WEBVTT NOTE Who Was the Better Monetary Economist? Rothbard and Friedman Compared 1 00:00:00.000 --> 00:00:05.000 Our next speaker is the Academic Vice President of the Ludwig von Mises Institute. 2 00:00:05.000 --> 00:00:08.000 He's the editor of the quarterly journal of Austrian Economics. 3 00:00:08.000 --> 00:00:14.000 He runs many of our summer programs, the Rothbard Graduate Seminar, 4 00:00:14.000 --> 00:00:17.000 of course the upcoming Austrian Scholars Conference in March, 5 00:00:17.000 --> 00:00:21.000 and are wildly successful at Mises University. 6 00:00:21.000 --> 00:00:24.000 He's a professor of economics at Pace University, 7 00:00:24.000 --> 00:00:29.000 and he is the author of Money, Sound and Unsound, the book I point at right here. 8 00:00:29.000 --> 00:00:40.000 Who is the better monetary economist? Rothbard or Friedman compared? 9 00:00:59.000 --> 00:01:08.000 I'm very happy to be here, and especially given that it's a happy event that we'll be honoring Professor Walter Block. 10 00:01:10.000 --> 00:01:16.000 Now, as a monetary economist, I don't pretend to judge Rothbard's other economic contributions. 11 00:01:16.000 --> 00:01:21.000 Rothbard was mediocre to bad. His version of the Austrian business cycle theory was naive. 12 00:01:21.000 --> 00:01:28.000 It depended on an equation that holds only with the help of about a dozen auxiliary assumptions, 13 00:01:28.000 --> 00:01:30.360 all of which are patently false. 14 00:01:30.360 --> 00:01:34.520 Milton will always seem to me the bigger man 15 00:01:34.520 --> 00:01:37.040 as well as the better monetary economist. 16 00:01:37.040 --> 00:01:40.600 The foregoing statement was, I told you to be surprised, 17 00:01:40.600 --> 00:01:45.400 was written by the prominent free banker George Selgin 18 00:01:45.400 --> 00:01:50.400 in a blog post on July 28th, 2011 entitled, 19 00:01:50.480 --> 00:01:54.000 I think rather modestly, Me, Murray and Milton. 20 00:01:54.960 --> 00:01:57.480 Now Murray Rothbard does not need to be defended 21 00:01:57.480 --> 00:01:59.520 from the slings and arrows of lesser critics 22 00:01:59.520 --> 00:02:03.080 in any area of economics, let alone monetary economics. 23 00:02:03.080 --> 00:02:05.200 And I here refer to Selgin as a lesser critic 24 00:02:05.200 --> 00:02:07.240 in the same sense that I would refer to myself 25 00:02:07.240 --> 00:02:11.360 as a lesser scholar when compared to Rothbard. 26 00:02:11.360 --> 00:02:14.480 Rothbard was first and foremost a monetary economist, 27 00:02:14.480 --> 00:02:17.360 and I would argue the leading monetary economist 28 00:02:17.360 --> 00:02:20.200 of the latter half of the 20th century. 29 00:02:20.200 --> 00:02:22.680 But it is an interesting and instructive exercise 30 00:02:22.680 --> 00:02:31.360 To compare the monetary economics of Murray Rothbard and Milton Friedman, I will do so 31 00:02:31.360 --> 00:02:35.920 by contrasting the analyses and predictions offered by Milton Friedman with those of the 32 00:02:35.920 --> 00:02:41.280 proponents of Rothbardian monetary theory with respect to the monetary policy that culminated 33 00:02:41.280 --> 00:02:46.200 in the housing bubble, asset boom and financial meltdown of the last decade. 34 00:02:46.200 --> 00:02:51.120 I choose to proceed in this manner because Milton Friedman was an avowed positivist, 35 00:02:51.120 --> 00:02:57.720 The very first in economics, for whom the one and only test of the truth of a theory 36 00:02:57.720 --> 00:03:03.000 is how well it predicts. Actually, Friedman explicitly rejected the idea that a theory 37 00:03:03.000 --> 00:03:08.680 can never be verified, that is, that its truth can be ascertained. According to Friedman, 38 00:03:08.680 --> 00:03:13.560 a theory is merely a conjecture based on observed empirical regularities in history, which is 39 00:03:13.560 --> 00:03:20.880 only tentatively valid until it is falsified by new evidence that contradicts its predictions. 40 00:03:20.880 --> 00:03:25.680 Once a theory fails an unspecified number of empirical tests, it is supposed to be revised 41 00:03:25.680 --> 00:03:34.600 or discarded completely. Friedman's method of deriving economic theory is best exemplified 42 00:03:34.600 --> 00:03:39.920 in his great book, A Monetary History of the United States, an 800-page tome that he authored 43 00:03:39.920 --> 00:03:44.680 with Anna Schwartz and has become one of the most influential works on monetary economics 44 00:03:44.680 --> 00:03:48.040 published in the latter, in the second half of the 20th century. 45 00:03:48.040 --> 00:03:53.640 In this book, Friedman and Schwartz sought to establish the validity of a very mechanical 46 00:03:53.640 --> 00:03:59.120 and aggregative version, macro version, of the quantity theory of money. 47 00:03:59.120 --> 00:04:04.160 Friedman and Schwartz concluded their study, from their study that, quote, inflation was 48 00:04:04.160 --> 00:04:09.720 always and everywhere a monetary phenomenon, or more famously and concisely, that money 49 00:04:09.720 --> 00:04:11.280 matters. 50 00:04:11.280 --> 00:04:29.280 It was this work and Friedman's stream of scholarly and popular articles defending its main thesis that eventually persuaded most monetary economists to abandon the naive Keynesian income expenditure framework and to adopt the quantity theory as an explanation of inflation and depression. 51 00:04:29.280 --> 00:04:36.280 By the late 1970s, Friedman's arguments had prevailed even among policy makers at the Fed and in government agencies. 52 00:04:36.280 --> 00:04:45.280 There is undoubtedly an important kernel of truth in the quantity theory, as Friedman states it, which is the positive causal relationship that runs from money to prices. 53 00:04:45.280 --> 00:04:52.280 In other words, a change in the supply of money in circulation will cause a change in prices in the same direction, all other things equal. 54 00:04:52.280 --> 00:04:59.280 But there are also numerous flaws in Friedman's version of the theory. For my purposes, I'll only need to briefly mention one. 55 00:04:59.280 --> 00:05:13.280 Because Friedman treats the relationship between money and prices in a macro and mechanical manner, he focuses narrowly on the effect that a change in the total quantity of money in the economy has on a single variable called the price level. 56 00:05:13.280 --> 00:05:18.280 The price level is defined in terms of an arbitrary average of prices, of which there are many. 57 00:05:18.280 --> 00:05:42.280 The CPI with energy and food prices excluded, the GDP deflator, something called the PCEPI, which is the personal consumption expenditure price index, and Alan Greenspan's favorite, the CTPIPCE, for chain index price, for chain type price index for personal consumption expenditures, and so on. 58 00:05:42.280 --> 00:05:47.280 Actually, the real problem is not that there are too many indexes, but that there are too few. 59 00:05:47.280 --> 00:05:54.280 In fact, everyone has his own personal index of inflation based on the kinds of goods he purchases and in what quantities and qualities. 60 00:05:54.280 --> 00:06:00.280 So any statistical index that presumes to identify the price level is completely arbitrary. 61 00:06:00.280 --> 00:06:06.280 Murray Rothbard always delighted in pointing out to me that his personal rate of inflation was grossly understated 62 00:06:06.280 --> 00:06:11.400 because he bought such an enormous number of books, an item that was not 63 00:06:11.400 --> 00:06:16.300 included in the official price indexes or had only minuscule weighting. Rothbard 64 00:06:16.300 --> 00:06:20.080 argued all such indexes are strictly arbitrary and there are a huge number of 65 00:06:20.080 --> 00:06:24.560 possible indexes, all of which create insuperable economic distortions. Which 66 00:06:24.560 --> 00:06:29.020 one should be used? There is no non-arbitrary answer. Even if we confine 67 00:06:29.020 --> 00:06:32.560 ourselves to the consumer cost of living index, the obstacles are 68 00:06:32.560 --> 00:06:46.560 and insurmountable. Whose cost of living do we measure? That of the classic Dayton, Ohio, blue-collar housewife with two kids, or that of a bachelor professor in California, Murray's aspiration. 69 00:06:46.560 --> 00:06:56.560 Every individual and group in the country experiences different cost of living indexes, and one overall index will fit none of the actual living individuals concerned." 70 00:06:56.560 --> 00:07:06.960 puts the matter more pointedly. He says a judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell. 71 00:07:06.960 --> 00:07:17.360 She has little use for computations disregarding changes both in quality and the amount of goods which she is able or permitted to buy at the prices entering into the computation. 72 00:07:17.360 --> 00:07:23.960 If she measures the change for her personal appreciation by taking the prices of only two or three commodities as a yardstick, 73 00:07:23.960 --> 00:07:33.960 She is no less scientific and no more arbitrary than the sophisticated mathematicians in choosing their methods for the manipulation of the data of the market. 74 00:07:37.960 --> 00:07:45.960 But really, there's a much more important problem with the Friedmannite quantity theory, which is embodied in the use of a single-valued price index. 75 00:07:45.960 --> 00:07:53.960 And that is the assumption that the main effect of an increase in the supply of money is to cause prices to rise at the same time and in equal proportion. 76 00:07:53.960 --> 00:08:08.960 This yields a definition of inflation that refers exclusively to the general movement of prices and completely ignores other more important effects of changes in the money supply that include artificially depressed interest rates, distorted structural production and relative prices, 77 00:08:08.960 --> 00:08:16.960 and the falsification of profit and wealth calculations, which we are seeing being unwound today. 78 00:08:16.960 --> 00:08:22.960 All of this leads to asset price booms and bubbles, which are left out in the monetarist telling of the story. 79 00:08:22.960 --> 00:08:28.960 This one-dimensional and unrealistic view of inflation has led quantity theorists from Irving Fisher to Friedman 80 00:08:28.960 --> 00:08:34.960 to advocate a monetary policy that stabilizes prices as a necessary and sufficient condition 81 00:08:34.960 --> 00:08:40.180 preventing an inflationary boom and its inevitable collapse into a depression. 82 00:08:40.180 --> 00:08:44.780 Yet prices were stable during the 1920s, leading up to the stock market crash and the onset 83 00:08:44.780 --> 00:08:45.780 of the Great Depression. 84 00:08:45.780 --> 00:08:51.440 And it was Irving Fisher, the leading proponent of the mechanical macro-quantity theory, and 85 00:08:51.440 --> 00:08:56.960 according to Friedman, the greatest American economist to ever have lived, who assured 86 00:08:56.960 --> 00:09:01.880 Americans in 1928 that they had entered an era of perpetual prosperity, his words, because 87 00:09:01.880 --> 00:09:31.880 The Austrian economists such as Mises and Hayek strongly dissented from this view at the time, and they warned that any attempt by the central bank to stabilize prices by expanding the quantity of money that would artificially depress interest rates and stimulate an inflationary boom that was concealed in the 1920s by stable prices. But nonetheless, there would be a resulting depression. 88 00:09:31.880 --> 00:09:36.880 He commented very bitterly a few years later on this tragic course of events in 1932. 89 00:09:36.880 --> 00:09:45.880 He wrote, we must not forget that for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. 90 00:09:45.880 --> 00:09:52.880 It is high time that their influence, which already has done harm enough, should be overthrown. 91 00:09:52.880 --> 00:10:00.880 And I would say the same thing about the price stabilizers since the mid-1980s. 92 00:10:00.880 --> 00:10:09.680 Okay, so now let me turn to Friedman's predictions and interpretations of events after 1985. 93 00:10:09.680 --> 00:10:13.920 So as a leading advocate of Fisher's Quantity Theory after World War II, or as the leading 94 00:10:13.920 --> 00:10:19.080 advocate, Friedman also adopted Fisher's views on the importance of a stable price level 95 00:10:19.080 --> 00:10:21.400 to a well-functioning economy. 96 00:10:21.400 --> 00:10:25.140 To achieve this aim, he advocated that the Fed increase the money supply at a rate sufficient 97 00:10:25.140 --> 00:10:31.420 to offset the price-reducing effects of increases in the demand to hold money and of increases 98 00:10:31.420 --> 00:10:34.260 in real output. 99 00:10:34.260 --> 00:10:38.260 He held this view until his death in 2006, as we'll see. 100 00:10:38.260 --> 00:10:43.340 In fact, he reiterated this view in a number of remarkable articles that he wrote between 101 00:10:43.340 --> 00:10:51.220 2002 and 2006, where he effusively praised the Fed, and especially Alan Greenspan, for 102 00:10:51.220 --> 00:10:54.540 finally learning how to maintain price stability. 103 00:10:54.540 --> 00:11:01.300 He argued that Fed monetary policy was significant in promoting unprecedented prosperity and 104 00:11:01.300 --> 00:11:05.180 growth in U.S. economy beginning in the mid-1980s. 105 00:11:05.180 --> 00:11:08.940 In these articles, he was totally oblivious to the formation of the greatest bubble in 106 00:11:08.940 --> 00:11:11.260 U.S. history. 107 00:11:11.260 --> 00:11:16.460 His bad monetary theory led to a bad interpretation of the development of economic events in the 108 00:11:16.460 --> 00:11:18.900 20 years leading up to the financial meltdown. 109 00:11:18.900 --> 00:11:24.300 So let me go through the articles and give you a taste of what he was saying. 110 00:11:24.300 --> 00:11:28.020 In a Wall Street Journal article in 2002, Friedman argued that the Fed under Greenspan 111 00:11:28.020 --> 00:11:32.620 was acting correctly to avoid a repeat of the Great Depression after the recession of 112 00:11:32.620 --> 00:11:38.060 2001 by rapidly expanding the money supply to prevent price deflation. 113 00:11:38.060 --> 00:11:45.960 Now, he wrote, what the future brings will depend of course on how monetary policy evolves, 114 00:11:45.960 --> 00:11:51.060 while the current rate of monetary growth of more than 10% is sustainable and perhaps 115 00:11:51.060 --> 00:12:20.780 In August 2003, in another Wall Street Journal article, Friedman blithely ignored the housing 116 00:12:20.780 --> 00:12:26.780 and the rapid run-up in stock prices that was becoming apparent even to many media commentators. 117 00:12:26.780 --> 00:12:35.780 Instead, he addressed the question of why the macroeconomic performance of the U.S. economy had become so good after 1985. 118 00:12:35.780 --> 00:12:44.780 He maintained that the reason was that the Fed and other central banks had found the correct thermostat, which was the equation defining the quantity theory. 119 00:12:44.780 --> 00:12:53.780 So according to Friedman, quote, the basic responsibility of the Federal Reserve is to produce as close an approximation as possible to price stability. 120 00:12:53.780 --> 00:13:01.780 Sometime around 1985, the Fed appears to have acquired the thermostat that it had been seeking the whole of its life. 121 00:13:01.780 --> 00:13:09.780 And then he goes on to say that a convenient way to talk about monetary theory and policy is to use the equation of the quantity theory, 122 00:13:09.780 --> 00:13:18.780 M times V, money times the velocity of spending money, equals P, the price index, times Y, which is the output. 123 00:13:18.780 --> 00:13:23.780 He thought that this, in fact, was the correct thermostat. 124 00:13:23.780 --> 00:13:30.780 And he talks about how anytime people want to hold more money, the Fed should expand the money supply, that is, if the velocity slows down, 125 00:13:30.780 --> 00:13:37.780 and they should also expand the money supply when there is an increase in the amount of goods and services being sold in the economy. 126 00:13:37.780 --> 00:13:50.780 Prior to the 1980s, the Fed got into trouble because it generated wide fluctuations in monetary growth per unit of output. 127 00:13:50.780 --> 00:13:54.780 Far from promoting price stability, it was itself a major source of instability. 128 00:13:54.780 --> 00:14:03.780 Yet, since the 1980s, it has managed to control the money supply in such a way as to offset changes not only in output, but in velocity. 129 00:14:03.780 --> 00:14:11.780 And then he asked the Alavid's question, which he says, where did this new thermostat come from and why did it occur then? 130 00:14:11.780 --> 00:14:17.780 He goes on to say that central banks the world over performed badly prior to the 1980s. 131 00:14:17.780 --> 00:14:23.780 Not because they lacked the capacity to do better, but because they pursued the wrong goals according to a wrong theory. 132 00:14:23.780 --> 00:14:25.780 He's here referring to the Keynesian theory. 133 00:14:25.780 --> 00:14:36.780 So he goes on to explain, the accumulation of empirical evidence of monetary phenomena, improved understanding of monetary theory, and many other phenomena, that was played a role. 134 00:14:36.780 --> 00:14:40.780 But I believe they were nowhere near as important as a shift in the theoretical paradigm. 135 00:14:40.780 --> 00:14:47.780 The mv equals py is the key to a good thermostat and was there all along. 136 00:14:47.780 --> 00:14:54.780 So no word at all about the bubbles that we were experiencing. 137 00:14:54.780 --> 00:14:58.780 He didn't see any clouds on the horizon in 2003. That was August. 138 00:14:58.780 --> 00:15:08.780 What about 2004? In 2004, in his contribution to a retrospective on the publication 40 years earlier of his great book, 139 00:15:08.780 --> 00:15:17.780 Monetary History of the U.S., Friedman's assessment of the Fed and other central banks' performance was absolutely glowing. 140 00:15:17.780 --> 00:15:31.780 He still saw no ominous clouds on the horizon, only an onward and upward movement toward greater macroeconomic stability as central bankers continued to learn and implement the policies of price stabilization taught by his book and his numerous followers. 141 00:15:31.780 --> 00:15:42.780 Friedman reported, since the 1980s, central banks around the world have reacted to the mounting evidence of monetary research by accepting the view that their basic responsibility is to produce price stability. 142 00:15:42.780 --> 00:15:47.660 Stability. More important, they have succeeded to a remarkable extent as they have discovered 143 00:15:47.660 --> 00:15:52.580 that, far from there being a trade-off between price stability and economic stability, they 144 00:15:52.580 --> 00:15:59.380 are mutually supportive. The variability of prices is less by an order of magnitude since 145 00:15:59.380 --> 00:16:04.860 the mid-1980s than it was before, not only in the United States, but elsewhere in names 146 00:16:04.860 --> 00:16:12.400 many other countries. So he says, their success in controlling inflation has altered the 147 00:16:12.400 --> 00:16:17.480 The empirical relationship between short-run movements in money and in nominal income. 148 00:16:17.480 --> 00:16:21.280 Short-term changes in the quantity of money can no longer be regarded as largely exogenous. 149 00:16:21.280 --> 00:16:27.880 In other words, the Fed now is simply responding to changes in velocity, that is, if the spending 150 00:16:27.880 --> 00:16:33.200 money slows down, the Fed has a method of responding automatically to that and also 151 00:16:33.200 --> 00:16:34.480 to changes in output. 152 00:16:34.480 --> 00:16:37.920 As output grows, you want more money to support that growth. 153 00:16:37.920 --> 00:16:44.480 Now he concludes, if the central banks continue to be successful in curbing price fluctuations, 154 00:16:44.480 --> 00:16:49.360 they will have converted the quantity of money from an unruly master to an obedient servant. 155 00:16:49.360 --> 00:16:56.080 Again, no problems at all in 2004. He didn't see any. He didn't predict any. 156 00:16:56.080 --> 00:17:03.080 Now for 2005, and I recommend this televised interview with Friedman very highly. On December 157 00:17:03.080 --> 00:17:14.080 On December 26, 2005, Friedman sat for a remarkable televised interview with Charlie Rose, which covered a broad range of topics, including the performance of the Fed under Alan Greenspan. 158 00:17:14.080 --> 00:17:24.080 He gave no indication, even at this late date, that he had a clue that monetary policy had stimulated a dangerous housing bubble, or that a bubble even existed. 159 00:17:24.080 --> 00:17:31.080 In fact, he again effusively praised Alan Greenspan and gave his approval to the Fed's recent monetary policy. 160 00:17:31.080 --> 00:17:37.080 The interview is worth quoting at length because it demonstrates how a very bad monetary theory 161 00:17:37.080 --> 00:17:45.380 gives rise to wildly false interpretations of the economy's performance. 162 00:17:45.380 --> 00:17:51.660 Note how Friedman is almost monomaniacal in his sole focus on price stability in this 163 00:17:51.660 --> 00:17:56.700 interview and how this drives his appraisal of the state of the U.S. economy. 164 00:17:56.700 --> 00:18:02.500 So let me be part of the Charlie Rose interview. Friedman. The United States is at the peak 165 00:18:02.500 --> 00:18:07.180 of its performance in its history. It's 2005 now. There has never been a time in the United 166 00:18:07.180 --> 00:18:10.900 States when we have had the state of prosperity, its level and its spread that we have had 167 00:18:10.900 --> 00:18:15.980 in the last 10 or 15 years. There has never been a 15-year period in which there has been 168 00:18:15.980 --> 00:18:21.300 so little fluctuation in prices, in inflation. Prices meaning this price index, this arbitrary 169 00:18:21.300 --> 00:18:25.620 Monetary Price Index. Inflation has stayed around 2 or 3 percent or less for the last 170 00:18:25.620 --> 00:18:31.140 15 years. And I would ask him according to which price index, Milton. It's unprecedented. 171 00:18:31.140 --> 00:18:35.260 I certainly do give credit to Alan Greenspan for that. I think monetary policy is primarily 172 00:18:35.260 --> 00:18:40.700 responsible for it. Charlie Rose. You think that Alan Greenspan was the greatest Federal 173 00:18:40.700 --> 00:18:45.780 Reserve Chairman ever? Ever? Friedman. There has been no chairman since the founding of 174 00:18:45.780 --> 00:18:50.780 the Fed who has anything like as good an outcome. Because he took the containing of inflation 175 00:18:50.780 --> 00:18:52.780 as a Chief Task of the Fed. 176 00:18:52.780 --> 00:18:53.980 Let me put it this way. 177 00:18:53.980 --> 00:18:56.180 In the first 75 years of its existence, 178 00:18:56.180 --> 00:18:58.460 the Fed on average was a major negative feature 179 00:18:58.460 --> 00:18:59.660 in the economy. 180 00:18:59.660 --> 00:19:01.860 We never would have had the Great Depression 181 00:19:01.860 --> 00:19:03.220 if there hadn't been a Fed. 182 00:19:03.220 --> 00:19:06.220 Well, I agree with that, but for different reasons. 183 00:19:06.220 --> 00:19:11.540 Since then, since 1982 or 1983, the Fed has been a beneficiary 184 00:19:11.540 --> 00:19:15.140 for, he means to say, has been beneficial for the economy. 185 00:19:15.140 --> 00:19:18.060 So that I had never, I very seldom had anything good 186 00:19:18.060 --> 00:19:20.100 to say about the Fed before the 1980s. 187 00:19:20.100 --> 00:19:26.860 But since Alan Greenspan took over, I have very little but good to say. 188 00:19:26.860 --> 00:19:31.460 I think his successor is a very able man, meaning Bernanke, and he, like Greenspan, 189 00:19:31.460 --> 00:19:36.760 takes keeping stable prices as a major function of the Fed, and I have a good deal of confidence 190 00:19:36.760 --> 00:19:41.260 that he will continue in Alan Greenspan's path. 191 00:19:41.260 --> 00:19:44.740 And so now for the kicker, he says, you can make a good argument that the Fed overdid 192 00:19:44.740 --> 00:19:51.460 easing money a little, that they kept the Fed funds rate at 1% a little too long, but 193 00:19:51.460 --> 00:19:56.820 of course he brushes this aside. And you know that it's a natural tendency that you overdo 194 00:19:56.820 --> 00:20:00.740 things, he says. You almost never go right along, he goes like this with his hand, on 195 00:20:00.740 --> 00:20:06.260 a stable path. You go up and then you go too far. It's very hard to calibrate. That was 196 00:20:06.260 --> 00:20:13.360 of Green Span's genius, his words." 197 00:20:13.360 --> 00:20:18.140 On November 17th, Milton Friedman passed away on November 16th. 198 00:20:18.140 --> 00:20:24.740 On November 17th, one day after his death, 2006, an article by Milton Friedman was posthumously 199 00:20:24.740 --> 00:20:27.100 published in the Wall Street Journal. 200 00:20:27.100 --> 00:20:29.260 Its title was Why Money Matters. 201 00:20:29.260 --> 00:20:35.020 In the article, Friedman compared three episodes of monetary policy, which he called in positivist 202 00:20:35.020 --> 00:20:40.700 jargon, a major natural experiment. These episodes were the booms of the 1920s and 203 00:20:40.700 --> 00:20:47.820 1990s in the United States, in the U.S., so he hasn't seen any boom yet in 2000, has never 204 00:20:47.820 --> 00:20:54.260 mentioned in any of these articles, since 2001, and of the 1980s in Japan. So we have 205 00:20:54.260 --> 00:20:59.420 the 20s and 90s in the U.S. and the 80s in Japan. He does a very good job of showing 206 00:20:59.420 --> 00:21:04.020 that all three booms occurred during periods of rapid economic growth, sparked by technological 207 00:21:04.020 --> 00:21:12.220 change and were accompanied by a stock market boom that terminated in a crash. 208 00:21:12.220 --> 00:21:16.420 Monetary policy, according to Friedman, was also very similar during all three booms. 209 00:21:16.420 --> 00:21:19.180 And I would agree with him up to that point. 210 00:21:19.180 --> 00:21:23.980 But monetary policy diverged widely among the three economies after the boom. 211 00:21:23.980 --> 00:21:28.500 The money supply contracted sharply after the 1920s boom collapsed in the U.S. 212 00:21:28.500 --> 00:21:35.500 After the Japanese boom of the 1980s ended, the money supply stagnated, pretty flat, and then began to grow very slowly. 213 00:21:35.500 --> 00:21:48.500 After the collapse of the 1990s, tech bubble in the U.S., high tech bubble in the U.S., the money supply continued to grow rapidly, 10% more, as he has pointed out in an earlier article. 214 00:21:48.500 --> 00:22:13.500 The conclusion that Friedman drew from this natural experiment was that the highly expansionary monetary policy that the Fed pursued after the 1990s boom in the U.S. caused the recession of 2000 and 2001 to be very mild and allowed the U.S. economy to avoid a 1930s style Great Depression or a 1990s Japanese style Great Recession. 215 00:22:13.500 --> 00:22:20.220 Now, there's an interesting point to be made about this article. Friedman did not give 216 00:22:20.220 --> 00:22:24.100 the slightest recognition to the fact that the rapid growth in the money supply, which 217 00:22:24.100 --> 00:22:32.140 had continued through 2005, from 2001 through the end of 2005, the money supply increased 218 00:22:32.140 --> 00:22:41.420 at about $1 billion per day, and it had doubled, increased by $2 trillion. But Friedman doesn't 219 00:22:41.420 --> 00:22:56.420 Friedman doesn't refer to that at all, and so he doesn't refer at all to the housing stock market bumbles that were clearly evident and peaking by 2006, when he had written this article presumably. 220 00:22:56.420 --> 00:23:08.420 In fact, Friedman argued, from this article I'm quoting, monetary policy played a role in these earlier three booms, but only a supporting role, his words. 221 00:23:08.420 --> 00:23:11.920 Technological change appeared to be a major player." 222 00:23:11.920 --> 00:23:18.920 Now, of course he couldn't admit that monetary policy caused these booms, 223 00:23:18.920 --> 00:23:21.920 because what occurred in those three decades? 224 00:23:21.920 --> 00:23:26.920 Prices didn't rise during the 20s in the US, that is consumer prices, 225 00:23:26.920 --> 00:23:30.920 didn't rise very rapidly in the 80s in Japan, 226 00:23:30.920 --> 00:23:34.920 and they rose pretty slowly in the 90s in the US. 227 00:23:34.920 --> 00:23:41.620 So this contention perfectly exemplifies the mindset of price stabilizers like Friedman and Fischer. 228 00:23:41.620 --> 00:23:50.320 Since there was very little change in some randomly selected price index or set of price indexes in the 1920s, 1980s and 1990s, 229 00:23:50.320 --> 00:23:54.820 well then, monetary policy could not have been the cause of the boom. 230 00:23:54.820 --> 00:24:02.520 And the same thing was true, of course, from 2001 through 2006, when Friedman was writing these articles. 231 00:24:02.520 --> 00:24:04.220 So he didn't see any boom. 232 00:24:04.220 --> 00:24:10.620 Let me just say a few words about the Rothbardians who foresaw the bubble beginning in 2003. 233 00:24:10.620 --> 00:24:25.820 I don't have much time, but I'll just mention that there's a very good article by Mark Thornton that points out that people like Peter Schiff, Christopher Meyer, Frank Szostek, and Mark Thornton himself in a number of articles, clearly foresaw the housing bubble. 234 00:24:25.820 --> 00:24:42.820 and pointed out the reasons for it, the fact that an increase in the money supply is not just increased prices, but more importantly distorts interest rates, distorts the structure of production and causes entrepreneurs to miscalculate. 235 00:24:42.820 --> 00:24:54.820 I myself wrote an article in 2004, I'll read a little part of that, in which I predicted. I hadn't realized this, Mark never cited me, but I went back and I looked and I actually did write something. 236 00:24:54.820 --> 00:25:00.820 I was commenting on Greenspan's monetary policy report to Congress in mid 2003. 237 00:25:00.820 --> 00:25:05.820 There was a very slow recovery occurring from the 2000-2001 recession. 238 00:25:05.820 --> 00:25:08.820 And I wrote the following. 239 00:25:08.820 --> 00:25:15.820 If we look more closely at Greenspan's testimony, we find that in his cynical attempt to manipulate markets, he has profoundly contradicted himself. 240 00:25:15.820 --> 00:25:23.820 While he was pointing to the remote probability of deflation with one hand, he was encouraging the housing bubble with the other. 241 00:25:23.820 --> 00:25:45.820 Thus he noted a solid advance in the value of owner-occupied housing noting changes in technology and mortgage markets that have dramatically transformed accumulated home equity from a very illiquid asset into one that is now an integral part of households ongoing balance sheet management and spending decisions. 242 00:25:45.820 --> 00:25:49.320 From that Greenspan speak, what he was saying in plain English, 243 00:25:49.320 --> 00:25:51.620 I'm getting back to what I'm writing about him, 244 00:25:51.620 --> 00:25:56.120 this statement means that the ready availability of cheap mortgages via internet shopping 245 00:25:56.120 --> 00:26:00.620 has fueled consumption spending as people cash out some of the gains realized 246 00:26:00.620 --> 00:26:03.620 in the ever-expanding housing bubble. 247 00:26:03.620 --> 00:26:07.320 And I regard myself as a hard core Rothbardian and I'm following along in his path. 248 00:26:07.320 --> 00:26:09.620 I don't think I was doing anything original here. 249 00:26:09.620 --> 00:26:18.460 Others also, as I pointed out, made the same points, and then I continued. 250 00:26:18.460 --> 00:26:25.060 By the end of 2003, the yield on 10-year treasury bonds and the rate on conventional mortgages 251 00:26:25.060 --> 00:26:29.740 had risen by nearly one percentage point, indicating spreading anticipations of future 252 00:26:29.740 --> 00:26:34.760 inflation as the Fed continued to expand the money supply rapidly to get the economy back 253 00:26:34.760 --> 00:26:35.760 on track. 254 00:26:35.760 --> 00:26:36.760 So I see this. 255 00:26:36.760 --> 00:26:38.700 Why doesn't Friedman see this? 256 00:26:38.700 --> 00:26:52.700 Indeed, one perceptive journalist, Ian Campbell, pinpointed the real and present danger to the economy, unrestrained monetary creation, blah-blah-blah, and then I provingly quote Campbell, and I'll stop here, he says this, he says, 257 00:26:52.700 --> 00:26:58.060 The danger to our minds is that Greenspan's solid advance is not solid at all. 258 00:26:58.060 --> 00:27:02.820 It is all based on flooding markets with liquidity, forcing down mortgage rates to indecently 259 00:27:02.820 --> 00:27:07.620 low levels, cutting rates on savings deposits, encouraging the creation of more and more 260 00:27:07.620 --> 00:27:14.020 debt and encouraging spending based on extracting equity from an asset whose price is inflating 261 00:27:14.020 --> 00:27:20.120 recklessly and which subsequently, like the equity markets, is likely to fall. 262 00:27:20.120 --> 00:27:25.380 So I conclude that based on this comparison of the Friedmanite and Rothbardian interpretations 263 00:27:25.380 --> 00:27:30.840 and predictions of the sequence of events that culminated in the financial meltdown in 264 00:27:30.840 --> 00:27:37.440 2007, as a monetary economist, Millard Friedman is manifestly much inferior to Murray Rothbard. 265 00:27:38.440 --> 00:27:40.440 Thank you very much.