Rose and Milton Friedman peer through the picture window of their living room high atop San Francisco’s Russian Hill. They gaze out across a stunning urban vista and watch the San Francisco Bay’s gale-swept waves crash into Alcatraz. These paragons of freedom and this symbol of captivity confront each other, and the Friedmans smile.
Like everyone else, the Nobel Laureate in economics and his Ph.D. economist wife of 62 years wonder how Alan Greenspan and the Fed may adjust interest rates on Tuesday. Milton Friedman believes “the Fed is increasing the money supply too rapidly, and there is danger that the economy will continue to slide and prices will start to rise.” He warns: “We may very well have stagflation.”
For now, these Hoover Institution scholars offer a better approach to monetary policy than having Americans breathlessly await Greenspan’s next Delphic pronouncement.
“Money is too important to be left to central bankers,” Mr. Friedman says. “You essentially have a group of unelected people who have enormous power to affect the economy one way or another.”
His proposal is simple: “I’ve always been in favor of replacing the Fed with a computer.” In essence, a PC could determine the economy’s monetary base and consistently increase it by, say, 3 percent annually. “That amount of money would be created and distributed, either by buying up government securities or by financing current government expenditures,” Mr. Friedman explains. “It would do that week after week, month after month, hopefully year after year.”
“It sounds so simple,” Rose Friedman says. “Why can’t a human do this?”
“There’s no reason the Fed couldn’t do this, but it obviously is not going to,” Mr. Friedman continues. “They’re going to believe they can do better.”
By attempting to outguess hundreds of millions of U.S. producers and consumers, the Fed has steered the economy onto the rocks in previous years.
“Because of its performance in the last eight or 10 years, which has been very good by historical standards,” Mr. Friedman explains, “people tend to forget that the long history of the Fed is not one of success, but of failure. The most recent dramatic failure was in the 1970s when you had the largest inflation the U.S. has ever had in peacetime as the result of poor monetary policy. So, avoiding mistakes like that would be the major advantage of an automatic computer system.”
Letting a laptop perform the Fed’s duties also would impose predictability where surprises now reign. The Fed stunned investors this year with two half-point rate cuts that suddenly dropped from the skies like meteorites. Knowing that the money supply would grow by a fixed amount annually is a more stable basis for economic decision making than trying to read Greenspan’s remarks for secret clues as to where, if anywhere, the Fed is headed.
Of course, a computer would not have responded to the 1997-1998 Asian financial crisis, either. Like so much else, this is a trade-off. As Mr. Friedman puts it: “You sacrifice this kind of appropriate fine tuning for what fine tuning generally is, which is a mistake.”
For free marketeers like myself, even that federal laptop evokes suspicion. America has no central bakery, yet we have bread. We have no central slaughterhouse, yet we have meat. Why should we have a central bank?
“It’s not clear that we should,” Mr. Friedman says. “We don’t need a central bank to have money. We had money before there was a central bank.” (The Fed was established in 1913.) “So I agree, we don’t need a central bank.”
He argues that Citibank and Wells Fargo, for instance, could issue their own currencies, provided that they be exchangeable for something else of value — perhaps gold. The government’s role would be limited strictly to replacing today’s dollar bills as they wear out.
Asked which issue has vindicated him beyond his expectations, Mr. Friedman cites the elimination of the draft and the success of the volunteer military.
“The monetary area would come a close second.” Mr. Friedman recalls a speech he delivered in Stockholm in 1953 entitled, “Why the American economy is depression proof.” “So far,” he says,” I have been right for 50 years, so I think that’s pretty good.”
Having picked the Friedmans’ brains for nearly an hour, I finally say, “Well, those are all of my questions.”
Milton Friedman laughs: “Those are not all of my answers.”