September 22, 2015

Milton Friedman Saw the Euro Crisis Coming

Scott Sumner

Ralph G. Hawtrey Chair of Monetary Policy
Summary

Among the general public, Milton Friedman is mostly remembered for the libertarian views outlined on his PBS show Free to Choose. Among economists, he is best known for his monetarist position on Fed policy. What's less well known is that he was also a soothsayer, accurately predicting the euro crisis that now has the global economy in upheaval. The Nobel laureate believed the boom-and-bust business cycle was mostly caused by central banking errors that allowed a country's money supply to fluctuate.

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This article appears in the October edition of Reason Magazine

Among the general public, Milton Friedman is mostly remembered for the libertarian views outlined on his PBS show Free to Choose. Among economists, he is best known for his monetarist position on Fed policy. What's less well known is that he was also a soothsayer, accurately predicting the euro crisis that now has the global economy in upheaval.

The Nobel laureate believed the boom-and-bust business cycle was mostly caused by central banking errors that allowed a country's money supply to fluctuate. Thus, he advocated for a policy rule under which the Federal Reserve would engineer a steady 4 percent increase in the money supply each year to help prevent recessions.

Friedman came to that view by collaborating in the 1960s with National Bureau of Economic Research economist Anna Schwartz on a major history of U.S. monetary policy. Perhaps their most important finding was that Federal Reserve policy errors had allowed the money supply to drop sharply in the early 1930s, dramatically worsening the Great Depression.

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