The Milton Friedman Correspondence

Challenging Milton Friedman

Beginning in 1976, I engaged in a lengthy correspondence with Professor Milton Friedman in which we debated our disagreements about the defects of fixed and flexible exchange rates, and the benefits of a renewed gold standard.

Milton Friedman was the most important economist who dissented from the Keynesian approach. He was not in favor of countercyclical fiscal policy. Instead, his recipe for managing both financial crises as well as inflation was for the central bank to provide a steady rate of money growth, and if necessary to intervene in the economy through purchases of government securities and other assets or by changing the interest rate. Instead of giving Congress the power to manage the economy, Friedman’s recommendation assumes central bankers can do a better job than budget planners in Congress.

Writing in the Wall Street Journal, Friedman also dissented from French economist Jacques Rueff’s point of view. In 1958, Rueff and Friedman met in debate at the Mount Pelerin Society at Princeton. During the program on “Inflation,” the participants included Milton Friedman, Henry Hazlitt, Jacques Rueff, and Bertrand de Jouvenel. At that meeting, Rueff declared: “There can be no free trading system among the nations with wage and price controls, and with a floating exchange rate. Inflation is a far greater threat to liberty throughout the world today than Marxism.” i One reason Rueff said this was that Karl Marx was a gold standard man – to protect the workers – as was Samuel Gompers, founder of the Union Movement in America.

The key difference between Rueff and Friedman arose from Friedman’s inconsistent notion of “money.” In the book he wrote with Anna Schwartz, A Monetary History of the United States, 1867-1960, Friedman indifferently included in what he called “the money stock” the following categories: 1. Gold coin; 2. Gold certificates 3. State bank notes; 4. National bank notes; 5. U.S. notes; 6. Subsidiary silver; 7. Fractional currency; 8. Other U.S. currency; and 9. total adjusted (national, state, and private) commercial bank deposits, so that his definition of the “money stock” comprised “total currency and deposits.” ii

Rueff, by contrast, always distinguished money proper, which comprised official monetary assets like gold and silver coins, from various claims on money, which were all official monetary liabilities. Rueff and Robert Triffin called attention to the fact that, beginning around 1960, U.S. official liabilities exceeded U.S. official monetary assets, so that thereafter U.S. net monetary reserves were actually increasingly negative. But Triffin and Rueff disagreed on the solution. Triffin favored John Keynes’ earlier proposal for what amounted to a world central bank with an inflationary bias, while Rueff favored international monetary reform which would restore an international gold standard, a proposal which he had laid out in 1932. iii

The difference is that a world central bank would have unlimited possibilities for the creation of money and credit, whereas Rueff’s plan put a limit on the creation of both. If a major national central bank tries to create too much money, their monetary standard will head downward. This process acts as a normal check on the ambitions of governments. The potential to create unlimited money with a world central bank would mean the abandonment of all discipline to the questionable discretion of the monetary authorities. The likelihood of inflation and potential financial collapse under these circumstances would create a baneful shadow in the marketplace due to the unlimited uncertainties thus created. This then would reduce real output in the world economy.

An article by the scholar and economist Marina von Neuman Whitman reveals some of the problems with monetarism as a theory. Whitman contrasted Milton Friedman’s “domestic monetarism” with what she called the “global monetarism” of Robert Mundell and Arthur Laffer. As she explained, “I have termed this group the ‘global monetarists’–’monetarists’ because of their belief that macroeconomic phenomena can be analyzed best in terms of the relationship between the demand for and the supply of money, and ‘global’ because of their conviction that, as a first approximation, the world consists, not of separable national economies, but of a single, integrated, closed economy.” iv

Perhaps the biggest difficulty with such “global monetarism” is its highly abstract nature, as outlined in Whitman’s article, where she cites Laffer and Mundell’s own publications. There are no specific national currencies–such as U.S. dollars or pounds sterling–or corresponding price levels expressed in such currencies, only a generic “world money” and a generic “world price level,” neither of which actually exists anywhere in the real world, except on academic blackboards. Because Rueff, in contrast, took account of actual real-world national currencies and prices expressed in those currencies, Rueff’s theories are more rigorous and practical than either domestic or global monetarism, and unlike them, they can also be empirically verified.

I met Milton Friedman myself at an important economic conference in 1976. We debated on the floor of the conference. I was respectful, but challenged him on floating exchange rates. I held my own. He was an extremely eloquent, extraordinary debater. In the Reagan Administration, he would prevail over the followers of John Maynard Keynes.

On April 22, 1976 I followed up on our debate with a letter to Professor Friedman:

Thank you so much for the time you so generously gave to me. Here is a book which came out of the Institute’s monetary policy seminars (Money and the Coming World Order) …. I do hope you will let me know when you are next in New York as I should like to continue our dialogue. I have learned a great deal from your published works. I learn even more from your arguments. I genuinely appreciate the opportunity. v

Thus began a spirited debate through the mail that lasted over a year. In my correspondence with Professor Friedman, I usually began by affirming points of agreement between us before outlining our differences on monetary theory. I was forced to refine my own economic thinking as I committed my ideas to paper.

Friedman responded forcefully to my arguments. For example, in a short letter on June 2, 1976, he wrote: “In re your penciled P.S. on your letter of April 22, 1976, I believe that implicitly you misconceive the nature of the problem. The problem is not what is possible to build in a hypothetical non-existent world but what will grow and develop in the world as it is…” There I had no disagreement. Friedman then went on, “The problem is not one of constructing a floating system [of exchange rates]; the fact is that we have no alternative.” vi To that argument I had to disagree.

I began my response by saying “You were very kind to take the time to respond to my handwritten comments on my last letter to you. It is difficult to argue with a distinguished economist, particularly one whose views I share, especially when he chooses the high ground of practicality, ‘in the world as it is’ as you say. Having spent my whole working life as a businessman, I am especially sensitive to practical arguments.” vii

I then pointed out that “It is true, as you imply, that a Floating System is the outcome of today’s unwillingness of the major trading nations to discipline their monetary policies. It seems to me [however] that this sovereign license is neither necessary nor permanent. In fact, is not the indiscipline a defect of leadership which, we may hope, some day American statesmen will remedy?” viii

Friedman responded briefly: “The chief defect of the fixed exchange rate system in my opinion in this context is that it tends to make the chain as strong as its weakest link. It enables the individual countries to distribute their lack of discipline among other countries and forces on the more disciplined the errors of the less disciplined.” ix

In a three-page response in August, I escalated our discussion: “I accept your ‘weakest link’ analysis as ‘the chief defect of the fixed exchange rate system,’ though it is fair to say that you criticize the reserve currency form of a fixed rate regime. May I presume to say that history [namely, American history] and theory provide us with several forms of fixed exchange rate regimes.” x

I concluded: “It is mostly true, of course, that a floating exchange rate policy, in the absence of central bank intervention, will lead to a ‘de facto’ stable monetary system, similar in most respects to a fixed exchange rate regime based on convertibility without reserve currencies. But then it is also true that the difference between anarchy and order is often simply the giving of the rule to the community by the equilibrium leader, backed up by the force to make it work.” xi

Friedman pushed back in his own two-page letter in September that began: “I am sorry to say that you have been wholly misled about what monetarism is and what monetarists say and do.” xii He had read my essay in Money and the Coming World Order, and referred to it:

Your discussion on pages 79 and 80 is a travesty of what is in fact the position of let me not say all monetarists but of myself.

Your argument seems to me to be unrealistic not in the trivial sense and in my view the unimportant sense that it prescribes policies which are politically unpalatable, but in the much more fundamental sense that it prescribes policies that, in the present actual state of the world, are undesirable […] I trust you will pardon me for commenting with such brutal frankness, but nothing else will promote effective intellectual discourse. xiii

I decided to suspend the correspondence because we were so far apart on the monetary issue., Then, in October, Friedman was announced as the 1976 recipient for the Nobel Prize in Economics for his work on income and consumption. There then followed a gap in our correspondence during which I tried to honor the pressures that a new Nobel Laureate must face.

But I still had more to say. Our correspondence culminated in a 12-page, single-spaced letter I sent in March of 1977. Lest Friedman lose track of our discussion, I wrote: “I have tried to respond point by point to the compelling criticisms of your last letter. You will find attached a copy of your last letter, for your reference, and copies of our entire correspondence on the issues which preoccupy us. I enclose also a copy of my essay in the book, Money and the Coming World Order, only parts of which I think you had time to read when I last sent it to you, large parts of which genuinely echo the sentiments of your last letter to me. I profoundly appreciate your willingness to share your time and thoughts with me.” xiv

Perhaps my arguments were persuasive because my correspondence files show no response from Professor Friedman. And although he continued to promote targeting of the “domestic money supply” for a long time, he did finally have the intellectual honesty to admit that it was not good monetary policy. In a remarkable June 7, 2003 interview with the Financial Times, he concluded that “the use of quantity of money as a target has not been a success. I’m not sure that I would as of today push it as hard as I once did.” xv

i Jacques Rueff, “Inflation Session,” (remarks at Meeting of the Mont Pelerin Society, Princeton, NJ, September 10, 1958).

ii Milton Friedman and Anna J. Schwartz, A Monetary History of the United States: 1867-1960, (Princeton: Princeton University Press, 1963),

iii Wrote to JDM for this on 2/23/23

iv Marina von Neuman Whitman, “Global Monetarism and the Monetary Approach to the Balance of Payments,” Brookings Papers on Economic Activity (3), 1975, 494.

v Lewis E. Lehrman, letter to Milton Friedman, April 22, 1976.

vi Milton Friedman, letter to author, June 2, 1976.

vii Lewis E. Lehrman, letter to Milton Friedman DATE NEEDED

viii Ibid.

ix Milton Friedman, letter to author, DATE NEEDED1976.

x Lewis E. Lehrman, letter to Milton Friedman, August 1976.

xi Ibid.

xii Milton Friedman, letter to author, September 1976.

xiii Ibid.

xiv Lewis E. Lehrman, letter to Milton Friedman, March 1977.

xv Simon London, “Lunch with the FT – Milton Friedman: The Long View,” Financial Times (Financial Times Magazine supplement, Issue No. 7), June 7, 2003, 12-13.