Friedman always contended that expansion or contraction of the money supply was more important than interest rates. Interest rates indirectly influence the money supply in the economy by affecting how many times the dollars which are out there are lent and re-lent. The equation that Friedman discusses in “Free to Choose” and some of his other work is:
% Growth in Money Supply = % Growth in GDP + Inflation Rate
If the money supply grows faster than the GDP is capable of growing, then the extra money available results in inflation. Inflation was the chief problem in the late 1970s, when Friedman was at the peak of his fame. Today, as long as inflation remains low, there needs to be enough growth in the money supply to support economic growth. The real problem, however, which can’t be fixed by monetary policy alone, is that even with very low interest rates, there are not enough people who want to borrow money for business in the environment that Obama/Reid/Pelosi have created. Monetary policy can help fix a recession but it can’t fix the structural impediments that the left is putting on the economy.
I’m not a big believer in the idea that we should scrap the Federal Reserve and return to the gold standard, even though that idea is popular with some conservatives. There’s nothing inherently valuable about hunks of rare metals, other than people have generally wanted shiny things throughout history. In a modern economy, it is perfectly rational that the value of a nation’s currency should be set by the goods and services that people can buy with it. I don’t think the problem with our economy is that people can’t trade their money for a fixed amount of shiny metal. The problem with our economy is that we don’t make enough of the products and services that people want anymore. And the left keep raising more and more barriers for us to be productive again.
CaptainMorgantown, Great comments.
Friedman had a tremendous effect on the U.S. and Chile. He established monetary theory as important, but it has been maligned repeatedly and recently by the Krugmans of the world. Too bad Friedman wasn’t around to see the flawless rescue of the miners by a country that implemented many of his policies and transformed from a third-world communist disaster into a largely economically free country.
It’s people like Friedman that show that history just may be driven by a few great people, or terrible ones like Obama and Rahm Emanuel, giving a new but tarnished meaning to the term “The Chicago School.”