing standard salary structures that has developed in the larger city and state-wide systems.#
• The substitution of contract arrangements for status arrangements was the first step toward the freeing of the serfs in the Middle Ages.#
• Any minority that counts on specific majority action to defend its interests is short-sighted in the extreme.#
• Humility is the distinguishing virtue of the believer in freedom; arrogance, of the paternalist.#
• The widespread use of the market reduces the strain on the social fabric by rendering conformity unnecessary with respect to any activities it encompasses.#
• There are thus two sets of values that a liberal will emphasize—the values that are relevant to relations among people, which is the context in which he assigns first priority to freedom; and the values that are relevant to the individual in the exercise of his freedom, which is the realm of individual ethics and philosophy.#

A Program for Monetary Stability (1960)

• So long as the fiduciary [fiat] currency has a market value greater than its cost of production… any individual issuer has an incentive to issue additional amounts. A fiduciary currency would thus probably tend through increased issue to degenerate into a commodity currency – into a literal paper standard – there being no stable equilibrium price level short of that at which the money value of currency is no greater than that of the paper it contains.#Quoted in George Selgin, “Synthetic Commodity Money” (2013)

“Lerner on the Economics of Control” (1947)

• If a number of random disturbances, each varying by about the same amount, are added, their mean tends to fluctuate less than any one of the disturbances, and in this sense, the errors tend to cancel out; but their sum tends to fluctuate more than any one of the disturbances, and the larger the number of disturbances added, the larger the fluctuations in the sum. The effects of countercyclical actions of government are added to, not averaged with, the economic movements that would otherwise take place.#
• The most that can be expected [of an institutional arrangement] is a reasonable approximation to the economic optimum. They must, therefore, be judged in part by (1) the practical administrative problems entailed in so operating them as to approximate the economic optimum and (2) as a corollary, the extent to which they lend themselves to abuse, i.e., the ease with which they can be used for objectives other than the general welfare.#

The Optimum Quantity of Money (1968)

• Real cash balances are at least in part a factor of production. To take a trivial example, a retailer can economize on his average cash balances by hiring an errand boy to go to the bank on the corner to get change for large bills tendered by customers. Then it costs ten cents per dollar per year to hold an extra dollar of cash, there will be a greater incentive to hire that errand boy, that is, to substitute other productive resources for cash. This will mean both a reduction in the real flow of services from the given productive resources and a change in the structure of production, since different productive activities may differ in cash-intensity, just as they differ in labor- or land-intensity.#

“Monetary Policy: Theory and Practice” (1982)

• Were it feasible for the Federal Reserve to adopt and achieve a target interest rate, it is inconceivable that the prime rate would ever have risen to over 20 percent. In principle, given sufficient knowledge about market behavior, it is possible to use money market instruments to achieve monetary aggregate targets. However, experience has demonstrated that monetary authorities are in practice unable to achieve in this way the degree of control over monetary aggregates that seems hypothetically possible. #
• Short-term swings in monetary growth do no great harm if they are not only actually reversed but also widely expected to be reversed.#
• The conduct of monetary policy does not require that the Federal Reserve System have any member banks. . . . The latter requires simply that the monetary authority have a monopoly on the printing press or its equivalent to control the total amount of high-powered or base money. Control over the base exerts about as much influence on nonmember commercial banks as on member banks, on thrift institutions as on commercial banks, and so on in unending circle.#