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Foreign Policy Analysis
Milton Friedman Teaches Monetary Policy

Milton Friedman Teaches Monetary Policy


Milton Friedman: Now, the first step to our
understanding the cause of inflation is to recognize that it is always and everywhere
a monetary phenomenon. It’s always and everywhere a result of too much money, of a more rapid
increase in the quantity of money than in output. Moreover, in the modern era the important
next step is to recognize that today governments control the quantity of money, so that as
a result, inflation in the United States is made in Washington, and nowhere else. Of course,
no government, any more than anyone of us, likes to take responsibility for bad things.
We’re all of us human. If something bad happens, it wasn’t our fault, and the government
is the same way, so it doesn’t accept responsibility for inflation. If you listen to people in
Washington talk, they will tell you that inflation is produced by greedy businessmen, or it’s
produced by grasping unions, or it’s produced by spend-thrift consumers, or maybe it’s
those terrible Arab sheiks who are producing it. Now, of course, businessmen are greedy, who
of us isn’t? Trade unions are grasping, who of us isn’t? And there is no doubt that
the consumer is a spend-thrift, at least every man knows that about his wife. But none of
them produce inflation, for the very simple reason that neither the businessman, nor
the trade union, nor the housewife has a printing press in their basement on which they can
turn out those green pieces of paper we call money. Only Washington has that printing press,
and therefore only Washington can produce inflation. If you listen to the people from the communist
world, they’ll tell you inflation is a capitalist phenomenon, that’s not true. If you look
at Europe today, one of the most rapid rates of inflation in Europe has been in Yugoslavia,
which is a communist country. One of the slowest rates of inflation has been in Switzerland,
which is a capitalist country. So inflation is not a capitalist phenomenon, but neither
is it a communist phenomenon. If Switzerland has low inflation, the United Kingdom, in
recent years has had inflation rates running up to 20-25% a year. Italy has inflation rates
today of that order of magnitude. Inflation is not a capitalist phenomenon,
it’s not a communist phenomenon it’s a printing press phenomenon. Now in saying that inflation
is a printing press phenomenon, in saying that inflation is always caused by a more
rapid increase in the quantity of money, than in output, you’re only at the beginning
of the problem. Because you must distinguish the immediate cause from the more ultimate
cause. You must ask “Why is it that the quantity of money increases too rapidly?”
but before I go onto that question, I just want to settle for once and for all, the point
that inflation is a monetary phenomenon. That proposition has been documented over and over
again. We have evidence, for the United States for over 100 years, for Great Britain for
200 years, for Sweden for 200 years. There is never in history been an inflation that
was not accompanied by an extremely rapid increase in the quantity of money. There is
never in history, been an extremely rapid increase in the quantity of money without
an inflation, but in order to persuade you of this quickly and with a minimum waste of
time, I have brought a few pictures along to show you, that will graphically illustrate
the proposition about the relation between money and inflation. And I’d like to, if
we can start with the first of those slides now, maybe you can make out that there are
two lines on that chart. That chart is for the United States, and it covers the 13 years
from 1964 through 1976. And one of those charts, the solid line, is the quantity of money per
unit of output, and the other line, which is a dashed line, is a consumer price index.
Those two lines cross at 1970, because that’s the way they’re constructed, both of those series
were expressed on 1970 as a base of a 100, in order to try to get the two series in the
same scale. But there is nothing whatsoever in the arithmetic of it to make those two
curves the same elsewhere. That, and I may say, that the quantity of money that’s plotted
there is a quantity of money for a year, ending six months before the price index, so that
you are not, there is nothing funny about that, and you can see that the two lines are
almost indistinguishable. Now, I’ve got a segment of 13 years up there,
but if I had a segment of 100 years, the relationship would be the same way throughout the whole
of that period. But you may say that’s only for the United States, but what about other
countries? And so, let’s have the next slide. The next slide is for Germany, for the same
period. And again, you will see the same story. Now, the interesting thing here is that you
can see that the quantity of money for a while in the later, in the 70s, was running ahead
of the price index, but now they’re coming back together again, and that’s a behavior
you very often observe. The quantity of money, per unit of output, is a major factor that
from the immediate sense, determines a price index, but it doesn’t operate instantaneously,
sometimes there are delays of a year or two, but sooner or later they all come back together.
Well, the United States and Germany are very similar countries. What about another country?
Let’s have the third chart. And the 3rd chart there, it’s supposed to be for Japan,
I can’t read it, is that what it says up there? That’s for Japan, and you will notice
that the Japan experienced a much greater price rise than either the United States or
Germany did, but Japan has now been coming back, it’s done a remarkable job of controlling
the quantity of money, and as a result, the rate of price inflation in Japan has come
down from close to 30% a year to where today, in the period after this chart, it’s back
down to about 7%. But again, you have the same synchronism between the two charts. Now, the next chart, let’s have the next
chart, which is for Great Britain, you can see each one of these has a little more
inflation than the preceding one, but each one of them, you again have the same relationship
in every case, between the quantity of money and prices. Now one of the interesting things
about that comparison between Japan and the United Kingdom, is you will hear many people
telling you that the real reason that you have inflation is because of trade unions.
If you listen to anybody telling you about Great Britain’s plight, they will tell you
that the real problem in Great Britain is that you have such strong trade unions, that
they push up wages and that causes inflation. Well if that explains this relationship for
Britain, what explains the previous chart for Japan, where trade unions are not very
important, or much weaker than they are in Great Britain, or what explains the next chart,
which is a honey, for Brazil? That’s, can we have the next…the last chart? Now that’s an inflation
that’s really an inflation, that’s not one of these baby inflations we’ve
been playing with. Of course, there are still better ones in Argentina and Chile, but we
don’t have a big enough room. (audience laughter) Now here again, if trade unions cause inflation,
as you know, Brazil has a military government, and trade unions have absolutely nothing to
say about anything except as they are branches of the government apparatus, so that it’s
clear, you cannot explain in the case of Brazil, the inflation by trade unions, but you can
see very clearly, that you can explain it by changes in the quantity of money. Thank
you, we can have the lights back on now.

25 comments on “Milton Friedman Teaches Monetary Policy

  1. 2% inflation goal and fighting deflation with inflation were Friedman's ideas. Bernanke got his monetary policy from Friedman.

  2. 6:00 – the chart stops before the CPI inputs were changed to make it seem like prices were not rising as much as they were.

    An increase in the money supply by 2% per year should be meant to more or less match an increase in output, and actually would probably result in lowering prices.

    A boom era in the US (when MOST people became wealthier) was always during monetary deflation, like 'gay 90's'.

    Today, boom eras are defined as asset price increases, which benefit FEW people, hurt most.

  3. The 90's aren't on the chart.

    There was increased inflation. The CPI had stapels removed and substituted with lower-priced goods to conceal inflation. This is not debatable; it's public policy.

    Interest rates on home loans went from 15% for 30 years to 5% or so. That's EASY money!

    Where did the asset bubbles come from? Clinton-era economics caused the dot com bust, and unfortunately Bush II did more of the same.

    Also, Clinton era DA actions were pretty harsh. They wrote the PATRIOT act.

  4. Actually, Friedman didn't endorse inflation targeting and wasn't in favour of inflation even at a low level. If you read "The Optimum Quantity of Money", he argues that a very deflationary price trend (such that the opportunity cost of holding cash is equal to the interest rate on government bonds) would be optimal. He endorsed price stability (i.e. inflation when output falls and deflation/price stability when output rises) as the best politically possible compromise.

  5. Also, Bernanke's monetary theory fundamentally contradicts Friedman's (Bernanke is a creditist like the Austrian School rather than a monetarist, i.e. it's credit and bank assets that matter, not the quantity of money) so it would be very surprising if he agreed with Friedman's monetary policy proposals. (He doesn't agree with the Austrians either, but that's only because they're generally anarcho-capitalists and against the Fed entirely.)

  6. Yugoslavia was more precisely socialist country and Switzerland is a place for hidden deposited money, not only a capitalist country.

  7. Even the printing press phenomenon failed to explain the consistent low inflation prevailing in the US …It's really strange!!!

  8. Milton Friedman was greatest economist. In how wonderful way he elaborate., I have never seen any such lecture.

  9. in the ratio "quantity of money per unit of output", where does the "units of output" number come from?

  10. Ok but he is part of the problem if he never professed the entire truth, because surely he knew it. The federal reserve is not a part of the government, it is a privatized bank. The only reason for inflation is when there is no gold or silver backing the money.

  11. I love it! The comments from the I am smarter than Mr Friedman, one day they might reflect on one self.

  12. Venezuela has the highest inflation rate as of 2019, at approximately 445,482.00%. Imagine the graph for that country! Yikes.

  13. Friedman taught globalization, under the guise of economics. I am amazed at the number of people mistake it for economics.

  14. i studied 3 types of inflation in my Alevels economics, one was due to supply of money..But then what about the demand pull inflation and cost push inflation ?

  15. I’m gonna look it up but I wonder how the overall production of money in Brazil compares to the US during these periods. Or production of money per capital rather than production of money per output

  16. Couldn’t inflation because by an unexpected lake of supply. Isn’t this the classic example of increasing price of the snow shovel in the winter.

  17. Although inflation is definitely a monetary phenomenon, however, the central bank being responsible for it may have been true at the time he said it, but right now it is mostly the responsibility of the commercial banks. Nowadays money is mostly created through loans, which means that who has the control over how much inflation we have are the commercial banks, not the CB.

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