Milton Friedman vs. the Fed; The Nobel laureate would never have endorsed increasing inflation to stimulate the economy.
Author: Allan H. Meltzer</br></br>Would the late Milton Friedman have endorsed the Federal Reserve's plan to make large-scale purchases of long-term Treasury bonds? The idea here is to pump more money into and thus jump-start the economy, reducing unemployment. Some people, including this newspaper's David Wessel in a column last week, believe the great Nobel laureate would favor this inflationary program. I am certain he would not.</br></br>Friedman's main message for central banks was to maintain a monetary rule that kept the growth of the money supply constant. In his Newsweek column, "Inflation and Jobs" (Nov. 12, 1979), for example, Friedman emphasized that "unemployment is . . . a side effect of the cure for inflation," so that if a central bank "cured" unemployment by inflating, it "will have unemployment later." In other words, don't try it.</br></br>Friedman's Newsweek column for July 28, 1980 ("Improving Monetary Policy") came with the unemployment rate rising past 7%. His proposals for improving policy made no mention of using monetary expansion to reduce unemployment. He proposed rules for stable growth to achieve target "dollar levels of monetary aggregates."</br></br>Friedman served on President Reagan's economic policy advisory board. His memos on monetary policy repeat the themes he made familiar to Newsweek readers and others all over the world. There is not a word suggesting that monetary policy should try to raise the inflation rate in order to reduce the unemployment rate.