Selgin is right – Friedman wanted to abolish the Fed

I guess George Selgin is right  – Milton Friedman at the end of his life had come to the conclusion that the Federal Reserve should be abolished. See for yourself here. This is six months before his death in 2006.

See George’s excellent paper “Milton Friedman and the Case against Currency Monopoly”.

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  1. Blake Johnson

     /  November 8, 2011

    I have yet to read a paper by Selgin that I have not found both interesting and enlightening. It is very interesting the turnaround made by Friedman after 1982 as he began to lose faith that central banks would continue to follow rules rather than discretion.

    I also find it interesting in light of the recent post you had on Selgin’s comment that Bernanke doesn’t understand the NGDP is not a tool to be used, but is rather the thing that central banks should be trying to stabilize. In Friedman’s 1982 paper, he makes some reference to how this would help to stabilize NGDP, showing that at least on some level Friedman understood what Bernanke does not.

  2. Are you certain that this was a change? What he said was that he would abolish the Fed but that was not currently possible. That could have been a long held position. He also had a plan to replace it with Treasury actions. Bagehot had a similar view. For that matter, so do I. But, in the current circumstances, it seems reasonable to focus on real possibilities that would make Monetary Policy better now.

  3. Benjamin Cole

     /  November 8, 2011

    Talk about radical. Not sure about abolishing a central bank. Man is not only a rational animal, but a social animal. I think there needs to be some gravitas, authority, buildings with pillars behind currency.

    If the “money supply” becomes a bunch of kids armed with computers trading derivatives on top of currency exchanges etc etc etc….

  4. Donald, you are right – I think it was a rather gradual process, but there is no doubt that Friedman probably around 1980-82 had lost all faith in central banks. This is exactly the period when the Federal Reserve started to “perform” quite well. Obviously Friedman at that time also gradually started to go in to some retirement even though he remained active in public debate for two more decades.

    BC, it is actually not that radical that it sounds. A lot of the variation in the money supply is already determined by financial institutions – so there is quite a bit of “Free Banking” anyway. Even none-financial institution “create” money. I am sure you have a frequent flyer card from your favorite airline company. You earn bonus points on that when you fly. You can use these points to buy services. This is in fact money creation (the Austrians should hate frequent flyer cards – it is fractional banking!)

  5. Shahid

     /  November 10, 2011

    I would agree with BC. This is radical stuff! As much as i like Friedman (he certainly makes my list of favorite economists), it does not imply that our intuition should take a back seat, and that we let our thought process be monopolized by someone else’s ideas. Agreed that Central Banks have made many mistakes over time, but it’s just not right to push their achievements aside. What, for example, of Fed under Paul Volcker, and its contribution in taming inflation? And mind you, this was the time when Friedman got many of his predictions wrong about the growth of GDP, etc. If nothing else, the presence of Central Banks is an assurity to many individuals that in the time of uncertainty or economic hardship, the Central Bank would act. At least we ‘expect’ it to. And on many occasions, this expectation has been fulfilled.
    I have always maintained that implementing and coordinating an idea or theory is much more difficult than just conceiving it. Let’s take the idea of abolition of Fed, and decentralizing the process of printing money, whereby a selected few banks will issue their own currency. Ok, first of all, with their shoddy role during the great recession, and their degraded stature in the wake of the great recession, how do you entrust such an important task to the same institutions? Were not many of these banks (at least their investment branches) peddling/ dealing in those toxic mortgage securities that led to the present day tumult? And in the wake of recession, how does one propose that these banks will come up with strategy/ies (and coordinate with each other for the purpose of social good) for taming the recession? Perhaps more important is the question that were there no recessions or bank runs before the establishment of the Federal Reserve? How did banks respond to those?
    What I am trying to get over here is that before we latch on to an idea, we should analyze its pro’s and con’s. Democracy has its weaknesses (and some of them quiet profound), but should we wrap up democracy?

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