Milton Friedman and Economic Debate in the United States, 1932–1972, Volume 2 9780226684925

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Milton Friedman

a n d E c onomic De bat e in the Un i te d S tates , 193 2 – 1 9 7 2

Milton Fried­man

and Ec onomic De bate in the United States , 193 2–19 7 2 Volume 2

Edward Nelson T h e U n i ve r s i t y o f C h i c a g o P r ess Chicago and London

The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London © 2020 by The University of Chicago All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission, except in the case of brief quotations in critical articles and reviews. For more information, contact the University of Chicago Press, 1427 E. 60th St., Chicago, IL 60637. Published 2020 Printed in the United States of America 29 28 27 26 25 24 23 22 21 20   1 2 3 4 5 ISBN-­13: 978-­0-­226-­6 8489-­5 (cloth) ISBN-­13: 978-­0-­226-­68492- ­5 (e-­book) DOI: https://​doi​.org​/10​.7208​/chicago​/9780226684925​.001​.0001 Library of Congress Cataloging-­in-­Publication Data Names: Nelson, Edward, 1971– author. Title: Milton Friedman and economic debate in the United States, 1932–1972 / Edward Nelson. Description: Chicago ; London : University of Chicago Press, 2020. | Includes bibliographical references and index. Identifiers: LCCN 2019046214 | ISBN 9780226683775 (v. 1 ; cloth) | ISBN 9780226684895 (v. 2 ; cloth) | ISBN 9780226683805 (v. 1 ; ebook) | ISBN 9780226684925 (v. 2 ; ebook) Subjects: LCSH: Friedman, Milton, 1912–2006. | Economists— United States—Biography. | Economics—United States— History—20th century. | Chicago school of economics. Classification: LCC HB119.F84 N45 2020 | DDC 330.15/53092 [B]—dc23 LC record available at https://​  lccn​.loc​.gov​/2019046214 ♾ This paper meets the requirements of ANSI/NISO Z39.48-­1992 (Permanence of Paper).

T hi s volu me i s de dic at ed t o t he m e mory of A n na J. S c h wa rtz , 1 9 1 5– 2 0 1 2 long ti m e f r ie n d a n d c on t i nu i ng in spir at ion

Contents

Introduction to Volume 2 Conventions Used in This Book Ch a p te r 1 1 : Moving into High Gear, 1961 to 1963 I.

Events and Activities, 1961–63

II. Issues, 1961–63

ix xiii 1 1 22

Capitalism and Freedom Arrives

22

Rolling Out the Monetary History

28

The Commission on Money and Credit

45

Operation Twist

47

III. Personalities, 1961–63

53

Abba Lerner

53

John F. Kennedy

55

Ch a p te r 1 2 : Critic of the New Economics, 1964 to 1966

58

I.

58

Events and Activities, 1964–66

II. Issues, 1964–66

82

The Credit Crunch and Minirecession

82

The Fiscal Critic—the Multiplier

90

III. Personalities, 1964–66

95

Barry Goldwater

95

James Tobin

99

C h ap ter 13: The Friedman Presidency and the Nixon Candidacy, 1967 to 1968

106

I.

106

Events and Activities, 1967–68

II. Issues, 1967–68 The St. Louis Connection

122 122

Income Support, Welfare, and Social Security The Presidential Address III. Personalities, 1967–68

129 138 163

Karl Brunner

163

Richard Nixon

171

C ha p t er 14 : Debates on Regulation and Aggregate Supply, 1969 to 1972 I.

174

Events and Activities Related to Regulation and Aggregate Supply, 1969–72

174

II. Issues Related to Regulation and Aggregate Supply, 1969–72

185

The Social Responsibility of Business

185

Money and Regulation Q

188

III. Personalities in Debates on Regulation and Aggregate Supply, 1969–72

198

Robert Gordon

198

Ralph Nader

217

Ch ap te r 1 5 : Monetary Policy Debates and Developments in Stabilization Policy, 1969 to 1972 I.

226

Events and Activities Related to Monetary Policy Debates and Developments in Stabilization Policy, 1969–72

226

II. Issues Related to Monetary Policy Debates and Developments in Stabilization Policy, 1969–72

239

From Gradualism to the New Economic Policy

239

The End of Bretton Woods

288

III. Personalities in Monetary Policy Debates and Developments in Stabilization Policy, 1969–72

297

Robert Lucas and Thomas Sargent

297

Arthur Burns

318

Notes

347

Bibliography

463

Index

557

Introduction to Volume 2

This volume, volume 2, completes the book Milton Friedman and Economic Debate in the United States, 1932–1972.1 The whole of volume 2 is a continuation of the book’s part 3, “Friedman’s Monetarist Years, 1951 to 1972,” which began with chapter 10 of volume 1. As discussed in volume 1, Friedman was firmly established as a monetarist by 1951, and chapter 10 considered the activities and debates in which Friedman was engaged during the 1950s—the first decade of his monetarist years. The five chapters that constitute volume 2 cover the twelve years from the beginning of 1961 to the end of 1972. The start of this period saw the coming to office of President Kennedy—whose electoral victory in 1960 Friedman had attributed to the unintentionally sharp tightening of monetary policy in which the Federal Reserve had engaged during the late 1950s.2 As will be discussed in chapter 11, events in the early 1960s initially seemed inimical to the success of the critique of Keynesian economics— and the corresponding revival of the quantity theory of money—that Friedman was developing. The perspective on economic theory and policy held by the Kennedy administration was more overtly Keynesian than those of previous US governments, while senior Federal Reserve officials in the early 1960s had negative perspectives on Friedman’s work or professed to be barely familiar with it. But Friedman’s approach to monetary economics would gain enormous attention from 1963 onward. Over the late 1960s, the dramatic change in the situation was evident in Friedman’s appointment as a Newsweek columnist in 1966, in his ascension, in 1967, to the position of president of the American Economic Association, and, in 1969, in the development of an economic strategy by the Nixon administration that owed much to Friedman’s work.3 At the 1980 Christmas party of Harvard’s University’s economics department, Martin Feldstein gave a lighthearted retrospective on this turn of events in the form of a poem on Friedman, titled “’Twas a Night in the

x I n t r o d u c t i o n t o V o l u m e 2

Sixties” (Feldstein 1981). Feldstein painted a picture of success, but also complacency and hubris, on the part of Keynesian economists in the early 1960s: “Paul with his textbook / And Art with his gap / Had settled their brains / For a long postwar nap.” On being violently disturbed from this comfortable situation, Feldstein observed, “They knew in a moment / It must be Milton.”4 Feldstein described the unfolding of Friedman’s research, alluding both to Friedman and Schwartz’s Monetary History and to the Friedman-­Meiselman work that suggested that money/income relationships were more stable than fiscal-­multiplier relationships.5 He noted further themes that Friedman pressed on the economics profession during the 1960s: “That curve by Phillips / It really is straight / And the cost of funds / Is the real interest rate.”6 Feldstein’s poem was well received at the party. But it surely generated unhappy recollections among some of his senior colleagues at Harvard University—perhaps most notably James Duesenberry, one of the Keynes­ ians against whom Friedman had been arrayed in those 1960s debates. It was, however, from two other major universities, Yale University and the Massachusetts Institute of Technology, that the principal Keynesian fight back against Friedman emerged during the 1960s. Paul Samuelson would figure prominently in this counterattack, although principally in contributions to media forums (including his own Newsweek column). In the research literature, Friedman’s main Keynesian adversaries during the 1960s were two figures discussed prominently in the chapters that follow: James Tobin and Franco Modigliani. An enormous setback for the acceptance of Friedman’s monetarist and free-­market ideas occurred in August 1971 when President Richard Nixon, with the encouragement of Federal Reserve chairman Arthur Burns, imposed wage-­price controls. These controls remained in force throughout 1972. The imposition of controls, their acceptance by the public, and the endorsement by government officials of the cost-­push theories of inflation that motivated the controls, all seemed to amount to a devastating rebuke to Friedman’s approach to economics, and the account provided in this book ends in December 1972 with both his influence and his physical health at a low ebb.7 Friedman rebounded sharply to good health in 1973, but the recovery of his influence on US economic policy would be a slower process—one spanning the rest of the 1970s.

Acknowledgments The author is grateful for the guidance and encouragement of current and former editors at the University of Chicago Press, in particular Joe Jackson, who organized the commissioning of the book, and Jane Macdonald and

I n t r o d u c t i o n t o V o l u m e 2   xi

Alan Thomas, who have seen the project through to completion. The author is also indebted to Kathleen Kageff for meticulous copyediting and to Mark Reschke and Alicia Sparrow for their production advice. The author is grateful also to a number of people for providing comments on drafts of this book. In many cases, the comments pertained to drafts of specific chapters. Accordingly, each of the individual chapters of this book contains an acknowledgments paragraph recognizing feedback received on earlier versions of those chapters. In addition, the author is grateful to Michael Bordo, Charles Goodhart, David Laidler, and David Lindsey for remarks on the whole of the manuscript and to William A. Allen, Russell Boyer, Thomas Humphrey, Douglas Irwin, James Lothian, Ann-­Marie Meulendyke, the late Allan Meltzer, Michael Parkin, Charles Steindel, George Tavlas, Roy Weintraub, and the late Donald Winch for supplying comments on a large number of chapters. The late Julio Rotemberg provided much advice and encouragement concerning the writing of this book and also supplied detailed comments on several chapters. Furthermore, in the years prior to starting this book, the author benefited from extensive discussions with a number of individuals concerning Friedman’s place in monetary economics. These individuals include Michael Bordo, Tim Congdon, Robert Hetzel, Bennett McCallum, the late Allan Meltzer, Christina Romer, David Romer, the late Anna Schwartz, George Tavlas, and John Taylor; as well as current and former colleagues at the Federal Reserve Board, including Mark Carlson, Burcu Duygan-­Bump, Neil Ericsson, Jon Faust, Christopher Gust, Andrew Levin, David López-­ Salido, John Maggs, Ellen Meade, Jonathan Rose, Jeremy Rudd, and Robert Tetlow; former colleagues at the Federal Reserve Bank of St. Louis, including James Bullard, Riccardo DiCecio, William Gavin, and David Wheelock; and former colleagues at the Bank of England, including Christopher Allsopp, Nicholas Oulton, and Geoffrey Wood. In more recent years, the author has benefited from discussions on the matter with former colleagues at the University of Sydney, including Colin Cameron, Daniel Hamermesh, and Colm Harmon. For research assistance on various matters, the author is grateful to Miguel Acosta, George Fenton, William Gamber, Christine Garnier, and Andrew Giffin. For help in finding and obtaining archival material and related information, the author is indebted to Riccardo DiCecio, Andrew Ewing, Johanna Francis, Kurt Gooch, Daniel Hammond, Özer Karagedikli, Stephen Kirchner, Levis Kochin, Terry Metter, Eric Monnet, Charles Palm, Jeremy Piger, Marcel Priebsch, Hugh Rockoff, Glenn Rudebusch, Bernd Schlusche, Tara Sinclair, David Small, Katrina Stierholz, Paolo Surico, Gloria Valentine, Mark Wynne, and the staffs of the libraries of Duke University, the Federal Reserve Board, the Federal Reserve Bank of Dallas, the

xii I n t r o d u c t i o n t o V o l u m e 2

Federal Reserve Bank of San Francisco, the Federal Reserve Bank of St. Louis, and the University of Sydney. In addition, the following individuals kindly shared material from their own collections: Douglas Adie, James Bullard, Nigel Duck, Claire Friedland, John Greenwood, Christopher Gust, R. W. (Rik) Hafer, Robert Hall, Rudolf Hauser, James Heckman, Douglas Irwin, Michael Keran, David Laidler, Leo Melamed, Ann-­Marie Meulendyke, Michael Mork, Charles Nelson, Gerald O’Driscoll, Pascal Salin, Roger Sandilands, the late Anna Schwartz, Christopher Sims, Stephen Stigler, and Lester Telser. The author is also indebted to Milton Friedman’s daughter, Janet Martel, for providing clearances and for making herself available for a conversation with the author in September 2016 about her father. The author extends sincere apologies to any individuals who also provided help for this project but who have inadvertently not been mentioned in the preceding acknowledgments. The author is also grateful to many individuals for making themselves available for interviews for this book. A full list of interview subjects is provided in the introduction to volume 1. Notwithstanding the acknowledgments given above, the views and conclusions expressed in this study are the author’s alone, and the author is solely responsible for errors in this study. In addition, the views expressed in this book should not be interpreted as those of the Federal Reserve Board or the Federal Reserve System.

Conventions Used in This Book

1. The chronological chapters in this book (those that cover blocks of years, i.e., chapters 2–4 and 10–15) are divided into sections titled “Events and Activities,” “Issues,” and “Personalities” (with the latter two sections in turn broken into subsections). The “Events and Activities” section covers some of Friedman’s main engagements in economic debate over the years considered in the chapter; this section, however, omits those topics subsequently covered in the “Issues” and “Personalities” sections. The “Issues” section covers major policy or research issues in which Friedman was involved during the years in question: for example, chapter 3, which covers the years 1940–43, includes under “Issues” the question of how to pay for wartime government spending. The “Personalities” section is of the same format as the “Issues” section, except that it is more closely focused on an individual with whom Friedman interacted (or to whom Friedman reacted) in the years covered in the chapter. In each case, no attempt is made to provide a complete picture of the work of the individual considered in the “Personalities” section. The aim of the discussion is, instead, to bring out the activities and work of Friedman that reflected his overlap of interests with the individual in question. The motivation for the “Events and Activities”/ “Issues”/ “Personali­ ties” division of each chapter is that Friedman’s activities covered several different areas in each block of years considered. Consequently, an explicit demarcation of each chapter by topic seemed preferable to a strictly chronological format. 2. References are described in the past tense (“Romer and Romer [2002a] argued . . .”) for publications that appeared during (or prior to) Friedman’s lifetime, and in the present tense (“Romer and Romer [2013a] argue . . .”) for post-­2006 articles.1 An exception to the latter practice is made for cases in which items published after 2006 were by authors who are now deceased (for example, Anna Schwartz and Gary Becker). In those cases, even post­2006 articles by the authors are referred to in the past tense.

xiv C o n ve n t i o n s U se d i n t h i s B o o k

3. Except when quoting others, or when using standard terminology (for example, “the Chicago School”), the term “Chicago,” appearing by itself, refers to the city of Chicago. It is not used as shorthand for the University of Chicago. 4. Articles cited in this book that appeared in newspapers or news or public-­ affairs periodicals are referenced in the main text or endnotes by their publication title and date (for example, “New York Times, January 25, 1970”). Fuller bibliographical details for these articles (including article title and, where given, article author, as well as page number, where known) appear in section I of the bibliography, in which the news articles are listed in chronological order. (Section II of the bibliography covers books, as well as articles that were published in research journals. This section of the bibliography gives articles in alphabetical order, arranged by author.) 5. To limit the extent to which the flow of sentences in the main text is interrupted by bibliographical references, and to contain the number of times that the word “Friedman” appears in any sentence in the main text, citations of Friedman’s writings appear in notes rather than in the main text. Accordingly, it is in the text of endnotes that one will find citation of the Friedman items to which reference is made in the main text (with such endnotes typically reading “See Friedman [(1973a, 1973b] . . .”). References to authors, other than Milton Friedman, with the surname Friedman are identified by both the author’s first initial and surname. 6. Interviews conducted specifically for this book are indicated in the main text or endnotes by the name of the interview subject and the date of the interview. Interviews quoted or cited in the main text or endnotes that appeared in research journals are cited using the name of the interviewer (not the interviewee).2 Thus, John Taylor’s interview with Milton Friedman, published in 2001 in Macroeconomic Dynamics, is cited as Taylor (2001) and not as a Friedman-­authored article.

•  C h a p t er 1 1 •

Moving into High Gear, 1961 to 1963 I. Events and Activities, 1961–63 Just as the Kennedy administration was entering office in January 1961 with its aim to get the economy moving again, Friedman’s own published output was poised to move into high gear. Once those publications appeared and made their mark, his name would figure very prominently in discussions of monetary matters in policy circles. As of 1961, however, there had been little foreshadowing of this major change in Friedman’s profile. Notwithstanding his various submissions and testimony to congressional committees during the 1950s, his meeting with Federal Reserve chairman Martin in 1960, and the release the same year of A Program for Monetary Stability, Friedman had not been particularly successful in holding the attention of policy makers. When, in June 1961, Senator William Proxmire asked Alfred Hayes, president of the Federal Reserve Bank of New York and vice chairman of the Federal Open Market Committee, if he was “familiar with Dr. Milton Friedman of the University of Chicago,” Hayes replied: “In a very general way. I do not know him.”1 By the end of the 1960s, the situation was very different, as remarks made during 1969 by two advisers in the Federal Reserve System confirmed. At that time, Richard Davis, an adviser to the Federal Reserve Bank of New York, would reflect in the following terms on the situation at the The views expressed in this study are those of the author alone and should not be interpreted as those of the Federal Reserve Board or the Federal Reserve System. The author thanks Daniel Hamermesh, David Laidler, and Rajat Sood for comments on an earlier draft of this chapter. The author is also grateful to Miguel Acosta, George Fenton, and William Gamber for research assistance, and to participants in the University of California, Berkeley, Economic History seminar, including J. Bradford DeLong, Barry Eichengreen, Martha Olney, Christina Romer, and David Romer, for comments on a presentation of portions of this chapter. See the introduction for a full list of acknowledgments for this book. The author regrets to note that, in the period since the research for this chapter was begun, four of the individuals whose interviews with the author are drawn on below— Gary Becker, Charles H. Brunie, David Meiselman, and Allan Meltzer—have passed away.

2 C h a p t e r e l eve n

start of the decade: “The fact is that the view held by Friedman and a few others on the predominant importance of money was just not given serious attention by most economists.”2 Along similar lines, Lyle Gramley, an adviser to the Federal Reserve Board, would acknowledge, “Professor Friedman fought for more careful attention to monetary variables when the going was the roughest—and he deserves our commendation.”3 Friedman himself might have been alluding to his years in the wilderness when, in 1967, he remarked: “Without standing in one’s own profession, one can have little leverage on events” (Fortune, June 1, 1967, 148). Friedman’s enhanced standing in the economics profession when it came to monetary issues would owe much to the success of the work published in the period covered in this chapter. Nonetheless, from the vantage point of 1961, Friedman’s prospects for changing views about monetary and stabilization policy did not look promising. It was not only that his name did not stand out in policy discussions; an additional factor was that the 1960 election result had pointed national economic policy in a direction away from the kind that Friedman had been advocating. During the Eisenhower years, Friedman’s status as a critic of the Keynesian revolution had put him distinctly in the minority in academic circles. But, with the Eisenhower administration generally refraining from very activist fiscal policies and providing an environment conducive to monetary restraint, Friedman had only limited cause to complain about the practice of stabilization policy. Furthermore, the weight that the Eisenhower administration gave to Arthur Burns’s views meant that Friedman could legitimately claim to be close to policy circles, notwithstanding Friedman’s maverick status in the profession. That situation changed in 1961, with a new-­look Council of Economic Advisers (CEA), initially headed by Walter Heller and featuring James Tobin among its members, and an administration propounding what was called the “New Economics.” “There is nothing very new about the so-­called New Economics,” Friedman would later remark (Dun’s Review, February 1968, 38). The “New Economics” was Keynesian economics. What was new in the early 1960s was not Keynesian economics per se, but the vigor with which Keynesian economic ideas were being integrated into the US government’s approach to stabilization policy. It was against this background that an avalanche of Friedman writings reached print—over one thousand pages in total—of which the two most notable were Capitalism and Freedom in 1962 and Friedman and Schwartz’s Monetary History in 1963. Each of these books is discussed in section II of this chapter.4 Capitalism and Freedom would take considerable time to make a major impression, but the Monetary History would create an immediate splash. The latter volume would help reestablish Friedman’s repu-

Moving into High Gear, 1961 to 1963  3

tation among economists. It would do so in a manner that created a sharp contrast between his position in the 1950s and that in the 1960s. In the 1950s, Friedman was in favor with leading figures in the federal government and largely out of favor with fellow economists.5 In the 1960s, the situation was the reverse: he would be out of favor with the Democratic administrations but gaining considerably in support among economists. The era that in 1971 Friedman would recall as prevailing “ten, fifteen years ago,” when those taking his position on the importance of money were being written off as “extremists who didn’t know what we were talking about,” was nearing its end.6 And even at the policy level during the 1960s, although Friedman’s views were largely resisted, they attracted great attention. Stands like that taken in the Hayes testimony quoted above, in which FOMC members would profess to have only a passing familiarity with Friedman’s position, would become untenable. A striking illustration of the turnaround in the degree of policy makers’ acknowledgment of Friedman is provided by the fact that, at the end of the 1960s, Friedman debated a Federal Reserve Board governor, George Mitchell, on the NBC Today show.7 Over the 1970s and 1980s, Federal Reserve Board governors would frequently find themselves called on in congressional testimony to react to this or that remark that Friedman had made concerning recent monetary policy developments. In the same vein, the economists of the Federal Reserve Board would, during the 1970s and 1980s, frequently be asked by senior staff and policy makers to write internal memoranda scrutinizing Friedman’s latest commentary (which he tended to relay via congressional submissions or testimony, or in his popular writings). And Friedman’s name would crop up frequently in Federal Open Market Committee meetings—as in 1982 when, upon being asked what evidence existed that M2 was related to gross national product, Federal Reserve chairman Paul Volcker replied: “Milton Friedman wrote a big book on the subject.”8 For Friedman’s role in economic debate, the year 1961 was the calm before the storm. As discussed in the previous chapter, Friedman gave congressional testimony or congressional submissions on monetary policy in 1958 and twice in 1959. He would deliver testimony on this topic again in 1963 and 1964. In addition, he published books dealing with US monetary policy in 1960 and 1963, and he would include a chapter on money in Capitalism and Freedom in 1962. By his standards, Friedman’s degree of activity in the public arena was low during 1961. Seeing the 1962 and 1963 books through to completion was evidently an effort that absorbed much of his time. In the first year of the Kennedy presidency, it was instead Arthur Burns who made a good deal of the running in providing a critique of the administration’s economic plans.

4 C h a p t e r e l eve n

Burns’s Critique of the Kennedy Administration It was Burns who, in an address at a conference at an April 1961 University of Chicago conference in which Friedman also participated, scrutinized “the economic theory that underlies the major economic policies of the new administration.”9 Burns criticized the premise of the new CEA’s analysis of economic performance in the 1950s. The CEA had published estimates of potential output and the implied output gap (or GNP gap), and these estimates suggested a shortfall of output behind potential that had shown what the CEA called a “distressing upward trend” during the 1950s.10 Burns argued that the CEA was drawing the wrong lessons from the experience of the 1958–60 recovery. As Burns pointed out, in an analysis that mirrored Friedman’s own, the brevity of that recovery could well have reflected the Federal Reserve’s shift to monetary tightening in 1959. This assessment was in contrast to the CEA’s implication that the weakness of the economy of late reflected a sustained and inherent tendency for private aggregate demand to exhibit weakness. Burns also raised questions about the CEA’s picture of the output gap in the 1950s. He observed that changed assumptions about the estimates of potential output would lead to a very different picture of the Eisenhower years. The council’s characterization of the eight years before 1961 as one predominantly featuring shortfalls of output behind potential was not supported by Burns’s alternative estimates, which instead suggested a situation closer to fluctuations around a zero output gap. In the course of this critique, Burns brought out the message that output-­ gap estimates were highly sensitive to the setting of the absolute level of potential output as well as to the assumed growth rate of potential. “Yes, Burns was very critical,” recalled Robert Solow, a staff economist for the Kennedy CEA who was asked to help draft a reply (Council of Economic Advisers 1961) to Burns’s analysis.11 Solow added: “He thought that we were pushing too hard to generate increases in employment. And the classic remark [was from] Henry Wallich—who was, I guess, maybe the only conservative-­[plus]-­Keynesian type who ever existed and who was a very smart man. He wrote a note to Arthur Burns, and said, ‘What GNP do you think corresponds to full employment?’ It was national product, not domestic product, in those days. And Arthur responded: ‘I don’t think in GNP terms.’ And since we all thought in GNP terms, we just responded to him as best we could” (Robert Solow, interview, December 2, 2013). The notion that the mismeasurement of the output gap was an important factor in the overstimulation of the economy during the 1960s has received support from the retrospective accounts of Orphanides (2003), Romer and Romer (2002b), and Meltzer (2009a).12 Consequently, Arthur Burns’s (1961a, 1961b) dissection of the emerging economic policy of the

Moving into High Gear, 1961 to 1963  5

Kennedy team, although little referred to afterward, appears to have been largely vindicated.13 That vindication is tempered by the fact that, as Federal Reserve chairman over much of the 1970s, Burns seemed not to maintain the wariness regarding measures of slack that he had expressed in the early 1960s. On the contrary, in making monetary policy decisions Burns appears to have drawn on estimates of economic slack that turned out to have far more severe biases than those that the CEA produced in the 1960s (see Orphanides 2003; Orphanides et al. 2000; Romer and Romer 2002b, 2004; and chapter 15 below). The qualifications that Burns entered in his 1961 critique were also important. He acknowledged that “the administration has avoided extreme economic views” and in particular had not gone back to Alvin Hansen–­style Keynesianism.14 In this connection, two important aspects of the New Economics as articulated by the Kennedy-­era CEA and its members deserve mention. First, while the CEA’s analysis did see the 1950s as predominantly a decade of economic slack, it did, as Burns acknowledged, grant that output could overshoot potential and had actually done so on occasion.15 It is consequently appropriate to conclude that, contrary to some claims in the literature, the CEA did not take potential output to correspond to the maximum feasible level of output.16 Rather, the CEA treated the two concepts as different from one another. This approach was in keeping with the practice of much economic analysis in the United States and the United Kingdom since the late 1940s, in which situations of full employment and overfull employment were distinguished.17 Second, as stressed in Tobin (1986, 132), the administration’s target output level was the CEA estimate of potential output. Therefore—and in contrast to the depiction of policy makers’ objectives in accounts such as those of Kydland and Prescott (1977) and Sargent (1999)—US officials did not knowingly seek to generate a positive output gap. It should be emphasized that Friedman’s own critique of stabilization policy—both in general and in its application to the 1960s—did not rest on, or claim, that policy makers were failing to make the potential-­output/ maximum-­output distinction. Nor did Friedman claim that policy makers were deliberately targeting a positive value for the output gap. He accepted that a zero-­output-­gap goal, with a potential concept clearly distinguished from peak output, was common ground among himself and Keynesians.18 What, then, was Friedman’s position in the economic policy debate of the early 1960s? In hunkering down to complete his books, Friedman left for the years 1961 to 1963 nothing like the paper trail of commentary that he provided for the periods on either side of these years. The period to 1960 was covered in the Monetary History, while from the mid-­1960s Friedman in effect gave a running commentary on monetary developments (including in memoranda for the Federal Reserve Board consultants’ series of

6 C h a p t e r e l eve n

meetings from 1965 and, especially, his Newsweek column from 1966 and audiotaped commentaries for Instructional Dynamics from 1968). But on the basis of his post-­1963 retrospectives on the economic policy of the early 1960s, and his known positions on stabilization policy, one can be confident that Friedman would have largely concurred with Arthur Burns’s 1961 critique. He would not have gone along with Burns’s (1961a) implication that fiscal tightening played a major role in the 1960–61 recession independently of its effect on monetary growth. But Burns’s main warning, against forming policy in terms of numerical output targets, lined up with Friedman’s position. As discussed in chapter 8 above, Friedman on numerous occasions expressed concern about economic policy strategies that rested on estimated levels of the output or employment gap. On one such occasion, in 1958, he had stated that while “we can surely avoid extreme fluctuations,” the same was not true of milder fluctuations, and policies that sought to avoid the latter “may increase rather than reduce instability.”19 In 1961—no doubt conscious that his warning of around a decade earlier, of a major, secular peacetime inflation, had not materialized in the United States—Friedman noted that US economic-­stabilization policy during the postwar period had not featured large-­scale active countercyclical monetary measures. He further expressed the judgment that actual economic outcomes had confirmed the merits of that restrained approach.20 The Kennedy administration’s proposals signaled a break with this tradition, owing to the presence of what Heller (1982, 287) later described as “specific quantitative targets”—including the potential-­output goal and the administration’s corresponding estimated full-­employment unemployment rate of 4 percent. As Heller (1982, 287) stressed, the president “endorsed those targets.” One example of Kennedy’s endorsement was his articulation of the 4 percent goal for unemployment in a press conference on March 15, 1961.21 Friedman’s Interventions In a rare contemporaneous commentary on the debate, Friedman made clear his opposition to the administration’s approach. In these remarks, given in mid-­1962, Friedman affirmed that “I do not believe that it is desirable to state national goals in terms of ” employment criteria, adding that what “a statistician grinds out critically depends on the definitions of what he counts as being in the labor force, what he counts as unemployed[;] it critically depends on who’s unemployed. . . . So I don’t believe that the numerical numbers [sic] of 3 percent, 4 percent, 5 percent unemployment or anything like that are very good indexes of economic policy.”22 As Friedman saw things, the new administration’s focus on boosting the economy was also misplaced, as recovery from the 1960–61 recession had

Moving into High Gear, 1961 to 1963  7

already been set in motion by the 1960 turnaround in monetary growth. In Time magazine (March 3, 1961b), Friedman stated: “The trough of the recession will come sometime this summer. The rate of change in the money supply turned upward in the middle of last year. Generally there is a lag of about ten to twelve months between such a turn and the trough of a business cycle.” He and Schwartz later found the lag between the turnaround in monetary growth in 1960 and the February 1961 business cycle trough to have been eight months.23 In a May 1961 debate at the Chamber of Commerce in Washington, DC, Friedman indicated that he opposed policies that were centered explicitly on a full-­employment goal. “I do not believe that the problem of the federal government is to get people back to work. The problem of the federal government is to provide a climate, a monetary system and monetary arrangements under which individuals separately will find it advantageous to work and cooperate with one another.”24 In September 1961, Friedman worried that an excessive rise in monetary growth was in prospect. “I think it highly likely that we shall have significant inflationary pressure during the coming year,” Friedman said. “Cyclical expansion is generally accompanied by a more than average rate of rise in the stock of money and by a rise in velocity and hence by a rise in prices. The inflationary pressure will, I fear, be particularly strong this time.” Friedman cited the coming rise in public spending as a source of upward pressure on monetary growth. “The Federal Reserve may try to impose a brake, but I doubt it” (Business Week, September 30, 1961, 85).25 In the event, inflation, as measured using modern data on the GDP deflator, was only 1.2 percent in 1962, little above 1961’s level. It actually fell to 1.1 percent in 1963 and stayed below 2 percent in the annual-­average data for 1964 and 1965. What Parkin (1977, 43) labeled a “gentle acceleration [of US inflation] of the early 1960s” was only a rise from 1.4 percent in 1959 to 1.8 percent in 1965 using the GDP deflator, and from 0.9 percent to 1.6 percent using the CPI.26 But, for other nominal variables, the same period did feature elements of what Friedman foresaw in 1961. Measured by the modern definitions of money, M1 growth rose in every year from 1961 to 1965, inclusive, so that in 1965 it stood at 4.3 percent compared with around zero in 1960. M2 growth, too, rose sharply in the early 1960s, then remained at around 8 percent through middecade, more than double its 1960 value. Nominal income growth rose every year in the annual data from 1962 to 1966, inclusive, reaching 9.6 percent in 1966 compared with 3.7 percent in 1961. Annual data on the aforementioned series, as well as on a key short-­term interest rate (the three-­month Treasury bill rate), are shown in figures 11.1 and 11.2. Why, despite the pickup in monetary growth and nominal income growth after 1960, did Friedman turn out to be wrong when predicting inflation for the early 1960s? One part of the answer is that as of 1961 Fried-

8 C h a p t e r e l eve n Percent

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Figur e 1 1.1. Annual data, 1960–67: (a) Monetary growth; (b) Nominal and real GDP growth. Source: Computed from annual averages of data in FRED portal, Federal Reserve Bank of St. Louis.

man had yet to appreciate the extent to which inflation was a lagging indicator. He had long viewed the reaction of inflation to monetary policy actions as spread out over time, but only in the early 1970s did Friedman fully incorporate into his analysis the notion that output growth and inflation differed from one another in their typical reaction speeds to monetary policy actions.27 Thus, in an October 1965 memorandum to the Federal Reserve Board, Friedman computed contemporaneous correlations on annual data both between monetary growth and nominal income growth and between monetary growth and inflation.28 And on the basis of simple regressions, Friedman reported underpredictions of inflation for the period 1962–65. In contrast, Friedman’s later practice in analyzing annual data was to compute contemporaneous monetary growth/nominal income growth correlations but to allow for a two-­year monetary-­growth-­to-­inflation lag when comparing rates of increase of money and prices.29

Moving into High Gear, 1961 to 1963  9 Percent

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Figur e 1 1.2. Annual data, 1960–67: (a) Inflation; (b) Treasury bill rate. Source: Computed from annual averages of data in FRED portal, Federal Reserve Bank of St. Louis.

Even prior to reaching this improved understanding of the lags involved, Friedman had some grasp of the explanation for why inflation was so slow to pick up in the 1960s. In the 1965 memorandum, he would emphasize the extent to which inflationary expectations had been flattened by the experience of the second half of the 1950s. This situation set up conditions for economic slack to be absorbed alongside zero or low inflation.30 He would reaffirm this argument in retrospectives he gave in the 1970s and 1980s. There had been “noninflationary growth” in the early 1960s, Friedman contended in 1976, “not because the Democrats were in . . . [but] because of the discipline imposed in the prior Eisenhower Administration which set a stage in which you broke inflationary expectations, fundamentally.”31 The Kennedy administration had, he suggested, inherited this “windfall” of expectations of price stability.32 The notion that inflation expectations were constant and near zero over

10 C h a p t e r e l eve n Percent

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Figur e 1 1.3. Fourteen-­quarter moving standard deviation of annualized M2 growth. Sources: Calculated from Federal Reserve Bank of St. Louis’s FRED portal, using the modern definition of M2 and defining annualized M2 growth as 400 times the log change in the quarterly average of M2. Prior to calculation of growth rates, the observations on M2 are rescaled for the introduction of money-­market deposit accounts in 1982–83, using the ratios given in Friedman (1988a).

the early 1960s would also help explain why the data on inflation and unemployment in the United States for the 1960s trace out an apparently downward-­sloping Phillips curve (as shown, for example, in Council of Economic Advisers 1969, 95). The taking up of economic slack over those years had its counterpart in the mild pickup in inflation in the years to 1965. This pickup in inflation was, however, so gentle that the rise in the rate of nominal income growth in the first half of the 1960s largely took the form of higher real output growth. From this outcome flowed Friedman’s characterization, laid out above, of the first half of the 1960s as a period of noninflationary growth, as well as Meltzer’s (2009a, chapter 3) coverage of the 1961–65 period under the heading, “A Low Inflation Interlude.” Indeed, even while recognizing that the period ushered in Keynesian policies in earnest in the United States, both Meltzer (1969a, 26) and Karl Brunner cited 1961–64 as a period of steady monetary growth.33 Friedman himself would identify the episode 1963:Q3 to 1966:Q4 as one of the periods of the most stable monetary growth, by the criterion of the behavior of (old) M2, in the postwar United States.34 This judgment echoed praise that Friedman had given in his October 1965 consultant’s memorandum, which noted that in the prior three years “monetary growth has been relatively stable by past standards,” an “excellent” monetary policy performance.35 This picture of stable monetary growth in the mid-­1960s is also what emerges from examining present-­day data on the modern definition of M2. For this series, the fourteen-­quarter standard deviation of (annualized)

Moving into High Gear, 1961 to 1963  11

quarterly growth reaches one of its postwar lows in the mid-­1960s: see figure 11.3. The lowest value of this standard deviation is for 1962:Q4–1966:Q1. Monetarist accounts of the economic outcomes observed during this period have assigned considerable weight to the stability of monetary growth in facilitating the stable output-­growth pattern observed in the 1960s. For his part, Friedman would come to refer to “period[s] like the early 1960s of four or five years of fairly steady growth” in real output.36 And, in the 1980s, he would point to the absence of major swings in monetary growth in the 1960s as a reason for the United States’ avoidance of any full-­fledged recession from 1961 to 1969.37 The Economic Pause The annual observations on output growth in figure 11.1 obscure what was at the time considered a “pause” in real economic activity during late 1962 and early 1963. On the modern vintage of data, four-­quarter real GDP growth declines from 7.6 percent in 1962:Q1 to 3.6 percent in 1963:Q1, before rebounding. Therefore, the economic expansion, although it certainly continued, registered a distinct slowdown in the course of 1962. Clearer evidence of weakness in economic activity was present, as Friedman would later note, in the fact that there was a slight decline in industrial production around the middle of 1962. Friedman would see the temporary faltering in the expansion as reflecting, with a six- or seven-­month lag, a monetary tightening in which the growth of the money stock shifted from rapid rates to temporarily low rates.38 With M1 as the measure of the money stock, a monetary slowdown emerges clearly in 1962, irrespective of whether one uses the old definition or the modern definition used since 1980: see figure 11.4a. With regard, however, to M2—that is, the aggregate that Friedman tended to use—­ analyzing the developments of the early 1960s is complex. If one considers solely the modern definition of M2—a practice followed in the figures on money displayed so far in this chapter—there is essentially no slowdown in monetary growth during 1962: see figure 11.4b. The slowdown is apparent only in the case of the old M2 definition—and even here the braking in monetary growth is much less than for M1, as figure 11.4b also makes clear. The difference in the message provided by the modern M2 series from that given by the other aggregates reflects the presence of thrift institutions’ deposit liabilities in the modern M2 series. As discussed in the next chapter, these institutions were exempt until 1966 from governmentally imposed ceilings on deposit interest rates. In contrast, the rates that could be paid on US households’ and firms’ time deposits with commercial banks (which constituted the non-­M1 component of old M2) were subject to the

12 C h a p t e r e l eve n Percent

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F igu r e 1 1 . 4 . Four-­quarter monetary growth, 1960:Q1–1969:Q4: (a) M1, old and new definitions; (b) M2, old and new definitions. Sources: Lothian, Cassese, and Nowak (1983) data for old (pre-­1980) M1 and M2 series; quarterly averages of data in Federal Reserve Bank of St. Louis’s FRED portal for modern monetary aggregates.

Regulation Q limitation. Friedman later identified the early 1960s as the first occasion on which Regulation Q’s ceilings on interest rates on time deposits—which had been present since the 1930s—became binding on a sustained basis.39 With the rise in short-­term market interest rates during 1962, funds moved out of commercial banks into thrift accounts. What ensued was that old M2 growth was below modern M2 growth for much of the 1960s. The two series came closer together once, in 1966, official ceilings were introduced on the interest rates that could be offered on thrift-­issued deposits. However, the fact that modern M2 growth records no major decline should not be taken as invalidating the notion that monetary conditions tightened during 1962. The shift from commercial bank deposits to

Moving into High Gear, 1961 to 1963  13

thrift accounts that took place likely amounted to a tightening of the monetary environment. For the “moneyness” of thrift accounts (as reflected in the readiness with which they could be converted into currency or demand deposits) was likely lower in the 1960s than in the 1970s.40 Friedman’s contention that a monetary tightening occurred during 1962 was an important part of his interpretation of monetary policy developments in 1962 and 1963. Friedman warned in May 1962 that “we are taking monetary measures, it seems to me, that are likely to spell an early end to this expansion.”41 He later dated the pause in monetary growth to January–­ August 1962 and noted that the slowdown was much more drastic for M1 than for M2. Notwithstanding Friedman’s preference for the latter series as a measure of money, he regarded the severity of the slowdown in M1 as relevant in assessing the monetary tightening.42 During the second half of 1962, the FOMC took note of the slowing down in the money stock observed in the year to date, and its directives referred to the need to resume monetary growth.43 As Friedman would later view the record, after it recognized that there had been too much monetary restraint, the committee proceeded to go too far in the opposite direction. Friedman would date the turnaround in monetary growth to September 1962 and argued that such a turnaround was in itself desirable but “too great in magnitude.”44 Instead of allowing monetary growth to settle down at levels roughly consistent with price stability, the FOMC permitted the growth of the money stock to rise by an excessive amount, so that the monetary pickup in late 1962 was followed by what Friedman described as “a sharp speeding-up of monetary growth” in early 1963 (Dun’s Review, February 1968, 39). As a consequence, monetary growth by the mid-­1960s was considerably in excess of rates observed prior to the 1962 pause. Viewed from Friedman’s perspective, the monetary growth pattern of the mid-­1960s was commendable for its stability, but it consisted of stability around too high a growth rate. A policy that implied that M2 growth was stable at around 7 percent in the mid-­1960s (figure 11.4b) was not, in light of the stationary velocity pattern that had set in since the 1950s, a policy consistent with the maintenance of price stability. A judgment of this kind applies if one treats price stability as 2 percent inflation—a common practice today and, as emphasized in the previous chapter, not an uncommon practice even in the 1960s. It also holds if one uses the criterion for price stability of a roughly 1 percent inflation rate that Kennedy administration economists set themselves (Heller 1982, 287). And it holds once again if one instead uses the zero percent inflation rate prescription that was built into Friedman’s specification of his preferred policy of a constant (4 percent) monetary growth rate. The judgment that Friedman would reach was therefore that 1962–63

14 C h a p t e r e l eve n

was a point at which US policy makers eschewed a valuable opportunity to put monetary conditions on a noninflationary course.45 The pickup in monetary growth in 1961–62 was defensible as a correction of the weak monetary growth of 1959–60. And an uptick in monetary growth in 1963 could be justified as compensation for the weak monetary growth (especially using the criterion of the M1 series) of 1962. But instead of following the monetary-­pause episode of 1962 with steady monetary growth at a noninflationary rate, policy makers eased excessively, delivering a rate of growth in the money stock that was, on average, too high. Although it was a view not widely shared at the time, Friedman’s assessment that monetary ease was overdone in the wake of the 1962 pause would eventually receive a good deal of acceptance. The opportunity that policy makers had at that point to permit only a moderate pickup in monetary growth, and thereafter to let monetary growth settle at a noninflationary rate, was one that they did not take. Instead, by the criterion of (modern) M2 growth, monetary growth was, at 8.4 percent, higher in 1963 than in prior years of the decade, setting the stage for the situation observed from 1963 to 1966, when monetary growth was stable but high. Furthermore, this pattern of stable monetary growth turned out to be merely a relatively horizontal part of a roller-­coaster pattern in monetary behavior, as figure 11.4 showed. That shift in monetary growth to what Friedman called “a higher plateau” (Newsweek, October 3, 1977) from 1963 to 1965 was followed by a dip in 1966 before the move to still-­higher rates in 1967–68. Friedman’s Verdict on the Monetary Record of the Early 1960s This pattern underlay Friedman’s ambivalence about early-­1960s monetary policy in the United States. That period witnessed a stretch of stable monetary growth, but, as well as being too high, this steady monetary growth was part of a regime that was not conducive to stable growth in money. Friedman may have had the first half of the 1960s in mind when in 1972 he conceded that there were scenarios in which discretionary policy “happened to produce roughly steady monetary growth,” only to add that such cases did not provide “a firm basis for confidence in monetary stability” of the kind that could be provided by a rule (Newsweek, February 7, 1972). Indeed, Friedman would later divide the Federal Reserve chairmanship of William McChesney Martin into two separate regimes: 1954–62 and 1962–69.46 The latter constituted the inflationary roller-­coaster regime— one foreshadowed by the election of Kennedy in 1960 and the appearance on the policy scene of the New Economists in 1961, but crystallized by the Federal Reserve’s overreaction to the 1962 pause. This overreaction had ensured that the 1960s would witness a long-­lasting shift to higher monetary

Moving into High Gear, 1961 to 1963  15

growth, and not simply a brief period of monetary stimulation to compensate for the late-­1950s monetary tightness.47 The policy steps that took place in the wake of 1962’s monetary and economic pause provided the basis for Friedman’s view that the policy regime in force after 1961 ultimately promoted variable and inflationary monetary growth, and that it eventually proved damaging to stability in economic activity and inconsistent with price stability, even though stability in monetary growth, economic growth, and prices had characterized the initial years of that regime. Accordingly, Friedman would reach the judgment that, by 1971, the United States had experienced a decade of monetary mismanagement.48 The monetary stability that had occurred during the early to mid-­1960s had proved an ephemeral and accidental feature of the post-­1961 regime, and the Kennedy and Johnson administrations, said Friedman, “threw away” the noninflationary environment that had been provided by the restrained policies and periods of high unemployment of the 1950s.49 Why did monetary policy move to a setting in 1962–63 that ultimately proved inconsistent with price stability? A clue is provided by the FOMC’s policy directives of early 1963. In the March directive, for example, the committee indicated that, although monetary growth would need to be moderated after the recent revival, the pace of moderation would be guided by “the limited progress of the domestic economy in recent months, the continuing underutilization of resources, and the absence of inflationary pressures.”50 Evidently, readings on economic slack led policy makers to overestimate the appropriate amount of monetary stimulus—a situation consistent with the recent accounts of 1960s economic policy making, cited earlier. Influential Keynesian economists outside the government also perceived a major need for additional stimulus in 1962, in view of the economic pause. Most notably, Paul Samuelson wrote in October 1962: “Though not in a recession decline, our real gross national product is beginning to flatten out. . . . Unemployment is rising” (Financial Times, October 8, 1962, 8). Official analyses of inflation were also problematic. Policy makers did not propound pure cost-­push views of inflation—it would not be until the early 1970s that such views became prevalent in policy circles (see chapter 15). But the US policy makers of the 1960s evidently subscribed to the view that inflationary pressure was partially cost-­push in character. The 1963 directives and other material clearly indicate that this was the view of the FOMC. In addition, policy makers were predisposed toward thinking that what inflationary pressure did emerge might reflect cost-­push factors that could be handled by nonmonetary measures. President Kennedy’s actions

16 C h a p t e r e l eve n

against price pressure in specific industries, discussed at the end of this chapter, reflected this way of thinking about inflation. The shifts in the settings of stabilization policy during 1962–63 took the form not only of explicit monetary policy decisions but also of easier fiscal policy. The centerpiece of what would be called the Kennedy-­Johnson tax cuts—a large reduction in corporate and personal income tax rates—did not occur until 1964 (see the next chapter). This tax cut is, however, widely viewed as part of a series of administration-­encouraged tax reductions implemented from 1962 to 1965.51 In 1962, the major measure in this sequence was the enactment of the investment tax credit (Tobin 1978a, 620– 21).52 Friedman opposed the investment tax credit.53 It would not, he contended, provide appreciable stimulus to aggregate demand: that required monetary accommodation. It would not raise aggregate investment: that required an increase in the amount of savings available to the US economy. And it would distort resource allocation, as it would encourage the diversion of capital projects to those eligible for the tax credit.54 Notwithstanding these criticisms, Friedman saw some valid basis for the investment tax credit. By 1962 he had already arrived at his “starve-­ the-­beast” position that all tax-­revenue-­reducing measures were desirable as restraints on government spending.55 In addition, he would come to see merit in the investment tax credit as a back-­door method of cutting taxes on corporations, and he concluded that it was a realistic means of doing so, as his own proposal—which was to eschew direct taxation of corporations— was not on policy makers’ agenda.56 As discussed in the next chapter, Friedman viewed the Kennedy-­ Johnson tax cuts as contributing to inflation because, at least initially, they generated budget deficits, which in turn were monetized.57 The literature has not reached a clear-­cut determination on whether the deficit spending associated with the tax cuts raised monetary growth. For example, Hein (1983) and Allen and McCrickard (1988) found a close relationship between deficits and growth in money for this period, but Barro (1977) suggested that federal government purchases, rather than deficits, were the fiscal variable that triggered money creation. Friedman himself was inclined during the 1950s and 1960s to see a close deficits/monetary growth relationship as occurring in practice.58 Such a relationship reflected, according to the view he held at the time, efforts by the Federal Reserve to hold down interest rates in the face of upward pressure arising from government debt issuance.59 In later years, however, Friedman would change his position on the connection between budget deficits, interest rates, and monetary growth. In particular, in the 1970s and 1980s he would adopt a posture more closely resembling the Ricardian equivalence proposition, in which deficits need not put upward pressure on interest rates.60 What is clear, however, is that US monetary growth did rise over much of the period of fiscal expansion in

Moving into High Gear, 1961 to 1963  17

the 1960s, so that monetary policy in essence did accommodate the deficit spending of the 1960s. Friedman’s Teaching of Price Theory As already noted, what occupied Friedman during much of the early 1960s was not current economic developments but instead the completion of new books. Before discussing one of these—Capitalism and Freedom—some words are in order regarding the other Friedman book to appear during 1962: Price Theory: A Provisional Text. This was the first of several books authored by Friedman that he did not himself set out to write. As discussed in chapters 4 and 9, Friedman had been teaching a—not the, as will be discussed presently—“Price Theory” course for the PhD program in economics offered by the University of Chicago since he joined the economics department in the 1946–47 academic year. At an early stage (specifically, in 1951), an enterprising student, David Fand, made transcription-­like notes of Friedman’s lectures, helped to some degree by another student, Warren Gustus.61 Mimeographed copies of these notes were in circulation among students during the 1950s and became part of the formal materials distributed as part of the course. They then spread beyond the University of Chicago. As Friedman recalled matters, it was not “feasible to keep the mimeographed notes from getting fairly wide circulation.”62 Written versions of the lectures were cited in their written form in articles as early as 1953.63 Then in 1959 Carl Christ, with Friedman’s permission, made further copies of the mimeographed version for a course that Christ taught in Japan (Carl Christ, interview, May 1, 2013).64 Finally, Friedman consented to the creation of a published version of the notes, one that would incorporate his further revisions and additions. Even with this final polish embedded in them, Friedman observed that the notes had a “scrappy nature” and that the book that resulted was not the textbook treatment he had hoped to write.65 The publishers of the monograph, Aldine, seem to have taken Friedman’s subtitle of A Provisional Text to heart, as the resulting book was hardly one produced for the ages. It had a shoddy, self-­destruct cardboard cover, and an oddly subprofessional, near-­typescript-­style font.66 The publisher did, however, keep the text in print into the 1970s, and later impressions of the book incorporated corrections that Friedman made to the text in 1966. The book did not set out to revolutionize economic theory. Rather, in large measure, it provided a standard treatment of the issues covered. This situation led H. Grossman (1974, 510) to cite Friedman’s text in referencing the “standard textbook definition of demand,” and Ehrenberg and Smith (1985, 110) acknowledged Price Theory as their main source for their treat-

18 C h a p t e r e l eve n

ment of substitution effects. The text did have some material that Friedman regarded as innovative, notably the coverage of capital theory near the end of the book. Friedman voiced a desire to expand the coverage of capital theory in his text into a book-­length treatment.67 However, Gary Becker observed that, other than in the coverage of capital theory that Friedman gave in his price-­theoretical teachings, “he never made much progress on trying to write anything extensive on that” (Gary Becker, interview, December 13, 2013). The Price Theory book also featured two brief passages that each foreshadowed a large literature: a discussion of intertemporal substitution in labor supply; and a criticism, provided in a tantalizing problem-­question at the close of the book, of the downward-­sloping Phillips-­curve idea.68 The topics covered in these passages were, however, not major concerns of the initial edition. In the main, the book reflected other interests of Friedman’s: a Marshallian treatment of demand, quite a bit on human capital (including the assignment, in the book’s readings list, of selected passages from the Friedman-­Kuznets Income monograph), and greater coverage of monetary issues (including the Pigou effect) than would be normal for a microeconomics course—although far less than in the 1976 revised edition, which devoted almost a whole chapter to the Phillips curve. The Price Theory text of 1962 was, as its subtitle indicated, intended to be a placeholder for a definitive treatment by Friedman of the subject. But that definitive treatment never materialized. The coverage of microeconomics in the aforementioned 1976 edition basically amounted to a light revision of the material in the 1962 edition. It in no way amounted to the far more extensive and comprehensive account that Friedman had once envisioned. Its “provisional” status notwithstanding, the 1962 version of the book provides something of a permanent record of Friedman’s oft-­noted Price Theory class. Friedman had continued to teach this class over the 1950s, despite the shift in his own research interests toward monetary analysis. Neil Wallace, who took the class in early 1961, recalled Friedman expressing to him at the time the view that people should not teach in their own area of research (Neil Wallace, interview, March 15, 2013). However, within a couple of years of the publication of the book version of his course materials, Friedman departed from his own edict. He gave up teaching price theory for about a decade and taught graduate monetary theory. The early years of Friedman’s price-­theory teaching were discussed in chapter 4. Some further comments on his 1947–62 Price Theory course—partly as reflected in the book’s contents, partly as given by firsthand accounts of students—are warranted here. First, the book of the course was not particularly technical. Its contents confirmed Friedman’s tendency after the mid-­1940s to move away from

Moving into High Gear, 1961 to 1963  19

heavy use of mathematics. This was noted when the book was examined in the American Economic Review: Miller (1963, 467) observed, “The book is essentially nonmathematical.” This characteristic of the book lined up with Gregory Chow’s experience in the early 1950s of Friedman’s Price Theory class, in which Friedman “used the Lagrange multiplier,” but this was “almost the limit” of the mathematics that Friedman deployed in the course (Gregory Chow, interview, July 1, 2013).69 But, when in the first half of the 1960s Friedman wound up his first stint as a teacher of the Price Theory class, the technical level of his course was not greatly out of step with other PhD economics courses at the University of Chicago.70 Robert Lucas, like Wallace, took the course in two quarters of the 1960–61 academic year, an experience that prompted him to label Friedman “the biggest influence by far, on me and all my classmates” (see McCallum 1999b, 281). When asked about the technical level of the Price Theory course in relation to the rest of the course program, Lucas recalled that it was at “about the same level.”71 He went on: Chicago was not a high-­tech place then. . . . [Friedman] didn’t have any interest in general equilibrium theory and was kind of hostile to it. That was something that was going on in the other places in the fifties and sixties in a big way. He was a good statistician. But he was not enthusiastic at all about the work that Klein and Modigliani and other people were doing with macroeconometric model building. And he was, you know, a severe critic of that work. It wasn’t that he was anti-­technical, but he wasn’t enthusiastic about the ways people were using the technical tools. (Robert Lucas, interview, March 12, 2013)

In the 1962 version of the text, Friedman himself acknowledged that he did not cover the “theory of general equilibrium,” a topic that arguably fit within the subject matter of the book. In the 1976 edition, however, while indicating that the revision still did not cover that topic, Friedman now seemed to regard the omission as appropriate.72 Indeed, as department chair in the economics department during the 1970s, Arnold Harberger endeavored to hold the line, once Friedman departed the university, in keeping Price Theory a relatively nontechnical course in the face of sentiment to give it enhanced “Pareto/Walras”-­style content (Arnold Harberger, interview, May 2, 2013). Of course, general equilibrium theory was already being expounded at the University of Chicago in Friedman’s time, in economics courses other than those he taught. And it would ultimately feature very heavily in the graduate teaching of economics at the University of Chicago—not only in the Price Theory class, but also in the courses that underlay Stokey, Lucas, and Prescott’s (1989) monograph.73 As noted in chapter 4, Friedman’s Price Theory class made heavy use of

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examples from the beginning, and this approach was reflected in the book of the course. The use of examples is, however, not the same as focusing on case studies. The course was primarily theoretical, as its name applied. Against this background, Friedman’s use of examples was as a jumping-­off point for a discussion of theory. Both Lucas and Sam Peltzman (another 1960–61 class member), for example, recalled Friedman using quotations from items in the Wall Street Journal and other newspapers to launch his analysis.74 Peltzman elaborated on the format of the class: What he would do is come in with a bunch of index cards on which everybody in the class was listed—the class was about fifty, it wasn’t small, about fifty or so—and he would start out, and he would say here’s a reading list, and here’s my notes, which later became actually a textbook. You can imagine in 1960 the state of the art; these were mimeographed notes that were held together by paper clips. And he said, “You can read all this stuff on your own. I was reading in the Wall Street Journal today the following. What do you think about that?” And he would go through his index cards, and he would say, “Mr. Harris, what do you think about that?” And that’s the way the class went. . . . There was a certain combination of informality and a demand for rigor. (Sam Peltzman, interview, March 1, 2013)

Peltzman added that, when Friedman called on a student to analyze a problem, “you had better have a good answer.” Peltzman also related the delayed impact the course had on him, and how this led him to improve his perception of Friedman’s aims in the course: Whatever he himself was doing professionally and how he was doing it, he certainly didn’t convey to the class that the important feature of an economist is technical sophistication. In fact, I only understood what he was doing in this class after it was over, or well into the second quarter of the class. I woke up one afternoon after, you know, a nice round of drinking with my buddies. Bleary-­eyed, half-­conscious. And I turned on the radio. There was a news report, and the guy said something. And I said to myself, “What kind of a model would generate that kind of a statement? What are the implications of the model, or theory, or whatever it was? What conceptual framework could produce the kind of connection that this guy was making?” And then I caught myself, and I said, “That’s what I got from Friedman.” That what you need to do is take economic theory to real-­ world problems, not only of your choosing, but 24/7. You would listen to developments in the real world, and interpret them through the lens of economics. That’s what he was teaching us; and the corollary was it doesn’t require mathematical sophistication to answer that kind of question. So

Moving into High Gear, 1961 to 1963  21

he did convey to the students, clearly, a belief in the importance of economics, but also in the importance of keeping it simple and applicable to a range of problems. (Sam Peltzman, interview, March 1, 2013)

The place of the Price Theory course in the graduate teaching at the university also provides a caution against the notion that Friedman “led” or “dominated” the University of Chicago’s economics department or its students. Price Theory was a required course, but it was typically offered twice during the academic year. Under this arrangement, only one of the offered Price Theory courses was taught by Friedman. Indeed, in the later years of Friedman’s teaching of Price Theory, his one-time Price Theory student Arnold Harberger taught the other Price Theory class. Typically, students who studied graduate-­level economics at the University of Chicago did not ever need to have Friedman as a teacher. Nor, as argued further later in this chapter, was Friedman dominant with respect to the rest of the Department of Economics. Rather, there were several department members who did research on decidedly different tracks from Friedman’s own. Robert Lucas recalled: “He respected the fact that there were people who maybe other people liked but whose research wasn’t his cup of tea. You know, he wasn’t a big guy pushing; he wasn’t a bully in departmental meetings at all” (Robert Lucas, interview, March 12, 2013).75 Furthermore, as discussed below, the positions of key monetary economists in the department differed in important ways from that of Friedman. Friedman was also, by the 1960s, not a constant presence throughout the year at the University of Chicago. He spent much of his time in New England. Friedman had a summer home in Orford, New Hampshire, close to Vermont, and he used that base for much of his work on the Friedman-­ Schwartz monetary project. Later, he relocated his summer base to Vermont proper, purchasing a home in Ely.76 Robert Lucas recalled of Friedman’s schedule in his later years at the university, “He always spent spring and summer in Vermont. So he only had two quarters here. And he told me [once Lucas joined the department in 1974] that I should do the same thing because that makes you unsuitable for any departmental position like chairman; you could focus on your research. I thought that was kind of funny advice, but not bad advice either” (Robert Lucas, interview, March 12, 2013).77 “I spend six months teaching in Chicago and six months here, but it’s here that I do most of my writing and research,” Friedman would explain in 1975, “away from classes and committees and whatnot” (New York Times, August 17, 1975, 13).

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II. Issues, 1961–63 Capitalis m and Freed om A rri ves Late 1962 saw the publication of Friedman’s book Capitalism and Freedom, which advocated market solutions for many areas of US public policy. It is the book version of Free to Choose with which Capitalism and Freedom is most often compared—usually very much in the earlier book’s favor. In 1982 Robert Lucas indicated that he far preferred Capitalism and Freedom to Free to Choose, on the grounds that the former was more rigorously argued and more clearly attuned to economist readers (Klamer 1983, 52). Likewise, in an interview for this book, Gary Becker stated: “Oh, Capitalism and Freedom was a great book; Free to Choose is a popular book, very good for what it does, but, you know, it didn’t have the depth of Capitalism and Freedom, which I consider a really great book, which was very influential in ideas and was a serious book. Free to Choose was a popular book . . . but you know, as a fundamental book, you can’t compare it to Capitalism and Freedom” (Gary Becker, interview, December 13, 2013). It is a difficult task indeed to find an economist who will contend that Free to Choose is superior to Capitalism and Freedom. Friedman certainly did not. Even the Friedmans’ introduction to Free to Choose conceded that it would not be as analytical as Capitalism and Freedom.78 And in 1991, Friedman acknowledged: “In fact, I believe that Capitalism and Freedom is a better book.”79 For a book that Friedman came to describe as one in which he “tried to present my economic philosophy systematically,” and which others hailed as an aesthetically pleasing piece of work, tightly written and unified in theme, Capitalism and Freedom had a notably disjointed origin, one considerably more “scrappy” than that of Price Theory.80 The book had no index.81 And its text consisted in large measure of a compilation of excerpts from speeches and articles that Friedman had composed during the 1950s and early 1960s. Friedman signaled that he was drawing especially heavily on talks that he had given in 1956 at Wabash College (in Indiana) to an audience of free-­market advocates, who had been assembled from various universities.82 Furthermore, not just unpublished material was considered for inclusion. It was with good reason that Friedman wrote in the book’s introduction: “I have drawn freely from material already published.”83 Indeed, a considerable amount of the book consisted of near-­direct reprinting of earlier items. For example, those who had read Friedman’s paper on central-­bank independence and his Program for Monetary Stability would recognize passages from those earlier writings.84 The fact that Capitalism and Freedom was largely a “greatest-­hits” package of Friedman material did

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not go unnoticed by reviewers. Abba Lerner, for example, opened his appraisal of the book in the American Economic Review with a description of it as a “rewrite of lectures and articles by Milton Friedman” (Lerner 1963, 458).85 But the durability of the book and the high regard in which it would come to be held among many economists indicate that, notwithstanding the disparate materials underlying Capitalism and Freedom, the final product was cohesive. For the book’s cohesion, much credit must go to Rose Friedman, whom Friedman acknowledged as responsible for synthesizing the materials into book form.86 The interior credit for the book reads “Milton Friedman with the assistance of Rose D. Friedman,” which contrasts with the full coauthor credit given Rose Friedman in the 1980s for the book version of Free to Choose and for Tyranny of the Status Quo. It is unclear whether the differences in credit between Capitalism and Freedom and Free to Choose reflect different degrees of input from Friedman’s wife. A Newsweek profile of Friedman (October 25, 1976, 89) stated that Rose Friedman “helped with the editing” of Capitalism and Freedom. But in a 1994 interview Milton Friedman said of his wife that “she should have been a joint author” in the 1962 credits.87 And in the same year he stated: “She really did most of the work on the book” (Investor’s Business Daily, January 14, 1994, 2). Indeed, Friedman had listed his wife as the coauthor of Capitalism and Freedom in successive Who’s Who in America entries (for example, Marquis Who’s Who 1964, 695; 1976, 1080), and the Friedmans would refer to the book as “our” book.88 On the other hand, Friedman occasionally described Capitalism and Freedom as “my book.”89 It should also be borne in mind that the partial-­reprint character of the 1962 book made its production less conducive to a full-­fledged collaboration than that of the Friedmans’ later books. For her part, in 1980 Rose Friedman described her collaborations with her husband as follows: “My husband never wrote anything without my reading it over and talking about it. In the two books we coauthored, we each wrote different chapters and exchanged them for comments and corrections. We worked evenly on them, writing, editing, revising. . . . [And] now you can’t tell who wrote what, the style is the same throughout the books. I always tell people we work as one. We are one” (Straits Times, October 18, 1980). In 1961, Milton Friedman had agreed with the notion that the merits of government intervention in the marketplace should be examined on a case-­by-­case basis. The qualification he added was that the judgment underlying this case-­by-­case examination should be based on an underlying principle.90 In Capitalism and Freedom, Friedman adhered to this method of proceeding, in making judgments about government intervention. The specific edict guiding these judgments was the presumption that

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there be a high bar for sacrificing individual freedom and decentralized solutions. Then, as Sutton (1963, 491) put it, the book “shows all of us where his principles lead him.” One reason why Robert Lucas considered Capitalism and Freedom a better book than Free to Choose is the connection the former book makes between principles and policy prescriptions. The instances in which free-­market solutions are advocated are after a systematic consideration of the case against: I liked the business of—and I still do—you know, “What’s the role of, and how do we decide what should be done through, government; and what should be done through the private market.” . . . There’s no presumption that government screws everything up. . . . The whole discussion, I thought, was really elegant, and the particular illustrations were elegant too. It’s just the idea that liberal economics is not a revolutionary doctrine. It can fix things piece by piece. And so we try to keep those grand issues out, and just start talking about [say] the minimum wage and what are its effects. (Robert Lucas, interview, March 12, 2013)

John Taylor contrasted the release of Capitalism and Freedom in 1962 with the issuance of the Economic Report of the President by the Kennedy administration the same year: “They’re completely different in terms of their focus.” Taylor cited the contrast between Friedman’s emphasis on limited government, rule-­based economic policy, and the greater power of monetary policy than fiscal policy, with the corresponding views espoused in the 1962 Economic Report of the President (Council of Economic Advisers 1962) (John Taylor, interview, July 2, 2013).91 Some may hesitate to accept Taylor’s comparison. After all, the most-­ remembered portions of the 1962 Economic Report were what one of its authors, James Tobin, would later recommend as a nontechnical exposition of US Keynesian macroeconomics (Tobin 1987a, 105), whereas the orientation of Capitalism and Freedom was primarily microeconomic, with only a couple of chapters about stabilization policy. Closer examination, however, confirms that Taylor’s contrast between the two documents is appropriate. As discussed in section III below, the Kennedy administration’s macroeconomic policies did entail intervention in the price system, in the form of its wage/price guidepost policy. And although the Kennedy administration strongly advocated a tax cut that would sharply lower marginal tax rates— and so was propounding a move that many economists of various schools would come to see as desirable, in light of the very high top marginal rates prevailing in the United States in 1962—the case the CEA gave for cutting taxes saw this primarily as an aggregate-­demand-­boosting move. The economists within, and close to, the Kennedy administration also

Moving into High Gear, 1961 to 1963  25

differed from the perspective Friedman voiced on monetary policy, both in his research output and in Capitalism and Freedom. Okun (1968) focused his analysis of monetary policy on the behavior of nominal interest rates. He thus overlooked the real/nominal interest-­rate distinction and, in effect, judged that Friedman’s emphasis on the money stock was misplaced.92 This judgment was also evident in the remarks of Paul Samuelson, who, although outside the government, was speaking supportively of the Kennedy economic team’s initiatives.93 Samuelson indicated that to “attach great importance to the behavior of the money supply” was to be part of an “older generation” (Financial Times, October 8, 1962, 8).94 As for the role of government, in a 1969 interview Friedman encapsulated his perspective as follows: “I rather like to think of ourselves as a community of individuals, of several hundred millions of individuals, and we jointly use various ways to satisfy our needs and our desires. . . . And the question is, what are the things that we would be best advised to do through government?” (Speaking Freely, WNBC, May 4, 1969, p. 3 of transcript). He had made a similar statement early in Capitalism and Freedom.95 As that outlook suggested, a great deal of Capitalism and Freedom was concerned with externalities and the appropriate public policy response in the face of externalities. This aspect of the book’s content was underlined by Friedman’s observation that much of economic research was concerned with externalities.96 Such material in Capitalism and Freedom serves to refute the claim in Jones (2012, 118) that Friedman “spent little time reflecting” on market failures. What is true is that Friedman did subscribe to the view that a solution involving minimal government intervention should be adopted unless an externality features prominently. This was a standard economist’s position, one reflected in Friedman’s observation (noted in chapter 9 above) that the logic of economic analysis tends to lead economists to support free markets. The analysis of Capitalism and Freedom would, however, conclude that there were fewer cases for which government intervention was justified than was the consensus among economists at the time. One case in point was public housing. In 1982, Lucas would cite public housing among the government interventions of which Friedman’s criticisms in Capitalism and Freedom in 1962 had seemed radical, only to become widely shared later on (Klamer 1983, 53). That said, few of the policy changes Friedman proposed in Capitalism and Freedom were ever adopted. Schwartz’s (1993, 209) observation that the number of Friedman economic policy prescriptions subsequently executed is “paltry in relation to the numerous reforms that he has advocated that have not been adopted” applies forcefully to the Capitalism and Freedom agenda. The presence of conscription among the policies in force at the time

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when Capitalism and Freedom was written gives some foundation for a statement in the book that otherwise appears overblown: namely, Friedman’s claim that the “modern” US liberals whose positions he was challenging were “proponents of measures that would destroy liberty.”97 Friedman’s claim is, nonetheless, problematic: it fails to distinguish between advocates of an extremely large public sector and those who wanted to limit government but perceived a need for a greater role for government in the economy than did Friedman. A more nuanced statement by Friedman on the matter appeared in Newsweek a decade after Capitalism and Freedom: “We can be, as we are, a little or even more than a little socialist without going all the way” (Newsweek, February 28, 1972). To conclude the present discussion, some consideration of the impact of the book is appropriate. The book was still being written in April 1962.98 It was published around six months later. Friedman considered Capitalism and Freedom suitable for a general readership.99 Sharing this sentiment, DePrano and Mayer (1965, 730) described it as a “popular book” rather than part of the research literature. But the dissemination of Capitalism and Freedom to a wide audience was initially blunted by the lack of extensive coverage of the book in popular outlets. As Friedman would recall several times, national media outlets such as the New York Times, Newsweek, and Time magazine did not publish a review of the book.100 Capitalism and Freedom was given some advance exposure in the Wall Street Journal, as Friedman had published a few Journal op-­eds in the early 1960s, including a couple of pieces that were, in effect, a preview of material in Capitalism and Freedom.101 But even that exposure was mitigated by the fact that, although it was a national newspaper, the Wall Street Journal as of 1962 hardly enjoyed the status of a general-­interest publication. Likewise, Business Week (October 6, 1962) published a long feature article on the book, and the Economist published a review, but these were business magazines, and the Economist lacked US newsstand circulation until the early 1980s.102 The lack of publicity could not have helped sales. Nevertheless, both Skousen (2001, 390) and Burgin (2012, 153) have stated categorically that Capitalism and Freedom was a best seller in the 1960s.103 This was not, however, the case. Fortune magazine’s assessment five years after the book appeared that Capitalism and Freedom was “scarcely a bestseller” in the 1960s was an appropriate one (Fortune, June 1, 1967, 148), and that statement lined up with the later observation in the Wall Street Journal (November 4, 1969, 15) that only on becoming a Newsweek columnist (in 1966) did Friedman secure a large non-­economist readership. The book did well for an item published by an academic publisher, with its paperback edition reaching a seventh impression in 1967. But Capitalism and Freedom was not a best seller during the 1960s on an objective standard (for example, on

Moving into High Gear, 1961 to 1963  27

the criterion that a book must reach the best-­seller lists recorded in newspapers). When the Friedmans’ Free to Choose was being readied for press at the end of the 1970s, the publisher required considerable persuasion to authorize as large an initial print run as it did, being concerned that it was justified by the track record of Friedman’s books (Charles H. Brunie, interview, July 15, 2013). It was Friedman’s fame in the 1970s and the spillover from the success of the Free to Choose book and program that helped boost Capitalism and Freedom’s sales over the years to a high level—to four hundred thousand by early 1981, five hundred thousand by 1987, and about six hundred thousand by the mid-­2000s.104 Correspondingly, Friedman was still well short of being a household name after the initial release of Capitalism and Freedom. He was becoming one of the better-­known US economists, and he traveled widely. But in contrast to his hectic national and global travel in the 1970s, during the 1960s Friedman often still traveled from Chicago to different US cities by car.105 The book did, however, become well enough known in the initial aftermath of its release that Sam Peltzman would date the time at which Friedman’s profile outside the economics profession went up considerably to following the publication of Capitalism and Freedom. To some extent, Friedman had already made a mark as a free-­market advocate via his pre-­ 1962 activities. Time magazine (March 3, 1961b, 22), using a label for his views that he eschewed, said Friedman was “considered the most brilliant conservative economist” in the United States; Sutton (1963, 491) observed that “Friedman has long been known as a formidable knight in the Chicago citadel”; and a 1962 book of readings (Mark and Slate 1962, 33) had stated that “Milton Friedman . . . is recognized as one of the foremost apostles for a free enterprise system.” Capitalism and Freedom reinforced this impression, and a Time magazine article on the University of Chicago (May 31, 1963) gave the book belated publicity. That article, however, gave an incorrect characterization of the situation when it stated: “The graduate economics department, where ‘classical’ Economist Friedrich Hayek long worked, now offers conservative Milton Friedman (Capitalism and Freedom) as Chicago’s answer to Harvard’s liberal John K. Galbraith.” In fact, of course, Hayek had not been a member of the economics department, and we have seen that Hayek seemed uninterested in the economics department’s activities, including the details of Friedman’s research program in monetary economics. Time magazine’s notion that the University of Chicago’s economics department “offered” Friedman to the world should also be called into question. To think of Friedman as a leader or spokesperson who was put forward by the university’s economists is to assume a degree of consent on the part of the University of Chicago’s economics department members that

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likely was not there. On the contrary, as has already been noted and as is discussed further below, the areas of interests of many department members had very little overlap with Friedman’s work, and Friedman’s views encountered resistance among even the department’s monetary economists. True, monetary economists in the economics department had to confront Friedman’s research on money. But the same was true, as the 1960s wore on, for US macroeconomists as a whole. Friedman’s image as the leader of the Chicago School was therefore much more his outside image than that accepted within the department. The October 1962 Business Week article that formed part of the limited press coverage of Capitalism and Freedom included a reference to Friedman’s “massive body of research into U.S. monetary history” (Business Week, October 6, 1962, 76). A little over a year later, the main output of that research would see print.

Rolling Ou t th e Mone tary H istory At the beginning of his 1961 reply to J. M. Culbertson’s critique of his monetary research, Friedman cautioned that the items under scrutiny—­ consisting largely of his late-­1950s congressional submissions and testimony—had been “necessarily condensed and preliminary” reports on work in progress. The definitive version of that work, he added, would soon appear in print. It would include his monograph with Anna Schwartz, “tentatively entitled The Stock of Money in the United States, 1867–1960, [which] is nearly in final shape. . . . It should appear in 1962 at the latest.”106 The 1962 date proved to be another deadline that was missed. The Friedman-­Schwartz project had proceeded throughout the 1950s, and Friedman provided updates on its progress in successive issues of the NBER’s Annual Report. In the 1958 report, for example, Friedman reported that NBER-­assigned readers were scrutinizing “much” of the draft in 1957, although he added that he and Schwartz were still adding chapters.107 Those following the research literature could also find references to the forthcoming book. For example, a long 1961 article in the Journal of Finance by a former Friedman student deployed a quarterly velocity series “developed by Milton Friedman and Anna J. Schwartz” (Selden 1961, 486), while Meltzer (1963, 235) relied on permanent-­income estimates that Friedman and Schwartz “will use in their forthcoming books.” At the University of Chicago, however, many economics students and teachers were only vaguely aware of the in-­progress Friedman Schwartz work—another illustration of the fact that Friedman and University of Chicago economics were not synonymous. Friedman’s colleague Arnold Harberger, asked if he and other department members were aware during the

Moving into High Gear, 1961 to 1963  29

1950s of the content of the Friedman-­Schwartz research-­in-­progress, answered in the negative. “It was, you know, like in most top-­level departments: everybody has his own thing to do; and it’s not often that you have an assemblage when most of the faculty are all in one place, listening to someone else in the faculty” (Arnold Harberger, interview, April 12, 2013).108 Nor even in Friedman’s own key research area of domestic monetary analysis could he be said to have dominated the University of Chicago economics scene. Some have claimed this to be the case in the early 1960s. For example, Bhagwati (1977, 225) contended that the department “was very Friedmanesque at the time.” In the judgment of Harberger, Friedman’s growing profile outside the economics department might easily have led to an exaggerated impression of his status within the department (Arnold Harberger, interview, April 12, 2013). Certainly the identities of other monetary economists in the economics department in the early 1960s do not support the idea that the department was patterned in Friedman’s image. A student of Friedman’s, Phillip Cagan, had been an assistant professor at the department after graduation, but he left in 1957 (American Economic Association 1970, 62). Harry Johnson, joining the department in 1959, started out from a Keynesian perspective that was largely hostile to Friedman’s views (see, for example, Laidler 1984). Arnold Harberger shared some of Friedman’s monetary views but, as already noted, was pursuing a research agenda that did not put him in close touch with Friedman’s work. And as Friedman’s research findings on money emerged, Harberger had his own major dissents from important aspects of those findings. An appropriate judgment seems to be that, excluding Friedman and his students, there were no economists of a strong, domestic-­economy-­oriented monetarist persuasion in the University of Chicago’s economics department from the mid-­1950s until William Dewald joined the department in 1962.109 Consistent with the preceding conclusion, Robert Lucas (2004a) would characterize the macroeconomics side of his graduate courses at the University of Chicago in the early 1960s as “my Keynesian education,” and Friedman himself would recall that the department’s practice in the 1950s and 1960s had been “to teach the quantity theory as well as the Keynesian theory.”110 This remained the case when, after 1964, Friedman himself taught two one-­quarter graduate courses in macroeconomics (a one-­ quarter course on the theory of national income determination and a one-­quarter course in monetary theory). John Gould, who attended these classes, noted that when Friedman’s name came up in later years he would ask people to guess the key text that Friedman used. They would rarely give the right answer: Keynes’s General Theory (John P. Gould, interview, March 20, 2015).

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An example, in addition to those provided above, of the nonmonetarist positions prevailing among the economics department’s monetary economists is provided by the work of Martin Bailey. Bailey’s output in the early 1960s fell primarily into the category of Keynesian analysis, his 1956 dissertation being titled “The General Equilibrium Foundations of Classical and Keynesian Theory” (American Economic Association 1970, 19). And when Bailey produced a book based on the macroeconomics course he taught to the University of Chicago’s graduate students, he described the book’s aim as being to provide a self-­contained presentation of Keynesian theory (Bailey 1962, vii). Bailey’s book did grant importance to monetary policy and—perhaps in light of Bailey’s exposure to Friedman’s 1950s research— it included a discussion of how the Federal Reserve could and should have prevented the money stock’s decline in the early 1930s (Bailey 1962, 172).111 However, the book had little discussion of the Friedman monetary work it cited; and although Bailey got on well with Friedman and attended the Workshop on Money and Banking, his work was clearly a breed apart from Friedman’s, as Bailey proceeded with his own research agenda. A sign of Bailey’s independence was the fact that Bailey (1968, 876) would come out against Friedman’s monetary-­growth rule. In that discussion, Bailey accepted that the rule would be an improvement on current Federal Reserve policy, but he declared that hardly anyone agreed with Friedman that a countercyclical monetary policy that did improve on Friedman’s rule was unlikely to be attainable in practice.112 For his part, Friedman does not seem to have been affronted at having a colleague working in his field in the department who disagreed with many of the Friedman positions. After Bailey had left the department to pursue his interests in national security, Friedman, in the graduate course in the later 1960s designed to cover Keynesian economics, used Bailey’s 1962 textbook for this purpose (as a supplement to the General Theory itself, which was, as noted above, also assigned by Friedman).113 The preceding picture of Friedman’s colleagues underscores the reality that University of Chicago monetary economics, taken as a whole, was not interchangeable with monetarism—just as Friedman did not speak for the whole department on nonmonetary issues, like the question of the merits of market solutions. Students in Friedman’s money workshop got some exposure to the Friedman-­Schwartz work, but the attendees were a small subset of the graduate student body and the department. For a large number of department members and students—including, as he noted in Lucas (2004a), Robert Lucas—what was true of Capitalism and Freedom was also true of the Monetary History: the first they saw of it was the published version. And even David Meiselman, who attended the money workshop and was working with Friedman in the late 1950s and early 1960s, did not grasp the scale

Moving into High Gear, 1961 to 1963  31

of the Friedman-­Schwartz enterprise until the Monetary History was fully drafted. “I knew they were working on something like that, but I had no idea of the scope of it—not at all. Later on, when the book came out, then I got to appreciate it more. [Before that,] Milton wouldn’t talk about the History very much” (David Meiselman, interview, July 16, 2014). The complete draft of the Friedman-­Schwartz manuscript, titled The United States Stock of Money 1867–1960, was finally ready at the end of 1961. Copies of the typescript were circulated to selected members of the profession, including James Duesenberry, Clark Warburton, Lloyd Mints, and Homer Jones.114 A copy was also sent to Chairman Martin at the Federal Reserve Board, with a cover letter dated January 5, 1962. As Friedman and Schwartz later recalled (Wall Street Journal, December 20, 1993), their letter sought feedback on the draft in the form of “criticisms and, in particular, the correction of any factual errors we might have made because we lacked access to Fed minutes.” They received a reply indicating that comments might take some time; instead, however, “we never heard another word—no criticisms, no corrections of errors, nothing.” A visiting scholar at the Federal Reserve Board did author a report on the draft for internal circulation, but Friedman did not see that (apparently, largely complimentary) report until the 1990s.115 In 1962, in the absence of official feedback, Friedman and Schwartz drafted a passage for their book’s preamble to indicate that they had sought but not received Federal Reserve Board comments. In the course of the drafting of this passage, Friedman noted in a June 28, 1962, letter to Schwartz what the passage was intended to convey: “We didn’t want to say outright that the [Federal Reserve] System were a bunch of s.o.b.’s for not giving us criticism [i.e., feedback on the draft] but we wanted the reader to be able to figure it out for himself with some thought.”116 The Friedman-­Schwartz draft also went to the formal NBER readers as well as to the NBER directors. At this point, as Anna Schwartz later recalled, “one of the directors’ comments on the draft was, ‘Why didn’t you use the Harrison papers that are at the Columbia rare book department [the Department of Special Collections]?’ Well, nobody had ever told me about them. So, essentially, we rewrote the manuscript after I had gone to Columbia and gotten copies of the relevant portion of the Harrison papers—the middle twenties to the end of the thirties.”117 By virtue of former Federal Reserve Bank of New York president George Harrison’s donation of his papers to Columbia University, internal Federal Reserve materials had become publicly accessible. Anna Schwartz related to Clark Warburton (in a letter of August 15, 1962) that the insights provided by the Harrison papers made the story of monetary policy from 1929 to 1933 even more incredible than previously supposed.118 Friedman and Schwartz’s examination of Harrison’s papers ultimately

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“produced a very substantial revision” of their manuscript, most notably of the crucial chapter 7, already titled “The Great Contraction,” on the period from 1929 to 1933.119 One of the peculiarities of the monetary-­history project is therefore that while it spanned a little over fifteen years, the final product embedded a large amount of substantive, last-­minute changes.120 A letter of May 22, 1962, from Friedman to Schwartz provides a snapshot of their frenetic activities in mid-­1962: finishing the Monetary History and circulating their spin-­off work “Money and Business Cycles.”121 The references to stencils also indicates the state of duplication technology in 1962. Dear Anna: I would like to be able to get hold of a considerable number of additional copies of “Money and Business Cycles.” If the Bureau’s supply is out, do they still have stencils? If so, do you suppose we could have something like 30 or 40 of these run off for me to have. The reason I want these is in connection with the trip I am making next [academic] year. It seemed to me it might be desirable to have copies of this that I could send to various people I am going to talk with in order to give them some idea of the kind of work we have been doing in the field of money and business cycles.

Friedman added in a handwritten “P.S.” that he had been working on their Monetary History manuscript: Hoped to get done with Ch[apters] 1 + 2 today but still stuck on ch[apter] 2, trying to write up a little section on Econ of Polit[ics] of Res. [Resumption,] a la Warb. [Warburton] suggestion. Hope to finish tonight. If so, shall send you preface, ch. 1., + ch. 2, tomorrow.122

The process of revision of the manuscript included a title change, from The Stock of Money in the United States, 1867–1960 to A Monetary History of the United States, 1867–1960. The new title was both more compelling and a more accurate description of the content of their study (even though it meant that “money” did not appear in the book’s title). The title change set the seal on the shift that had taken place over the 1950s in Friedman and Schwartz’s approach to the project. Anna Schwartz’s background conferred on the project an orientation on the historical development of US monetary institutions, and both authors would emphasize that they had been encouraged at an early stage of the project by an NBER director, Walter Stewart, to take a historical angle on the project.123 But Friedman and Schwartz took a long time to decide on the narrative for-

Moving into High Gear, 1961 to 1963  33

mat that the book ultimately possessed. Anna Schwartz would later note that well into the 1950s, the book more closely resembled the “Money and Business Cycles” paper, which was not narrative based (E. Nelson 2004a, 402). Friedman and Schwartz had initially envisioned the narrative material as providing “historical background of the stock of money,” as Friedman described matters prior to the title change.124 The historical content was initially intended as a way of adding institutional detail and local color to the authors’ largely statistical study of money. In this spirit, as of 1958 Friedman and Schwartz had added a chapter titled “The Money Stock in its Historical Setting” to the incomplete draft.125 But the 1962 change to the title amounted to an acknowledgment of the fact that their study was no longer a primarily statistical analysis and instead constituted what the authors called an “analytical narrative.”126 Friedman and Schwartz had made money a prism through which to view the previous century of American history. Anna Schwartz recalled that “once we got into the history, that seemed like the most important thing to do.”127 The narrative approach and the anecdotal asides were in keeping with Friedman’s view that a successful research article or presentation of research entailed a storytelling approach. “Doesn’t anybody know how to tell a story?” he complained at a research conference in 2002, in expressing exasperation at the conference presentations, which, he felt, concentrated excessively on the technical aspects of the papers being delivered and were consequently less than riveting.128 The Monetary History, however, was the most overt case of Friedman’s research output taking the form of storytelling. As already noted, this approach also lined up well with Anna Schwartz’s perspective on economic research. The book was, therefore, very different from A Theory of the Consumption Function: as well as being far longer, the Monetary History differed in its approach from the earlier book in using a historical narrative and veering away from statistical analysis. “The secret of Monetary History was the combination of interesting history and of a lot of data,” observed Stanley Fischer (interview, August 30, 2013). Most notably, Friedman and Schwartz emphasized the similarity of money/income relations in key historical episodes even though the circumstances that produced changes in the stock of money differed across those episodes. This was a feature of their approach that was stressed by Harrington (1970, 273), Geweke (1986, 11), and Miron (1994), and one from which Romer and Romer (1989) drew inspiration in their work on narrative-­derived estimates of monetary policy shocks.129 In addition, Theory of the Consumption Function had an explicit model, and Monetary History did not. Nonetheless, the Monetary History is not atheoretical, and the numerous observations on monetary relationships made in that book must play a major part in the piecing together of Fried-

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man’s implied model of monetary relationships.130 Furthermore, the course of the narrative involved considerable coverage of price theory, so much so that Schwartz would later describe the book as consisting heavily of applied price theory.131 Robert Barro—who, while acclaiming the coverage of the period 1929–33 in the Monetary History, regarded Friedman’s work in price theory as, on the whole, more enduring than the monetary contributions—singled out the price-­theoretical material and other side comments as a highlight of the analysis in the Monetary History (Robert Barro, interview, June 4, 2013). Although it was jointly written, the main narrative of the Monetary History read much like Friedman’s other work. “When I read it, I hear Milton’s voice,” Claudia Goldin noted (interview, September 20, 2013). In line with Goldin’s observation, the text of the Monetary History had many trademark Friedman phrases and stylistic choices, among them the frequent use of the word “sharply.”132 But the uniformity of the writing style of the Monetary History should not be taken as implying that Friedman was the senior author. Anna Schwartz made it a point of pride that a multi-­authored book should read as though it was written by one person.133 She was therefore willing to see her own contributions to the text revised in subsequent iterations to resemble more closely the writing style of Friedman’ solo-­authored work. As for portions of the book for which Friedman wrote the initial draft, Schwartz would, as already noted in chapter 4, insist that these be rewritten if she felt Friedman’s narrative had not been clear or consistent. With respect to the perspective taken by Arthur Burns and the NBER hierarchy on the Monetary History, the evidence is not clear-­cut. Correspondence between Burns and Friedman in early 1952 indicates that Burns was taken aback at the extent to which Friedman was emphasizing the strength of the money/income relation. On that occasion, Burns insisted that Friedman revise the summary, for the NBER’s annual report, of Friedman and Schwartz’s provisional findings in a direction that involved adding more caveats.134 Anna Schwartz, whose relations with Burns, during her long stretches as his employee, were sometimes difficult, indicated to the present author with respect to the Monetary History, that “they [Burns and the NBER’s Geoffrey Moore] didn’t really believe the findings we were coming up with” (Anna Schwartz, interview, April 21, 2003). Schwartz felt that in light of the content of the Friedman-­Schwartz account, particularly its criticism of the Federal Reserve, the NBER senior management might stand in the way of publication: “they weren’t sympathetic. And it was only when the book sort of took off on its own, and people started paying attention to it, that whatever misgivings the National Bureau had became subdued. And I guess if there had been somebody less forceful than Milton involved, they probably could have squelched it.”135

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In this vein, in correspondence with Burns in the early 1960s, Friedman referred to a conversation in which Burns had told Schwartz he disagreed with the argument in the Friedman-­Schwartz account. Friedman seemed distressed by an indication that Burns had given that he did not intend to read the latest draft of their manuscript. “I have been troubled by getting no reaction from you[,] not alone because I value your judgment so highly but also because you were responsible for my getting started in this. . . . I was so shocked by your saying you would fundamentally differ with our approach.”136 Against this, however, should be weighed the fact that Burns had largely stepped away from active oversight of the NBER—having become the bureau’s chairman rather than continuing to serve as its research director—and had himself also moved away from research.137 In view of these changes, Burns’s disinclination to read the Monetary History drafts may have reflected his new role rather than a slight against Friedman.138 “I don’t know how carefully my father went over that work,” Joseph Burns observed. “You know, when he was younger, and working at the bureau as director of research, he would go over studies very, very carefully. When he later went back to the bureau after the Eisenhower administration, he wasn’t director of research at that point. . . . And I don’t think he ever got back to the same detailed analysis of material that he did in his earlier days” (Joseph Burns, interview, September 12, 2013). Furthermore, Burns was not badly disposed toward the Monetary History after its publication: he would cite it as an influence on his thinking, and he seemingly would concur with the History’s account of the 1930s (see E. Nelson 2013d, 2016). In addition, Friedman’s public statements during the early months of 1970 indicated that he believed that he and Burns were in substantial agreement on monetary matters. On the whole, therefore, it would appear that Burns did not have the strong hostility toward the Monetary History that Friedman and Schwartz occasionally perceived as coming from him in the early 1960s, and that by the late 1960s Burns was sympathetic with much of the argument laid out in the published volume. One matter that did create tension between Friedman and Schwartz and the NBER was the authors’ treatment of the Federal Reserve’s position. As indicated above, Friedman and Schwartz wanted to indicate in the book that the Federal Reserve had not taken the opportunity to provide detailed official reactions to their draft. The precise phrasing of this indication was a matter of controversy, and Burns wanted it toned down. “I don’t know what the h [hell] Arthur was caustic about,” Friedman wrote to Schwartz when Burns complained to Schwartz about the authors’ proposed formulation.139 Eventually, a compromise form of words was hammered out. In addition, the NBER elected to balance Friedman and Schwartz’s criti-

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cal analysis with a different perspective. In a repeat of the format of the Friedman-­Kuznets Income study back in 1945, to Friedman and Schwartz’s mammoth analytical narrative was appended a “Director’s Comment.” This comment, by Albert Hettinger, put distance between the NBER and the Friedman-­Schwartz account of the Great Contraction, which had forthrightly described monetary policy during that episode as “inept.”140 Revisions to the manuscript continued via exchanges of drafts and suggestions in long-­distance correspondence between Friedman and Schwartz after the Friedmans started almost a year of traveling from August 1962.141 In late 1963, it was finally show time, and Princeton University Press published the Monetary History. The book gained considerable attention in the business press.142 It also received prominent reviews in research journals. One review, that of Krooss (1964, 662), claimed that “what was originally new in the book has long since become public property” on account of the previews of the Friedman-­Schwartz findings that Friedman had given in his 1950s and early 1960s solo-­authored work. That assessment, however, did not anticipate the impact that the Friedman-­Schwartz account of history would have when presented in a fully argued and heavily documented context. The impact of the Monetary History greatly exceeded that of the prior partial disseminations of the Friedman-­Schwartz work. Certainly Krooss’s assessment (1964, 667) that the book was unlikely to change anybody’s mind has not been borne out. The book quickly became widely known to the profession and to policy makers. And it stayed that way: Friedman in 1994 declared it his most influential book.143 The Monetary History’s treatment of the years 1933–60 has been covered in previous chapters of this book. The remainder of the discussion in this section will focus on the period that received the lion’s share of the attention in reactions to the book: the Great Contraction of 1929–33. In an account that focuses on Friedman’s free-­market activities, Jones (2012, 118) states that Friedman devoted “a large slice of his academic efforts and reputation to exonerating the market for the devastation caused by the Great Depression in A Monetary History of the United States, written with Anna Jacobsen [sic] Schwartz.” This statement reflects a misinterpretation of Friedman’s work on markets, his and Schwartz’s work on money, and the relationship between Friedman’s writings in the two areas. With respect to the work on markets, it cannot be said, in light of Capitalism and Freedom, that Friedman “spent little time” (to quote Jones again) on market failures. On the contrary, as already noted, that book largely consisted of a consideration of possible market failures. And with respect to the Friedman-­Schwartz work on money, Jones’s analysis does a disservice to Anna J. Schwartz, both by repeatedly misspelling her name and in offering an interpretation that would leave Schwartz little more than a cipher,

Moving into High Gear, 1961 to 1963  37

whose research with Friedman was designed merely to validate the latter’s predetermined pro-­market opinions. In fact, Friedman and Schwartz’s account reflected years of economic research, and some of their conclusions included important endorsements of government intervention in the economy. Both in the Monetary History and afterward, Friedman and Schwartz saw a role for government in monetary management, and they perceived the private financial system as containing elements making for instability. In particular, they regarded that system as embedding forces that tended to destabilize the stock of money and that monetary policy needed to offset. And, as discussed in chapter 2, Friedman and Schwartz viewed certain New Deal reforms, notably deposit insurance, as having been highly conducive to economic and monetary stability. The Friedman-­Schwartz criticism of monetary policy as pursued between 1929 and 1933 amounted not to an indictment of excessive government intervention but of the failure by the authorities to exercise control in an area that Friedman acknowledged as a legitimate field of government activity, namely, control of the money stock. Friedman accepted that, under a fractional-­reserve system, the behavior of households, firms, and financial intermediaries had features that tended to contract the money stock in the face of negative shocks to private-­sector aggregate demand. In particular, a tightening of the credit market, deposit-­to-­currency conversions, and buildups of reserve balances by commercial banks, all tended to promote money-­stock contraction. Offsetting action by the monetary authority was justified as a response to these developments. Viewed from this perspective, the Federal Reserve’s failure during much of the period 1929–33 consisted not of initiating the monetary contraction but of failing to take steps to forestall the contraction. Friedman and Schwartz did not argue that up to 1930 the monetary authorities—tight though their policy may have been—took actions that made the one-­third decline in the money stock from 1930 to 1933 inevitable. But the monetary authorities’ passivity in 1930–31 and 1932–33, when confronted with bank panics, amounted to a failure to utilize—at least to the degree required— traditional central-­banking tools in the face of private-­sector disturbances to the money stock.144 As Robert Lucas put it in 1982, the deposit contraction in the Friedman-­Schwartz account was a private sector development that the government should have offset, so “Friedman’s policy isn’t exactly laissez faire.”145 The failure of policy makers to take the requisite offsetting actions was, in turn, compounded by the conscious policy tightening in the form of the Federal Reserve’s increase in the discount rate in 1931.146 Friedman and Schwartz’s indictment of the Federal Reserve was by no means one that was in lockstep with advocacy of small government. Rather,

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as noted, it consisted of a criticism of the Federal Reserve’s failure to follow traditional central-­banking practices in a panic—and, indeed, to adhere to the practices that the Federal Reserve was expected to follow when it was created.147 Friedman and Schwartz’s criticism of the Federal Reserve’s passivity during the banking panics of the 1930s therefore lined up with the sentiments expressed by Federal Reserve chairman Paul Volcker when, in 1984, he described the recently undertaken official rescue of the Continental Illinois Bank in these terms: “The operation that we are engaged in, in lending to these banks—Continental Illinois in this case—is the most basic function of the Federal Reserve. It was why it was founded, to serve as a lender of last resort in times of liquidity pressures of this sort.”148 The Federal Reserve’s failure to lend adequately to troubled banks formed an important part of the bill of charges against the institution in Friedman and Schwartz’s account of the Great Contraction. The authors contended that the Federal Reserve failed to step in as a lender of last resort as it should have, and that it consequently permitted bank failures that led to monetary contraction. A number of monetary economists who have credited Friedman and Schwartz’s account as a key influence on their interpretation of the Great Depression have taken discount-­window management as the area of the crucial policy mistakes of the 1930s. For example, Fischer and Dornbusch (1983, 654) stated: “The collapse of the banking system in the Great Depression resulted in large part from the failure of the Fed to act as lender of last resort.” In the same vein, in a speech on April 8, 2010, Federal Reserve chairman Bernanke remarked (Bernanke 2010, 7): “The discount window was the tool the Federal Reserve could have used, had it chosen, to stem the banking panics of the 1930s.” In a 1986 article, however, Friedman and Schwartz bristled—probably too viscerally—at the characterization of their basic position as a statement that the Federal Reserve failed to serve as a lender of last resort.149 That basic position was instead that the Federal Reserve should have provided base money on a scale sufficient to avoid the monetary contraction. As both unsterilized discount-­window lending or concerted open-­market purchases are ways of providing reserves to the commercial banking system, the discount window was one, but not the only, tool with which base money could have been created on a scale sufficient to offset the impact on the money stock of the decline in the money multiplier. Friedman and Schwartz argued that “open market operations would have been just as effective for this purpose as lending.”150 The statement in the preceding quotation requires qualification, however. The scale of open-­market purchases required to prevent a monetary contraction would likely have been larger than the volume of emergency lending required to achieve the same effect, because an early Federal Re-

Moving into High Gear, 1961 to 1963  39

serve decision to undertake large-­scale lending to the commercial banking system would likely have reduced the spread of runs across banks and so helped stabilize the money multiplier. As Abel and Bernanke (1992, 616) observed, at the founding of the Federal Reserve, discount-­window lending was perceived as the “main way” in which banking panics were to be avoided or contained henceforth. Yet the discount window was not used in this way in the early 1930s. Nor were open-­market purchases pursued in a sustained manner. In this connection, Friedman and Schwartz noted the lack of a vigorous purchase program before 1932 and the failure by the Federal Reserve to stick with the purchase program that it started in 1932.151 As indicated in chapter 4 above, criticism of the Federal Reserve’s conduct in the 1930s had been widespread even in the late 1940s. The critics included Mints (1945, 1950), who, although granting the validity of major aspects of Keynes’s General Theory analysis, had drawn the line at accepting the liquidity-­trap idea and had pointed instead to certain inadequacies of interwar US monetary policy.152 But the Friedman-­Schwartz “Great Contraction” chapter extended this criticism. For the authors argued for a monetary explanation of the Depression on a number of fronts: monetary policy could have stopped the decline in the money stock; monetary policy could have boosted the money stock once it had contracted; and monetary expansion would have revived the economy. With respect to the contraction in the money stock, Friedman and Schwartz’s data tables revealed a further problem with Federal Reserve policy, beyond its passivity: the Federal Reserve’s posture regarding the provision of bank reserves was not just inadequate but actually perverse, as total bank reserves declined between 1929 and 1933. The decline in the stock of reserves is referred to on pages 318 and 346 of the Monetary History and in vaguer terms on page 395. It was nonetheless an element that was probably not adequately emphasized in Friedman and Schwartz’s narrative, as some subsequent accounts have referred, as Friedman and Schwartz did, to the increase in banks’ desired reserves as a contractionary factor in the period 1929–33; but these later narratives have seldom made clear that downward pressure on the money stock was also arising from a decline in actual reserves.153 The fact of the decline in reserves featured more prominently in Clark Warburton’s accounts of the 1930s, such as Warburton (1950b, 546–47), and—shortly before the Monetary History was published—­ Warburton (1962, 87). In the latter discussion, Warburton stated that Federal Reserve behavior in the early 1930s violated a principle on which the system had been founded. This was that large flows from deposits into currency should not be allowed to make inroads into commercial banks’ holdings of reserves. It was presumed, therefore, that the Federal Reserve would replen-

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ish commercial banks’ reserves, should a currency drain threaten to deplete them. The Monetary History also mentioned this deviation from the principle (on pp. 346, 407–8). Friedman and Schwartz also each again referred to the 1929–33 decline in reserves in their later accounts—perhaps reflecting a realization that they had not emphasized it sufficiently in their Monetary History narrative.154 Various studies have analyzed the ways in which the Friedman-­Schwartz account of the Depression has been scrutinized and challenged; these studies have included Bordo (1989b), Bordo and Rockoff (2013a), Schwartz (1981), Hammond (1996), Bernanke (2002b), Parker (2002), and Laidler (2003, 2013b). See also Lucas (1994b) and Miron (1994) for thirtieth-­ anniversary retrospectives on the book. In the discussion that follows, attention is restricted to two issues: one bibliographical, and one concerning a missing element of the Friedman-­Schwartz account of monetary policy’s behavior. Humphrey (1971, 14) and Patinkin (1973b, 454) took the Monetary History’s account to task for omitting reference to the work on money published in the 1930s by Lauchlin Currie, including The Supply of Money in the United States (Currie 1934). Underlining Friedman and Schwartz’s failure to mention Currie’s contributions is the fact that those contributions have been stressed heavily in the writings on the Depression by two other leading monetarists, Brunner (1968a) and Meltzer (2003). Much of the information required to derive money-­stock series for the interwar period was available publicly at the time, and Currie constructed his own series and formed a monetary account of the Great Depression on that basis. Sandilands (1990, 37) stated that “it can surely be no mere oversight” that Friedman and Schwartz did not mention Currie’s work in the Monetary History and also gave credence (p. 38) to the “suggestion that in Friedman’s view one cannot be a bona fide monetarist if one is also a New Dealer [as Currie was] and so need not be given serious consideration.” There is no disputing that Friedman and Schwartz’s failure to cite Currie’s work was a jarring omission.155 Furthermore, Friedman later acknowledged that Currie should have been cited (Laidler 1993a, 1077–78; Leeson 2003d, 289). However, Sandilands’s proposition that support for the New Deal, or government intervention, would disqualify someone as a monetarist “in Friedman’s view” or lead him to judge their monetary analysis unworthy of attention, is not viable. It contradicts a great many of Friedman’s writings that Sandilands did not cite, in which Friedman stated that the position one takes on the role of monetary factors in economic fluctuations is separate from one’s views of the appropriate role of government. An example was Friedman’s statement: “In a scientific sense Karl Marx was a monetarist, and so are Russia’s central bankers today” (Newsweek, July 12,

Moving into High Gear, 1961 to 1963  41

1982).156 Sandilands’s conjecture also overlooked the fact that Friedman, as already indicated, himself supported aspects of the New Deal, including such financial reforms as deposit insurance.157 Currie was actually involved in some of these financial reforms as an adviser and senior staff member at the Federal Reserve Board after the institution’s restructuring in the mid-­ 1930s (see, for example, Meltzer 2003, 467–68). The fact that Currie figured heavily in the New Deal financial reforms makes the omission of his name from the Monetary History still more problematic, but his connection to those reforms does not—in light of Friedman and Schwartz’s strong support for the reforms—seem to be a plausible reason for their not citing him. It is, furthermore, not the case that, in the monetary work that Friedman wrote and oversaw, mention of Currie’s work was prohibited. As Sandilands (1990, 382) acknowledged in an endnote, Friedman and Schwartz referred to Currie (1934)—the key reference that the Monetary History omitted—in their 1970 Monetary Statistics.158 They also cited Currie in their 1960s writings, as their 1966 manuscript “Trends in Money, Income, and Prices 1867– 1966”—which amounted to an early version of both their Monetary Statistics and Monetary Trends—mentioned Currie on the very first page (p. i) and in the introductory chapter.159 And a revised edition of Currie (1934) was profusely cited in Meigs (1962). Meigs’s work was a Friedman-­supervised PhD dissertation—one Friedman rated very highly indeed—that was, as was noted in the previous chapter, published as a book by the University of Chicago Press. Meigs’s book, featuring a foreword by Friedman, appeared a little ahead of the Monetary History, and the Monetary History in turn cited Meigs’s work. Another Friedman-­overseen book that cited Currie (1934) was Phillip Cagan’s Determinants and Effects of Changes in the Stock of Money, 1875–1960—see Cagan (1965, 2, 253)—a companion volume to the Monetary History for which Friedman wrote the foreword. In sum, although Currie (1934) should have been cited in the Monetary History, Friedman during the 1960s did cite that work in his own writings, and he oversaw and wrote forewords to other work that cited Currie. Let us now return to the Monetary History’s account of monetary policy’s behavior. Friedman and Schwartz argued that one reason for the Federal Reserve’s behavior between 1929 and 1933 was because one of the individuals who might have pushed for monetary ease, Governor Benjamin Strong of the Federal Reserve Bank of New York, had died in 1928. In his later writings, Friedman would reaffirm the Monetary History’s emphasis on the role played by Strong’s death in the unfolding of monetary developments in the early 1930s.160 The key role ascribed to Strong’s death, however, went against much of the spirit of Friedman’s other work, which stressed the role that theoretical misperceptions played in producing policy mistakes. Friedman and

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Schwartz’s emphasis on the Benjamin Strong factor received sharp criticism during the 1960s from their fellow monetarists Karl Brunner and Allan Meltzer (see Brunner and Meltzer 1968).161 Meltzer (1995, xvi) went on to argue that the stress on Strong’s death in Friedman and Schwartz’s account was “unsatisfactory and unverifiable,” and it is difficult to disagree with Meltzer’s assessment. An explanation of systematic policy behavior in terms of the doctrine guiding policy makers seems to be more appealing on a priori grounds than an explanation centered on the presence or absence of specific individuals. In addition, Brunner and Meltzer had on their side the fact that Friedman and Schwartz’s account of the Great Depression seemingly failed to incorporate a feature of Federal Reserve policy that Friedman and Schwartz had highlighted when studying other periods: the Federal Reserve’s tendency to rely on the short-­term nominal interest rate as a measure of its policy stance. In light of the strong case that Friedman made in his other work (including in material published before 1963) that low nominal interest rates did not, of themselves, signify monetary policy ease, it may appear surprising that the Friedman-­Schwartz account of the Great Depression did not press this point. Meltzer (1976, 469) criticized the Federal Reserve for using “nominal rates as an indicator of monetary policy” during the 1930s, but it is difficult to locate a parallel criticism in the account of policy behavior from 1929 to 1933 in Friedman and Schwartz’s Monetary History. In chapters of their book other than that covering the Great Contraction, Friedman and Schwartz did note the nominal/real interest-­rate distinction, and they pointed to the unreliability of nominal interest rates as an indicator of policy tightness.162 But one is hard put to find a statement in the Monetary History to the effect that the Federal Reserve in the years 1929–33 was misled by the existence of low nominal interest rates (especially short-­term rates) into viewing its policy stance as loose when it was tight. Friedman and Schwartz did, of course, state that policy was actually tight in that period (pp. 375, 395). They also stated that Treasury short-­term rates became unrepresentative of the rates facing many private borrowers, owing to elevated risk premiums (p. 313). Furthermore, they found fault with the Federal Reserve for taking a low discount rate as amounting to policy ease at a time when that discount rate remained high in relation to key market rates.163 But it seems that one has to go to page 628 of the Monetary History for a statement to the effect that controlling interest rates, at the expense of interest in the money stock, had characterized the whole history of the Federal Reserve. This was a position Friedman articulated on many occasions. In 1979, for example, he observed that “the Fed has given its heart not to controlling the quantity of money but to controlling interest rates” (News-

Moving into High Gear, 1961 to 1963  43

week, August 20, 1979).164 And, as noted in the previous chapter, that Friedman position underlay his 1950s critiques of pre- and post-­Accord monetary policy. But to find explicit statements from Friedman and Schwartz that during the Great Contraction (i) the Federal Reserve’s concern with nominal interest rates led it to withdraw reserves and put downward pressure on the money stock, and (ii) the Federal Reserve interpreted low nominal market interest rates as implying monetary ease even though real interest rates were distinctly positive, one seems better served by consulting post-­1963 statements by these authors than the Monetary History. For example, in his American Economic Association presidential address of 1967, Friedman famously cited the early 1930s as a case in which low interest rates were an indication not that monetary policy was currently loose, but instead that it had been tight in the recent past.165 In Instructional Dynamics Economics Cassette Tape 12 (January 1969), Friedman stated that the authorities were misled by interest rates between 1929 and 1933 and braked their decline, reducing total bank reserves in the process; and in a 1971 talk Friedman stressed that the Federal Reserve in the early 1930s had been led astray by its reliance on short-­term nominal riskless-asset returns in judging monetary conditions.166 In the same vein, in 1998 Anna Schwartz criticized the 1930s-­era Federal Reserve for taking low nominal rates as indications of ease and neglecting the “crippling” real interest rates associated with those nominal interest rates (Wall Street Journal, December 31, 1998; see also Bordo, Choudhri, and Schwartz 1995). As these points were not communicated adequately in the Monetary History, an important part of the running in providing a monetarist critique of the Great Depression was taken up by Brunner and Meltzer (1968) in a research program that culminated in Meltzer (2003).167 One might think that a monetarist writing a chapter on the Great Contraction forty years after the Friedman-­Schwartz account could add documentation, but perhaps not offer an improved hypothesis. Meltzer did indeed provide much more documentation—in particular from Federal Reserve documents, including but not limited to the FOMC Minutes, which were made part of the public record only in 1964.168 But Meltzer was able to go further and to develop an improved hypothesis. In his interpretation of policy decisions, Benjamin Strong’s death did not play an epochal role. Instead, Meltzer viewed the whole Great Depression period as one in which the Federal Reserve adhered to the same doctrinal framework that it had followed in the 1920s. That doctrinal framework in turn assigned considerable value to nominal interest rates as an indicator of monetary policy. The Federal Reserve’s misinterpretation of interest rates consequently became a central part of the story of the 1930s in Meltzer’s account. All that said, it deserves underscoring that the Friedman-­Schwartz ac-

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count, although foreshadowed by Currie and Warburton and improved on by Meltzer, turned the tide of opinion about the Great Depression. Their account elevated the Federal Reserve’s role in narratives of the Depression to such an extent that Dornbusch and Fischer (1981, 317) could refer matter-­ of-­factly to “the Fed’s incompetence” during the 1930s, while the same authors could later conclude (Dornbusch and Fischer 1987, 425): “This monetary view, in turn, came close to being accepted as the orthodox explanation of the Great Depression.” The consensus created by the Monetary History is well illustrated by the opening of an article on the Depression published in the year of Friedman’s death: “There is little debate that monetary contraction was a central cause of the Great Depression in the United States” (Hsieh and Romer 2006, 140). As for the Federal Reserve, notwithstanding the lack of an official reply, Friedman indicated to Clark Warburton in correspondence in early 1962 that he and Schwartz were receiving negative feedback from Federal Reserve personnel regarding their strong criticism of historical monetary policy.169 This reaction on the part of Federal Reserve personnel was also prevalent in the initial period after the release of the book. With regard to the Friedman-­Schwartz account of the early 1930s, Michael Bordo would observe: “It was a huge eye-­opener, and the Fed was very defensive” (Rutgers magazine, Fall 2006, 24). On the other hand, some Federal Reserve staff in the 1960s endorsed the critical perspective that Friedman and Schwartz took regarding 1930s monetary policy but not the authors’ emphasis on the money stock. In time, both the notion that Federal Reserve monetary policy was misguided between 1930 and 1933 and the position that the money stock’s contraction was an important part of the problem would become widely accepted in the Federal Reserve System (see, for example, Bernanke 2002b). One final point about the position of the Monetary History in Friedman’s career output deserves mention here. The Monetary History reached completion at roughly the same time that Capitalism and Freedom was published. But the Monetary History was not the end of Friedman’s research work. Indeed, it was far from the end even of the Friedman-­Schwartz monetary project. These facts argue against the interpretation (in Ebenstein 2007, 135; and Burgin 2012, 198, for example) that it was in the 1960s that Friedman wound up his economic-­research activities and switched his energies to popular advocacy of free markets. There is merit in this interpretation if the date of the change is shifted from circa 1962 to circa 1972, but it is not a convincing interpretation if a date in the 1960s is insisted on.170 Friedman wrote a considerable number of solo-­authored research papers in the decade from 1962 to 1972.171 And he delivered his most celebrated research paper ever when president of the American Economic As-

Moving into High Gear, 1961 to 1963  45

sociation in 1967. On top of this, Friedman after 1962 produced essentially three book-­length sequels to the Monetary History with Schwartz: not only Monetary Statistics and Monetary Trends, but also the 1966 draft of Trends, which in the event would have very little overlap in text with the 1982 published version of the study.172 These sequels made much less impact on economic research than Monetary History, but they added up to well over a thousand pages of material. Producing that material was hardly the behavior of someone who in the 1960s had decided to discontinue research.

T h e C ommission on Money and Credit Writing in February 1974, Robert Gordon would judge that the Friedman-­ Schwartz Monetary History had been “probably the most important single contribution to the revival of interest in monetary economics which has occurred during the past fifteen years.”173 As Gordon’s comments implied, attention to monetary issues had stepped up considerably even before the Monetary History. In 1959, at the start of the fifteen-­year period to which Gordon referred, Friedman conjectured that interest in monetary arrangements was now greater than at any time since the creation of the Federal Reserve System. One manifestation of this interest that Friedman cited was the setting up of an inquiry called the Commission on Money and Credit (CMC).174 In 1957, the Committee for Economic Development, a private organization, started organizing a Commission on Money and Credit to investigate US monetary and financial arrangements. Unlike the Radcliffe Committee, which was getting started at roughly the same time in the United Kingdom, the Commission on Money and Credit was not a governmental inquiry.175 Furthermore, in contrast to the Radcliffe Committee, which gave a prominent role to academic experts on monetary policy such as Richard Sayers, the CMC was consciously composed largely of nonspecialists who were drawn from outside the academic world.176 The result, Friedman wrote after the commission reported, was that the commission members lacked “any special competence in the subject matter of the report.”177 However, Friedman and other academic specialists in monetary policy did benefit from the CMC’s existence, as the commission funded a number of research studies on topics within its terms of reference. Friedman received a grant from the commission with which he was able to revive work that he had been doing with David Meiselman on making empirical comparisons of Keynesian and quantity-­theory models (David Meiselman, interview, April 30, 2013). The strong reaction triggered by the Friedman-­ Meiselman work is discussed in the next chapter. By the time of the debate over the Friedman-­Meiselman study, the com-

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mission itself had long since issued its report, which had appeared in mid-­ 1961 (Commission on Money and Credit 1961). Friedman reviewed that report in print about a year later in the proceedings issue of the American Economic Review. Friedman was far from impressed with the report’s contents. The CMC’s report can, in retrospect, be seen as testament to the meager inroads that Friedman had made into mainstream opinion on monetary matters in the years prior to 1963. The report criticized his constant-­monetary-­growth recommendation. And it did so, Friedman complained, without referring to him by name, without referencing the relevant research literature, and without offering a concrete alternative rule for monetary policy, beyond a list of policy objectives. And, more than five years before his American Economic Association presidential address, Friedman found himself at odds with exponents of an inflation/unemployment trade-­off. In this connection, Friedman wrote that the report “asserts that there may be a conflict between full employment and stable prices for reasons which I do not myself find persuasive.”178 The report’s position that there existed such a trade-­off rested partly on its acceptance of cost-­push views of inflation—an aspect of the report that had been highlighted and criticized by Karl Brunner (1961b, 610). Another grievance that Friedman had with the CMC was that, having ordered and funded a host of supporting studies, including his joint research with Meiselman, it finalized and published its report before many of the studies were completed.179 The CMC-­funded studies pertaining to stabilization policy would not see print until 1963. One of these, Ando, Brown, Solow, and Kareken (1963, 3), had not shared the commission’s reticence about naming names: this study—which summarized the work of another CMC-­commissioned article, Kareken and Solow (1963)—stated: “Milton Friedman’s proposition that the effects of monetary policy actions on aggregate output are powerful, but occur with a very long and highly variable lag . . . simply will not hold water.” Friedman persuaded the American Economic Review to publish his brief rebuttal, in which he expressed doubts about the rival authors’ method of calculating lags, while also stressing that a number of Kareken and Solow’s findings on the length of lags actually conformed with those that he himself had reported.180 Friedman also pointed out that many of the authors’ criticisms of his findings on lags had already been covered in Friedman’s 1961 exchange with John Culbertson. Culbertson, for his part, continued to press his criticisms of Friedman beyond that exchange. For example, Culbertson stated in August 14, 1962, testimony to the Joint Economic Committee (1962, 454): “Professor Friedman’s doctrine of the long and variable lag in effect of monetary policy is far from universally accepted. I think it is wrong. Many people are undecided. This has not been demonstrated.” This statement

Moving into High Gear, 1961 to 1963  47

would be rendered largely obsolete by the addition in 1963 to the record of two major pieces of documentation of the long and variable lag: Friedman and Schwartz’s Monetary History and their “Money and Business Cycles” article. The appearance of these publications, along with other items such as Meltzer (1963) and the Friedman-­Meiselman study, would amply justify Mishkin’s (1989, 550) assessment that 1963 was “obviously a vintage year for the monetarists.” The evidence that the 1963 Friedman-­Schwartz studies produced, and the confirmation that the subsequent monetary policy literature provided on the role of lags, would lead to wide acceptance in the economics profession of the existence of long and variable lags in the effect of monetary policy.

Ope ration T wist Friedman had noted in his 1959 lectures at Fordham University that the Federal Reserve’s bills-­only policy, in force since 1953, had “evoked controversy in recent months.”181 Although the Federal Reserve remained reluctant to characterize its policy in terms of management of short-­term interest rates, it was clear to informed observers that, since adopting the bills-­only policy in 1953, that was what it had been doing.182 There was little serious advocacy for a return to the pre-­Accord policy of a peg of longer-­ term interest rates. But some critics of the Federal Reserve regarded its concentration on short-­term interest rates, at the expense of longer-­term rates, as excessive. In particular, Congress’s Joint Economic Committee, as well as a number of academic economists, had complained about what they saw as a missed opportunity for the Federal Reserve to provide more sensitive management of aggregate demand via direct interventions in the longer-­term securities markets. From 1953 to 1961, the Federal Reserve had abstained from such intervention, except for an occasion of pronounced disruptions to the US bond market during 1958. By early 1961, a number of the academic critics of the bills-­only policy were affiliated with the incoming Kennedy administration. Their proposal to stimulate the economy via direct Federal Reserve purchases of long-­ term bonds was now accompanied by a suggested means of addressing the larger balance-­of-­payments deficits that the United States had begun to record. The overall package was translated into policy as “Operation Twist,” adopted by the Federal Open Market Committee in 1961 with the administration’s approval. Under this policy, the Federal Reserve would purchase longer-­term bonds—and thereby, it was hoped, put downward pressure on longer-­term interest rates, which were considered more relevant than short-­term rates for private-­sector spending decisions. It would simultaneously sell short-­term securities—and thereby, it was hoped, keep

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short-­term rates high enough to reduce the United States’ net capital outflow and so improve the balance-­of-­payments position. Friedman was not one of the advocates of Operation Twist. With regard to the domestic component of the policy, Friedman did not deny the feasibility of altering longer-­term interest rates for a given path of the short-­term interest rates. As we have seen (chapter 6), his view that short- and longer-­ term securities were imperfect substitutes—a position that formed part of his more general belief in imperfect substitutability of assets—amounted to an acceptance that the expectations theory of the term structure was not the be-­all and end-­all for the explanation of yield-­curve behavior.183 Friedman stressed that the Federal Reserve could not arbitrarily fix interest rates of different maturities at particular levels. But he also accepted that it was within the monetary authorities’ power to influence the pattern of interest rates across maturities—including via measures that altered the proportions in which the private sector held different maturities of government debt.184 He and Schwartz did question the need for the Federal Reserve to be involved in operations of this kind if they were judged desirable. The same rearrangement of the maturity of the Treasury debt in the hands of the private sector could, they noted, be achieved by Treasury debt-­ management activity alone.185 As already indicated, Friedman’s discussions did include an acknowledgment that Operation Twist–­style operations, under which the Federal Reserve increased the ratio of bills to bonds in the hands of the private sector, could lower the term premium embedded in longer-­term interest rates. But—insofar as downward pressure on longer-­term interest rates was the aim of policy makers—Friedman regarded a Twist measure as likely to generate less pressure of this kind than would an unsterilized injection of base money in exchange for longer-­term bonds. The latter operation would, in his vision of the transmission mechanism, produce greater short-­run downward pressure on longer-­term interest rates than would a Twist operation for two reasons. First, Operation Twist was explicitly designed to generate upward pressure on short-­term interest rates alongside the downward pressure on longer-­term rates. In contrast, an operation that consisted solely of unsterilized bond purchases would not trigger the upward pressure on the overall level of longer-­term rates that would arise (via the expectations channel) from a policy that had an increase in short-­term interest rates as one of the authorities’ actions. Second, because Friedman believed that base money was more liquid than Treasury bills, a purchase of longer-­term securities that was accompanied by an increase in base money would boost the ratio of short-­term liquid assets (properly weighted) to longer-­term assets by a greater amount than would a bills-­for-­bonds switch, and so the former

Moving into High Gear, 1961 to 1963  49

operation would exert a more pronounced effect on prices of longer-­term securities.186 The Operation Twist action was, however, sterilized—and so it did not constitute a scenario in which the Federal Reserve’s bond purchases were accompanied by an expanded stock of base money. In any event, however, it was not clear to Friedman that longer-­term interest rates should be lowered, for he questioned the desirability of the specific policy goal underlying Operation Twist. In 1961 he stated that the administration had a “mistaken belief that artificially low interest rates will stimulate growth” (Business Week, September 30, 1961, 85). The authorities’ intention to put downward pressure on longer-­term interest rates was, he felt, part of an emerging problem: the danger that policy makers would overstimulate the economy. In regard to the external component of the Twist policy, Friedman also had a number of grave reservations. He acknowledged that the US balance-­ of-­payments deficit had, by the early 1960s, reached levels large enough that “we will have to do something” about it (Chattanooga Times, March 9, 1962). But he felt that the efforts of the US authorities to achieve a zero balance-­of-­payments deficit under the Bretton Woods arrangements were misguided. In his analysis, because the US dollar served as the reserve currency, other Bretton Woods member countries would, in aggregate, be predisposed toward acquiring dollar reserves. Acquisition by these countries of US dollar reserves implied balance-­of-­payments deficits for the United States. With a US current account surplus seemingly a perennial fixture of US international accounts, a US balance-­of-­payments deficit could arise only from a sizable capital account deficit for the United States (that is, a sizable net capital outflow).187 Policies of the United States, Friedman conceded, might be able to contain the balance-­of-­payments deficit, and even close it for short periods. But, he argued, the familiar “nth country” problem meant that the overall balance-­of-­payments position for the United States would reflect other countries’ actions, not US policies.188 Measures undertaken by the US authorities to alter the country’s balance of payments might well have temporary success. However, Friedman insisted, the measures’ impact on the payments balance would, in time, be offset by the reactions of other countries if those countries’ demand for dollars remained unchanged. In light of this assessment, Friedman considered the direction of US monetary or debt-­management tools toward a balance-­of-­payments goal to be largely futile.189 He further judged that a focus of domestic policy tools on such a goal, even if feasible, was undesirable. On this score Friedman took his cue from the Keynes (1923, 1925) position that the exchange rate should be subordinate to domestic economic management and not the reverse.190 Friedman’s 1953 article on the case for flexible exchange rates

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had followed up Keynes’s 1920s work while making his own position plain that, in contrast to Keynes, he did not regard fixed exchange rates—even when adjustable—as appropriate for the postwar situation. The predicament faced by the United States in the early 1960s provided new impetus for Friedman to apply this argument. One aspect of the United States’ balance of payments in those years that did make for a somewhat unusual situation, when considered alongside other countries’ experiences with major deficits in the Bretton Woods period, was that the US balance-­of-­payments deficit did not reflect a current account deficit. Rather, as noted above, the United States had a current account surplus; the overall US deficit arose from a net capital outflow that exceeded that surplus. Consequently, the existence of the US balance-­of-­ payments deficit could be viewed as reflecting a situation in which current account surpluses were not large enough to offset the flight of investments out of the United States. From that perspective, the recourse to policies such as Operation Twist in response to the balance-­of-­payments situation was, as Friedman put it—in celebrated testimony on the matter that he delivered to Congress in 1963—evidence of the “extent to which the small foreign trade sector dominates national policy.”191 In Friedman’s view, the measures that the United States took in the area of international policy in the early 1960s represented a retrograde step. Prior to recent years, US policy makers, in his interpretation, had typically not allowed the external deficit or exchange-­rate obligations to dominate monetary policy decisions. He and Schwartz emphasized that even under the interwar gold standard, the Federal Reserve had had extensive leeway in the short run to insulate the behavior of the money stock from the United States’ external commitments. Policy makers accordingly had been able to pursue domestic policy objectives in the 1920s, and, as Friedman and Schwartz saw it, the Federal Reserve could have deployed, but did not, existing sterilization techniques to maintain the US money stock from 1929 to 1933.192 The Bretton Woods arrangements, with the primacy they gave the United States, endowed the US authorities with still further scope to call the shots with respect to domestic monetary conditions and to fence off those conditions from external forces. Reflecting this, Friedman’s 1959 Fordham University lectures had stated that “the United States has been able to achieve so large an apparent degree of independence in its internal monetary behavior.”193 In the same vein, in 1964 he testified that “the Reserve System can, if it wishes to, control the quantity of money.”194 To Friedman’s dismay, US policy makers did not exercise these prerogatives in the early 1960s. Instead, they allowed balance-­of-­payments considerations to figure in monetary policy decisions. Friedman characterized monetary policy in the early 1960s as having been rendered tighter than

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otherwise as a result of these considerations. Policy makers, Friedman contended, had been “forcing maladjustments in the whole economy to solve a problem arising from a small part of it, the five percent accounted for by foreign trade.”195 According to Friedman’s account, this shift—under which balance-­of-­ payments considerations trespassed on the setting of domestic monetary policy—began in the later Eisenhower years. The Monetary History specifically characterized the setting of monetary policy from 1958 to 1960 as partly reflecting policy makers’ failure to sterilize balance-­of-­payments deficits and their willingness to keep interest rates high to prevent greater deficits.196 Meltzer (2009a, 344) argued that the balance of payments continued to be an important influence on the setting of monetary policy in 1961. In Friedman’s later account, 1961 would in fact be the final year in which balance-­of-­payments considerations made monetary policy decidedly restrictive.197 In that sense, Operation Twist—under which the authorities intended to allow external considerations to lead to higher short-­ term interest rates but not to a reduction in the monetary base—did help the United States move back to its pre-­1958 situation in which aggregate monetary conditions were set separately from balance-­of-­payments considerations. Nevertheless, the fact remained that Operation Twist gave balance-­of-­ payments factors a prominence in domestic financial policy that Friedman felt was unwarranted. In particular, as Meltzer (2009a, 418) discussed, the balance of payments figured in Federal Reserve decisions to raise US short-­term interest rates during 1963. As has been noted, Friedman felt that monetary growth went up too much in 1963. Thus he would probably have preferred to see a situation in which short-­term rates indeed rose in 1963 but in which this rise came from a policy of restraint in monetary base growth rather than from an attempt to twist the yield curve. Alongside his criticism of the practice of directing financial policies toward balance-­of-­payments needs, Friedman also objected to the deployment of nonmonetary measures, such as trade and capital restrictions, to deal with the balance-­of-­payments deficit: he criticized the “direct controls over trade developed in recent years” and called for the abolition of these as well as of all tariffs (Chattanooga Times, March 9, 1962). The appropriate policy response to the US balance-­of-­payments situation, as Friedman saw it, did not lie in monetary policy, debt-­management measures, trade restrictions, or foreign exchange controls. Instead, the United States should abandon the Bretton Woods arrangements. Friedman would lament the fact that President Kennedy did not abolish the $35 gold price commitment and end the United States’ fixed-­exchange-­rate obligations as soon as he took office.198 If those obligations were abolished, Friedman

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conceded, other countries might still want to peg their currencies against the dollar. But the United States could be free to seek domestic policy objectives, notably price stability—the pursuit of which, Friedman felt, constituted, alongside free trade, the most important contribution that US economic policy could make to international economic stability.199 In the event, Operation Twist did not prove a durable policy: Kohn (1974, 11) dated its de facto abandonment to 1965.200 Furthermore, other measures frequently tended to swamp the effect of the operation on monetary growth, the maturity of outstanding Treasury debt, and longer-­term interest rates. Operation Twist was, as indicated above, an unsterilized operation—but it might as well not have been, because other forces were driving up growth in commercial bank reserves and the money stock during the first half of the 1960s. Operation Twist also did not prove to be the most important influence on the structure of government debt in the early 1960s, for—to the consternation of proponents of Operation Twist like James Tobin and, to a lesser extent, Franco Modigliani—the Treasury lengthened the maturity of the government debt in a way that swamped the Federal Reserve’s Twist operations.201 It accordingly became difficult to isolate any effect of Operation Twist on the term structure, especially in view of the Treasury’s debt lengthening. Modigliani and Sutch (1966), for example, could not detect such an effect. However, Swanson (2011) has found that impacts of the Federal Reserve’s bond purchases on bond yields can be ascertained if attention is concentrated on the behavior of bond prices during the 1961 rounds of purchases. Longer-­term interest rates did decline somewhat in the early 1960s. But if, as Friedman contended, inflation expectations were themselves declining in the early 1960s, the Fisher effect offered itself as an explanation for this reduction in bond rates.202 Furthermore, as it occurred in the context of a move to much more expansionary overall monetary conditions, the Operation Twist venture was ultimately followed, not by a combination of lower longer-­term interest rates and higher short-­term rates, but by higher interest rates across the maturity spectrum. This eventual result of the early-­1960s policies likely underlay Friedman’s later assessment that “the Fed and other central banks have repeatedly failed when they have tried to alter interest rates or the interest-­rate structure appreciably. Operation Twist is widely recognized to have been a fiasco.”203 The United States came out of Operation Twist with a continuing balance-­of-­payments deficit. During the second half of the 1960s, the ongoing deficit would not usher in the greater exchange-­rate flexibility that Friedman favored. Instead, it would give rise to a greater array of official restrictions on capital movements.204

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III. Personalities, 1961–63 A bba Le rn e r Some of Abba Lerner’s writings during the 1940s and 1950s have been considered in earlier chapters. Lerner was someone Friedman once judged “probably the intellectually most effective promoter of the Keynesian view.”205 Lerner was also, in the estimation of Franco Modigliani, an exponent of a brand of Keynesianism for which the monetarist literature was a most useful tonic. Specifically, Lerner was a leading champion of the position that monetary policy did not matter for aggregate demand and that inflation should be managed via tax measures.206 These, of course, were views that Friedman himself held in the early 1940s, only to repudiate them in the second half of that decade. But although Lerner was one of the first Keynesians with whom Friedman took issue in print (via Friedman’s book review of The Economics of Control), that debate did not bear on the monetary-­versus-­fiscal policy issue. Rather, as discussed in chapter 4, although the review allowed Friedman to lay out some of his general reservations concerning stabilization policy, it was written and published at a time (that is, pre-­1948) that preceded the shake-­up in Friedman’s views on the comparative effectiveness of monetary policy and fiscal policy.207 Lerner got an opportunity for payback of sorts for Friedman’s review when, in the early 1960s, he was asked to be a book reviewer for Friedman’s recent output. In fact, he had this role twice in quick succession, as Lerner wrote a long review of A Program for Monetary Stability in the Journal of the American Statistical Association in 1962, followed by a review of Capitalism and Freedom in the American Economic Review in 1963. It turned out, however, that Lerner had moderated his views on monetary policy and had become a partly “reconstructed” Keynesian. His review of A Program for Monetary Stability (Lerner 1962a) indicated that Lerner continued to claim relevance for the liquidity trap in circumstances of depression, but it did not expound the view that monetary policy was weak or ineffective outside depression conditions. Likewise, in his review of Capitalism and Freedom, although Lerner expressed the judgment that Friedman was overstating the importance of monetary policy, Lerner implied that “the Keynesian concentration on fiscal policy” at the expense of monetary policy was not justified outside depression conditions (Lerner 1963, 459).208 A prominent attack on Friedman’s monetarism from a truly hard-­line Keynesian perspective would have to wait until the appearance of Nicholas Kaldor’s critique in 1970.209 Monetary policy had evidently gone up in Lerner’s estimation as a factor mattering for aggregate demand. But a new area of divergence had

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emerged between himself and Friedman. As discussed in the previous chapter, in the late 1950s Lerner had emerged as one of the strong proponents of the importance of cost-­push inflation.210 That perspective came out clearly in his discussion of Program for Monetary Stability, for in that review Lerner (1962a, 218) stated: “In the United States[,] the price-­stability level of unemployment seems to be something like seven per cent.” That statement quantified the position that had already been laid out in Lerner (1958) and made somewhat more formal by Samuelson and Solow (1960): that there was a permanent downward-­sloping inflation/unemployment relationship—one in which, furthermore, the price-­stability position was associated with above-­normal unemployment. This conception of the price-­setting process, in which cost-­push shocks had a positive mean, led Lerner (1962a, 218) to conclude that Friedman’s constant-­monetary-­growth rule would likely lead to permanently above-­ normal unemployment even if it stabilized the price level. The contrast with Friedman’s own view of inflation behavior was great. Although he had hardly touched on this matter in Program for Monetary Stability, Friedman would make emphatically clear in his writings during the 1960s that he ruled out the situation that Lerner sketched. For Friedman, the long-­ run Phillips curve was vertical, and cost-­push shocks were zero in mean. Price stability and full employment were consequently compatible in the long run, and the appropriate concept of unemployment to use as a benchmark rate in economic analysis was not a “price-­stability level of unemployment” but instead the natural rate of unemployment. Lerner’s own policy position was that price stability and full employment could indeed be compatible. But, in contrast to Friedman, he perceived a roadblock to rendering compatible the two objectives in the form of the US economy’s tendency to generate cost-­push inflation. Having come to view the United States’ macroeconomic situation in this way, Lerner advocated direct public-­sector intervention in wage and price setting as the solution. In his May 15, 1958, appearance before the Joint Economic Committee, Lerner had said: “My point is that it is not sufficient to have a policy of keeping the volume of spending right; because the right volume of spending which gives you prosperity also[,] in present situations[,] gives you a tendency for prices to be pushed up. Therefore, you need some regulation of administered prices and wages in addition to, or complementary with, a policy of preventing demand from being excessive” (Joint Economic Committee 1958, 156). As mentioned in the previous chapter, Friedman missed his scheduled appointment to appear with Lerner at that hearing. Friedman and Lerner did, however, debate each other publicly on at least two occasions. The first of these, sometime between 1946 and 1949, was at the University of

Moving into High Gear, 1961 to 1963  55

Chicago when Lerner visited the campus.211 The debate, held in front of both teachers and students, was evidently a memorable one. Friedman recalled it in a 1970s discussion (in which he indicated that the debate was on Keynes).212 And two University of Chicago students of the late 1940s, Kathy Axilrod and Arnold Harberger, referred to the debate when discussing their recollections of Friedman.213 Both of these former students remembered Friedman as dominating the debate. But their recollections of the debate also bring out the different types of reactions that Friedman’s debating style tended to provoke. Whereas one former student (Harberger) regarded Friedman’s performance in the debate as a demonstration of his rigorous thinking, the other former student (Kathy Axilrod) felt that Friedman’s treatment of Lerner came across as nasty. Around fifteen years later, on May 10, 1962, a second debate between Friedman and Lerner took place in the city of Chicago, this time under the auspices of the US Savings and Loan League. On both depression and inflation, Friedman and Lerner’s differences in view were clearly apparent. Lerner, although prepared to see monetary policy as potent in many situations, stuck to Keynes’s position that monetary policy “does not work” in a Depression—“This is called the liquidity trap” (Lerner 1962b, 37). In contrast, Friedman took the opportunity to provide another preview of his historical analysis with Schwartz, on the basis of which he concluded that there was no liquidity trap in the United States during the 1930s.214 With regard to inflation, Friedman took issue with Lerner because “he identifies stickiness in prices with administered prices”—“administered prices” being yet another term for cost-­push pressures.215 Friedman acknowledged that prices could be “very sticky,” but he saw this phenomenon as reflecting costs of price adjustment and not as evidence that prices did not ultimately respond to market conditions.216 Thus, whereas Lerner invoked stickiness as demonstrating that the price mechanism did not work, Friedman viewed stickiness as a reason for expecting the adjustment to changes in market conditions to be spread over time. Lerner clearly was not persuaded by Friedman, either during that 1962 debate or subsequently, for in a 1978 article Lerner sounded a call for incomes policy (in the form of a “wage-­increase permit plan”) to deal with inflation (Lerner 1978).

John F. Ke nnedy President Kennedy’s inaugural address of January 20, 1961, included his celebrated remark, “Ask not what your country can do for you—ask what you can do for your country.” Friedman challenged this statement in Capitalism and Freedom.217 He concurred that one should not ask “what your

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country can do for you,” as that question suggested that the government’s function was to confer favors. But Friedman took exception to the sentiment that the appropriate alternative formulation was “ask what you can do for your country,” because he saw the premise of this question as inconsistent with individuals’ pursuit of their own objectives.218 As indicated in earlier parts of this chapter, several of the Kennedy administration’s economic policies also drew Friedman’s opposition. Kennedy and Friedman broadly agreed on the Federal Reserve’s culpability for the 1960–61 economic downturn. Appearing on television in mid-­1960, then-­senator Kennedy had said: “I think the policies of the Federal Reserve Board have been partly responsible for the slowdown.”219 But the two parted company on the alternative monetary policy that was desirable and on the appropriate assignment of policy instruments. One instance of such disagreement was on fiscal policy. The Kennedy administration was putting fiscal policy to the fore just when the Friedman-­ Meiselman work, described in the next chapter, was being circulated. That work entered a negative verdict regarding the existence of a sizable influence of fiscal actions on total spending. From Friedman’s standpoint, therefore, the view of spending determination taken by the Kennedy administration was misconceived. And whether fiscal policy worked or not, the manner in which the federal government proposed to use fiscal policy consisted of fine-­tuning that Friedman found objectionable. The Kennedy administration’s approach to inflation was another important divergence with Friedman’s position. Treasury secretary Douglas Dillon had stated in June 1961: “The greatest threat to our dollar, inflation-­ wise, comes from the wage-­price cost-­push inflation.”220 It was against this background that Friedman predicted (in Business Week, September 30, 1961) that the administration would move toward wage and price controls in the following twelve months. This expectation was partially realized in the US government’s resort to “jawboning”—public criticism by leading members of the government of prominent wage and price increases—as a device to quell the supposed cost-­push pressures. In laying out his objections to this approach, Friedman wrote: “Price controls, whether legal or voluntary, if effectively enforced would eventually lead to the destruction of the free-­enterprise system and its replacement by a centrally controlled system. And it [that is, the use of controls] would not even be effective in preventing inflation.”221 When President Kennedy intervened to force the steel industry to cancel a planned price increase, Friedman’s reaction was visceral: “It brings home dramatically how much power for a police state resides in Washington” (Time, April 27, 1962).222 A little later, Friedman stated that Kennedy’s intervention set a tone that would limit firms’ expectations concern-

Moving into High Gear, 1961 to 1963  57

ing their prospects for profits and their incentive to undertake investment (Ketchum and Kendall 1962, 57). As has already been noted, actual monetary-­growth patterns under Kennedy won some praise from monetarists. Friedman’s position was that this was basically an ephemeral stability of monetary growth ahead of an upturn; and so, notwithstanding the differences in economic outcomes observed under Kennedy from those recorded under President Lyndon Johnson, Friedman viewed the Kennedy and Johnson administrations as of a piece with respect to economic policy. In addition, Walter Heller, head of the Council of the Economic Advisers until 1965, would say of President Kennedy, “Remember, first of all, that he had become a practitioner and teacher of modern [i.e., Keynesian] economics by the time of his death” (Sunday Times, June 20, 1965). It seems appropriate to conclude that Keynes­ian policies would have been continued had Kennedy served eight years as president. Instead, of course, President Kennedy was assassinated on November 22, 1963. In 1968, after President Kennedy’s brother Robert had also been assassinated, Friedman offered something of a theory of the source of assassinations. He contrasted the fact that the two Kennedy brothers, both prominent political leaders, had been victims of “tragic assassination,” with the fact that their wealthy father had not suffered this fate. Friedman cited the difference between political and economic power. Political power, he contended, likely had a greater effect on the general public’s daily lives than the economic power of even a very wealthy person. Leading politicians, Friedman argued, were more liable than business leaders to attract the attention and resentment of would-­be assassins. Furthermore, as political power was more consequential than economic power, the “assassination of the two sons may well change the history of the world” in a way that an individual’s assassination of a businessman would not (Newsweek, June 24, 1968).223 While the last of these points seems unexceptionable, the column as a whole and the theory it expounded do not stand up well in retrospect. Friedman underestimated the extent to which celebrity, irrespective of whether it is accompanied by political power, generates interest from disturbed and violent individuals. Lack of political power would prove no guarantee against assassination, contrary to Friedman’s 1968 conjecture.

C ha p te r 1 2

Critic of the New Economics, 1964 to 1966 I. Events and Activities, 1964–66 Milton Friedman judged the year 1964 to be “just about the date when Keynesian views were at the peak of widespread public acceptance” in the United States.1 That year witnessed what Dolan and Lindsey (1977, 158) would call “probably the most famous episode in the history of fiscal policy”—a major reduction in federal personal and corporate income tax rates. The 1964 reduction in taxes on incomes was the major component of what would come to be called the Kennedy-­Johnson tax cut.2 When, in 1962 and 1963, President Kennedy argued the case for the cut, he had cited a number of benefits that would flow from it, among them not only a boost to aggregate demand, but also improvements to the supply side of the economy.3 It was, however, the demand-­side aspects of the proposed income tax on which Paul Samuelson had focused when, in an October 8, 1962, op-­ ed in the London Financial Times, he urged passage of the measure. “The only rational reason for a tax cut,” Samuelson wrote, “is to create an increase in aggregate demand, which means stimulating spending activities relative to saving activities” (30). Friedman himself supported the tax cut, largely on the basis of an argument to which Samuelson had made reference in his Financial Times piece but that Samuelson did not support: that the tax cut would put downward The views expressed in this study are those of the author alone and should not be interpreted as those of the Federal Reserve Board or the Federal Reserve System. The author thanks David Laidler and Rajat Sood for their comments on an earlier draft of this chapter. The author is also grateful to Miguel Acosta, George Fenton, William Gamber, and Christine Garnier for research assistance and to William Brainard for discussion of some of the issues discussed in this chapter. See the introduction for a full list of acknowledgments for this book. The author regrets to note that, in the period since the research for this chapter was begun, five of the individuals whose interviews with the author are drawn on below—Gary Becker, Lyle Gramley, Thomas Mayer, Ronald McKinnon, and David Meiselman—have passed away.

Critic of the New Economics, 1964 to 1966  59

pressure on government spending.4 In addition, the tax cut took the US taxation system in a direction of which Friedman approved. In Capitalism and Freedom as well as on earlier occasions, he had deemed the top federal marginal tax rates on income to be excessive.5 The 1964 tax cut made strides in lowering these rates, with the top personal income tax rate reduced from 91 percent to 70 percent (see, for example, Vatter and Walker 1983, 370). The corporate tax rate was also lowered. But these moves left the tax system well short of Friedman’s ideal tax arrangements. As outlined in Capitalism and Freedom, this ideal comprised a flat-­rate personal income tax system and no separate tax for corporate income (which would instead be deemed shareholder income, even if retained by firms, and taxed as personal income). Perhaps because the Kennedy-­Johnson tax measures centered on rate reductions instead of a systematic overhaul, Friedman, in a discussion in 1969, made clear that he did not regard 1964 as having witnessed substantial tax reform. He contended, instead, that there had not been a major tax reform since his own years of service at the US Treasury (Instructional Dynamics Economics Cassette Tape 23, April 1969). In the years immediately following the 1964 tax cut, it was cited by administration economists and other Keynesians as a demonstration of the powerful effects on aggregate demand of fiscal stimulus.6 For example, in 1965, Otto Eckstein, then at the Council of Economic Advisers, referred (Eckstein 1965, 17) to “the great success of the 1964 tax cut [which], particularly when contrasted [with] the lack of success of the previous orthodoxies, has also greatly increased the support for modern fiscal policy. The tax cut has added $30 billion to GNP in the second quarter, according to the detailed analysis of my colleague Mr. Okun.” Arthur Okun, a mainstay at the CEA during the Kennedy and Johnson administrations, published his study as Okun (1968), in which he reported sizable multiplier effects of the tax cut—effects that were said to have cumulated into the major increase in (nominal) GNP to which Eckstein referred. Friedman was not at all persuaded that the Okun study had demonstrated the power of fiscal policy, as he explained in late 1968: What Okun did was to assume away the whole problem because he looked only at the effect of fiscal policy without asking what role monetary policy played during that period. What he did was to say that we could put monetary policy aside, because interest rates didn’t change during the period and that, therefore, we could suppose that monetary policy was neutral. As I’ve just made clear, that really begs the fundamental issue. If monetary policy were really neutral, you would have expected interest rates to go up, not stay constant.7

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The preceding Friedman criticism has a parallel with objections voiced during the early 1980s when supply-­side economists were—like the 1960s Keynesians before them—claiming that the Kennedy-­Johnson income tax cut had generated greater flows of real and nominal income (and with that, higher tax revenues). In 1982, Paul Evans wrote of the supply-­siders’ ­evidence: My guess is that tax receipts were high after the Kennedy tax cuts because the Federal Reserve loosened monetary policy considerably. Specifically, the M1 money supply rose over 2 percent a year more rapidly between late 1962 and early 1966 than it did between 1954 and 1963. The increased money growth produced increased nominal income growth, which in turn produced increased growth in tax receipts. No univariate modeling procedure can take this fact into account. Therefore, CJL [Canto, Joines, and Laffer 1981] have probably attributed to the Kennedy tax cuts some effects that stemmed from the loosening of monetary policy and from other changes taking place between 1962 and 1966. (P. Evans 1982b, 429)

One curiosity that emerges from comparing Evans’s passage regarding the supply-­siders’ evidence with Friedman’s critique of Okun’s Keynesian analysis is that Evans mentioned monetary growth explicitly, while the reference to the behavior of the money stock is only implicit in the Friedman passage. But both Evans’s and Friedman’s critiques essentially boiled down to the same message. This was that an analysis of the 1964 tax cut that failed to hold monetary growth constant could not provide a clear-­cut evaluation of the effect of the tax cut.8 Okun’s calculations, Friedman argued, could be regarded as a numerical demonstration of the size of the fiscal multiplier if Keynesian fiscal-­multiplier analysis was assumed to be correct.9 Or it could be regarded as an assessment of the impact of a tax cut that was financed by money creation. But, he maintained, it could not be regarded as showing that the tax cut had a powerful effect on nominal income for given monetary policy. The crux of the problem, as already indicated, was Okun’s conditioning his experiment on actual observed interest rates. Okun (1970, 56) defended this assumption, citing the fact that “both preceding and following the enactment of the tax cut, monetary strategy was geared to provide the reserves needed to stabilize interest rates.” Insofar as the tax cut put upward pressure on interest rates, however, this defense does not overcome Friedman’s criticism. By investigating fiscal expansion in a stable interest-­ rate environment, Okun was implicitly building into his exercise the assumption that the rate of monetary expansion increased upon the enaction of the tax cuts: that is, that fiscal expansion was accompanied by monetary

Critic of the New Economics, 1964 to 1966  61

accommodation. Relatively stable interest rates for the period surrounding the tax cut did not imply that monetary policy was unchanged or neutral. Consequently, the configuration that followed the tax cut—rising nominal and real income growth and initially stable market interest rates, alongside rising monetary growth—was evidence to Friedman of the effectiveness of monetary policy, not fiscal policy, and did not establish that fiscal policy had a powerful influence on aggregate demand. With respect to retrospective verdicts on the tax cut’s effect, the assessment of Tatom (1981a, 29) was that “numerous studies have shown that the 1964 tax cut had no effect on total spending.” That judgment may require qualification, in light of the more recent findings by Romer and Romer (2010) and Barro and Redlick (2011) that measures, like that in 1964, that cut marginal tax rates likely boosted nominal GDP.10 But, like Okun (1968), these later studies do not specifically hold monetary growth constant in their estimation exercises and so do not contradict Friedman’s position that the substantial rise in nominal income growth in the mid-­1960s could not have taken place without monetary accommodation.11 The rise in nominal income growth proved to be steep. Measured by the modern vintage of nominal GDP growth, the rate rose from 5.6 percent in 1963 to 7.4 percent in 1964 and 9.6 percent in 1966: see figure 11.1 in the preceding chapter. In time, Friedman would count the tax cuts among the factors contributing to the overstimulation of the economy.12 But the way that the tax cut helped produce excessive demand was, in Friedman’s view, by prompting the Federal Reserve, in its efforts to hold down interest rates, to take actions that boosted monetary growth. Emerging Inflation In the Financial Times piece mentioned above (October 8, 1962), Paul Samu­el­son had advocated the tax cut as a way of getting out of the 1962 economic pause. In the event, however, the pickup in the economy would precede the 1964 tax cut and would continue thereafter, and, by Friedman’s lights, the pickup in monetary growth in 1963 was behind the revival. Indeed, according to modern estimates of the output gap produced by the Congressional Budget Office, the output gap had already closed at the end of 1963, ahead of the major tax cut, with output moving above potential early in 1964. From this perspective, the rationale for the tax cut as a measure to eliminate slack seems to have been misplaced, even if the tax cut’s effectiveness as a demand-­raising measure is accepted. Major Keynes­ian economists, however, did not regard the extra stimulus put in place during 1964 as inappropriate—even in their retrospective accounts. Franco Modigliani, for example, would argue in 1975: “We created a fair amount of un-

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employment in 1960 and 1961 and we recouped very slowly until we got almost back to full employment in ’65 and then we began running at great speed and then through full employment running like mad.”13 Although estimates of the output gap were not Friedman’s focus when he analyzed aggregate behavior of the economy, those estimates, in their revised form, do provide ex post confirmation of his argument that the excess-­demand problem emerged in the United States prior to the post­1965 date that Modigliani nominated. The nominal data on which Friedman relied proved to be a more sound indication of emerging inflationary problems of the 1960s than were the estimates of slack that were available at the time. In particular, in centering his analysis on the behavior of monetary growth, Friedman had a different perspective on the timing and origin of the 1960s policy mistakes than did Keynesians. For Friedman, the overdoing of the stimulus could be traced, not to some point in 1965 or 1966, but instead to the sharp rebound in monetary growth that had begun around September 1962. Focusing on that rebound, Friedman had already declared monetary growth to be excessive in his March 1964 congressional testimony, delivered at a time before the 1964 tax cut had really added to the pressures for money creation.14 In Friedman’s analysis, the elimination of inflation expectations at the start of the 1960s had allowed the economic recovery to proceed for a long stretch of time, untarnished by an appreciable upturn in inflation. The key problem with monetary policy in the 1960s, in this account, was the failure to keep monetary growth in check as the economic expansion proceeded, with the excessive monetary expansion that was permitted by the authorities ultimately leading to the loss of price stability. As of September 1965, Friedman could still observe that the United States’ postwar performance on price stability was very good.15 He could even state that—contrary to his expectation in the early to mid-­1950s—it was still true to generalize that every major peacetime US mistake the Federal Reserve had made in its history had been deflationary.16 But even by the time at which Friedman made these remarks, inflation was long past its trough. The First National City Bank Monthly Economic Newsletter—usually drafted over this period by Friedman’s former student James Meigs—noted in May 1964 that “the United States shows signs of beginning to inflate,” and that this might confirm predictions that “price increases will probably follow a credit and money expansion that has occurred here since August 1962” (50). For calendar 1964, inflation was 1.3 percent by the CPI measure—still low, but higher than in the preceding years. Friedman would later refer to the “creeping inflation that started in 1964” (Newsweek, December 9, 1968).17 He would also come to see this initial wave of price rises as part of

Critic of the New Economics, 1964 to 1966  63

“the wild inflationary binge we were on from 1964 to 1969” (NBC Nightly Evening News, April 28, 1970). The mid-­1960s pickup in inflation amounted, in his view, to the beginning of a years-­long departure from price stability, one made long lasting by the authorities’ failure to stick with the 1966–67 resumption of monetary restraint.18 That short-­lived episode of monetary restraint was the “credit crunch,” discussed in the next section. The heyday of Keynesian economics in officialdom in 1964, Friedman later noted, occurred when Keynesianism was “already losing ground in the academy.”19 Some of the loss of ground was evidenced in the heightened interest among economic researchers in the behavior of money. By 1964, Friedman would be able to observe that he and Schwartz now had a “host of competitors” in studying monetary policy.20 And the attention given to his own monetary contributions was increasing sharply, with Business Week (May 16, 1964, 76) referring to “the growing debate over monetary theory.” In addition to participating in the debate about his work with David Meiselman (considered in the next section), over the mid-­1960s Friedman built on the momentum created by the Monetary History with his testimony to the Joint Economic Committee in March 1964. This repeated the Monetary History’s message on the Depression, but it also stressed ways in which the postwar monetary policy record could have been better. Friedman highlighted, in particular, the unnecessary nature of the 1960–61 recession. The notion that monetary policy had been important in generating recessions in the most recent decades was not widely accepted during the mid-­1960s. For example, Woodlief Thomas—a former Federal Reserve Board official—stated (W. Thomas 1966, 14) that postwar US recessions “have not been due to restrictive monetary policies.” The Ongoing NBER Project Still another element of Friedman’s 1964 congressional testimony was his advocacy of a constant-­monetary-­growth rule. He had already made the case for the rule in his 1958–59 messages to Congress, but, under NBER rules against stating policy recommendations, he and Schwartz had not been permitted to advocate the rule openly in the Monetary History. The Monetary History, which in the 1960s was available solely as a hardback volume, proceeded into a third printing in 1966, with Schwartz inspecting proofs of the new printing (incorporating typographical corrections spotted since 1963) in April 1966.21 In addition, Friedman and Schwartz pressed ahead with the next volume in their monetary studies, with a draft completed at the end of 1966.22 The processing of this draft into book form proved to be extremely protracted. The material in the draft would ultimately prove to be an early version of two books: Monetary Statis-

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tics, published in 1970, and Monetary Trends, published in 1982. The slow completion of these books will be considered in later chapters. While Friedman and Schwartz were continuing their monetary project, chapter 7 of the Monetary History was published, in 1965, as a free-­ standing paperback titled The Great Contraction, 1929–1933. The publication of the latter reflected widespread interest in Friedman and Schwartz’s coverage of the Depression. Alongside the reprinted chapter, Friedman and Schwartz included new material, in the form of a brief preamble and a glossary.23 Phillip Cagan’s Determinants and Effects of Changes in the Stock of Money, 1875–1960 was also published in 1965. This was a companion volume to the Monetary History, but it failed to make anything approaching the same impact. In a blow to Cagan, Princeton University Press had rejected Cagan’s book, contending that much of the material in his monograph—whose subject matter was largely the behavior of the components of the money multiplier—had been covered in the course of Friedman and Schwartz’s analytical narrative.24 Following Princeton University Press’s rejection, the book was published by Columbia University Press. The contrast between Friedman’s growing success in influencing academic opinion and the hegemony of Keynesianism in policy circles continued in 1965 and 1966. Asked in 1969 why his views had been shunned in policy making during the 1960s, Friedman answered: “The people who are legislating and influencing policy are now reflecting what they learned in college (laughs) 20 and 25 years ago. And, as a result, the attitudes in the profession itself are very different from the attitudes in the public. In fact, it seems to me kind of ironic that just when this Keynesian doctrine of the managed budget has really captured the civil servant and the politician and the journalist, just at that time it has lost almost complete credence, or a large part of its credence has been lost, . . . [in] the profession itself.”25 What is missing from this characterization is that, during the mid-­1960s, there were a number of erstwhile academic economists in the administration—including Heller, Okun, and Eckstein at the Council of Economic Advisers—who all knew Friedman and his work, but who in this period did not number among those economists swayed by his arguments.26 Interaction with the Federal Reserve As discussed in chapter 10, Friedman had some interactions with the Federal Reserve in the period from 1951 to 1960, the most notable of which was his 1960 meeting with Federal Reserve chairman Martin. But in the early part of the 1960s he was, as already indicated, frustrated by the Federal Reserve’s failure to enter into a dialogue with him concerning the prepub-

Critic of the New Economics, 1964 to 1966  65

lication draft of the Friedman-­Schwartz Monetary History. After the History was published, Friedman embarked, in a memorandum appended to his 1964 congressional testimony, on a rebuttal to criticisms that Federal Reserve Board governors George Mitchell and Dewey Daane had made of Friedman’s arguments. Friedman’s rebuttal only underlined the paucity of his communication with officialdom, as he took Mitchell to task for the latter’s unfamiliarity with Friedman’s work.27 Along similar lines, in another 1964 piece Friedman complained that current policy makers, like many of their predecessors, cared little about the quantity of money.28 Evidently, not much had changed since 1962, when Romney Robinson (1962, 320) had complained that Friedman and Federal Reserve personnel seemed to talk at cross-­purposes. Robinson expressed the wish for an opportunity for them to exchange views. In 1965, things did begin to change, and a more regular dialogue between Friedman and the makers of monetary policy started to take shape. The first notable event in this dialogue occurred when Friedman was a guest in one of a series of events that their Federal Reserve organizers called a “System luncheon meeting.” In Friedman’s case, this was a gathering on January 15, 1965, at the Federal Reserve Board in Washington, DC, with senior staff of the Board and Federal Reserve district banks. The exchange saw Friedman participate in a detailed discussion of how the Federal Reserve might give itself better short-­run control over the quantity of bank reserves. Much of Friedman’s research had, in one way or another, abstracted from this topic. As Friedman’s focus in research tended to be on the demand for money, the correlation between nominal spending and monetary totals, and low-­frequency data regularities, he had seldom had occasion to go into detail on the subject of the short-­run determination of the volume of reserves and the stock of money. Research on issues pertaining to money-­supply determination and short-­run monetary control had largely been carried out by other monetarists, like Brunner and Meltzer, or Cagan, Meigs, and Dewald, rather than by Friedman.29 But in Capitalism and Freedom, Friedman had remarked that his ideal corresponded to a situation of a constant day-­to-­day increase in the stock of money.30 This statement naturally raised the question of how monetary control of such precision was to be achieved. The guidance that Friedman provided on this matter in A Program for Monetary Stability had consisted primarily of a list of radical changes to the monetary system, including a 100 percent reserve system and abolition of discounting. These changes were, however, clearly not on policy makers’ agenda. And so in 1965 Friedman—frustrated with claims by Federal Reserve officials that improved short-­run control of reserves and money was infeasible—put forward suggestions for smaller-­ scale institutional changes that could improve monetary control.

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Friedman was satisfied that—even under existing arrangements—­ Federal Reserve actions could exert effects on the money stock “with relatively short lags.”31 But he believed that the money stock could be rendered more stable, and more rapidly responsive to Federal Reserve actions, if the Federal Reserve moved to a regime in which the quantity of bank reserves was its operating target. The counterargument that he faced on this score in 1965 was similar to that he would encounter whenever he pushed the idea to Federal Reserve staff over the following twenty years. The position advanced in opposition to that Friedman espoused was that in the short run, the Federal Reserve was, essentially, obliged to supply a volume of reserves to the commercial banks that would validate banks’ existing deposit levels. Otherwise, the attempt by the commercial banks to obtain reserves to meet their legal and prudential reserve requirements would lead to violent increases in short-­term interest rates.32 Confronted with this position, the solution Friedman proposed at the lunch was to have staggered reserve-­maintenance periods—that is, for different segments of the commercial banking system to have overlapping but not identical periods to which their reserve requirements applied. This proposed change in arrangements offered the hope of reducing the perceived obligation on the Federal Reserve’s part to supply a predetermined volume of reserves to the banking system, and of allowing the amount supplied by the authorities to be governed instead by macroeconomic considerations. With only some commercial banks having to meet reserve requirements on any given day, a reserve deficiency could be met by borrowing from those banks that were not subject to requirements on the day, rather than by the creation by the Federal Reserve—through open-­market purchases or discount-­window loans—of new bank reserves. Friedman elaborated on his proposal in a memorandum of January 19, 1965, to Albert Koch, associate director of the Federal Reserve Board’s Division of Research and Statistics.33 The proposed change, Friedman suggested, would help avoid “very short, erratic, and soon to be reversed fluctuations in aggregate reserves” (5). Koch’s reply, dated March 9, 1965, opened as follows: Dear Milton: Thank you very much for your memorandum of January 19 discussing the possible effects of staggering bank reserve periods within the week. . . . It certainly merits consideration. As a matter of fact, we currently have a staff committee reviewing the broad question of member bank reserve computation periods[,] and your proposal will be studied along with several others that have been made from time to time. The words “will be studied” bother me a little as I say them, since I am

Critic of the New Economics, 1964 to 1966  67

as well aware as you must be that they are often used by bureaucrats to brush off a suggestion. . . . I want to assure you that this is not the case in this instance. We are not wedded to the present reserve computation arrangement and will, in all likelihood, change it in one way or another. . . .

The result of the review process described in the letter would do little to reassure Friedman that his proposals were being given serious consideration. For one thing, the Federal Reserve declined to adopt his proposal.34 But, in addition, in 1968 it moved to a lagged reserve-­requirement system. Under the lagged reserve-­requirement arrangement, the Federal Reserve’s short-­run prerogatives in determining the aggregate level of reserves became less than they had been even in 1965.35 Furthermore, the Federal Open Market Committee, which had already moved toward becoming more explicit during its deliberations in the early 1960s about its use of a short-­term interest rate target (Meltzer 2009a, 335), became more focused on the federal funds rate as a key short-­term rate. A number of researchers have suggested that, with the deepening of the federal funds market, the FOMC’s systematic use of a federal funds rate target should be viewed as beginning in 1965–66.36 What had therefore emerged was that, instead of shifting to a total-­reserves instrument, the Federal Open Market Committee turned toward more concerted use of a short-­term interest-­rate instrument. The experience of 1965 would consequently form one of a succession of episodes in the 1960s through the early 1970s in which Friedman initially perceived a move on the part of the authorities away from an interest-­ rate-­based operating procedure toward control of reserves, only to discover that such a move had not occurred (Newsweek, October 22, 1979). Friedman visited the Federal Reserve Board again in 1965, including on October 7, when he participated in a regular Board program featuring appearances by a panel of academic consultants. These meetings, which were sometimes acrimonious, would see Friedman engage directly with the Federal Reserve chairman and other Board members, as well as Board senior staff (with subordinate staff permitted to attend but not speak). Friedman would attend these meetings fairly regularly until 1978, with Meltzer typically being the monetarist on the panel when Friedman was absent.37 Friedman’s memorandum for the October 1965 meeting (the second in the series) largely recapitulated the Monetary History, albeit supplemented by explicit statements of policy implications.38 Friedman also departed from the historical orientation of the memorandum in an important respect. He emphasized that he continued to believe that peacetime inflation—even though it was not a danger suggested by the US historical experience—might well be the main concern for the future. Indeed, he noted that there were signs that such a state of affairs was already emerging. In-

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flation had stopped falling and might be increasing, while there was “a real danger of accelerated price rise if the present rate of monetary expansion continues.”39 Meanwhile, the economists on the Federal Reserve staff were starting to devote more attention to Friedman’s critiques. This trend came out in public in 1965 when an article, “Time Deposits in Monetary Analysis,” appeared in the Federal Reserve Bulletin, authored by two Board economists, Lyle Gramley and Samuel Chase. Although the article disputed aspects of the Monetary History’s analysis, it was not a full-­fledged rebuttal, and Gramley remembered the article as stimulated more by Brunner and Meltzer’s work on money-­supply determination than by Friedman and Schwartz’s work (Lyle Gramley, interview, April 2, 2013). The Gramley and Chase (1965) article did, however, raise Friedman’s ire by attributing to him the position that the interest elasticity of money demand was zero and casting him as an extremist in light of that conclusion. Friedman reacted sharply to these characterizations of his view, including those by other Federal Reserve Board staff economists such as Daniel Brill.40 The Interest Sensitivity of the Demand for Money One of Friedman’s most visceral responses, however, came when David Laidler, a recent University of Chicago economics graduate, added his voice to those characterizing Friedman as an adherent to the zero-­elasticity view. Laidler did so in an empirical study of the demand for money (published as Laidler 1966). “Milton wrote me a very rude letter about it, because I’d said he had said there was no interest elasticity. And he said, ‘No, I didn’t. I said I couldn’t find one, and that’s different.’” Laidler recalled that Friedman’s letter asked, “How could a student of mine misrepresent me in this way?” Laidler added: “And he was also the referee for the paper. I could tell because the same sentences appeared in his letter and in the referee’s comments” (David Laidler, interview, June 3, 2013). The issue of the interest elasticity of money demand, and Friedman’s position on the matter, remained a major area of controversy into the early 1970s. In the monetary-­economics literature, the interpretations of Friedman’s position have fallen broadly into two camps. One camp, occupied not only by Keynesian critics (see Tobin 1972a, 860; and Buiter 2003, F609) and Friedman’s 1960s critics from the Federal Reserve like Brill and Gramley and Chase, but also by some monetarists (for example, Meltzer 1965; and Laidler 2012), has taken the position that Friedman stubbornly maintained that the interest elasticity was zero until mounting empirical evidence to the contrary forced him to recant his position.41 Additionally, some in this camp—specifically, its Keynesian members in the 1960s

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and 1970s—tended to treat Friedman’s alleged change in position as a major concession of great theoretical consequence—purportedly, one that amounted to giving ground on such issues as the relative effectiveness of monetary policy and fiscal policy and the legitimacy of bivariate money/income regressions. Okun (1970, 58) even took the position that findings that establish a nonzero interest elasticity of the demand for money “disprove the quantity theory of money.”42 The contrary position, which Friedman articulated and to which the present author also subscribes, is that Friedman did not change his position regarding the existence of the interest elasticity, and furthermore, that a nonzero interest elasticity did not carry with it profound ramifications, contrary to what was claimed by some of Friedman’s critics.43 In laying out this contrary position, one must distinguish between two propositions: (1) the proposition that the returns on fixed-­interest securities do not appear in the money-­demand function—that is, that these returns are not one of the items that are an opportunity cost of holding money; (2) the proposition that, after adjustments to a one-­time permanent injection of nominal money have been completed, the goods market is the only market that has undergone lasting change in response to the monetary injection—that is, that the monetary injection affects securities-­market prices only in the short run. It is argued here that it is the second proposition rather than the first to which Friedman adhered. This interpretation of Friedman’ work is developed in the next few pages. Friedman indicated that the demand for money depended on returns on financial securities (as well as physical assets) in his 1956 restatement of the quantity theory of money, in the Friedman-­Schwartz Monetary History and in their 1963 “Money and Business Cycles,” and in his entry on the quantity theory for the Encyclopedia of the Social Sciences (published in 1968 but drafted in 1964).44 The attribution to Friedman of a zero interest elasticity came from two strands of his work: his 1959 article on money demand in which he could not find a significant impact of interest rates on the real quantity of money demanded; and his frequent use in empirical analysis (including in the Friedman-­Meiselman study discussed in the next section) of bivariate money/income relations. Each of these lines of work is considered in turn. In the 1959 article—which at one point was rated by some (for example, Chick 1973, 35) as his most famous article on money—Friedman did not find a significant role for interest rates in accounting for the behavior of real money balances. On that basis he argued, not that the interest elasticity was zero, but that the empirical evidence suggested that real income rather than an interest-­rate variable was the most important factor accounting for variations in real money balances.45 That position was also expressed in

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studies by other economists. For example, Courchene and Shapiro (1964, 503) stated that “we can get surprisingly good estimates of the demand for real money balances without even using interest rates as an explanatory variable.”46 It should also be noted that many of the interest-­elasticity estimates offered by Okun (1970) as findings that contradict Friedman’s, and subsequently suggested by Samuelson (1971, 21) as indicating that Friedman’s 1959 results reflected his priors, did not constitute relevant evidence against Friedman’s findings because they pertained to an M1-­type aggregate. Friedman and Schwartz readily granted that the interest elasticity of M1 was much more sizable and detectable than that for the M2 series that they used. Behind this acknowledgment lay the reasoning that M2 had a substantial interest-­bearing component that was not contained in the M1 series. That being the case, an effort on the part of the private sector to reduce the fraction of its wealth held in the form of M1, in favor of higher-­ yielding assets, implied portfolio shifts that could largely cancel within the M2 aggregate.47 The same reasoning applies today—perhaps more so than in the 1960s, in light of the broader definition of M2 subsequently adopted in the United States and the greater degree to which the returns on (non-­M1) M2 funds are linked to securities-­market interest rates. Few would nowadays deny, therefore, that as far as the modern definitions of money are concerned, the aggregate interest elasticity of demand for real M2 is considerably smaller than for real M1. In this connection, Hafer and Jansen (1991, 164) found the elasticity of real M2 demand to be about 0.12 between 1912 and 1988, close to that Friedman and Schwartz found in 1982 for real (old) M2 for the years 1867–1975.48 These are certainly lower than typical estimates of the interest elasticity of real M1 demand, which are around 0.5 (see, for example, D. Hoffman and Rasche 1991, 669).49 It is nonetheless appropriate to judge that the demand for real M2 is indeed interest elastic and that this statement applies both to the old and new definitions of M2. Laidler (1966) established that a nonzero interest elasticity for M2 demand could be obtained using the data from Friedman’s 1959 study if multiple-­regression procedures were used. In keeping with this finding, the 1982 Friedman-­Schwartz Monetary Trends study obtained a nonzero and statistically significant interest (semi-­)elasticity of money demand.50 It seems, however, right to conclude that the 1959 paper did not establish Friedman as an exponent of a zero interest elasticity of money demand. His protest that he merely could not find a significant elasticity was justified. But, by the same token, it should be underscored that his 1959 paper did not contain best-­practice empirical testing. Nor could that 1959 paper be considered among Friedman’s most lucid treatments. The confusion that his discussion of the interest elasticity gen-

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erated would, by itself, establish that point. But another part of the exposition of Friedman’s views on which the 1959 paper fell short (as did its condensed version in the American Economic Review) was in its sketch of the transmission mechanism. The 1959 account emphasized the empirical correspondence between aggregate money and aggregate nominal income, and it questioned the importance of observed, securities-­market interest rates in producing the link between the two series. Friedman’s pre- and post-­1959 work stressed that unobserved interest rates nevertheless provided an important link between money and income. But the 1959 articles did not make this point explicitly, and in isolation they could be taken as implying a denial on Friedman’s part of a substitution-­effects-­based view of monetary policy transmission.51 This was an implication that Friedman later had to correct. Let us now turn to the legitimacy of examining bivariate money/income comparisons in a context in which money demand is interest elastic.52 Okun evidently viewed a nonzero interest elasticity as damning for the quantity theory. He may have regarded a nonzero elasticity as implying that an increase in the money stock induced by policy actions would be felt in a mixture of a permanent interest-­rate decline and an increase in nominal income, rather than in only the latter reaction.53 Friedman, in countering the perspective just sketched, could argue that in a general equilibrium setting, it was the physical goods market, not the securities market, that ultimately bore the brunt of equilibrating money supply and demand. He believed (following Hume 1752) that the liquidity effect on nominal interest rates of a monetary injection was temporary. The aforementioned substitution effects would operate via portfolio and spending decisions. Interest rates would fall at first, but as spending flows thereupon came under upward pressure, interest rates would go back up to their initial level, and one would obtain an outcome in which nominal income rose in the same proportion as the stock of money.54 In the case of a permanent step-­up in monetary growth, on the other hand, interest rates would not simply go back to their initial level. Rather, the Fisher effect would shift nominal interest rates up permanently. Velocity would consequently rise too. However, the increases in both the interest rate and velocity could be traced back to the initial increase in monetary growth. Therefore, in this case, too, it might be adequate to view the whole process in terms of an adjustment of nominal income to policies that affected the money stock, with interest rates magnifying the response of nominal income to the monetary stimulus.55 Consequently, in Friedman’s view, the ultimate responses of monetary actions to nominal income, prices, and their rates of change would resemble the outcomes that one would predict if there were no interest sen-

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sitivity of money demand. This was so even though the economic structure took a form in which interest rates provided an important connection between the money and goods markets. Friedman could therefore view the quantity theory of money as operative even in a nonzero-­interest-­elasticity environment. Friedman and Schwartz did acknowledge that, with a nonzero interest elasticity, “there is currently no satisfactory accepted theoretical analysis” of the dynamic adjustment of nominal income to a monetary injection.56 But this merely amounted to a special case of Friedman’s long-­ standing position that short-­run economic relations were a matter on which economists knew little. In the face of this uncertainty, one point on which Friedman did have confidence was that a nonzero interest elasticity did not prevent money/income relations from becoming apparent at medium-­ term and longer frequencies, with a looser but discernible relation often visible even in monthly and quarterly data.57 Another way of looking at the issue is by considering the fact that Don Patinkin (1969) labeled Friedman’s analysis “Keynesian.” Patinkin did so because he viewed analyses in which money demand was treated as interest-­elastic as ipso facto Keynesian and as implying what Patinkin called the “monetary theory of the rate of interest” (Patinkin 1983, 158). For Friedman, however, a monetary theory of the rate of interest did not follow from the position that money demand was interest elastic. He viewed an interest-­elastic money-­demand function, when combined with an endogenous price level, as being consistent with the interest rate being the price of credit rather than the price of money. In his interpretation, the interest rate would be influenced only in the short run by one-­time monetary injections or contractions. It was the price level that would instead ultimately feel the effect of such injections. Hence 1/P—the inverse of the price level for goods and services—was the price of money.58 If, therefore, one drew a demand/supply curve figure for the money market and wanted to put on the y-­axis the price that (in the long run) changes in response to a shift in money supply or money demand, 1/P would be a legitimate price to use on the y-­axis. In contrast, the interest rate (real or nominal) would not appear to be a price one could use in this context, as the effect on the interest rate of shocks to money demand or to the money supply washed out in the long run. A nonzero interest elasticity of the demand for money does open the way for nominal income to respond to government deficit spending that is not accommodated by monetary expansion, provided that such spending puts upward pressure on nominal interest rates. But this result—which is familiar from IS/LM diagrams—did not, in Friedman’s view, put monetary and fiscal policy on an equal footing. He emphasized that whereas ongoing monetary growth tended to promote ongoing nominal income growth, a

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sustained fiscal deficit tended to raise velocity only by a one-­time amount and so raised the level, but not lastingly the growth rate, of nominal income.59 In addition, further arguments against the effectiveness of fiscal policy would become prominent in the economic-­research literature of the 1970s. These arguments would reinforce Friedman’s stress on monetary policy because they cast doubt on the extent to which deficit spending, for given monetary growth, could generate even a one-­time rise in velocity. Evidently unhappy at others’ characterization of his position on the interest elasticity of money demand, Friedman rushed into print an article on the subject, published in the October 1966 issue of the University of Chicago Press’s Journal of Law and Economics. Its two key passages were “I know no empirical student of the demand for money who denies that interest rates affect the real quantity of money demanded” and “in my opinion no ‘fundamental issues’ in either monetary theory or monetary policy hinge on whether the estimated elasticity can for most purposes be approximated by zero or is better approximated by −0.1 or −0.5 or −2.0, provided it is seldom capable of being approximated by −∞.”60 Some critics—among them James Tobin—viewed the 1966 article as marking a change in Friedman’s position.61 But, as discussed above, Friedman was already on record before this article as taking the interest elasticity of money demand to be nonzero. Indeed, some of these earlier statements, not the 1966 article, had been cited by other critics as the occasion of Friedman’s alleged change in position in favor of a nonzero elasticity.62 Another point that Friedman made in his 1966 article was that a nonzero-­but-­non-­infinite elasticity of money demand was not an innovation of the General Theory. It had appeared previously in Keynes’s pre-­1936 work such as Keynes (1923), which had been a quantity-­theory-­based analysis, and it had also appeared in the work of other quantity theorists such as Irving Fisher.63 Discussions of the Transmission Mechanism Another part of Friedman’s position on monetary matters that attracted criticism during the 1960s—especially from Federal Reserve staff—­ pertained to the transmission mechanism. In 1964 Friedman published an article, “Post-­war Trends in Monetary Theory and Policy,” in the short-­ lived US government-­published journal the National Banking Review. The article provoked a critical memorandum from the Federal Reserve Board’s Robert Solomon, which Solomon issued in the internal (that is, circulated only within the Federal Reserve System) series Staff Economic Comment.64 It was Friedman’s alleged reluctance to discuss interest rates when considering the determination of aggregate spending that irritated Solomon. “He refuses to refer to ‘interest rates’ any more than is absolutely necessary; he

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insists on thinking in terms of balance sheet changes rather than income and spending flows. . . . But the process, as he describes it, by which monetary changes affect aggregate demand, is similar to that of the Keynesian approach.” Solomon was right to see both Friedman and Keynesians as perceiving asset prices, rather than the money stock per se, as the variables appearing in the IS equation. But he was wrong to characterize Friedman as merely stating a position with regard to monetary transmission that was identical in substance to that expounded by the Keynesians. It was Friedman and his coauthors, as well as other monetarists, who attached significance to money as a better summary than any observable interest rate of the various yields that mattered for aggregate demand. And it was also the monetarist side that emphasized the possibility that monetary injections could exercise numerous influences on the various yields—including influences that were distinct from the influence that these injections had on the expected path of a benchmark short-­term interest rate. Solomon further challenged the treatment of developments from 1929 to 1933 that Friedman had given in the article. Solomon (1965, 33) contended that “one cannot ascribe incorrect monetary policy in 1929–33 to lack of appreciation of the importance of the money supply.” The curious justification that Solomon offered for this contention was that other financial information could also have indicated monetary stringency. This position, however, does not rule out the use of the money supply as a metric for the monetary restriction from 1929 to 1933. Nor did Solomon’s discussion even cite indicators that might be thought to be the most defensible alternative metrics for monetary stringency between 1929 and 1933, such as real interest rates. Instead, he pointed to the failure of nominal long-­term interest rates to fall much from 1929 to 1933 as evidence of restrictiveness.65 Solomon’s critique perhaps signified a retrogression in the Federal Reserve’s economic analysis compared with that prevailing in the 1950s, when the acknowledgment of the real/nominal interest-­rate distinction had been prevalent in official circles. In addition, his analysis did not grasp Friedman’s message, expressed in print by this point, that a vigorous expansion of money could generate conditions for higher real growth while leaving (nominal) market interest rates little changed, on net. Partly because Solomon did not come to grips with these aspects of Friedman’s analysis, his critique of Friedman took the perspective that Friedman was not adding to existing knowledge. News Magazines The conviction that Keynesian economics was the state of the art, and that what Friedman propounded was simply a reiteration of Keynesian eco-

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nomics, was also manifested in a Time magazine article that appeared at the end of 1965. The cover featured a portrait of Keynes, and the cover story inside took its title from a quotation from Friedman in the article: “We are all Keynesians now” (Time, December 31, 1965). Friedman was not happy, as his letter in the February 4, 1966, issue of Time made clear: “The quotation is correct, but taken out of context. As best I can recall it, the context was: ‘In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.’ The second half is at least as important as the first.” Friedman’s contention that all economists were in one sense Keynes­ ians rested on the fact that Keynesian terminology had become the professional idiom. Friedman distinguished this success of the Keynesian language from the notion that the message of 1936’s General Theory remained widely accepted thirty years later—a notion he rejected.66 The observation that all economists use Keynesian language but do not necessarily accept the initial Keynesian economic analysis was not a position original to Friedman. It had been made explicitly by Arthur Burns (1947) and Schlesinger (1956). In saying that “nobody”—not just himself— was a Keynesian any longer, Friedman probably had in mind the fact that adherence to the secular-­stagnation thesis and a belief in monetary policy’s ineffectiveness had largely been shaken off by the US economics profession ten to fifteen years earlier. He may also have been referring to the modifications to the consumption function arising from his and Modigliani’s work that had been widely accepted and had started to supplant the traditional Keynesian current-­income consumption function.67 Friedman’s rebuttal to Time was too brief to specify the respects in which his own rejection of Keynesianism distinguished his views from those economists who considered themselves to be modern Keynesians. But his ongoing work in monetary economics would continue to bring these differences out in a variety of areas, including with respect to the determination of inflation, interest rates, and unemployment. Meanwhile, Friedman was able to take the fight to Time magazine on a more permanent basis in late 1966 by signing on as a regular Newsweek columnist. His first column was published in the edition of September 26, 1966. It is not the case, as has often been implied, that Newsweek had no anti-­Keynesian or pro-­free-­market economics columnist prior to the advent of Friedman’s column. On the contrary, until Friedman’s arrival, Newsweek had a well-­known journalist, Henry Hazlitt, as an economics columnist.68 Friedman would praise Hazlitt for having been a champion of market economics during a time when the free market was out of favor (Forbes, December 12, 1988, 162). Hazlitt was, in addition, a critic of Keynes­ian economics, having written a highly readable monograph on the subject (Hazlitt 1959). But in this area Friedman had reservations about Hazlitt.

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Although he was an admirer of Hazlitt’s writings, both positive and normative, on price theory, Friedman had doubts about the quality of Hazlitt’s economic analysis when it came to monetary matters.69 As Lerner (1960) pointed out in a review of Hazlitt’s 1959 book The Failure of the “New Economics,” the Hazlitt critique of Keynes’s General Theory presumed that Keynes’s analysis of depression was one intended to be applied also to excess-­demand conditions. This presumption that did not seem appropriate in light of the fact that Keynes (1936) implied, and Keynes’s (1940) affirmed, that inflation could be generated by excess demand and that aggregate-­demand policies should be directed at limiting spending under those circumstances. Furthermore, as a devotee of the Austrian school of economics, Hazlitt was providing economic analysis that—especially on the macroeconomic side—was unrepresentative of the mainstream US research literature. This implied, in particular, that, although Hazlitt was employing a critical stance with regard to Keynesian economics, his criticisms were dissimilar in major respects to the perspective of Keynesianism that Friedman and other monetarists had developed in their research. Another problem was that Hazlitt’s strident style had likely eroded his credibility as a critic of the New Economics. In particular, Hazlitt’s writings portrayed Keynes’s analysis as both incoherent and reprehensible. Friedman, in contrast, indicated his admiration for Keynes and made clear that his dissent from the General Theory stemmed from his disagreement with key hypotheses advanced in that book. In 1957 Friedman had made very plain his admiration for Keynes when he noted that Keynes “contributed so greatly” to economic theory.70 And he observed in a 1968 television interview: “Keynes, himself, was very much of a scientist. I think he was wrong on various things, but he certainly had a scientific approach.”71 Friedman elaborated further in 1970: Now John Maynard Keynes was one of the greatest economists of all time. I know many people regard him as a devil who brought all sorts of evil things into this world—he was not that; he was like the rest of us: he made mistakes. He was a great man, so when he made mistakes, they were great mistakes. But he was a great economist.72

One of the items that Friedman regarded as among Keynes’s mistakes was the diagnosis of the Great Depression. As indicated in chapter 3, and as his 1966 paper on the demand for money made clear, Friedman took Keynes as subscribing to the position that in depression conditions the interest elasticity of money demand could be approximated as infinite— that is, that a liquidity-­trap situation prevailed in the 1930s. Friedman believed nevertheless that Keynes’s position was internally consistent in the

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sense of implying a coherent model.73 Friedman’s critique of Keynes centered not on a challenge to the internal logic of that model but on his preference for an alternative model that he believed was empirically more viable. Friedman’s appointment as a Newsweek columnist gave him a new forum in which he could outline his alternative vision of economic behavior. Newsweek’s new format for its economics columns involved a rotation of academic economists, each of whom contributed a column every three weeks (New York Times, September 4, 1966):74 Friedman (as a critic of the New Economics), Samuelson (as a proponent of it), and Yale University’s Henry Wallich (representing a middle-­of-­the-­road position).75 With Samuelson’s background as a best-­selling textbook author and long-­ standing op-­ed writer, it must have seemed at the time that Samuelson would outshine Friedman in their columns for Newsweek. In the event, by general agreement, this proved not to be the case, and Friedman is regarded as having been the more effective columnist (as will be discussed in chapter 14). Friedman had already written sporadically for the Wall Street Journal in the first half of the 1960s (his contributions including an op-­ed of July 21, 1964, that was an abridgment of his testimony to Congress from the previous March). The Newsweek column, however, meant regular publication in what was far more a mass-­circulation periodical than the Journal could at this point claim to be. Newsweek’s print runs compared even more favorably with those of the ideological magazines National Review and Human Events, which had published articles by Friedman during 1965–66.76 Rose Friedman’s work was part of the labor input in the production of many of the columns. Friedman acknowledged in their joint memoirs that in his public policy writings, “Rose has been an equal partner, even with those publications, such as my Newsweek columns, that have been published [solely] under my name.”77 The arrangement for the writing of Friedman’s columns continued the pattern, already manifested in the making of Capitalism and Freedom, under which Rose Friedman during the 1960s renewed her engagement with economic issues and collaborated with Friedman in that connection (San Francisco Chronicle, March 18, 1984, 9). Jerry Jordan explained the collaboration between the Friedmans on some of these columns: She explained to me at the time that their approach was to pick a topic and then what they wanted to cover in a forthcoming column, and they would turn on their reel-­to-­reel tape recorder, and she would play an uninformed man-­in-­the-­street and start asking him questions, and she kept pushing him to say it better, find a different way to explain it; and they might tape for a couple of hours. And then she would transcribe the whole thing, edit it down . . . and finally produce a column. So, you know, on a sort of labor

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theory of value, she had far more to do with producing those columns than he did. (Jerry Jordan, interview, June 5, 2013)

Not all the columns followed this production process, of course. A good number of the columns arose from full drafts penned by Friedman.78 For example, Gloria Valentine, his secretary from 1972 onward, recalled typing up Friedman’s handwritten columns and sending the typed versions to Newsweek (Gloria Valentine, interview, April 1, 2013). As Friedman described it (Instructional Dynamics Tape 41, January 5, 1970), the columns were delivered five to six days before the publication date, which was in turn a week ahead of the Newsweek newsstand cover date. Friedman, rather than Newsweek, tended to choose the titles of the columns.79 Teaching, Supervision, and Affiliation The account of Friedman’s activities in the 1964–66 period given so far has mostly concerned pursuits other than what remained his main responsibility, namely, teaching economics at the University of Chicago. Friedman’s regular routine had been disrupted in the early and mid-­1960s both by his year of international travel in 1962–63 and a spell at Columbia University in late 1964. Friedman had in fact come close to moving to Columbia University at the end of the 1950s when, in the wake of the success of his consumption-­function work, its department of economics offered him a position.80 He turned that offer down, and his membership in the department in 1964 was only as a visitor. Friedman came out with a negative impression from his 1964 spell at Columbia University. His accounts of his time there complained that the academic groups to which he gave talks had too great a uniformity of views.81 But it is hard to know how much weight to attach to this assessment because Friedman took the dearth of support among academics in the New York City area (not just at Columbia University) for Barry Goldwater’s presidential campaign, in which he was involved, as tantamount to a lack of diversity of opinions.82 Such a conclusion on Friedman’s part seems unwarranted, however. Many of those Friedman encountered might well have disagreed with his characterization of the Goldwater campaign. For while Friedman saw it as a campaign stressing liberalism, his opponents could legitimately point to the fact that it was the Johnson and not the Goldwater campaign that was emphasizing the extension of liberties through civil rights legislation. As far as monetary matters were concerned, Columbia University did not fit Friedman’s characterization of a uniform mindset. The university would have a good record in representing both sides of the Keynesian-­ monetarist debate. Richard Selden, a participant in the early years of

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Friedman’s money workshop, had been associate professor of banking at Columbia University from 1959 to 1963, and, in 1966, Phillip Cagan would join the university’s economics department; in addition, Anna Schwartz received her PhD from the university in 1964 on the strength of her work with Friedman.83 Schwartz had been turned down for a PhD from Columbia University in the early 1950s, when Arthur Burns had decided that she should not receive it for her joint work on UK economic history (that is, for Gayer, Rostow, and Schwartz 1953a, 1953b). “I didn’t pursue the issue [that is, she didn’t challenge Burns’s edict],” Schwartz recalled, “[as] by the time he’d made this decision, I was already working with Friedman, and I thought to myself, ‘I’ll surely get a dissertation from the work I’ll do with Friedman.’” Sure enough, “I finally did get a PhD on the basis of the joint work with Friedman.” Schwartz observed: “I had probably done more work on it than anyone does on a dissertation.”84 In the 1964–65 academic year, Friedman also contemplated an offer from Stanford University’s economics department.85 He would ultimately decline this offer. One reason was that the position was as a chair in the study of American enterprise. “That chair was basically [intended] for a conservative economist,” recalled Marc Nerlove, who was a member of Stanford University’s economics department at the time—and Friedman was reluctant to accept an academic position that attached a label to his research (Marc Nerlove, interview, September 18, 2013). “It seemed that a Stanford donor felt that the economics department at Stanford was not of the free-­enterprise sort,” Rose Friedman recalled in 1998, “and this person was going to provide the funds to set up a professorship at Stanford to be held by someone who shared Milton Friedman’s economics.” Rose Friedman relished the prospect of moving to the Bay Area, but Milton Friedman, she recalled, “was not very enthusiastic” about the offer.86 A precedent of sorts for the sort of position on offer lay in the fact that Friedman, along with several other economists at the University of Chicago, had been a member of the Free Market Study group from 1946 to 1951.87 Although the name of that group referred to the study, rather than advocacy, of free markets, it was nonetheless viewed as a unit that provided backing to free-­market ideas. But Friedman’s membership of that group had been at a time when he thought that capitalism was on its deathbed.88 What is more, his research interests during the Free Market Study group’s existence had not adhered to what was perceived at the time as the agenda of free-­market advocates. For example, he actually shifted away from the price-­theoretical orientation of the group, moving to monetary analysis. And although Friedman was pro–­free market before, during, and after the Free Market Study group’s existence, several of the specific positions Friedman developed during the Free Market Study group’s existence—for example, his exemption of labor unions from responsibility for inflation, and

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his opposition to fixed exchange rates and commodity standards—were at odds with positions frequently taken by advocates of smaller government, particularly in the business world.89 By the 1960s, Friedman liked being a contrarian figure to all sides and had become resistant to labels. Acceptance of a professorship of free enterprise would mean his acquiescence to such labels. In addition, he was probably resistant to encouraging the perception—which acceptance of the Stanford University position would foster—that his own main research interest was no longer monetary economics. With regard to the Stanford University position, Marc Nerlove recalled that in some ways, “Friedman was interested. He was feeling the rigors of the Chicago winter, and Stanford was beginning to look attractive, so he considered this job. He came out to talk to us, [and] to talk to the [university] administration and so on.” During Friedman’s visit to the Stanford University campus, Nerlove went on a long walk with Friedman along Palm Drive. “I’m not sure what time of year it really was then, because I think that Goldwater had already lost the election; or it was obvious that he was going to lose it.” Friedman told Nerlove that he somewhat “regretted having become Goldwater’s adviser, as that, he said, had labeled him as a ‘conservative.’ And he did not want to be labeled as anything. So that gives you some insight into his personality, which was he was so much a seeker of the truth. . . . He viewed himself as a man of principle” (Marc Nerlove, interview, September 18, 2013). Indeed, by the end of the 1970s Friedman had become outspokenly critical of the idea of an academic institution offering a free-­enterprise professorship. “I personally believe that it is a great mistake to establish a chair of free enterprise,” he would declare. “It goes against the fundamental idea of a university to have people appointed in order to promote certain sets of ideas. Should there be a Chair of Marxian Economics, a Chair of Social Democratic Economics, a Chair of New Deal Economics?” (Newsweek, April 30, 1979a, 65). On top of his doubts about the appropriateness of the position, Friedman was unhappy with the negotiations with Stanford University’s economics department about the appointment. In particular, he was stung by the department’s reluctance to accompany their offer to Friedman with the offer of an appointment to Gary Becker. “I do know one thing,” Becker recalled. “In 1964, when he was visiting Columbia, at that point, Stanford made him an offer. They got some money for a chair in free enterprise, and they offered that to Friedman. Friedman was very seriously thinking of going, very seriously. Again, his wife wanted to move to the West Coast. And he asked that they also make me an offer. I probably couldn’t have taken any offer, so it would have been a free offer on their part. They decided not to make me an offer, and that upset Friedman a lot” (Gary Becker, interview,

Critic of the New Economics, 1964 to 1966  81

December 13, 2013). The cumulative effect of Friedman’s various reservations about the offer was that Friedman stayed at the University of Chicago. For students in the field of monetary economics, a major element of the University of Chicago experience continued to be Friedman’s Workshop on Money and Banking. The format for workshop sessions was well established by the mid-­1960s. Much of the University of Chicago economics department’s reputation for an aggressive, “take-­no-­prisoners” format for presenters seems to have been derived from that particular workshop. Paul Evans, who was in the workshop throughout the first half of the 1970s, provided a detailed account of the format: Speakers were allowed five minutes to apologize for anything [in the paper] they wanted to apologize for. . . . Typically, people would waive that opportunity and then one would proceed directly to the paper. Friedman would say: “Does anybody have any comments on page one?” And then after all the comments about page one were out there, then he’d say, “Does anybody have any comments on page two?,” and go sequentially through the paper. There was a tendency for persons who wanted to make comments—everyone presumably having read the paper—to jump the gun. They would say, “I see that you have the word ‘money’ on page one. But over on page 23, you do this type of thing that I don’t think is the correct way of handling money.” It was very gladiatorial. You had the sense that the faculty, especially Friedman, valued people who could find significant comments to make about other people’s papers, generally negative. It was like you were put in the Roman Coliseum with swords and there were these other people with swords, and your goal was to cut up the other people in the Coliseum while avoiding being cut up oneself. (Paul Evans, interview, February 26, 2013)

The format applied to presenters irrespective of whether they were students, University of Chicago economists from the department or the business school, or external presenters. Robert Lucas participated in Friedman’s workshop sessions during the mid-­1970s.90 He recalled: Yes, we’d just go through the things, you know, “Any questions on page one?” “Questions on page two?” and so on. It was designed so it wasn’t like a [typical] seminar series. Sometimes you invited people from the outside. Like Robert Clower, [who] once told me that people who already had a pretty good reputation didn’t like being treated [this way]—you know, they were offended by this. But when you go through it page by page, it was kind of set up for teaching students how to write a paper, how to motivate it. . . . You know: just all kinds of writing and presentation talents, as well as just

82 C h a p t e r t w e l ve

getting the economics straight. That was still going on when I came in the ’70s. (Robert Lucas, interview, March 12, 2013)91

Paul Evans suggested that senior visitors to the workshop may have had a somewhat easier time: Well, I think that, if a very senior person was invited to the workshop, the faculty [members] at the workshop didn’t particularly want you to bloody them too badly. So there was a tendency for many of the comments [in those sessions] to be more like marshmallows rather than like daggers. But if it was somebody trying to get a job as an assistant professor at Chicago, then the point count that graduate students got by bloodying the [prospective] assistant professor went up: maybe double points, like “double jeopardy.” So it was a very aggressive workshop. . . . It was really, really tough on people trying to get a job as an assistant professor. (Paul Evans, interview, February 26, 2013)

Growing Professional Recognition Friedman’s dominant presence at the money workshop during the 1950s contrasted with the lack of great influence, outside the university, of his monetary work. This dichotomy would not last. In the mid-­1960s, the workshop format continued as before, but the impact Friedman was now creating stretched far beyond the epsilon-­neighborhood of the monetary group at the University of Chicago. By 1966, Milton Friedman had been publishing economic research for over thirty years, yet he was getting the profession to sit up and take notice to a greater degree than he had ever done before. Robert Solow observed in 1964: “Although only a small minority of the profession is persuaded by his opinions, around any academic lunch table on any given day, the talk is more likely to be about Milton Friedman than about any other economist” (Banker, November 1964, 710). The December 1965 meeting of the American Economic Association codified Friedman’s profile within his profession when it made him president of the American Economic Association for the year 1967 (American Economic Association 1966, 604).

II. Issues, 1964–66 T he Cr e dit Crunch and Minir ecession Writing in early 1966, one UK economic commentator looked admiringly at “the United States where, for five near-­miraculous years, reasonable economic growth has been maintained and reconciled with price stability”

Critic of the New Economics, 1964 to 1966  83

( Journal of the Institute of Bankers, February 1966, 10).92 Earlier, a US financial columnist had cast her eyes over the country’s price-­level performance over a longer stretch of postwar years. Her judgment was summed up by the column’s subtitle, “Buying Power of U.S. Dollar Holding Up Well, Thank You!” (Morning Herald, June 21, 1965). At just the point when these columnists were writing, however, price-­ level patterns in the United States were undergoing a change. The price inflation that Friedman would date as having begun in 1964 became more clearly apparent in the data. The CPI inflation rate—measured on a twelve-­ month basis—rose in the course of 1965 and crossed the 2 percent value in February 1966. It would remain above that rate continuously for over two decades. Indeed, many analysts have treated 1965 as a turning point—the date at which the United States began a sustained departure from price stability.93 Speaking in March 1966, Friedman did not foresee inflation going too much above 2 percent: “What I have in mind for the United States is a somewhat faster upward creep in prices than the 1 to 2 percent rise of recent years. Maybe the coming period of inflation will be at 3 or 4 or 5 percent, maybe a little higher. It won’t get out of hand” (U.S. News and World Report, April 4, 1966, 63). His prediction would be valid for the years immediately ahead, but not for the period beyond that. Friedman rested his confidence that inflation would be limited to the lower single digits on his belief that it was “extremely unlikely that [Federal] Reserve officials would ever permit the money supply to go up at a rate that would permit rapid inflation.” In making this assessment, Friedman did not anticipate that Federal Reserve policy makers in the 1970s would deny that it was in their power to “permit” or “not permit” inflation. It would be several years yet before policy makers adopted that flawed perspective. Even in 1965–66, however, Friedman was concerned with debunking cost-­push views of inflation. Although they did not yet deny the existence of a connection between their actions and inflation, US officials were already assigning a sizable role to nonpolicy factors in their analysis of inflation behavior. In the mid-­1960s, both the Johnson administration and the Federal Reserve cited special events as sources of the inflationary pressure that had emerged (see Romer and Romer 2002b, 20). In line with this diagnosis, the Johnson administration had increased its emphasis on announced numerical wage/price guidelines as a way to restrain inflation. In addition, a 1965 cut in excise taxes had been enacted with reducing inflation in mind.94 Friedman was scornful of the guidelines: “Price control by exhortation and threat and use of extralegal powers never has worked and never will, except to disrupt the economy. The cure is worse than the disease. Holding down a few prices here and there only diverts inflationary pressure elsewhere, just as squeezing the corner of a balloon

84 C h a p t e r t w e l ve

pushes the air into the rest of it” (St. Louis Globe-­Democrat, December 9, 1965). Friedman had a similarly negative verdict on the idea of imposing more general controls: “Direct control of prices and wages does not eliminate inflationary pressure. It simply shifts the pressure elsewhere and suppresses some of its manifestations. The only way to stop inflation is to restrain the rate of growth of the quantity of money” (Chicago Tribune, May 8, 1966). Friedman made this statement shortly after his participation in a conference at the University of Chicago’s business school—a conference that made front-­page news in the New York Times (April 29, 1966). Although Friedman received only a brief mention in that Times article, he had been a major contributor to the conference, with two presentations.95 In the first of these presentations, Friedman critiqued cost-­push inflation theories, offered the monetary explanation for inflation, and took the Council of Economic Advisers to task for not referring to monetary policy in its recent analysis of inflation.96 In the second presentation—in which he discussed Robert Solow’s (1966a) paper on guideposts—Friedman gave a condensed outline of the natural-­rate hypothesis, which he would elaborate on late in the following year (see the next chapter).97 Solow’s reply to the natural-­rate hypothesis would come later. In his rebuttal to Friedman at the conference, Solow (1966b) took a different tack, arguing that Friedman was unnecessarily bringing money into a discussion that mainly pertained to aggregate-­supply relationships. It was in this context that Solow made his celebrated remark to the effect that everything reminded Friedman of money, and that Friedman should try to refrain from mentioning money throughout his papers just as Solow refrained from mentioning sex in his papers even though everything reminded him of sex. This became, as Solow would acknowledge, the most-­quoted remark Solow ever made (Robert Solow, interview, December 31, 2013). “I made a joke,” Solow recalled. “That violated Samuelson’s first law, which is: never make a joke. And sometimes I think that I’ll go to my grave, and all anyone will ever remember me for is making that joke” (Robert Solow, interview, December 2, 2013). One complaint that Friedman had concerning cost-­push explanations was that they “make correct policy less likely.”98 In particular, as he put it in a February 1966 speech in Detroit, if the authorities and the population “misconceive the nature of the problem,” guidelines might be imposed in a context in which “the government goes on pouring coal into the furnace, increasing the quantity of money, and says that any resulting inflation is not its fault.”99 Indeed, at the University of Chicago conference, even while defending guidelines and rejecting Friedman’s dismissal of cost-­push factors, Solow acknowledged that an excess-­demand problem was emerging.

Critic of the New Economics, 1964 to 1966  85

The Federal Reserve had taken that position too, with the Federal Reserve Board raising the discount rate in December 1965.100 The increase drew critical comment from the White House.101 But Federal Reserve chairman Martin defended the measure, citing excess-­demand pressures as a legitimate reason for tightening monetary policy ( Journal of the Institute of Bankers, February 1966, 11). Friedman, too, voiced his approval for the move (St. Louis Globe-­Democrat, December 9, 1965). In the wake of the December 1965 discount-­rate increase, however, there emerged renewed criticism of US monetary policy from monetarists—as they were just beginning to be called in 1966.102 The gist of this criticism was that there had not been a bona fide tightening of monetary policy, as the Federal Reserve had allowed the monetary base to expand in the first months of the year.103 What this criticism overlooked was the extent to which the discount-­rate increase signaled a slowing in the pace of the creation of bank reserves. The move therefore encouraged the commercial banking system to rein in the expansion of its loans and investments, even if the growth in the base and total reserves did not immediately slow down. Another manifestation of the genuine character of the policy tightening was the fact that short-­term market interest rates were allowed to rise. In particular, as Romer and Romer (1993, 77) noted, the federal funds rate first started increasing in the final quarter of 1965. The federal funds rate then rose every month in the first eight months of 1966. Assessments of the magnitude and timing of the slowdown in monetary growth in 1966 turn on the definition of money. Meltzer (2009a, 494) argued that the December 1965 discount-­rate increase did not prevent high monetary growth in the January–­April 1966 period. For the June 15, 1966, meeting of the Federal Reserve Board’s academic consultants, Friedman presented a memorandum that made a similar claim. He stated that “the rate of growth of the money stock has sharply accelerated since August, 1965, most notably for the narrower definition of money.”104 He presented a table of annualized growth rates:

M1 (currency plus demand deposits adjusted) M2 (M1 plus time deposits in commercial banks)

August 1962 to August 1965

August 1965 to April 1966

3.6 7.9

7.6 9.5

However, beneath the copy of Friedman’s memorandum that is held in the Federal Reserve Board’s records is a handwritten line: M3 ([M2 plus] mutual savings banks and S&L shares)

7.2

7.3

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The handwritten annotation was not by Friedman, and the initials “McC” written alongside it suggest that it was added by Federal Reserve chairman Martin himself.105 Consideration of the behavior of the broader M3 definition appreciably modifies the analysis of monetary behavior in the 1965–66 period. That M3 definition became one of the official Federal Reserve money-­stock measures in the 1970s, and later still (1980) the official definition of M2 was redefined so that it essentially became what Martin in 1966 was calling M3.106 Friedman would accept that redefinition of M2 and would use it himself in his later work. The behavior of the broader total indeed suggests that monetary growth did not accelerate materially in late 1965 and early 1966. The four-­quarter growth of modern M2, for example, declined in both 1966:Q1 and 1966:Q2. The rapid monetary growth that Friedman cited in 1966 largely reflected, at least in the case of M2, a flow back into commercial banks of funds held in thrift institutions (savings banks and savings and loan institutions). Flow-­backs of this kind cancel within a monetary aggregate, such as modern M2, that includes thrift accounts. The impetus for the shift of funds into commercial banks was a sizable increase—made concurrently with the December 1965 discount-­rate rise—in the Federal Reserve Board’s Regulation Q ceiling on interest rates on commercial-­bank time deposits. From April 1966 to the end of the year, the monetary policy tightening showed up in low rates of monetary base growth (Fratianni and Savona 1972a, 73). The tightening also started being registered more uniformly across monetary aggregates. The M2 aggregate that Friedman was using in 1966—which included banks’ issuance of large certificates of deposit (CDs)—shows a decline in the twelve-­month growth rate from 9.6 percent in December 1965 to 4.9 percent in December 1966.107 Over the same period, the growth rate in the modern definition of M2 also declined notably, by about 3.5 percentage points: see figure 12.1. Part of the decline in the growth rate of the aggregate that Friedman was using in 1966 arose from the fact that commercial banks were losing deposits on a large scale because they were experiencing a runoff in large certificates of deposit as market interest rates increased. The issuance of these deposits by commercial banks beginning in 1961 had, in effect, launched the market for wholesale deposits in the United States—a development discussed further in chapter 14. Friedman and Schwartz would decide late in the 1960s that their preferred concept of money was an M2 definition that excluded large CDs, on the grounds that the latter were more akin to commercial paper than the deposits that should enter a demand-­ for-­money function. Essentially the same philosophy would guide the Fed-

Critic of the New Economics, 1964 to 1966  87 7ZHOYHPRQWKJURZWKUDWHSHUFHQW

12 11 10

GrowthinM2(moderndefinition) GrowthinFriedmanͲSchwartzM2excl.largeCDs GrowthinFriedmanͲSchwartzM2incl.largeCDs

9 8 7 6 5 4

1965

1966

1967

1968

F igu r e 1 2 . 1 . Growth in various M2 series, January 1965–­December 1968. Sources: Calculated from Friedman and Schwartz (1970a, table 1) and Federal Reserve Bank of  St. Louis’s FRED portal.

eral Reserve’s exclusion of wholesale deposits from the modern definition of M2.108 Friedman’s reliance over the course of 1966 on an M2 definition that included large CDs gave him the same basic message of a sharp tightening of monetary conditions that can now also be obtained from examination of the modern M2 series. Although the latter aggregate excludes large CDs, it includes the deposits of the thrift or mutual-­banking institutions— which were under severe pressure in 1966 from deposit drains. The reason why commercial banks were losing CDs was also the reason that the thrifts were losing deposits: the inability of either type of institution to match rising market interest rates. As Friedman later put it, “That unattractive word ‘disintermediation’ entered the financial vocabulary in 1966.”109 During the 1960s, the commercial bank liabilities subject to the coverage of Regulation Q included bank-­issued large CDs, and the attractiveness of CDs as a savings vehicle (in relation to rates on such instruments as commercial paper) accordingly fell in the course of the rise in market interest rates in 1966. The Regulation Q ceilings on time deposit interest rates began to bind around July 1966—the first notable occasion on which it had done so, in Friedman’s view.110 In contrast to prior episodes, the authorities did not respond by raising the ceiling rates (Romer and Romer 1993, 78). Indeed, in this period, the ceilings were lowered (Maisel 1967, 19).111 The thrift institutions, although not traditionally subject to formal ceilings, were constrained in the deposit rates that they could offer by the large volume of fixed-­rate housing loans in their asset portfolio. Depository institutions thus entered what Friedman called “the 1966



88 C h a p t e r t w e l ve

interest rate crisis.”112 A more widely used term to summarize their predicament in this episode was the “credit crunch”—a phrase that captured the pressure on the institutions to retrench their balance sheets. Friedman accepted this terminology.113 However, he also used the term “money crunch” to reflect the fact that monetary growth was also being squeezed (Newsweek, June 3, 1968). The effect on the financial system of the interest-­ rate environment prevailing in 1966 was traumatic, with Paul Volcker—at the time a senior commercial banker—referring to “the near-­chaos of August 1966” (Volcker 1967, 31). Thrift institutions were hit harder than the commercial banks, and the squeeze they underwent gave rise to a policy-­ imposed change in institutional arrangements. The Interest Rate Adjustment Act of 1966 was passed by Congress to make the thrift institutions subject to deposit-­rate ceilings similar to those that Regulation Q imposed on banks. But the rate ceilings for thrift institutions were above those that applied to commercial banks—an arrangement designed to provide the thrifts with a competitive edge.114 In particular, a higher ceiling rate on thrift deposits than that applied to commercial bank time deposits would, it was hoped, make the thrift institutions less susceptible to drains of funds to commercial banks. This advantage was further buttressed by the lowering of the Regulation Q ceiling in September 1966, noted above. This 1966 episode also represented a watershed for US market interest rates. In 1964, Friedman had said: “Nominal interest rates are empirically very stable; they seldom change by much over short periods or even long periods.”115 Similarly, in his October 1965 memorandum to the Federal Reserve Board, Friedman stated that the Fisher effect was visible in overseas data but was masked in US data by the absence of a prolonged inflation experience.116 These generalizations were, however, rapidly becoming obsolete. During the 1960s, the federal funds rate, measured by monthly averages, started out around 4 percent, fell to 1.17 percent in July 1961, crossed 2 percent decisively in October 1961, rose above 3 percent in July 1963, above 4 percent in March 1965, above 5 percent in June 1966, and reached a local peak of 5.76 percent in November 1966. Friedman and Schwartz would come to see the mid-­1960s as the first sustained period in which nominal interest rates moved closely with inflation—a phenomenon brought out in figure 12.2. Inflation expectations had mattered for US interest rates before then, they stressed, but the relationship between actual inflation and interest rates had not previously been visible because investors had been inclined to regard bursts of inflation as temporary and to assume a forthcoming reversion to a price-­level trend.117 Evidence in favor of the Fisher effect could be found by consulting postwar evidence from major inflations in Latin America and elsewhere.118 But until the mid-­ 1960s evidence of the same phenomenon in the United States was difficult to ­discern.119

Critic of the New Economics, 1964 to 1966  89

Percent

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F igu r e 1 2 . 2 . Federal funds rate and twelve-­ month CPI inflation, January 1960–­December 1969. Source: Federal Reserve Bank of St. Louis’s FRED portal.

Friedman himself spoke with greater frequency about the Fisher effect.120 “If there is one thing you must get across to your readers,” he told journalists in the summer of 1966 (shortly before he himself received his regular journalistic outlet as a Newsweek columnist), “it is that high interest rates are ordinarily a sign that money has been easy, while low interest rates are a sign that money has been tight” (Business Week, August 6, 1966).121 In 1968, Friedman stated—articulating a theme that he would reiterate often—that he regarded it as “one of the great tragedies of the past decade” that inflationary expectations had been allowed to resurface, after the series of recessions in the 1950s had eliminated them at considerable cost (Instructional Dynamics Economics Cassette Tape 1, October 1968). By late 1966, the behavior of monetary growth had convinced Friedman that monetary policy was indeed very tight. He would later cite the final nine months of 1966 as the restrictive period, in which monetary growth fell off considerably. Indeed, he would characterize this period as featuring no growth in the money stock at all.122 This was approximately accurate as a description of M1 behavior; but M2 excluding CDs continued to rise, albeit at a much-­reduced rate, of about 5 percent per year. Irrespective of which monetary aggregate is considered, it is the case that the period witnessed a notable decline in twelve-­month growth rates in money, as was shown in figure 12.1.123 In the face of the emerging slowdown in monetary growth, Friedman began his first-­ever Newsweek column on monetary policy (his second column for the magazine) by saying: “Our record economic expansion will probably end sometime in the next year” (Newsweek, October 17, 1966). A couple of months later, he was quoted remarking that the US economy was “headed straight for recession in the next two or three

90 C h a p t e r t w e l ve

months” (Christian Science Monitor, December 19, 1966, 7). In Newsweek shortly thereafter, Friedman reaffirmed that it was “almost surely too late to prevent a recession” (Newsweek, January 9, 1967). Modern US national-­accounts data show a notable slowdown in real GDP growth in late 1966 and the first half of 1967. In addition, as Friedman pointed out (Newsweek, May 26, 1969), industrial production registered a decline in 1966–67.124 Indeed, looking back on the period, Eckstein (1976, 13) granted that Friedman had been more correct than others in predicting a weakening of the economy in the wake of the 1966 crunch. There was, however, no decline in total output, as measured by modern real GDP data, in either 1966 or 1967. There was also no recession in 1967 according to the official NBER business cycle chronology. The term “mini-­recession” gained some traction as a description of the period, and Friedman himself used that terminology occasionally.125 He also indicated, however, that his own preference would be to define “recessions” as episodes of dips in output growth and that he would classify 1967 as a recession period on that basis.126 Indeed, in their own business cycle dating for 1982’s Monetary Trends, Friedman and Schwartz amended the NBER business cycle chronology for the United States to categorize 1966–67 as an economic contraction.127 Some justification for this choice, apart from the softness of real variables in early 1967, rests in the fact that the Friedman-­Schwartz 1982 study was partly concerned with relations between money-­stock movements and nominal income movements, and 1966–67 is an important episode in this respect. Nominal income slowed down notably—see figure 11.1 in the previous chapter—in what Friedman later judged was also an unusual instance of inflation responding as rapidly as nominal income growth to a tightening of monetary policy.128 Indeed, twelve-­month CPI inflation actually came back below 3 percent in the first half of 1967 after crossing the 3 percent barrier in 1966: see again figure 12.2. But inflation then rebounded and stood above 3.5 percent in both 1968 and 1969. Friedman traced the rebound in nominal income growth and inflation that occurred from 1967 onward to a reversal of Federal Reserve policy, manifested in “the sharp increase in monetary growth that began in December, 1966 or January, 1967.”129 He later counted 1967, along with 1963, as the occasions during the 1960s when the Federal Reserve abandoned pursuit of a monetary policy course that would have delivered sustained price stability.130

T he F i s cal C ritic — the Multi pli er Around 1954, Friedman approached a graduate student at the University of Chicago, David Meiselman.131 “And he offered me a job to work for him

Critic of the New Economics, 1964 to 1966  91

for twenty hours a week. He told me economists had been fighting with each other for more than twenty years about macroeconomics. He didn’t use the term ‘macroeconomics,’ but that’s the term we use [now]. . . . He said they can’t resolve the argument because nobody has any evidence, and they can’t resolve it because nobody is testing anything. They’re just arguing with each other. He said, ‘Well, what I want to do is test a simple version of the Keynesian theory model and a simple version of the quantity-­theory model, and to see which is better. Your job is to do the calculations’” (David Meiselman, interview, April 30, 2013). After some preliminary work, this endeavor was allowed to lapse.132 In the late 1950s, after Friedman had received funding for his research from the Commission on Money and Credit, Friedman and Meiselman revived the project. The initial draft to arise from their collaboration was a twenty-­one-­page typescript, titled “Judging the Predictive Abilities of the Quantity and Income-­Expenditure Theories.” Crude stencil reproductions of the typescript were made, and the paper was circulated for presentation at the Workshop on Money and Banking on October 27, 1959.133 From this low-­key beginning followed a draft in the early 1960s titled “The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, 1897–1958.”134 The change in title in part reflected the narrowing of the paper’s coverage to US data; the early version had also presented results for Germany, Chile, and Japan, and it even indicated that a future draft might also cover France and Czechoslovakia. The revised, US-­data-­only form of the paper was in turn also presented at the money workshop.135 And its final, 104-­page version was published by the Commission on Money and Credit in 1963.136 That 1963 paper has been described by Meigs (1972, 19) as “one of the most devastating critiques of the conventional Keynesian faith.” The Friedman-­Meiselman findings and the debate they engendered received considerable coverage in economics textbooks during the 1970s and early 1980s.137 Furthermore, in reviewing Friedman’s work, Thygesen (1977, 75) described the Friedman-­Meiselman paper as Friedman’s most influential study. As of 2020, however, that judgment would not hold up. Although Friedman and Meiselman (1963) is prominently cited in Sims’s (2012) Nobel lecture, citation of it has become rare, and, for the 1960s alone, there are three Friedman papers (and three further books) that would qualify as better-­known writings than the Friedman-­Meiselman paper.138 In the 1960s, however, the paper produced a sensation because of its challenge to the validity of the fiscal-­multiplier concept. It was not a theoretical critique. Such a critique was, to some degree, available elsewhere in Friedman’s writings. For Friedman had provided a theoretical (although wholly verbal) critique of fiscal policy in a brief chapter in Capitalism and

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Freedom, offering a variety of a priori arguments why deficit spending might not stimulate aggregate demand, with a focus on possible crowding-­out mechanisms.139 The main theoretical contribution of Friedman and Meiselman’s paper, on the other hand, concerned not fiscal policy but monetary policy, as they provided an outline of the “multiple-­yield” view of monetary policy transmission that underlay monetarists’ position on the links between central-­ bank actions and aggregate demand.140 Although this discussion occupied several pages, Friedman and Meiselman’s paper was very largely an empirical study. And their empirical exercises can be described very simply. For successive decades in US historical data, the authors ascertained whether the money/aggregate spending correlation was higher than the correlation between aggregate spending and a measure of “autonomous expenditures”—the latter being the portion of aggregate spending that, according to elementary Keynesian theory, became “multiplied” by the multiplier to induce further spending flows. The multiplier effects of increases in autonomous spending were the basis for the standard textbook exposition of the importance for aggregate demand of fiscal policy. Therefore, Friedman and Meiselman’s paper was indirectly investigating the power of monetary policy compared with that of fiscal policy. The title of the Friedman-­Meiselman paper was somewhat misleading, as the authors were not really directed toward ascertaining the relative stability of the numerical values of the multiplier and velocity over time. Rather, they were concerned with the relative sizes of correlations (between a spending total and a measure of either fiscal or monetary policy) when their 1897–1958 sample was broken up into periods of a decade in length. The comparison of correlations—one between economic activity and a “Keynesian” variable, one between economic activity and money— was offered as the first empirical comparison of Keynesian and quantity theories. In fact, however, Warburton’s work, that of Brunner and Balbach (1959), and some earlier research by Friedman all could claim to be precursors to this approach.141 The results, Friedman and Meiselman pronounced, were “strikingly one-­sided.”142 Nominal money and nominal consumption (which was their stand-­in for aggregate spending) were strongly correlated in all samples considered, and this correlation was larger than that between consumption and their autonomous spending measure for all sample periods considered, except the one that contained the years of the Great Depression. From the perspective of the modern literature, the value of this exercise is open to doubt. A correlation between money and income will be a function of the monetary policy reaction function in force and so may reveal little about economic structure. Consequently, Sims (2012, 1190–91)

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attributes to Friedman and Meiselman an invalid assumption of exogeneity of money and treats them as failing to recognize the impact of the monetary policy regime on correlations.143 If the aim is to extract an exogenous policy event from the data and thereupon learn the effect of policy actions on aggregate demand, various other procedures seem more appealing than the method of examining raw correlations. Among such procedures would be exercises based on formal statistical methods, such as those associated with identified vector autoregression analysis—as in, for example, Bernanke (1986). Other viable procedures would include attempts by narrative means to isolate clear-­cut cases of exogenous policy actions in the historical record—as in the study of Romer and Romer (1989). It should be observed, nevertheless, that the exercises on the money/ income relationship that Friedman and Meiselman conducted are not without interest. The very fact that the authors considered many periods provided an indirect way of protecting themselves against the endogeneity critique. If the money/income correlation is resilient across different samples, and the monetary policy regime has undergone changes across time, it becomes harder to attribute the positive money/income correlation to the policy reaction function instead of the reaction of aggregate demand to monetary policy. This, in fact, was an argument that Friedman used on a variety of occasions.144 And the argument is one reason why a number of authors, including Bernanke (1986), Brunner (1986), and Benjamin Friedman (1993), have put emphasis on whether there is a positive money/income correlation in the US data, and they have viewed whether the correlation persists over time as an important factor in deciding on the merits of approaches that stress monetary aggregates.145 A latter-­day textbook discussion of the Friedman-­Meiselman study gave its bottom line with pithy accuracy: “they discovered that the monetarist model wins!”146 This striking finding meant that, as McCallum (1986a, 11) observed, “the Friedman-­Meiselman study was welcomed by the profession about like an unexpected slap in the face.” A Keynesian riposte soon came on the scene. Meiselman recalled the situation: “there were other people who were writing criticisms of what we did. So we spent a lot of time writing articles, defending the piece, the whole thing. Then there was a famous issue [September 1965] of the American Economic Review. . . . Between their articles and our article, it took up virtually the whole AER. So that caught everybody’s attention” (David Meiselman, interview, April 30, 2013).147 The principal critics of the Friedman-­Meiselman paper—and those to whom Friedman and Meiselman wrote replies—were Hester (1964) and the two pairs of critics in the American Economic Review, DePrano and Mayer (1965) and Ando and Modigliani (1965). Of these critics, Ando and

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Modigliani got the most attention, including in Friedman and Meiselman’s replies. The principal piece of value-­added arising from the exchange with Hester was that Friedman and Meiselman now presented correlation results using first-­differenced data.148 This represented an important addendum to their results, because—as Friedman himself had stressed in 1943, back when he was still on the Keynesian side of the debate—the use of first differences ensured that correlation results were not dominated by the upward trends in money and total spending.149 Friedman and Meiselman’s original finding that money and spending totals were significantly correlated—with the correlation exceeding the corresponding correlation between their aggregate-­demand variable and their autonomous-­spending variable, except for samples that included in the 1930s—proved resilient to the use of first differences. As for the DePrano-­Mayer critique, it overlapped very heavily with that offered by Ando and Modigliani. It was therefore the exchange between Ando-­Modigliani and Friedman-­ Meiselman that became the main event. Robert Gordon observed: “The first real awareness I had of him [Friedman] was in graduate school. I was at MIT from 1964 to 1967. And there was at that time a very harsh and acrimonious rivalry, an intellectual dislike, between Friedman on the one hand and particularly Modigliani on the other. . . . So the big public display of this animosity is the hundred pages in the AER in September 1965, which everyone calls ‘the battle of the radio stations,’ AM versus FM” (Robert Gordon, interview, March 21, 2013).150 The debate had been set in train by Friedman and Meiselman’s circulation of their prepublication draft. “We sent out copies to a lot of people at MIT,” Meiselman recalled, “and some of them were sure that Milton had pulled a fast one on them. . . . So they ran the tests themselves, and they came up with the same results!” (David Meiselman, interview, April 30, 2013).151 The replicability of the Friedman-­Meiselman study was a point of pride for the authors. It was facilitated by Meiselman’s preparation, at Friedman’s request, of a detailed data appendix for their paper (David Meiselman, interview, July 16, 2014). Paul Wonnacott witnessed some of the face-­to-­face exchanges that took place regarding the Friedman-­Meiselman study, such as those at the September 1964 American Bankers Association meeting. He believed that a critical factor behind the study’s impact was the fact that, taking Friedman and Meiselman’s sample period choices and data definitions as given, other investigators could reproduce their findings. “That is, if you did what Friedman and Meiselman said, you got their result” (Paul Wonnacott, interview, May 12, 2014). In the same vein, Meiselman recalled that “if people didn’t like the numbers, they could replicate them. So, sure enough, a whole bunch of people started doing that; and then replicating them, getting the same damn results. That would drive them crazy. So that

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was part of the whole effect of that exercise” (David Meiselman, interview, July 16, 2014). Ando and Modigliani, like other critics, confirmed the replicability of Friedman and Meiselman’s findings. But they made the case for alternative measures of autonomous spending as well as for the position that empirical tests should be centered on (the peacetime component of ) the sample period 1929–58. In their reply, Friedman and Meiselman expressed misgivings about the practice, which all their principal critics had followed, of defining autonomous spending to cover many categories of expenditure. This practice, they argued, was prone to deliver spurious evidence in favor of fiscal-­multiplier analysis because it meant that fluctuations in aggregate demand would now be traced to an autonomous-­spending series that itself comprised a large component of total demand.152 Friedman and Meiselman showed, however, that even the favorable correlation results that Ando and Modigliani obtained with their own preferred autonomous-­spending series rested largely on the inclusion of the Depression-­year observations—a period that Friedman and Meiselman had already conceded favored the “income-­expenditure” (that is to say, simple Keynesian multiplier) theory. On the whole, therefore, the Ando-­Modigliani critique cannot be regarded as having overturned the Friedman-­Meiselman correlation evidence. Ando and Modigliani could and did argue that reduced-­form evidence of this kind did not provide the appropriate means of discriminating between the Keynesian and quantity theories.153 But this fallback position was undermined by the fact that they had devoted so much effort to challenging Friedman and Meiselman on the latter authors’ own ground of reduced-­form, correlation-­based evidence. Because Ando and Modigliani had done so, the predominant impression among observers of the debate was that the Keynesians had been baited, caught, and reeled in by Friedman and Meiselman.154 Once, therefore, all the exchanges with the critics had gone to press, Friedman could say of the Friedman-­Meiselman results: “Despite the heavy barrage directed against them, I believe our results stand up remarkably well, as I hope our replies demonstrate.”155

III. Personalities, 1964–66 Barry G oldwat er In late 1963, Friedman was cited in the US press as likely to be an economic adviser to Senator Barry Goldwater if Goldwater became the Republican Party’s candidate for the 1964 presidential election (Business Week, November 23, 1963). Friedman did go on to become an adviser to Gold-

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water. Whether, however, Friedman should be regarded as having been Goldwater’s main economic adviser in the 1964 presidential campaign is questionable. Friedman was indeed described during 1964 as the campaign’s chief economic adviser (for example, in Columbia Owl, November 25, 1964). But the New York Times (January 25, 1970, 80) would later note that Friedman saw Goldwater only rarely in the course of the election campaign.156 And it was Friedman’s former student Warren Nutter who seems to have been more continuously engaged with Goldwater in 1964 in consultations on economic matters. Friedman’s role in the Goldwater campaign drew him greater national and, indeed, international attention. Reports on the presidential election in the UK press described Friedman as “a dynamic personality” (Financial Times, August 18, 1964) and “a tough and articulate debater” (Guardian, October 27, 1964). Friedman’s proposals regarding monetary policy naturally received increased scrutiny because of his connection to Goldwater. However, Goldwater ruled out implementing Friedman’s monetary proposals. Goldwater stated that a constant-­monetary-­growth rule “would require too fundamental a change in our monetary system. We must continue to work within the framework of the independent Federal Reserve System” (Christian Science Monitor, September 28, 1964). Nor did Goldwater’s views on inflation closely correspond to Friedman’s. The differences between their perspectives on this subject would be underscored some years later, in 1970, when Goldwater endorsed wage-­ push views of inflation in his syndicated newspaper column (Arizona Republic, February 3, 1970; E. Nelson 2005b).157 The distance that Goldwater had established between his own views on monetary policy and Friedman’s did not prevent President Lyndon Johnson from making a clear reference to Friedman’s proposals. The reference appeared in a presidential statement on monetary policy in October 1964. The Johnson statement included the sentence: “In the future as in the past, our monetary system must remain flexible, and not be bound by any rigid, mechanical rules” (L. B. Johnson 1964, 274). Goldwater had voted against the 1964 tax cut (New York Times, August 28, 1964)—a stand that represented a further parting of company between himself and Friedman, who by 1964 was unconditionally in favor of tax cuts (see section I above). However, the Goldwater campaign proposals did include a large (25 percent) tax cut to be phased in over five years. Friedman wrote an article, “The Goldwater View of Economics,” for the New York Times Magazine (October 11, 1964) a few weeks before the election.158 In the article, Friedman highlighted the tax cut and put it in the context of other Goldwater proposals, including restraint in nondefense government spending and reductions in regulation, that together constituted an ap-

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proach of “cutting the government down to size” (133). Friedman defended the Goldwater proposals by invoking arguments he had used in Capitalism and Freedom. It was also true, however, as the Financial Times (August 18, 1964) observed, that the proposals in Capitalism and Freedom to reduce the role of government went “far beyond anything Goldwater has proposed.” Friedman lacked interest in returning to government service, and therefore he was not set to become head of the Council of Economic Advisers in the event of a Goldwater victory. Warren Nutter was reported to be the Goldwater campaign’s informal designate for that position (Christian Science Monitor, September 4, 1964). Such speculations were idle, however. Friedman would later say that even during the campaign he knew that Goldwater had little chance of victory (Boston Globe, April 3, 1983, 24). In addition, Friedman contended, that if Goldwater had pulled off an upset victory, the new president would have likely not succeeded in securing passage for his proposals to reduce the size of government.159 Goldwater, in fact, suffered a landslide defeat to President Johnson. In a 1969 television appearance, Friedman indicated that he did not believe that Goldwater’s economic positions were the main reasons for Goldwater’s defeat. In explaining the defeat, Friedman gave pride of place instead to what he called an “extraordinarily effective campaign” in which Goldwater was portrayed as someone “who would press the button and cause a nuclear holocaust. I think that was a major factor that damaged him” (Speaking Freely, WNBC, May 4, 1969, p. 18 of transcript). But the fact that the small-­government message had not gained appreciable support in the community forced Friedman to rethink his position, which had figured prominently in Capitalism and Freedom, that large-­scale disillusionment with activist government had already set in among the American public. He would realize that that judgment was misplaced. By the late 1980s, Friedman’s assessment was instead that, from the New Deal until the 1970s, “the public at large had favored an expansion in the role of government,” a desire registered in both higher public spending and a widening of regulations.160 Consistent with this interpretation of the public mood, the US government’s nondefense spending increased substantially during President Johnson’s second term, partly reflecting the successful legislative passage of Great Society programs (including, in 1965–66, Medicare and Medicaid—measures that Friedman would later regard as factors driving up health-­care costs in the United States).161 The increase in domestic government spending programs in the 1960s put a new layer of US public-­ sector activity over that established by the New Deal. In the years after the mid-­1960s, it was these newer programs, and related later initiatives, that would tend to be the principal source of controversy about the size of gov-

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ernment. The earlier measures, such as the New Deal welfare and agricultural programs, would be routinely accepted in US public discourse, even though many of them were still rejected by Friedman.162 This shift in the terms of the debate on the role of government was exemplified by Ronald Reagan’s stance. In 1964, Ronald Reagan had prominently campaigned for the Goldwater campaign and its winding back of regulations and government programs. In so doing, Reagan was, in effect, arguing for some reversal of the New Deal. But Reagan took a different perspective in his later career. In particular, after he took office as president in 1981, Reagan wrote in his diary: “The press is dying to paint me as now trying to undo the New Deal. . . . [But] I’m trying to undo the Great Society.”163 The Goldwater campaign’s stand on public spending was also not the likely factor behind Goldwater’s winning of several states in the election. Other than Goldwater’s own state of Arizona, the states won by the Republicans in the presidential election were located in the Deep South. The Johnson administration was pursuing civil rights legislation, and the Goldwater campaign’s opposition to such legislation figured importantly in Goldwater’s electoral success in the southern states. The fact that Goldwater and his campaign opposed civil rights legislation put them on the wrong side of history and severely undercut attempts to portray the philosophy of the campaign as one that promoted individual rights.164 Goldwater voted against the Civil Rights Act when it was passed by the Senate.165 Friedman, like Goldwater, opposed the Civil Rights Act of 1964 in the lead-­up to its becoming legislation; and Friedman continued to criticize the act for some time in the aftermath of its passing. Some of his arguments were along libertarian lines that he had outlined in Capitalism and Freedom.166 He further contended that racial discrimination should be fought by allowing the free market to operate (Harvard Crimson, May 5, 1964) and by changing public opinion (Financial Times, August 18, 1964; Washington Post, September 11, 1964).167 David Lindsey, an economics graduate student at the University of Chicago from the second half of 1964 onward, confronted Friedman on the issue when they were at a cocktail party and stressed that Friedman’s proposed alternatives to civil rights legislation were inadequate. “I actually, personally, was adamantly involved in the civil rights movement, coming from Earlham. I went to Birmingham and went to the mass meetings well before the bombing of the churches. I was at the March on Washington, et cetera. . . . And so, I gave him a hard time” (David Lindsey, interview, May 2, 2013). Arthur Okun may have had in mind the libertarian-­style stand that Friedman had taken on civil rights legislation when Okun voiced the view that although, on many issues, “Milton has forced us to tighten up and see

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things in a more balanced way,” Friedman had too much confidence in purely market-­based solutions when it came to issues “like honesty and racial equality” (New York Times, January 25, 1970, 83). In the initial years after Goldwater’s defeat, Friedman maintained the stand he had taken in 1964 concerning the civil rights legislation. For example, in 1967 he criticized Goldwater for taking too long to make clear that he shared the objectives of the Civil Rights Act and that the campaign’s opposition was on libertarian lines rather than on opposition to the act’s objectives (Fortune, June 1, 1967, 150). In addition, Friedman continued to criticize the record of civil rights legislation in a 1970 retrospective.168 On this issue, however, there is some evidence of second thoughts on Friedman’s part in later years. In his original 1955 paper on educational vouchers, a long footnote confirmed Friedman’s opposition to school segregation but came out in favor of the hackneyed libertarian line that segregation should be overcome by persuasion.169 By the time of Free to Choose in 1980, however, the Friedmans were suggesting that nondiscrimination by a school should be a precondition for making vouchers redeemable at that school.170 And, whereas in 1964 Friedman had said that the Civil Rights Act would not achieve its aims (Columbia Owl, November 25, 1964), in 1972 he acknowledged that President Johnson’s civil rights legislation was the most far-­reaching and effective in US history.171 Later in the 1970s, when invited to comment on the proposed Equal Rights Amendment to the US Constitution, Friedman did not redeploy the libertarian/market-­solutions arguments that he had used in the 1960s, instead answering, “I have no particular stand on it.”172

Jam es Tobin Robert Hall has characterized the mid- to late 1960s as an era in which, every six months, Milton Friedman and James Tobin would receive each other’s most recent paper, stop everything they were doing, and write a rebuttal.173 The characterization is a good one, although the frequency of this activity was closer to a year than six months. James Tobin responded to the 1963 Monetary History by writing a review (published as Tobin 1965a) that he presented at a conference at Princeton University in September 1964.174 Friedman wrote a full-­length reply that he presented at the same conference, but which he never published.175 Friedman and Tobin both submitted memoranda, which gave contrasting perspectives on current monetary policy, to the Federal Reserve Board academic consultants’ meeting of June 1966. Tobin published an op-­ed in the Washington Post in 1967 criticizing Friedman’s work on money (April 16, 1967). Later in the year, Tobin

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penned another Washington Post op-­ed, arguing for a tax increase (October 8, 1967). A rebuttal by Friedman then appeared in the same newspaper, in the edition of November 5, 1967.176 Tobin used a conference appearance at Columbia University in January 1968 to offer a refutation of Friedman’s December 1967 AEA presidential address (see Tobin 1968). Then in 1969 Friedman and Schwartz published an article in the Journal of Money, Credit and Banking in which they discussed Tobin’s views on the money-­supply process.177 In the same year, Tobin wrote and talked about a paper he had written that criticized the value of Friedman’s timing evidence on the relationship between money and income. That paper then appeared in the Quarterly Journal of Economics in May 1970, with a reply by Friedman published in the same issue.178 Small wonder that in mid-­1969 it was observed (Kaufman 1969a, 23) that Friedman and Tobin “often are identified as the leading representatives of two strongly opposed schools of thought.”179 In the course of these exchanges, and further interaction in the 1970s, Friedman and Tobin would give indications of a strained relationship. The initial exchanges, however, were amicable enough, and Friedman and Schwartz had reason to be pleased by much of what Tobin said in his review of their Monetary History. Tobin was generous in his praise of the book, and the final line of his review—“This is one of those rare books that leave their mark on all future research on the subject”—would be excerpted on the back cover of Monetary History when Princeton University Press issued a trade paperback edition of the volume in 1971.180 Remarks that Tobin made at a conference more than twenty years after he wrote his Monetary History review suggested that the Friedman-­ Schwartz perspective on business cycles might well have rubbed off on him. Tobin observed: “I think that not just the most recent recessions but almost every recession we’ve had since the Second World War was a policy-­ induced recession designed to reduce the inflation rate. . . . [It] has been generally the case that worrying about inflation has led the Federal Reserve to tighten money and that has led to disinflation with a recession. . . . That is the business cycle; that is the post–­World War II business cycle, anyway.”181 By that stage, Tobin had in turn had an important influence on the direction of Friedman’s research. Friedman proved receptive to a suggestion Tobin advanced, in his 1965 review, for modifying the Friedman-­Schwartz account of US velocity behavior. Velocity exhibited a sharp downward trend in the last third of the nineteenth century. Friedman and Schwartz had attributed this decline to the income elasticity of money demand being well above unity. And in providing full-­sample money-­demand function estimates in their companion paper “Money and Business Cycles,” they reported an income elasticity of money demand of 1.8.182 Okun (1963, 76–77) stressed the implausibility of such a large elasticity. And Okun’s skepticism

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was well founded. Far more than the much-­better-­publicized controversy over the interest elasticity, the subject of the income elasticity of money demand was one on which Friedman took a stand that was untenable. There was very little support in other work for such a high income elasticity, either for the M1 or the M2 series (see Meltzer 1963; Courchene and Shapiro 1964; Chow 1966; and Laidler 1966, 1995). Tobin offered the hypothesis that Friedman and Schwartz’s conclusion in favor of a high elasticity was an artifact of their pooling of data from the nineteenth and twentieth centuries. In particular, Tobin (1965a) contended that structural change in the financial system was an influence on the money/income ratio in the lead-­up to the twentieth century. Under this hypothesis—which would be affirmed by the detailed work of Bordo and Jonung (1987)—the rise in the ratio of money to income (equivalently, the fall in velocity) in the late nineteenth century reflected the spread of commercial banking in the United States, and not an income elasticity of money demand in excess of unity. Consequently, inclusion of nineteenth-­century data in estimation of money-­demand functions could distort the estimate of the income elasticity. Consistent with this contention, studies that used only twentieth-­ century data obtained an income elasticity for US money demand much closer to unity. Correlation evidence also pointed toward the distorting effect of nineteenth-­century observations. For whereas Tobin (1965a, 479), using Friedman and Schwartz’s data, found a correlation of only about 0.56 between M2 growth and nominal income growth for 1869–1959, Plosser and Schwert (1978, 645), using Friedman and Meiselman’s series, found a higher correlation, 0.76, between the two series for 1897–1958.183 In his reply to Tobin in 1964, Friedman expressed interest in Tobin’s suggestion that the decline in velocity in the later nineteenth century reflected the expansion of commercial banking in the United States—the rationale being that this development had made it easier for the private sector to hold larger money holdings in relation to income.184 Continuing along these lines, Friedman and Schwartz began, in their 1966 draft of their book on monetary trends, to move away from their earlier position on the income elasticity. Their previous finding of an income elasticity well above unity did not prove resilient either to different sample periods or to the use of rate-­of-­change data. Consequently, Friedman and Schwartz acknowledged: “The evidence of our data on the income elasticity of demand for money is somewhat ambiguous.”185 After further work with Schwartz, Friedman moved in 1970 to advocacy of an income elasticity of around unity; he started using that value in his theoretical and empirical work, acknowledging his debt to Tobin on this matter.186 Therefore, by the time Chen (1976, 180) referred to “Milton

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Friedman’s well-­known thesis that money is a luxury good,” Friedman had actually gone so close to a unitary income elasticity in his specification of monetary behavior that he had essentially dropped the luxury-­good assumption and had moved nearer to Tobin’s position.187 In their 1982 published version of Monetary Trends, Friedman and Schwartz adjusted their US velocity series so that the pre-­1903 downward trend was largely removed.188 When making this adjustment, the authors stated explicitly that they had accepted Tobin’s explanation for the fall in velocity. Furthermore, in their chapter in Trends on the demand for money, the authors reported a much lower US income elasticity estimate (a value of 1.15) than they had in the 1970s or previously.189 In Friedman and Schwartz’s analysis in subsequent chapters of Monetary Trends and in Friedman’s later empirical work in the 1980s, the income elasticity was approximated as unity.190 Indeed, in the 1990s some writers portrayed a unitary income elasticity of money demand as part of the modern quantity theory of money that Friedman expounded in his 1956 article (see, for example, Hendry and Ericsson 1991a, 837; and Ericsson, Hendry, and Tran 1994, 194).191 To make this attribution, however, seems to be going too far, as Friedman’s theoretical framework (either in his 1956 paper or more broadly) did not hinge on a unitary value for the income elasticity.192 What is clear, however, is that by the end of the 1970s Friedman had dropped his old line that the income elasticity of the demand for money was well above unity, and here he had followed a suggestion from Tobin. This change in position instigated by Tobin would affect Friedman’s constant-­monetary-­growth recommendation. When, during the late 1960s, Friedman had occasion to cite a single target number for the proposed rule, he typically gave a rate of 5 percent.193 That target rate, however, incorporated an allowance for a trend decline in velocity; once Friedman adopted the Tobin explanation of nineteenth-­century velocity behavior, he no longer had a basis for assuming a sizable ongoing downward trend in velocity that a constant-­monetary-­growth rule would need to offset. Accordingly, in the 1970s, Friedman would give 4 percent as the target monetary growth rate for the rule (see, for example, Newsweek, April 24, 1978). This prescription, in common with that of the late 1960s, embedded the assumption of a 4 percent long-­run growth rate for output. Another area of activity for Tobin in the mid-­1960s was his spearheading of a “New View” of money-­supply determination. This interpretation of the money-­supply process emphasized that the modern financial system was one in which commercial banks were the principal creator of (nominal) money balances, and in which households and firms did not have new money “forced” on them (as might occur in a hypothetical regime dominated by fiat money). In such an environment, the reason agents would

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come to hold a higher volume of nominal money balances was because their quantity of money demanded had increased. At the time, the New View was seen as a challenge to the validity of the monetary-­base/money-­multiplier approach to money-­supply determination that Friedman and Schwartz had used in their Monetary History. Goodhart (1984, 16), for example, recalled: “Tobin wrote a brilliant, innovative paper on the correct way to analyze the determination of the money supply, ‘Commercial Banks as Creators of “Money”’ [Tobin 1963b], . . . which convinced me that the base/multiplier approach was analytically unhelpful.” Gramley and Chase (1965)—the Federal Reserve Bulletin article that had some critical analysis of the Friedman-­Schwartz work—endorsed the New View. The authors took the New View as saying “open market operations alter the stock of money balances if, and only if, they alter the quantity of money demanded by the public” (Gramley and Chase 1965, 1390, emphasis in original). The New View did not end up figuring very heavily in the monetarist-­ Keynesian debate. The reason for this was that the monetarists—Brunner and Meltzer as well as Friedman and Schwartz—concurred that the base/ multiplier approach should not be used mechanically, and that the money multiplier (that is to say, the ratio of the money stock to high-­powered money) should be treated as endogenous. Friedman and Schwartz used the base/multiplier approach to decompose money-­supply movements, but they did not use the decomposition at the expense of behavioral analysis. For example, as Schwartz (1981, 27–29) stressed, their Monetary History narrative acknowledged that the money multiplier depended on economic variables. In their later, post–­Monetary History work on the definition of money, Friedman and Schwartz discussed Tobin’s 1963 paper.194 They treated Tobin’s article as providing an elucidation of the process through which an open market operation generated a multiplied increase in deposits. Tobin’s exposition of this process highlighted elements of the process that Friedman and Schwartz had not emphasized. In particular, Tobin had stressed that asset prices must adjust in order both for banks to be willing to make the investment and loan undertakings that accompany the deposit multiplication, and for the nonbank private sector to be willing to increase its holdings of nominal deposits. But Friedman and Schwartz did not regard this picture of the process as implying a view of money-­supply determination that was incompatible with their own. In this vein, they described Tobin’s (1963b) analysis as one “with which we agree fully and which we find most illuminating.” Similarly, Friedman and Schwartz expressed agreement with the Gramley-­Chase quotation given above. Karl Brunner, who wrote more extensively about the New View literature than did Fried-

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man and Schwartz, likewise stressed that monetarists and New View advocates had common ground on the determination of the money stock.195 As monetarists saw it, Tobin had fleshed out the money-­supply process, but his analysis had not denied that an open market operation, ceteris paribus, generated a multiplied deposit adjustment on the part of commercial banks, nor had it denied that a monetary policy action sets in train reactions of households’ and firms’ nominal spending on goods and services.196 In particular, what Gramley and Chase (1965) took to be the key message of Tobin’s New View perspective on the money supply—that the commercial banking system’s capacity to expand the supply of money in the wake of an injection of reserves rested on its ability to persuade customers to hold extra deposits—was one Friedman readily granted. “We talk about a distinct supply function of money that the commercial banks are induced [to generate] by their [seeking of] profits,” Friedman observed. “But they can’t increase the quantity of money unless somebody will hold it. And, therefore, they have to affect the willingness of people to hold money” (Milton Friedman, interview, January 22, 1992). From Friedman’s perspective, this dimension of the money-­supply process did not vitiate analysis of the money stock in terms of the monetary base and the money multiplier. Instead, it amounted to a description of the asset-­price adjustment, and the accompanying move of households along their demand curve for (nominal) money balances, that underlay the normal operation of the monetary-­base/money-­multiplier mechanism of deposit creation. Tobin did like to point out that the relationship between the stocks of base money and commercial bank deposits was subject to various slippages.197 But Tobin did not deny that commercial bank reserves were a key variable in monetary analysis. Indeed, Tobin’s (1965a, 468) review had said: “The concept of ‘high-­powered money’ is indispensable to understanding a monetary and banking system like that of the United States.”198 Along similar lines, although they were critical of mechanical application of base/multiplier analysis, Federal Reserve Board staff accepted the existence of connections between reserve and deposit creation. For example, Federal Reserve Board staff stated in a May 1966 report: “When the System wished to tighten, it would slow down the rate at which it supplied reserves just as it now does, bringing about a slowdown in the rates of expansion in the money supply and bank credit and an increase in interest rates.”199 A new arena of combat between Tobin and Friedman emerged in the course of 1966. Tobin took the opportunity of a contribution to the magazine New Republic (Tobin 1966a) to take on the just-­emerging critique of the Phillips curve. As noted earlier, Friedman had briefly sketched the argument at the 1966 University of Chicago conference on wage/price guide-

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lines. Tobin had not been a conference participant, but the conference’s contents had been widely discussed. In addition, as of late 1966 Tobin was aware of the research on the Phillips curve that Edmund Phelps had done in the previous year and a half—work that Phelps had recently outlined in a discussion paper issued in Yale University’s own Cowles Foundation series (Phelps 1966). The latter paper must have been disquieting for Tobin. Phelps was a former student of Tobin’s; Phelps was not a Friedman associate by any stretch of the imagination; and Phelps was—as he had shown in the Cowles paper—far more inclined than Friedman to ground his analysis in formal mathematical modeling. Yet Phelps had, simultaneously with and independently of Friedman, produced an analysis pointing to a long-­ run vertical Phillips curve. In his New Republic article, Tobin acknowledged this research without naming either Phelps or Friedman, yet he affirmed that “if prices rise one percent faster that will make wages rise faster too, but by no means one percent faster” (Tobin 1966a, 13). Tobin further argued that cost-­push forces, unless their influence on inflation was fought with wage/price guideposts, would render the goal of full employment inconsistent with price stability. Tobin’s 1966 article, therefore, staked out a position against Phelps and Friedman in a debate that would rise to the forefront of economists’ attention in the years ahead.

C ha p te r 13

The Friedman Presidency and the Nixon Candidacy, 1967 to 1968 I. Events and Activities, 1967–68 Milton Friedman observed in 1971 that he had a tendency for “always get[ting] that date mixed” when it came to whether a key event—the introduction of a two-tier gold price arrangement into the Bretton Woods exchange-­ rate system—had occurred in 1967 or 1968 (Instructional Dynamics Economics Cassette Tape 81, August 25, 1971). As it happened, it was 1968 when that event took place. But Friedman’s confounding of 1967 and 1968 was understandable. These were two hectic years in which his profile in both the economics profession and US public discourse rose sharply. Furthermore, Friedman’s most famous article—his presidential address to the American Economic Association—was delivered in 1967 and published in 1968.1 Consequently, the two years are naturally treated together in an account of Friedman’s career. As discussed in the previous chapter, Milton Friedman entered 1967 believing that the US economy was headed for a recession. Speaking at Stanford University’s business conference in February 1967, Friedman conjectured that the recession might already be underway, and that the economy might have peaked in December 1966 or January 1967. He added that he viewed a development of this kind as necessary, cautioning that “there’s no way of getting a stable price span without a recession” (Lodi News-­Sentinel, The views expressed in this study are those of the author alone and should not be interpreted as those of the Federal Reserve or the Federal Reserve Board of Governors. The author thanks David Laidler for comments on an earlier draft of this chapter. The author is also indebted to Miguel Acosta, George Fenton, and Christine Garnier for research assistance on this chapter. See the introduction for a full list of acknowledgments for this book. The author regrets to note that, in the period since the research for this chapter was begun, four of the individuals interviewed for this chapter—Martin Feldstein, Lyle Gramley, Allan Meltzer, and Robert Rasche—have passed away.

The Friedman Presidency and the Nixon Candidacy, 1967 to 1968  107

February 10, 1967). In the event, as noted in chapter 12, what emerged in early 1967 was a slowdown in economic growth rather than a recession. Friedman was, however, on the right track in suggesting that a period of softer economic activity was needed to get inflation down. The step-­down in economic growth during 1967 did appear to deliver dividends in terms of greater price stability.2 Indeed, those dividends emerged promptly, with inflation shifting down roughly at the same time as the slowdown in real activity, instead of exhibiting a lag behind output—a prompt reaction pattern that Friedman would come to see as unusual.3 Consequently, Friedman was later able to report in Newsweek (May 26, 1969) that CPI inflation fell from a rate of 3.7 percent in the October 1965 to October 1966 period to an annualized rate of 2.4 percent in the period from October 1966 to July 1967. But the decline in inflation was short-­lived: the same Newsweek column noted that from July 1967 to March 1969 inflation averaged an annual rate of 4.6 percent—higher, in fact, than the rate that had prompted the monetary tightening of 1965–66. Lower inflation was only short-­lived, Friedman believed, because of the resumption during 1967 of upward pressure on aggregate demand. This renewed demand stimulus was in turn attributable to the rapid turnaround in monetary policy (Instructional Dynamics Economics Cassette Tape 39, December 1969). For most of 1967—until November—the Federal Reserve pursued what Friedman labeled an “extraordinarily easy monetary policy” (Instructional Dynamics Economics Cassette Tape 1, October 1968). In correcting their overtight monetary policy of 1966, the authorities had, he contended, returned to a too-­loose policy (Newsweek, May 26, 1969). According to Friedman’s assessment of postwar monetary policy, developments during 1967 amounted to an important turning point. The deviations from price stability observed during the 1950s had led to policy actions that restored low inflation, and even the outbreak of inflation in 1965–66 had been followed by the near price stability of 1967. In contrast, although the rest of the 1960s and the bulk of the 1970s would feature some short-­lived episodes of aggregate-­demand restraint, and although some of these episodes would see monetary growth briefly decline to rates consistent with long-­run price stability, in no case would the phases of restraint be sustained long enough to generate a return to low inflation. Accordingly, Friedman’s retrospectives would classify 1967 as the beginning of an extended departure of the United States from a situation of price stability. During this long deviation from price stability, monetary policy would largely conform to the pattern he had laid out in 1954: an inflation roller coaster around a rising trend, with the downward tugs on that trend reflecting periods of monetary restraint that would be abandoned once recession conditions emerged.4

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International Economic Policy The rapid monetary growth of 1967 occurred alongside continuing balance-­of-­payments disequilibrium. United States balance-­of-­payments deficits, which had emerged by 1960, continued over the period from 1961 to 1967 (Argy 1981, 38; Lothian, Cassese, and Nowak 1983, 699; Bordo 1993, 56). The coexistence of these deficits with robust monetary growth confirmed the Federal Reserve’s ability to separate US domestic conditions from Bretton Woods responsibilities. Balance-­of-­payments deficits were a factor lowering the monetary base, but Federal Reserve actions more than offset this influence and moved overall growth in the monetary base upward, thereby creating conditions conducive to rapid growth in aggregates like M1 and M2.5 Facilitating this pattern was the fact that pressure to direct monetary policy toward improvement in the US balance of payments— pressure that had been heavy during the early 1960s—had receded by 1967. When, therefore, Friedman faced former undersecretary of the treasury Robert V. Roosa in a public debate, organized by the American Enterprise Institute, “The Balance of Payments: Free versus Fixed Exchange Rates,” Friedman’s arguments in favor of floating rates reflected this new monetary policy reality. The objections that he laid out in that debate—held in Washington, DC, on May 18, 1967 (Washington Post, May 19, 1967)—to the United States’ participation in the Bretton Woods system did not focus on the fixed exchange-­rate system as a constraint on US monetary policy. That constraint had been Friedman’s concern in his 1963 congressional testimony on the subject, but in 1967 he recognized that policy makers were not allowing balance-­of-­payments considerations to figure in monetary policy decisions in the way they had in the early 1960s.6 Friedman instead centered his 1967 presentation on the complaint that the price system—­ specifically, exchange-­rate flexibility—had not been deployed. His statement that “a system of floating exchange rates completely eliminates the balance-­of-­payments problem” reflected his view of floating rates as an equilibrating mechanism.7 In the short term, a country could record balance-­of-­payments surpluses or deficits under a fixed-­exchange-­rate system. For the medium term, however, it was Friedman’s contention that the choice was not really between balance and imbalance in the balance of payments. Even fixed-­exchange-­ rate systems, he recognized, had lasted only so long as they delivered a roughly zero overall balance of payments.8 That being so, the choice facing each country concerned what arrangements they should adopt to secure this rough balance: a direct mechanism—floating exchange rates—based on the price system, or reliance on indirect methods. Such indirect methods were not in practice likely to include aggregate-­demand adjustment,

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owing to the widespread embrace—already noted in previous chapters—of economic stabilization as a national policy goal in the postwar period.9 In particular, for the United States as of 1967, with external considerations no longer given such weight in the setting of monetary policy, achievement of balance-­of-­payments goals under a fixed-­exchange-­rate system entailed deployment of a variety of nonmonetary actions that could affect the current or capital accounts. Friedman consequently viewed balance-­of-­payments considerations, even when they did not intrude on monetary policy decisions, as having a distorting effect on “national policies” of the US government—­including those concerning foreign aid, foreign policy, and import quotas.10 Other policy measures that Friedman cited as an undesirable by-­product of balance-­of-­payments concerns were the US government’s attempts to guide the pattern of private-­sector international lending and portfolio selection. These attempts would be among the items Friedman listed when, a couple of years after his debate with Roosa, Friedman provided a catalogue of “direct and indirect exchange controls” that had been imposed. This list would include the interest-­equalization tax introduced in 1963–64 and the exchange controls, initially voluntary, that the Johnson administration had made compulsory at the beginning of 1968.11 In all, Friedman observed, the Johnson years had seen the “erection of a great many gadgets and gimmicks” to address the balance-­of-­payments deficit (Instructional Dynamics Economics Cassette Tape 3, November 1968). “Is it really so,” Friedman asked Walter Heller and other panelists in a January 1968 broadcast, “that the rest of the people on this panel view with equanimity these restrictions on foreign travel, on foreign investments, on foreign lending that the president has been imposing and extending?”12 By the time Friedman made these televised remarks, the international monetary system was under considerable strain. The UK pound sterling underwent a 14 percent devaluation in 1967.13 Pressure on the Bretton Woods system continued into 1968 with the long-­standing arrangement of a pegged gold price of $35 an ounce being put under stress in international financial markets. Friedman wrote frequently in Newsweek about the efforts in process to maintain the system and testified to Congress on the matter on February 1, 1968.14 In Newsweek, he had predicted that the gold price “will be raised[,] or permitted to rise. The only questions are when and how” (Newsweek, January 1, 1968). His prediction would be realized in full within five years. In the meantime, however, the change in international arrangements that materialized in March and April 1968 represented a shift of actual practice in the direction of Friedman’s prediction. Under the new arrangements, the $35 gold price would now apply only to intergovernmental transactions in the Bretton Woods system. Correspondingly,

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no attempt would be made to peg the price prevailing in international commodity markets. In addition, and reflecting a change already agreed on, special drawing rights (SDRs) were introduced as a new source of international reserves. Asked by a magazine to comment, Friedman opined that the change was “very sensible, though it would be still better for the government to get completely out of the business of trying to affect the price of gold, including removing the restrictions on the ownership, purchase, and sale of gold by U.S. residents. Few things are less important to the U.S. than whether the price of gold in London is $35 an ounce or $100 an ounce. The two-­tier system goes part of the way—by giving up any attempt to fix the price of gold in private trading—but it retains the fiction of a fixed $35-­an-­ounce price for official transactions” (Family Weekly, March 16, 1969). What was not explicitly noted in that assessment was that the 1968 revision of international monetary arrangements still left the Western world with a fixed-­exchange-­rate system. All the same, Friedman could take considerable satisfaction in the 1968 changes. They continued to separate monetary policy from the US gold commitment, underscoring his February 1968 testimony that “the link between gold and the quantity of money has become a rubber band” and bolstering his case for a monetary rule to provide a framework for domestic monetary policy decisions.15 The large modifications made to the Bretton Woods system, together with the international financial market turmoil that had preceded the changes, made flexible exchange rates look more feasible as a future step. And Friedman believed that the events of the 1960s only underlined the case for a floating-­exchange-­rate system. For although the preservation of the Bretton Woods regime did not impose constraints on US aggregate demand, the apparatus of exchange and trade controls instituted as part of the administration’s international economic policy imposed what Friedman called an “utterly unnecessary discipline” on the nation.16 Friedman believed that the foreign exchange controls and accompanying measures, in addition to being undesirable in their own right, would prove futile: he was convinced that they would not succeed in making the Bretton Woods obligations sustainable for the United States in the longer term. In particular, Friedman insisted that the gold-­price peg, even in its new two-­tier form, would have to be dropped. “I don’t think there’s any conceivable chance that we can hold the price of gold at $35 very much longer,” Friedman said on a television appearance in March 1968.17 Pressed by his fellow guest Paul Samuelson to “date your prediction,” Friedman did not hold back. “I think, sometime within the next three to four years, the price of gold will be higher than $35 an ounce.”18 Within four years, Friedman’s prediction was borne out.

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Delays with Monetary Trends By the time of the 1968 changes to international economic policy, Friedman’s debate with Robert Roosa on fixed exchange rates had been in print for some months, their hosts having expedited the production of a book commemorating the debate. On November 21, 1967, Friedman sent a copy of the new book to Anna Schwartz with an inscription, “This is an instant book—if only ours could get done as fast!”19 This was a reference not only to the protracted process by which the Monetary History had reached print, but also to the fact that Friedman and Schwartz’s follow-­up book was clearly going to take longer to complete than they had planned. When, in the early 1960s, Friedman referred to “a study (now drawing to a close) by Anna J. Schwartz and myself,” he probably had in mind both the Monetary History and the planned Trends and Cycles volume.20 Footnotes in the Monetary History had cited that volume as a forthcoming book, and the authors would occasionally describe their trends volume as having been completely drafted before—perhaps years before—the Monetary History was completed.21 As was discussed in the previous chapter, a revised draft of Friedman and Schwartz’s Trends and Cycles manuscript was completed at the end of 1966. Friedman presented and circulated the manuscript in January 1967 at the University of California, Los Angeles (UCLA), when serving for a few months as a visiting professor.22 While at UCLA, Friedman gave a version of the money class that he had been teaching of late at the University of Chicago—and was initially taken aback that his class included students with surnames of both Samuelson and Canes (Keynes).23 The small NBER reading committee for the Trends manuscript had also come back to the authors by early 1967. The recommendation that arose from the review process was fateful. The NBER advised that monetary relations in the United Kingdom be added to the coverage of the book.24 What ensued from this recommendation was that the manuscript was broken up into two separate books: one covering US monetary statistics and one covering monetary trends (and, it was hoped, also cycles) in the United Kingdom and the United States. The extra work involved, and Friedman’s many other commitments, meant that neither book saw publication in the 1960s. Indeed, the book on monetary trends did not even reach print during the 1970s. The Fisher Effect Gains Attention If Friedman was concerned that that the delays that the new Friedman-­ Schwartz volumes were encountering would limit his ability to have an im-

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pact on discussions in the economics profession, he need not have worried. For one thing, he was still publishing books in the meantime, with a new book, mostly of reprinted material, Dollars and Deficits, appearing in 1968.25 But much more important in sustaining and raising Friedman’s profile was the tail fire of his pre-­1967 publications. Together with Friedman’s presidential address at the end of 1967, these writings would ensure that Friedman’s views dominated the research agenda in monetary economics and inflation analysis in the years from 1968 to 1977, as well as the monetary policy agenda in the United States and the United Kingdom over those years and into the early 1980s. Having already set several hares running by triggering debates on international arrangements, the merits of a constant-­monetary-­growth rule, the causes of the Great Depression, and the modeling of inflation, Friedman in the second half of the 1960s got yet another debate going—one that was played out both in public discussions of monetary policy and in the research literature. He did so by pushing hard on an issue that had been weaved into his analyses for years but that he would now give greater emphasis than ever before: the Fisher distinction between nominal and real interest rates. As discussed in the previous chapter, Friedman had stressed this distinction in 1966 in discussions with the media and with the Federal Reserve Board. A chapter of the 1966 Friedman-­Schwartz Trends and Cycles draft had addressed the issue, and fifteen years later the authors would recall the drafting of that chapter as being against a background in which “Irving Fisher’s path-­breaking work, dating from 1896, distinguishing between nominal and real interest rates and examining the empirical role of inflationary expectations was hardly known and was certainly not part of the received wisdom.”26 In 1967, with nominal interest rates, inflation, and monetary growth all rising, Friedman’s argument in favor of the relevance of the Fisher effect gained considerable traction.27 As one of Friedman’s critics noted (DePrano 1968, 39), “Monetary increase as the cause of higher interest [rates] has even reached the popular press.” In this connection, DePrano cited an article, “Why Does More Money Mean Higher Interest?,” that had appeared in Business Week in its October 14, 1967, edition—the second time in as many months that the magazine had highlighted Friedman’s position on the subject.28 The later Business Week article described Friedman’s analysis of interest rates—which he would publish in 1968 and which drew on the Friedman-­Schwartz manuscript.29 In that analysis, Friedman distinguished between two key effects on nominal interest rates that occurred when the authorities raised the rate of monetary growth: the transitory liquidity effect (a decline in rates) and the permanent Fisher effect (a rise in rates). The liquidity effect was the effect that tended to get the bulk of

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attention in discussions of the money/interest rate relationship, with Foley and Sidrauski (1970, 44) labeling it “one of the basic postulates of monetary theory and policy.” But Friedman contended that, being the more enduring of the two effects, it was the Fisher effect that could explain the upward trend in nominal interest rates observed of late. The argument that high US nominal interest rates reflected the Fisher effect, and the association of that position with Friedman, would achieve further major press coverage when it made front-­page news in the Wall Street Journal (November 17, 1967).30 Taking the opposite position from Friedman on this issue, as on so many others, was James Tobin. In his submission for the October 21, 1966, Federal Reserve Board consultants’ meeting (one for which Allan Meltzer, rather than Friedman, was the representative of the monetarists), Tobin criticized “observers [who] belittle the tightness of current monetary policy by subtracting an inflation premium from current interest rates.”31 Indeed, the following February, Tobin called for monetary policy to bring nominal interest rates below their values in 1966.32 As with much of his analysis over the following fifteen years, Tobin argued during 1966 and 1967 that low real interest rates on fixed-­interest securities did not signify easy financial settings.33 His reasoning was that the US stock market was doing poorly and that equity-­market-­based indicators deserved a higher place than interest rates (and money) in the hierarchy of indexes of financial conditions.34 After Tobin staked out this position, some of his past students would lightheartedly summarize his perspective as “q is all that matters” (Tobin 1978b, 422). A key paper in this research program, Brainard and Tobin (1968), had stated (104) that “the valuation of investment goods relative to their cost is the prime indicator and proper target of monetary policy.” In taking this stand, Brainard and Tobin had adopted a perspective that was very different from Friedman’s—and indeed from the standard New Keynesian analysis of thirty years later, for the latter analysis emphasized neither money nor equities but instead, interest-­rate-­based metrics such as real interest rates or the Taylor (1993) rule prescription. Often during the late 1960s and the 1970s, monetary growth and real interest rates would paint largely the same picture of considerable monetary ease, while stock-­market-­ based indices of financial conditions would suggest tightness. Other indicators of monetary policy that incorporate the nominal/real interest-­rate distinction, notably the Taylor (1993) rule prescription, likewise tend to give a similar account of monetary policy stance in the 1965–81 period to that provided by monetary growth, and dissimilar to that using Tobin’s q. Therefore, whether viewed from a perspective that emphasizes monetary growth or from one that puts stress on interest rates, Tobin’s evaluation of

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the stance of monetary policy during the 1960s and 1970s now looks very jarring, on account of its suggestion that monetary policy over that period was generally tight. Where did policy makers stand on the issues of the Fisher effect and ascertaining monetary policy stance? The articles on the Fisher-­effect controversy in Business Week and the Wall Street Journal suggested that the top officials in the Federal Reserve did not accept the proposition that high nominal interest rates in the United States reflected the backwash of prior years’ excessive monetary expansion. The public statements of Federal Reserve Board policy makers and senior staff confirmed these characterizations of their views. The November 17, 1967, Wall Street Journal item reported that Board governor George Mitchell was denying that monetary policy was easy, and it quoted his fellow governor Andrew Brimmer saying: “Where the heck would interest rates be now if we hadn’t been easy? Through the roof, that’s where” (1). And in an appearance at a Federal Reserve Bank of Minneapolis workshop in May 1968, Lyle Gramley, adviser to the Federal Reserve Board, faced the issues squarely. Gramley emphatically endorsed the position that nominal interest rates were a more reliable indicator of monetary policy than was monetary growth. Gramley (1968, 23) asked, “are we really content to class 1967 as the year of easiest money during the period since the end of World War II? That is what we must do if we make our judgment on the basis of the money stock alone, defined either narrowly or broadly. But it would seem a somewhat difficult judgment to accept, given the fact that interest rates last year rose to the highest levels since the Civil War.” But the retrospective answer to Gramley’s near-­rhetorical question is yes. Monetary policy in the United States in 1967 can now be judged to have adopted the easiest posture observed since the 1940s. Certainly an affirmative answer to Gramley’s question is what emerges from looking at monetary growth. That answer is confirmed by interest-­rate based metrics too. In particular, Taylor (1999, 337) showed that there were steep increases in the Taylor (1993) rule prescription in the mid-­1960s, and Taylor further noted (1999, 338–39) that “the gap between the funds rate and the baseline policy started growing in the late 1960s.” The judgments expressed by Gramley about the current policy stance were shared by Daniel Brill, who was the Federal Reserve Board’s research director on domestic matters and therefore one of the most senior staff members. In a speech in February 1968, Brill took the position that nominal interest rates accurately measured monetary policy stance.35 Such judgments pointed up two aspects of the monetary analysis that basically underlay the authorities’ posture as of 1967–68. The first was that, by explicitly associating high nominal interest rates with tight policy, they were

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neglecting the distinction between real and nominal interest rates. As we have seen, Friedman had regarded policy makers’ preoccupation with nominal interest rates as a source of error even in the 1950s.36 The official focus on interest rates had, however, evidently not been too serious a source of policy error for much of that decade: as discussed in chapter 10, nominal interest-­rate movements in the 1950s generally gave the same signal as that arising from real interest rates and, frequently, also the same signal as that registered by monetary growth. But the experience of the 1950s may have made policy makers readily disposed toward treating inflation expectations as low and constant, for monetary policy for much of the 1960s conformed to Meltzer’s (1976, 469; 2009a) and Benjamin Friedman’s (1988, 444) characterizations of that era: the nominal/real interest-­rate distinction was elided by policy makers, who treated high nominal interest rates as tantamount to tight monetary policy.37 The second key aspect of the Federal Reserve’s analysis during the late 1960s was its rejection of the signal coming from monetary growth. Implicitly or explicitly, policy makers were treating the monetary aggregates as though they were highly distorted measures of underlying monetary conditions, and they attributed high monetary growth to a (policy-­ accommodated) positive shock to money demand. This state of affairs, in which Federal Reserve officials who deprecated money’s indicator role would be pitted against monetarists emphasizing the value of the signal from money, would be a repeated game from the 1960s to the 1990s. For the 1970s, the monetarists would have the better part of the argument; for the 1980s (judged as a whole) and early 1990s, points were about even across the two sides; and the later 1990s would see something of a capitulation on the part of the monetarists, Friedman among them. Of all the postwar decades, however, the 1960s provided perhaps the clearest case in which the monetary aggregates—irrespective of definition considered— were unambiguously more reliable than nominal interest rates as an indicator of monetary stance.38 The stress that Federal Reserve officials of the 1960s put on the unreliability of the monetary aggregates appears in retrospect to have been grossly overdone. Rather, the 1960s would be considered part of a “golden age” of US money-­demand stability (Rasche 1987, 30) and certainly would go down as a period in which monetary aggregates had considerable predictive power for nominal income.39 Setting the Agenda The fact that senior Federal Reserve officials like Brill and Gramley were elaborating at length and in public on their reactions to Friedman’s views

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was itself an indication of how much the ground had shifted over the previous five years. In the public square, Friedman was experiencing a rising profile, with Fortune magazine observing (June 1, 1967, 131) that he was “becoming something of a celebrity.” But if Friedman’s name was coming up quite a bit in public debates over this period, in monetary policy discussions it was simply ubiquitous. An April 1967 Business Week article on monetary policy observed, “The debate swirls around University of Chicago economist Milton Friedman” (Business Week, April 15, 1967, 188), and later in the year a Federal Reserve Board governor lamented: “Friedman has everybody mesmerized—economists, the press, us” (Wall Street Journal, November 17, 1967). Friedman was not liked within the Federal Reserve Board. This was understandable, because he was constantly making public criticisms of the Federal Reserve and was, by this point, frequently attracting considerable attention when he made these criticisms. Friedman also interacted directly with policy makers, including in his continuing participation in the Federal Reserve Board’s consultants’ meetings.40 The days when the Federal Reserve could largely ignore Friedman were gone. In a talk he gave in May 1967 at the University of Chicago, Friedman hailed the revived interest in the quantity theory among economists, arguing that it had occurred in light of empirical evidence “in the past decade.”41 Nor, at the very top of the Federal Reserve, could Chairman William McChesney Martin ignore the Friedman juggernaut. Friedman’s revival of the notion of the Fisher effect came up in discussion when Martin appeared at a February 1968 hearing of the Joint Economic Committee: “Senator SYMINGTON. A famous economist has developed the theory that easy money creates higher interest rates. If you have not examined that concept, would you have someone on your staff do so? It is an interesting theory. I discussed it with the economist in question only last week. Would you have somebody look into it? “Mr . Ma rt i n. I will be very glad to.”42

The “famous economist” was, of course, Friedman. As it happened, the issue of whether high nominal interest rates necessarily connoted tight monetary policy was one on which Martin was probably more open to persuasion than his fellow governors. In the 1950s, Martin had recognized the value of the Fisher distinction as a matter of principle.43 In 1967, Martin showed that he remained receptive to the idea when he stated that “those of us who have worked in this field know that the thing that really makes high interest rates is inflation getting out of control.”44 Likewise, in the February 1968 hearing quoted above, Martin had

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said: “A number of years ago one of my South American friends said to me that ‘If you really want to get high interest rates, the way to do it is to just continue on an absolutely easy money policy.’”45 This statement did not amount to an acknowledgment of the relevance of the Fisher effect to the analysis of US developments in the 1960s. But Martin would make just such an acknowledgment in 1969: I do not mean to argue that the interest-­rate developments of recent years have had no relation to monetary policy. We know that, in the short run, expansive monetary policies tend to reduce interest rates and restrictive monetary policies to raise them. But in the long run, in a full employment economy, expansive monetary policies foster greater inflation and encourage borrowers to make even greater demands on the credit markets. . . . Over the long run, therefore, expansive monetary policies may not lower interest rates; in fact, they may raise them appreciably. This is the clear lesson of history that has been reconfirmed by the experience of the past several years. (March 25, 1969, testimony, in Committee on Banking and Currency, US Senate 1969, 9–10)

Martin’s statement was a concession to the monetarist position that monetary policy since 1967 had been loose, not tight, and that nominal interest rates, taken in isolation, were a misleading indicator of monetary policy. Friedman’s prediction that his message concerning interest rates and inflation was “bound to sink in” with policy makers eventually (Wall Street Journal, November 17, 1967, 1) had been borne out by Martin’s reassessment. Not surprisingly, Martin’s 1969 admission became something of a favorite quotation in the monetarist literature, appearing in Fand (1969b, 104; 1970, 18) and Meltzer (1969a, 29; 1981, 43; 2009a, 565), for example. In quoting Martin, however, Meltzer (1969a, 29) was careful to note that Martin was accepting only a “portion” of the monetarist position. In particular, the Federal Reserve authorities had not accepted the validity of monetarists’ recommendations for monetary reform, including the replacement of the federal funds rate (which by the late 1960s was increasingly emerging as the variable in terms of which the FOMC framed its policy decisions) with the monetary base or total bank reserves as the policy instrument. Indeed, on September 12, 1968, the Federal Reserve changed the framework in which commercial banks were required to meet reserve requirements to a lagged reserve accounting system.46 Under the new arrangements, banks’ required reserves would be a percentage of their deposit levels prevailing two weeks earlier rather than of their current amount of deposits. This new state of affairs obliged the Federal Reserve, in any given

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week, to make available a certain minimum level of total bank reserves. The Federal Reserve retained its ability to use nonborrowed reserves or the federal funds rate as a policy instrument. But lagged reserve accounting did greatly circumscribe the Federal Reserve’s scope to adhere, on a week-­to-­ week basis, to the policy that the monetarists recommended of setting the total volume of reserves.47 Debates on Monetary Targeting The Federal Reserve also was not enamored of a fixed monetary-­growth target. Monetary-­growth targeting did, however, win the support of the Federal Reserve’s congressional overseers. In 1967, and more emphatically in 1968, the Joint Economic Committee made a nonbinding recommendation that the Federal Reserve should be judged by the criterion of meeting a 2 to 6 percent growth rule for the money supply.48 Friedman applauded the proposal, suggesting that its greatest import lay in the fact that it provided “for the Fed to be aware of the attitude of Congress” on the desirability of steady monetary growth (Chicago Tribune, July 5, 1968). The Joint Economic Committee’s support for constant monetary growth reflected the fact that two key congressional Democrats—Representative Henry Reuss and Senator William Proxmire—had been intrigued and, to some extent, persuaded by Friedman’s discussions of money.49 Beneath the surface of the Joint Economic Committee’s recommendation there was, however, plenty of evidence that what Meltzer would observe about the Federal Reserve also applied to Congress: only a “portion” of the monetarist position had been absorbed. In particular, Representative Reuss had qualified the constant-­monetary-­growth recommendation with a provision that above-­target growth should be permitted in the event of an outbreak of cost-­push inflation. This escape clause was inconsistent with Friedman’s framework on two counts: first, in presupposing that there was a systematic force in the economy tending to produce cost-­push inflation; and second, in indicating that the appropriate response to such cost-­ push forces, if they existed, was to validate them by monetary expansion. It was left to Franco Modigliani, whom the committee called to testify as a representative of economists hostile to Friedman’s views, to voice an objection to the Reuss clause that Friedman himself might have raised: that “the money supply should adjust and permit any expansion [or] any increase in the price level that the cost-­push is creating . . . would be a dangerous principle.”50 Clearly, the Joint Economic Committee was accepting Friedman’s monetary views only in a piecemeal manner. Constant monetary growth was evidently attractive to members of Congress as a way of both reducing

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monetary instability and holding the Federal Reserve accountable. But the congressional advocates of constant monetary growth failed to appreciate the interdependence of the parts of Friedman’s framework they took on board and the parts they overlooked or rejected. In particular, Reuss continued after 1968 to embrace nonmonetary views of inflation, and in 1970 he called for wage/price controls against inflation (E. Nelson 2005b). Friedman’s views on aggregate-­demand determination seemed to have gained a stronger foothold with Congress than his position that inflation was a monetary phenomenon. The Surcharge The growing influence of Friedman’s perspective on aggregate demand was manifested not only in legislators’ statements regarding monetary policy but also in their remarks concerning fiscal policy. On February 5, 1968, Senator Proxmire spoke to his committee colleagues about the administration’s proposals to impose an income tax surcharge as a way of putting a brake on the economy.51 Proxmire suggested that a tax increase would not create the intended slowdown in consumer spending: “what is much more likely on the basis of experience, the taxpayer will be likely to maintain his spending and simply save a little less.”52 This conclusion had parallels with what Friedman had been articulating when discussing taxes in his Newsweek columns.53 In 1967, a Friedman column had said that a tax increase would produce a major braking effect on aggregate demand and inflation only if it prompted the Federal Reserve to slow monetary growth (Newsweek, January 23, 1967). In saying this, Friedman was repeating a position he had voiced before he became a Newsweek columnist and before the tax-­increase proposal became official policy. “The only effective way to prevent inflation is to restrain the rate of monetary growth,” he had told the Washington Post (March 10, 1966). “That is a task for monetary policy and not fiscal policy.” The surcharge became law in late June 1968 (Okun 1970, 91). The confluence of economic policy settings as of mid-­1968—fiscal tightening and expansionary monetary policy (as measured by monetary growth)—led monetarists to predict a resilient economy and the New Economists to predict a slowdown. Of these two forecasts, the monetarist prediction proved to be the accurate one. The period 1968–69 witnessed a combination not seen since the Korean War: a fall in conventional measures of private real income (calculated as net of tax) alongside a continued robust rise in aggregate real spending (Auerbach and Rutner 1976, 19). The emerging picture was noted by a news wire report in September 1968: “It surprises economists that families did not cut back on spending when taxes went up”

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(Cleveland Press, September 21, 1968). Some economists, of course, were not surprised, and Friedman, having predicted that the surcharge would be ineffective, very soon claimed vindication, citing the coexistence of “an income tax surcharge and accelerating inflation” (St. Louis Post-­Dispatch, November 11, 1968). He would later recall that “that [Keynesian] body of opinion got a shock in 1968.”54 And over the first half of the 1970s Friedman would hail the 1968 surtax episode as one of the most important test cases favoring the monetarist view.55 That judgment came to be widely shared in the profession. For example, Lawrence Klein (1979, 266) recalled: “The tax surcharge of 1968 did not work out so well for the concept of fine-­tuning.” Similarly, in his retrospective on the evolution of aggregate demand policies in the United States, Gordon (1980, 136) observed that “the temporary income tax surcharge . . . has come to represent the Waterloo of activist fiscal stabilization management.” The Federal Reserve, too, would be shaken by the experience, with Chairman Martin and FOMC vice chairman Alfred Hayes stating that they would not have provided as much monetary ease as they did in the second half of 1968 had they known how robust private-­sector expenditures would be in the wake of the tax increase.56 What is sometimes lost in discussions of the imposition of the tax surcharge in 1968 is that there existed two main bases on which Friedman could predict the tax increase would be ineffective, and, of these two, the basis that has proved enduring is not the one he emphasized most in the late 1960s. In 1967–68, Friedman appealed to a (reverse) crowding-­out argument: the surtax, he believed, would restrain consumption but, by reducing the government’s call on the credit market, the surcharge would also tend to promote lower interest rates and higher private investment spending. On this view, the main effect of the tax increase would be to alter total spending’s composition. There would, however, be a modest downward effect on total spending arising from the decline in velocity that lower nominal interest rates would encourage.57 In contrast, Friedman’s permanent-­income theory of consumption provided quite a different basis for viewing the tax surcharge as ineffective. Instead of envisioning the surcharge as prone to reduce consumption but raise investment, leaving aggregate demand little changed, the permanent income hypothesis instead predicted that the surcharge would leave consumption basically unaffected. The reason for this prediction lay in the temporary character of the surcharge. Consumers would, according to the theory, recognize the tax increase’s temporary nature and therefore would let their saving, not their consumption, decline for the period in which the surcharge was in effect. That aggregate demand would largely be insensitive to the tax increase was a prediction of the permanent-­income story,

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just as with the reverse-­crowding-­out story. But the mechanism relied on was different, as were the associated predictions for the behavior of investment spending and interest rates. Friedman at first seemed content to rely on the reverse-­crowding-­out story, both when predicting the effects of the surtax and when analyzing its effects ex post. For example, in early 1969, he stated that the tax increase had reduced consumption, but that, by putting downward pressure on interest rates, it had had an ancillary effect of stimulating investment.58 However, during the late 1960s other economists were utilizing the permanent income hypothesis rather than crowding out as the basis for dismissing the effect of the surtax. William Proxmire, as indicated above, implicitly used it; and Robert Eisner of Northwestern University appealed to the permanent income hypothesis explicitly (Eisner 1969, 1971a, 1971b). Robert Lucas would recall Eisner—who, being located in the greater Chicago area, had considerable interaction with Friedman—as a Keynesian economist whose view of fiscal policy’s effects was greatly altered by Friedman’s work on consumption (Robert Lucas, interview, March 12, 2013).59 The message that fiscal multipliers cannot be expected to be large in the case of temporary tax changes would be generalized and underscored in Barro’s (1974) work on the permanent income hypothesis. Friedman, although he consistently emphasized the weakness of fiscal policy, shifted over the 1970s and 1980s from crowding-­out arguments to criticisms of fiscal policy that rested more squarely on the permanent income hypothesis and the associated Ricardian equivalence proposition (see section II below). The conclusion that the 1968 tax increase was ineffective did encounter resistance in certain quarters. Some Keynesians tried to uncover an effect on consumption of the tax increase and to point to other factors that allegedly masked the impact of the tax increase on aggregate demand (Okun 1970, 91; 1971; 1977; see also Modigliani and Sterling 1986). But that position would be very much a minority view, and the 1968 tax surcharge would become a textbook case of the permanent income theory in action (Dornbusch and Fischer 1978, 323–26; Hall and Taylor 1997, 282). The episode would also be noted in the research literature as an empirical illustration of the proposition that forward-­looking consumers see beyond temporary tax changes in making their spending decisions (see, for example, Kormendi and Meguire 1986; Meltzer 2009a, 539). The 1967 monetary easing, the US government’s reliance on an ineffective 1968 fiscal tightening, and the renewed monetary ease that came in the wake of the 1968 tax increase left Friedman with the conviction that further ground would be lost in the attempt to restore price stability. In this connection, Friedman warned in late 1968 that “we shall again have to pay

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a significant price” to break inflation expectations (Instructional Dynamics Economics Cassette Tape 1, October 1968).

II. Issues, 1967–68 T he St. Louis C onn ection As has already been indicated, the proceedings of the Joint Economic Committee during 1968 seemed to keep returning to discussions of Friedman’s views. On one such occasion, at a hearing on May 15, 1968, Federal Reserve Board governor George Mitchell testified: “Now let us take our magnitude, which is the credit proxy, and which you can think of as being Milton’s money supply, M2.” Chairman Proxmire intervened, “You are not talking about the English poet. You are talking about the Chicago economist, Professor Friedman?” Mitchell replied: “I am sorry; yes, Professor Friedman. We speak too familiarly of him, but he is well known by everyone.” “He is kind of a poet, too,” Proxmire added.60 Another economist in this era whose first name coincided with that of a celebrated poet was Homer Jones, Friedman’s one-­time teacher (at Rutgers University in the early 1930s) and later student (at the University of Chicago in the late 1940s). Jones had worked on the Federal Reserve Board staff from 1949 to 1958, after which he had moved to the Federal Reserve Bank of St. Louis, serving as research director.61 And it was in the position of research director that Jones would foster the transformation of the St. Louis bank into a driving force for Friedman’s ideas within the Federal Reserve System. The research department of the Federal Reserve Bank of St. Louis would, in the late 1960s and early 1970s, produce an outpouring of high-­profile research and commentary on money and economic activity that would simultaneously challenge the Keynesian academic world and help make the Federal Reserve Bank of St. Louis a powerful internal critic of Federal Reserve policy.62 Jones’s own written output remained small and low impact, and he would have a low profile in the bank’s engagement with the economics world outside the Federal Reserve System.63 He would, however, play a pivotal role in setting a tone for the staff of the bank’s research department. Robert Rasche, a visitor to the St. Louis bank from the early 1970s and later himself the research director at the bank, observed: “I guess I wouldn’t characterize Homer as much of a researcher in his own right. . . . But he certainly was a—maybe the word is ‘mentor,’ to people who came through there, starting in the relatively early ’60s” (Robert Rasche, interview, May 6, 2013). Friedman himself expressed a similar judgment.64 During Jones’s tenure as research director, the St. Louis research department became an organization producing a stream of articles published in external research outlets or in

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the bank’s own monthly Review, whose content evolved toward more technically oriented material that was more like that seen in research journals. By virtue of this arrangement, Jones set a standard for the Federal Reserve System—one that made a strong research publication portfolio a prerequisite for the position of research director of a Federal Reserve bank. Ironically, therefore, Jones was instrumental in ushering in an era in which it would be impossible for someone like himself, who had little published research to his name, to become a reserve bank’s research director. An early, and enduring, part of the Federal Reserve Bank of St. Louis’s contribution to monetary research was its provision of monetary data. When the Federal Reserve Board started publishing an M1 series in 1960, the St. Louis bank had been involved in the discussion of collection of the series. Indeed, the article introducing the M1 series in the October 1960 issue of the Federal Reserve Bulletin was by a Federal Reserve Bank of St. Louis staff member, William Abbott (Abbott 1960). When, from the 1960s onward, the Federal Reserve Bank of St. Louis made a point of issuing publications in which data on bank reserves and the money stock could be found, it was using data that was actually sourced from the Federal Reserve Board. But, in an age in which hard-­copy publication was the vehicle for making data available to researchers, the St. Louis bank helped put itself on the map via its mass distribution of user-­friendly presentations of the monetary time series. A Business Week profile of the bank (November 18, 1967, 132) concentrated on the bank’s data publications and referred to the “triangles” format of the St. Louis tabulations of three-­, six-­, nine-­, and twelve-­month rates of change. Jerry Jordan joined the research department of the St. Louis bank in 1968.65 Jordan recalled that “the rate of change triangles and the charts were part of his [Jones’s] strategy of reaching large audiences” (Jerry Jordan, interview, June 5, 2013).66 An area in which the St. Louis research department added value on the data front was in the collection and reporting of monetary base series. Friedman and Schwartz’s Monetary History had provided a high-­powered money series, but the Federal Reserve Board did not provide an official monetary base series until 1980, when it did so on the recommendation of the Bach Committee on which Friedman had served (Bach et al. 1976, 3; Pierce 1977, 103; Simpson 1980; Hafer 1980). Around the time of the initiation of the Board’s monetary base series, an article in the UK newspaper the Guardian (December 28, 1979) noted: “Much of the background work on the monetary base . . . has been done in the Federal Reserve Bank of St. Louis in America.” This was true; indeed, during the early 1960s, the St. Louis Federal Reserve’s biweekly publication Bank Reserves and Money published bank-­reserves data that were adjusted for changes in reserve requirements (as noted in Sprinkel 1964, 46–47). Although it is not without pitfalls, the process of adjusting the bank-­

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reserves component of the monetary base for changes in reserve requirements is often essential for the analysis of historical monetary base data (see McCallum and Hargraves 1995). This was certainly the case for the United States: reserve-­requirement variations had, of course, been an important means by which the Federal Reserve altered its policy stance in the late 1930s. And, as Friedman noted, in the postwar period the Federal Reserve often allowed total reserves to rise or fall as reserve requirements changed—a practice that rendered invalid the use of unadjusted reserve totals for the evaluation of monetary policy stance.67 Brunner and Meltzer’s (1964d) procedures for adjusting the base for reserve requirements came to be those adopted by the Federal Reserve Bank of St. Louis (Fratianni and Savona 1972b, 356), reflecting Jerry Jordan’s experience as a student and research assistant of Karl Brunner at University of California, Los Angeles.68 An article in the August 1968 issue of the Federal Reserve Bank of St. Louis Review, “The Monetary Base—Explanation and Analytical Use,” by Jordan and his colleague Leonall Andersen (1968b), provided an exposition both of the reserve adjustment of the base, and of the analysis of base determinants in terms of the “source base”—the assets on the Federal Reserve’s balance sheet, the variations in which gave rise to changes in the Federal Reserve liabilities and thus, typically, in the monetary base. The article analyzed the assets side of the Federal Reserve’s balance sheet as the source of reserve funds. In so doing, this study foreshadowed the enormous amount, in the years after 2008, of analysis of Federal Reserve balance-­sheet behavior (see, for example, Gavin 2009; and Carpenter, Ihrig, Klee, Quinn, and Boote 2015). The sources-­oriented approach to the analysis of the monetary base also followed the tradition of Friedman and Schwartz’s Monetary History analysis of the Federal Reserve’s securities portfolio. One aspect of the Monetary History analysis that Andersen and Jordan did not follow was the terminology: the St. Louis “monetary base” term quickly superseded “high-­powered money” as the preferred nomenclature in the literature. Brunner (1958) had used the “monetary base” terminology, and even the Monetary History had deployed it fleetingly.69 But Friedman’s preferred term was clearly “high-­powered money,” whose usage he traced to the Federal Reserve literature of the 1930s and which he claimed the Federal Reserve had also employed in the 1920s.70 Although he and Schwartz stuck to the “high-­powered money” label in their books in the 1970s and 1980s, Friedman otherwise often yielded to the “monetary base” terminology, using it many times in his cassette commentaries from 1968 onward as well as in print. It was, however, a different 1968 Federal Reserve Bank of St. Louis Review article by Andersen and Jordan (Andersen and Jordan 1968a) that created a storm and that made the St. Louis reserve bank a mover and shaker

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in the research world. In that paper, the authors adopted an approach developed from Friedman and Meiselman’s analysis of monetary and fiscal policy. Andersen and Jordan estimated on US quarterly data an equation linking the first difference of nominal GNP to distributed lags of the first differences in both money (M1 or the base) and a fiscal variable (particularly “full-­employment” nominal government purchases; full-­employment revenues were also considered). The results were highly favorable for monetary policy, as it was found that the sum of coefficients on monetary change grew over time, and unfavorable for fiscal policy, as the authors’ findings suggested that the initial impacts of fiscal actions on GNP faded away in the course of a year. The conclusions of the study seemed to confirm the monetarist message regarding developments in the late 1960s. In 1967, as Friedman noted (Washington Post, November 5, 1967), in the wake of fiscal ease and monetary tightness, the economy had slowed down. And in the 1968 episode, which was just beyond Andersen and Jordan’s sample period, the economy had been resilient when money had been easy, and fiscal policy tight owing to the surtax, as already discussed. Frazer (1988b, 798) claimed that Friedman never participated in the debate on the “St. Louis equation” (which is what Andersen and Jordan’s nominal GNP equation came to be called) and that the statistical procedures in the Andersen-­Jordan study were not consonant with Friedman’s empirical approach. This assertion, buried in an endnote (no. 26) of Frazer’s book, allowed Frazer to ignore the debate and to proceed with his own idiosyncratic interpretation of Friedman’s statistical procedures. But it was an assertion that flies in the face of the facts. Friedman was close to Homer Jones, as well as Jordan, whom he met while Jordan was a graduate student at UCLA in 1967 and with whom he remained close friends until Friedman’s death in 2006.71 To characterize Friedman as uninterested in the Federal Reserve Bank of St. Louis’s research findings also overlooks the fact that, in his cassette commentary series in 1968 (Instructional Dynamics Economics Cassette Tape 3, November 1968), Friedman discussed the Andersen-­Jordan (1968a) article at length, labeling it a “fascinating statistical study” containing striking results.72 Friedman highlighted the St. Louis equation results in his November 14, 1968, debate with Walter Heller on monetary versus fiscal policy. Michael Keran, a Friedman student turned member of the St. Louis bank’s research department, noted, “he had a debate with Walter Heller at one point, which was put into a small book. And in that exchange, he used a lot of the St. Louis Fed material. He certainly was familiar with it” (Michael Keran, interview, March 7, 2013). Indeed, in that debate Friedman accepted the Federal Reserve Bank of St. Louis as an unofficial arm of the Chicago School.73 In the early 1970s, Friedman cited the Andersen-­Jordan

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results as evidence supporting the monetarist position and as consistent with his monetary theory of nominal income.74 He praised Jones for developing St. Louis’s “extraordinarily influential and excellent research program” (Instructional Dynamics Economics Cassette Tape 84, October 20, 1971). In addition, beginning in 1971 and at least into the mid-­1970s, Friedman would rely on a version of the St. Louis approach in his own monetary analysis, when he would use simple one-­equation ordinary least-­squares regressions predicting the growth in nominal personal income on the basis of M2 growth nine months earlier.75 It is true, however, that Friedman’s relations with the Federal Reserve Bank of St. Louis were basically informal. As Homer Jones put it: “Milton Friedman is a good friend, but what we’ve done here is our own” (Wall Street Journal, January 23, 1979).76 Friedman did make very occasional visits to the Federal Reserve Bank of St. Louis. However, other academic monetarists, especially Karl Brunner and Allan Meltzer, were far more frequent visitors.77 A much more important source of face-­to-­face interaction came when St. Louis research staff would visit the University of Chicago to participate in Friedman’s money workshop. Jerry Jordan recalled: “Several of us—myself, Keith Carlson, ‘Andy’ [Leonall] Andersen, when there was a workshop topic that was being conducted, or some other seminar at Chicago, we would go up there and we were always welcomed as a participant-­ observer in whatever was going on” (Jerry Jordan, interview, June 5, 2013). St. Louis research staff would also present at the workshop. Their presentations included one in the early 1970s on monetary control.78 Most notably, the Andersen-­Jordan St. Louis equation work was presented at the workshop by the authors. Robert Gordon, a regular workshop attendee upon joining the University of Chicago’s economics department in 1968, was dismayed by Friedman’s enthusiasm for the Andersen-­Jordan approach: The period I was there was the heyday of debates about the role of money and fiscal policy in macro. A central moment . . . at the workshop in late ’68, early ’69, was [the presentation of ] the famous St. Louis equation. . . . You know, so you stick money and you stick fiscal deficits on the right-­hand side of an equation explaining the growth rate of GDP [or GNP] without any attention to the endogeneity of the both of the right-­hand-­side variables. It’s an indication of Friedman’s thinking that even as late as that St. Louis thing . . . that Friedman actually paid no attention whatsoever to the endogeneity problem that inherently the fiscal policy coefficient was biased downward and the monetary policy coefficient was biased upward, especially if during the sample period, which was true, the Fed was trying to stabilize interest rates. That means they automatically had to sort of let

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the LM curve move with the economy to stabilize interest rates. Of course, the fiscal deficit is endogenous because tax revenues are endogenous. And we all knew that, coming from MIT. I was one of the tigers in that workshop saying, this is preposterous. (Robert Gordon, interview, March 21, 2013)79

Critiques of the St. Louis equation approach that were similar to that voiced by Gordon appeared in a number of articles in the late 1960s and 1970s by Keynesian academics and by economists at the Federal Reserve Board and at Federal Reserve district banks other than that of St. Louis.80 In defense of the St. Louis equation, however, it should be observed that the equation stood up quite well to criticism and proved robust to various allowances for endogeneity problems, including two-­stage least-­squares estimation. Furthermore, coefficient estimates were little altered by the inclusion of interest rates and the lagged dependent variable as right-­hand-­ side terms in the regression (see Batten and Thornton 1986). In addition, McCallum (1986a) defended the basic St. Louis specification, arguing that it could be viewed as a final-­form equation. The equation abstracted from the precise channels of monetary transmission, but—in keeping with the monetarist view of monetary growth as a good summary of the various channels through which monetary policy works—posited a simple link between nominal income and money as a result of the operation of those channels. This approach became an attractive framework for analyzing monetary relations even for economists beyond the St. Louis network (see, for example, Feldstein and Elmendorf 1989; Feldstein and Stock 1994; and McCallum 1988a, 1990b). Another aspect of the St. Louis equation, which fitted in with Friedman’s approach, was the fact that it was expressly concerned with the prediction of nominal income, thereby leaving open the question of whether the split of nominal income between prices and output could be modeled successfully. Indeed, when the St. Louis research department ventured into modeling the division of nominal income change between price rises and real output growth (Andersen and Carlson 1970), Friedman was far less enthusiastic. He treated the associated results as much more tentative than the St. Louis equation for nominal income (Instructional Dynamics Economics Cassette Tape 76, June 15, 1971). The impact of the Andersen-­Jordan study and the follow-­up St. Louis Review articles meant that the St. Louis bank was setting the pace for economic research in the Federal Reserve System. Friedman credited Jones and Darryl Francis (the bank’s president from 1966 to 1976) with making the St. Louis Fed “by far the most important unit in the System.”81 Beyond its research, the St. Louis bank made an impression via Francis’s speeches and his interventions in FOMC meetings, in which he voiced the mone-

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tarist position and advocated bank reserves as an instrument (although Francis stopped short of endorsing a policy of constant monetary growth). However, Lyle Gramley—a senior Federal Reserve Board staffer, as noted above—did not consider Francis a very effective participant in the FOMC meetings.82 The primary impact of the St. Louis bank on the US monetary policy debate would appear, therefore, to have come through its research arm. The Federal Reserve Bank of the St. Louis research department in the late 1960s became a “hit factory,” with a string of widely noticed research articles. In light of the attention that the Andersen-­Jordan paper and its sequels had received, Friedman observed that citations of the Federal Reserve Bank of St. Louis Review had become prevalent in research journals—an unprecedented phenomenon for district bank publications.83 In contrast, in the late 1960s and early 1970s, Friedman was acerbic about the priority given to, and content of, research on monetary policy issues at the Federal Reserve Board. He pointed to the anomalous fact that the Board had a large research staff but had very few engaged in monetary policy research and little to show in terms of an external publication record.84 The Federal Reserve Bank of St. Louis filled this vacuum—and did so with material that was at variance with the positions on economic theory and policy taken by key personnel at the Federal Reserve Board and several of the other reserve banks. The success of the Federal Reserve Bank of St. Louis’s research agenda was also manifested in the degree to which Andersen and Jordan’s work prompted responses from top names at the Massachusetts Institute of Technology—albeit responses that were uninhibitedly negative. Paul Samuelson repeatedly provided critical comments on the St. Louis equation in his economic commentaries in the late 1960s and early 1970s.85 Indeed, it was to the St. Louis equations, as well as Friedman’s reduced-­form approach, that Samuelson was likely referring when he deplored the “crypto-­positivism” and “crude empirical proof ” that underlay support for monetarism (Sunday Telegraph, January 24, 1971, 19).86 Franco Modigliani, deeply involved with the Federal Reserve Board in econometric model building, provided a critique of the St. Louis reduced-­form approach in Modigliani and Ando (1976). And Robert Solow entered the fray with Blinder and Solow (1973), a study that Alan Blinder remembered was partly motivated by the fact that “a great deal of attention had been accorded recently to Andersen and Jordan, at the St. Louis Fed” (Alan Blinder, interview, December 6, 2013). The influence of the St. Louis movement partly reflected the fact that there was a sound empirical message underlying the research. For money did have an enduring relationship with nominal income in the United States during the 1960s and 1970s. With M1 as the definition of money, the St.

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Louis equation survived with relatively minor adjustments into the early 1980s (Tatom 1988), and versions using M2 worked well into the mid-­ 1990s (Feldstein and Elmendorf 1989; Feldstein and Stock 1994).87 The resilience of these equations suggests that the endogeneity-­of-­money issue, so stressed by the critics, was perhaps not a crucial factor behind the predictive success of the equation during the original sample period, nor the source of the finding of statistical significance of the monetary variable.88 In contrast, the equation’s results regarding fiscal policy are harder to assess. The St. Louis–­style findings of weak fiscal effects are not inherently inconsistent with recent studies finding nonzero multipliers for government purchases or tax changes (such as Hall 2009, Romer and Romer 2010, Barro and Redlick 2011, and Ramey 2011) because the St. Louis study concerned pure fiscal policy—that is to say, fiscal impacts holding the money stock constant—whereas the recent studies do not hold money constant. Indeed, the main analysis of the government-­spending/output relationship in Christiano, Eichenbaum, and Rebelo (2012) takes short-­term interest rates as fixed and so, in effect, takes the fiscal action as accommodated by monetary policy.89 But—if they are not simply to be interpreted, as in Gordon’s account above, as distorted by endogeneity problems—a clear-­cut theoretical interpretation of the Andersen-­Jordan results concerning fiscal policy does not appear to be available. Initially, Friedman interpreted the zero coefficient sum on fiscal terms in the St. Louis equation as reflecting crowding out, that is, a situation in which the dependence of interest rates on public borrowing led private spending (particularly investment spending) to move in a different direction from deficit-­financed public spending. But, as already indicated, in later years he came to doubt the empirical importance of crowding out. If crowding out is rejected as an explanation, the results concerning fiscal policy in Andersen and Jordan (1968a) would have to be explained in some other way.

I nc ome Supp ort, Welfare, and S ocial S ecu rit y Friedman vigorously opposed the idea of a legislated minimum wage. He devoted his first-­ever Newsweek column (September 26, 1966) to a critique of the minimum wage. The year 1966 also saw the appearance of a book, The Minimum Wage Rate: Who Really Pays?, in which Friedman and the business school’s Yale Brozen had an exchange on the subject.90 This was a dialogue rather than a debate, because both Brozen and Friedman opposed the minimum wage, and they spent the balance of the book trying to top one another with arguments against the idea. For Friedman, the minimum wage was harmful because it raised unemployment. In the 1967 American Economic Association presidential address that is discussed later in

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this chapter, Friedman cited the minimum wage as a factor that made the natural rate of unemployment higher than otherwise. In this connection, he would see the 1967 legislated increase in the minimum wage as having further boosted the natural rate (Instructional Dynamics Economics Cassette Tape 6, December 1968). Furthermore, Friedman regarded this view as prevailing nearly unanimously across the profession. In 1976, he stated categorically that “every single economist would agree—at least in private—that requiring a minimum wage causes unemployment” (Christian Science Monitor, August 26, 1976). This statement would, however, become obsolete in the 1990s, when Card and Krueger (1994) provided evidence that minimum-­wage increases had not raised the US unemployment rate. Friedman, however, made no concessions to this new literature—if indeed he knew about it at all.91 Rather, he affirmed in 1996 that legislation to raise the minimum wage would “mean that fewer people would be employed” (Wall Street Journal, April 24, 1996). Similarly, in late 2004 Friedman remarked that the minimum wage “creates unemployment” (Election 2004: The Economy, WQED San Francisco, October 15, 2004). Research during the twenty-­first century has included several studies that have reaffirmed that increases in the minimum wage raise the actual and natural rates of unemployment. Tulip (2004) suggested that the evidence of the Card-­Krueger type did not hold enough factors constant, and Tulip’s evidence, together with the methodological problems with the 1990s literature highlighted in Neumark, Salas, and Wascher (2013), has pointed in favor of the original presumption that a higher minimum wage raises the natural rate of unemployment. The Negative Income Tax Advocates of the minimum wage saw it as a means of providing a guarantee to households of a floor level of income. But, for Friedman, a legislated minimum was ill suited for that aim because it increased the amount of the workforce that was unemployed: “How is a person better off unemployed at a dollar sixty an hour than employed at a dollar fifty?”92 In the 1960s, Friedman advanced what he regarded as a much more effective version of a minimum income guarantee, one that did not directly increase the costs that employers faced in doing business. His proposal was for a negative income tax, so that wage earners below a certain income received a rebate from the government that was a function of their wage income. The notion of a negative income tax had been raised by Boulding (1945, 158), who had observed: “There is no particular reason why tax rates should stop at zero. . . . A negative tax rate would mean, of course, that the gov-

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ernment would pay money to the taxpayer instead of taking money from him. There is nothing inherently ridiculous or unsound in this idea, however shocking it may sound by reason of its unfamiliarity.”93 Boulding’s concern was with the extent to which the negative income tax could extend and reinforce the economic-­stabilizing aspects of the progressive tax system. Friedman’s own 1948 study of stabilization policy had expressed ideas along the same lines, while also pointing toward the income-­support scheme he ultimately advocated in the 1960s: “It may be hoped that the present complex structure of transfer payments will be integrated into a single scheme coordinated with the income tax and designed to provide a universal floor for personal incomes.”94 By the early 1960s Friedman, while not opposed in principle to the operation of automatic stabilizers, was sufficiently disillusioned with the effectiveness of fiscal policy as a stabilization tool that he put little weight on the negative income tax as a means of modulating aggregate demand. Indeed, when advocating the negative income tax in Capitalism and Freedom, Friedman had also recommended that the progressive tax system should be replaced by a flat-­rate system. Therefore, he was not in a strong position to argue that the negative income tax was a way of enhancing the progressivity of the tax system. Rather, Friedman viewed the negative income tax as a welfare measure. He realized that the proposal was not new to him: he observed in 1972 that the negative income tax idea was advanced by Lady Rhys-­Williams in the 1940s.95 As of late 1965, Friedman’s expositions of the negative income tax idea were concentrated in two places: the discussion in Capitalism and Freedom and an article “Transfer Payments and the Social Security System” that appeared in the September 1965 issue of the National Industrial Conference Board Record.96 However, an interview that Friedman gave to the New York Times at the end of 1965 gave his proposal added attention (New York Times, December 19, 1965a, b). The topicality of the proposal was underlined by Friedman’s suggestion in the interview that the negative income tax would provide a more effective “war on poverty” than the programs the Johnson administration had launched for that purpose. Over the rest of the 1960s, Friedman’s discussions of the negative income tax would proliferate, and by late 1970 the time Friedman had devoted to the issue no doubt underlay his reference to “my fields of social and monetary policy” (Guardian, September 17, 1970).97 In December 1966, he spoke at length on his proposal at a conference held in Washington, DC, on a guaranteed income (US Chamber of Commerce 1967), and various versions of Friedman’s conference paper, titled “The Case for the Negative Income Tax,” appeared in print over the next few years.98 He would write back-­to-­back Newsweek columns on the subject in 1968 (Newsweek, September 16 and October 7,

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1968).99 Another sign of the interest in Friedman’s scheme came at the end of his April 1967 congressional testimony on conscription, when Republican senator Winston Prouty of Vermont told Friedman that he hoped at a future hearing “to discuss some of your theories with respect to negative income taxes and things of this nature, which I find very intriguing.”100 One of the reasons why the negative income tax proposal was a source of interest in public policy circles was the fact that a small-­government advocate like Friedman was associated with it. The negative income tax proposal was a transfer payment scheme. Consequently, it was not a proposal that people tended to associate with individuals who had Friedman’s economic and political outlook. This was a proposal on which Friedman had support from economists associated with Keynesianism and with the Kennedy and Johnson administrations. Friedman opened the first of his Newsweek columns on the negative income tax by noting that Paul Samuelson supported the measure. James Tobin was another prominent supporter of it, and he had, like Friedman, been an attendee of the December 1966 guaranteed-­income conference.101 At the same time, however, Friedman’s support for the negative income tax, and thus of transfer spending, drew the ire of hard-­line libertarians, and his proposal became perhaps the number-­one issue in their catalogue of objections to Friedman (Fortune, June 1, 1967, 150; Rothbard 1971). The details of Friedman’s negative income tax proposal did put some distance between himself and other advocates like Tobin. First, he saw the introduction of negative income tax as a substitute for the existing social welfare system.102 The lack of cohesion of the existing system repeatedly drew scorn from Friedman, who referred to the status quo as “the present rag bag of measures.”103 “I think we ought to help the poor indiscriminately,” Friedman stated (Chicago Daily News, March 26, 1968, 39), and he saw the way of doing this as by the introduction of a negative income tax arrangement, in which the tax would supersede other benefit programs. Other advocates of the negative income tax, however, wanted to superimpose it on the existing welfare system. Second, Friedman proposed a negative income tax that would likely imply a reduction in overall welfare spending. He claimed with regard to federal welfare expenditure that “the problem is not that we’re not spending enough money—we’re spending too much money” (The Great Society: The Sizzling Economy, NET, June 27, 1966). Part of the reduction in welfare spending would come from the streamlining of welfare programs that he envisioned as accompanying the introduction of negative income tax. But restraint would also arise from a limitation on the amount of transfers permitted by the negative income tax system. Friedman believed that the government had an obligation to provide

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funds sufficient to prevent people from “starving to death,” or being in distress.104 In his view, a negative income tax that provided benefits that far exceeded this amount would provoke resistance from those not benefiting from the scheme. “A negative income tax is not a good idea just because it’s a negative income tax,” he said in 1972. “It depends on whether it’s at a low enough level so that it’s feasible—so that the rest of us are willing to pay the taxes that are required to finance it.”105 In addition, because the specified minimum income would be ensured for both employed and unemployed members of the labor force, Friedman wanted its level to be low enough to preserve incentives to work. In this connection, Friedman specified that the negative income tax should be at a level that implied a large gap between the minimum guaranteed income and the income at which positive tax rates began to apply.106 The two income thresholds should not be allowed to coincide, he stressed, because that would “destroy the incentive. . . . Why should anybody go to work and earn anything?”107 In particular, Friedman regarded as a “basic difference” separating him from economists more associated with government activism the fact that he wanted the negative income tax rate to be well below 100 percent: the rate he specified was 50 percent.108 Tobin agreed that he and Friedman differed materially on this issue, and he criticized Friedman’s negative income tax proposal for providing only modest assistance and for embedding the suggestion that existing transfer programs be abolished (Economist, October 23, 1976a). Tobin (1986, 133) would later add regarding Friedman’s proposal, “his version seemed to me too small to fill much of the poverty gap.” In this discussion, Tobin also noted his own role in helping to “design a negative income tax plan for George McGovern in 1972,” when McGovern was a Democratic candidate, and then nominee, for president.109 Indeed, a New York Times report on McGovern’s proposal, while acknowledging Tobin’s authorship of the specific McGovern proposal, quoted another senior economic adviser to McGovern—Edwin Kuh of MIT—stressing the lineage between Friedman’s views on welfare and those of the McGovern campaign.110 Against this backdrop, Friedman spoke out against the McGovern proposal. In comparing the proposal with his own negative income tax idea, Friedman observed (Instructional Dynamics Economics Cassette Tape 102, June 28, 1972): “Well, they are members of the same family, but of course members of the same family are not necessarily identical twins. Sometimes they don’t even have much liking and respect for one another.” His objections centered on the two differences brought out above: first, Friedman but not McGovern favored the negative income tax proposal as a replacement for existing programs, and second, McGovern’s minimum guaranteed income was more generous than Friedman’s proposed level.

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“The numbers are too high,” Friedman said of McGovern’s proposed floor for household income.111 The fact that Friedman’s preferred numbers implied benefits that were lower than were typical in other negative income tax proposals was the basis for Solow’s (2012, 43) characterization of Friedman as less interested than others in income support, notwithstanding Friedman’s advocacy of the negative income tax. Solow contended that “if you looked at the magnitude of the sort of thing that he had in mind,” the income assistance that Friedman’s scheme would provide was very limited (Robert Solow, interview, December 2, 2013). Ebenstein (2007, 174) asserts that “Friedman largely abandoned discussion of a negative income tax since the early 1970s.”112 This is clearly not correct. The fact that the negative income tax was discussed in both the television and book versions of Free to Choose is sufficient to refute Ebenstein’s assertion.113 And, in the period from the early 1970s until the making of Free to Choose, Friedman gave many discussions of the negative income tax, including in his testimony to the Hawaii state senate’s Ways and Means Committee on March 8, 1972 (Honolulu Register, March 9, 1972) and in the mid-­1972 cassette commentary noted above. Friedman extolled the virtues of the negative income tax in interviews in Challenge and Playboy magazines.114 He did so too in Reason magazine (December 1974, 14) and People Weekly (April 5, 1976, 52), and in mid-­1970s Newsweek columns (January 27, 1975, and June 13, 1977).115 He also advanced the negative income tax in a 1975 speech in Kansas City (Kansas City Times, December 5, 1975) and in another talk in the mid-­1970s.116 Friedman included his advocacy of the negative income tax in a 1976 presentation to London’s Institute of Economic Affairs.117 His other endorsements of the proposal included those in an interview with the London Times (September 13, 1976), in appearances on the television talk shows The Jay Interview (ITN, July 17, 1976) and Dinah! (March 30, 1977), and in three episodes (1, 10, and 14) of his videotaped lecture series Milton Friedman Speaks in 1977 and 1978.118 Friedman went on to continue to talk and write about the negative income tax after 1980.119 The earned income tax credit, introduced in 1975, is sometimes portrayed as the US implementation of Friedman’s negative income tax proposal. But Friedman did not regard his proposal as having been enacted via the earned income tax credit. For example, in 1977, he characterized the negative income tax as a measure that had been rejected by Washington policy makers.120 Most likely, this interpretation stemmed from the fact that the earned income tax credit was not instituted as the sole income-­ support measure in the federal tax/transfer system. Therefore, it did not play the role that Friedman envisioned for the negative income tax.

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Social Security Among federal government activities, Friedman considered Social Security to be the “major welfare-­state program.”121 The classification of Social Security as a welfare program was in itself something that would not be accepted by proponents. They would also usually resist the label “old-­age pension,” which a press questioner used with Friedman in a 1961 exchange.122 Rather, advocates of Social Security typically viewed it as an insurance scheme. Friedman made some concession to this position in his writings, as when he titled a chapter of one of his Newsweek column collections “Social Security and Welfare” rather than simply “Welfare.”123 Nevertheless, Friedman’s contention was: “Though labeled ‘insurance,’ the system . . . is no such thing” (Newsweek, April 3, 1967).124 In particular, he emphasized that the cost of current benefits was primarily borne by current taxpayers, rather than deriving mainly from current recipients’ prior Social Security tax payments; and that “the relationship between taxes paid and benefits received is extremely loose” (Newsweek, June 14, 1971). Friedman did concede, however, that there was in fact a “tiny bit of a relationship.”125 In a Newsweek column in 1971 and a debate that year with Wilbur Cohen, who had served as Secretary of Health, Education, and Welfare during the Johnson administration, Friedman criticized an official booklet for giving the impression that the Social Security system’s trust fund, as opposed to tax collections, played the predominant role in financing benefit payments.126 The dependence of promised benefit payments on the taxes to be paid by the next generation led Friedman to label Social Security a “chain letter” (Newsweek, June 14, 1971; Instructional Dynamics Economics Cassette Tape 174, August 1975, part 2). For the most part, Friedman avoided using the more controversial label “Ponzi scheme” (which Paul Samuelson had used to describe Social Security in a Newsweek column of February 13, 1967—ironically in a piece that was intended to highlight the program’s virtues). Friedman did, however, eventually succumb and used the “Ponzi scheme” label in a New York Times op-­ed in 1999 (New York Times, January 11, 1999). In fact, the Ponzi parallel is not apposite, precisely because of one of the features of Social Security that Friedman (and Samuelson) emphasized: it was financed by future taxes and, therefore, the availability of a source of funds for benefits was not in doubt. The prospect of resistance by future taxpayers to providing the funds for benefits was a theme in Friedman’s critique of Social Security.127 But he also came to realize that there was a danger of overstating the speed at which the tax burden implied by Social Security would increase. “One has to be very careful, I’ve discovered in the past, in talking about Social Security, not to give misrepresentations,” Friedman remarked on Donahue in

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September 1975. On that occasion, as well as on a return appearance on the talk show in November 1976, Friedman told the members of the studio audience—many of whom had indicated that they did not expect to receive the Social Security benefits promised for their retirement years—that they would in fact likely receive those benefits.128 Friedman was very critical of the method of funding Social Security: “it is highly regressive,” he argued.129 In this connection, Friedman noted that the specific tax connected with Social Security stopped applying for incremental labor income beyond a certain level. With respect to the part of the tax ostensibly paid by the employer, Friedman stressed the likelihood that the tax burden would be passed on to employees.130 In addition, Friedman viewed payroll taxes as one of the worst forms of taxes, as imposts on payrolls directly discouraged firms from making additions to their hiring.131 In Friedman’s assessment, Social Security amounted to “taxing the young to help the old, and taxing the poor to help the middle classes.”132 “We’ve conned the poor working stiff into providing us, the middle class, with excess returns for our old age,” he maintained in 1976 (Detroit News, February 15, 1976). Friedman repeatedly expressed his puzzlement that Social Security had become a “sacred cow” in political discourse despite the fact that its underlying components included the capped Social Security tax and the lack of thorough means testing of benefits. Both components, he contended, seemed vulnerable to criticism on grounds of equity, yet when applied in unison they seemed to have become a winning combination. Although, as discussed in the previous chapter, Friedman did not think the issue had been decisive for the election result, he was also aware that Senator Barry Goldwater’s support during the 1964 presidential election campaign for a possible shift to a voluntary Social Security system had cost the Republican Party votes.133 Friedman indicated his support in Capitalism and Freedom for ending Social Security.134 In 1974 he reaffirmed: “I think we ought to stop creating new obligations and just honor our old ones” (Akron Beacon Journal, December 1, 1974).135 Along these lines, the book version of Free to Choose laid out a proposal for the phasing out of Social Security, under which undertakings made to retirees and present taxpayers would be kept, but the populace would be informed that, henceforth, no additional commitments of future payments would be made.136 Friedman responded harshly when other proponents of Social Security reform envisioned a less laissez-­faire solution than his own. A case in point came when Martin Feldstein edited an NBER conference volume titled Privatizing Social Security (Feldstein 1998a). The title notwithstanding, Feldstein parted company with Friedman’s vision of totally voluntary arrangements, instead favoring a mandatory requirement that employees make some provision, possibly via private-­sector-­operated schemes, for their

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retirement. Feldstein defined privatization of social security as a situation in which a menu of private-­sector-­provided retirement schemes was available, from which the employee had to choose one (Feldstein 1998b, 2). Late in his life, Friedman lashed out at what he portrayed as a paternalistic assumption on Feldstein’s part that a mandatory scheme was required (New York Times, January 11, 1999). Friedman did not, however, challenge the notion that some workers might not save enough for retirement—which was Feldstein’s point—and therefore Friedman did not really contest the existence of the externality that Feldstein had identified as justifying a mandatory scheme. Friedman was essentially using a framework like the one that underlay his permanent-­income consumption function: a model in which the bulk of the population is well approximated as highly informed, long-­horizon households.137 This may be contrasted with the framework of Paul Samuelson. For all the admiration he showed toward the permanent income hypothesis, Samuelson did not subscribe to the infinite-­horizon postulate that is typically associated with that hypothesis. He argued, instead, that economists should be “rejecting such a perpetual-­life model as extreme and unrealistic” (Samuelson 1971, 9).138 The contrast between Friedman and Samuelson on this issue became even more marked: in 1984, the same year that Samuelson declared Ricardian equivalence (an implication of the infinite-­horizon version of the permanent income hypothesis) laughable on its face (Samuelson 1984, 8), Friedman endorsed Ricardian equivalence as an approach to understanding the connection between fiscal deficits and the economy (Wall Street Journal, April 26, 1984). Samuelson’s celebrated alternative to the infinite-­horizon assumption— his overlapping-­generations model (Samuelson 1958)—has been used heavily in discussions of Social Security arrangements. It has been cited as providing a rationale for government-­mandated saving for retirement because the model highlights possible welfare losses from the unregulated operation of private-­sector intertemporal consumption decisions.139 Indeed, in one of his own pieces in favor of Social Security, Samuelson (1983c, 285) went so far as to say that “there is nothing optimal about laissez-­faire saving decisions.” In contrast, in an environment in which the infinite-­horizon assumption is widely applicable, the market failures cited as the basis for mandatory retirement plans do not apply to the bulk of the population. But, as noted, Friedman acknowledged that some individuals would not in fact make adequate provision for retirement. His answer in this case was a safety net: those who did not save enough for old age could, once in retirement, receive income support to reach some minimal living standard.140 Feldstein observed of Friedman’s alternative, “In retrospect, both in Capitalism and Freedom and in his later writings, he takes, in my judg-

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ment, a really extreme view which, from an intellectual point of view . . . is good. Not realistic, and not practical, but a way of getting people to think, ‘Well, you know, why do we want Social Security? Why don’t we have some means-­tested welfare program for people who screw up, but otherwise, let them do it on their own.’ And I never thought that was in the feasible realm; and I’m more of an engineer, trying to put down a doable plan” (Martin Feldstein, interview, November 21, 2013). Indeed, for all his criticisms of reform proposals like those advocated by Feldstein, Friedman recognized the popularity of a government-­required retirement scheme. In 1993, Friedman told a meeting of the House Republican Conference Task Force on the Economy that he realized that his proposals to abolish Social Security had no chance politically (CSPAN, May 7, 1993). In the televised version of Free to Choose in 1980, Friedman predicted that the younger generation would receive “a very raw deal indeed.”141 This prediction was arguably made obsolete by the reforms to Social Security, legislated in 1983, that were designed to forestall a financing crunch. But even after these measures to fortify the existing system had been instituted, Friedman still seemed to see sweeping Social Security reform as around the corner, brought about by growing taxpayer resistance. “I have no doubt that you are going to face a revolt of the young against the old on the subject of the burden of Social Security,” he contended in 1984, and he made a similar prediction in 1988.142 Clearly, this revolt did not occur in the three decades after Friedman made these statements. In 2013, Michael Boskin observed of Friedman’s predictions: “I think we haven’t had the real test yet, because until the last several years, we had a remarkably benign demography for twenty-­five years that didn’t require tax increases. But that’s starting to change, and his prediction may be confirmed in a decade or so” (Michael Boskin, interview, July 3, 2013). Although his reform proposals never gained traction, fragments of Friedman’s critique of Social Security have recurred in public debate. In 2007, as a presidential candidate, Barack Obama pointed to the cap on incomes subject to the Social Security tax as an inequity and suggested that this arrangement might be reconsidered.143 And in the question-­and-­ answer session of his July 13, 2011, testimony to the House Financial Services Committee, Federal Reserve chairman Ben Bernanke stated in regard to Social Security arrangements, “they are not true insurance programs. . . . What is happening mostly is that younger generations are paying with their taxes for older generations’ benefits.”144

T he Pr eside n tial A ddress The Washington, DC, and national release date of the film The Graduate was December 22, 1967. A week later, at 8 p.m. on December 29, Milton

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Friedman delivered his presidential address to the American Economic Association meetings in Washington, DC.145 One film reference book has said of The Graduate that because it “opened a few new doors,” “few people noticed that only the first half was any good.”146 Quite a few retrospectives have reached the same conclusion about Friedman’s presidential address. A case in point was Eichenbaum (1997, 236), who characterized the economics profession in the quarter century after Friedman’s address as having “collectively struggled with the task of separating the wheat from the chaff ” in the address. Eichenbaum implied that the “wheat” component was Friedman’s position that economic behavior was characterized by a combination of short-­run monetary nonneutrality with a long-­run-­ vertical Phillips curve, and that the “chaff ” consisted of Friedman’s recommendation of a rule of constant monetary growth. A parallel reaction to Friedman’s address came from Franco Modigliani. Modigliani was highly receptive to the natural-­rate hypothesis. He acknowledged the hypothesis as an important contribution and something that should be absorbed into mainstream thinking (see Modigliani 1977). Modigliani was thus, of the “Big Four” US-­based Keynesian economists (i.e., himself, Solow, Samuelson, and Tobin), by far the most congenial to the theoretical part of Friedman’s presidential address (which saw print in March 1968).147 But Modigliani’s assessment of Friedman’s presidential address as a whole was that “Friedman went on to say other things in that paper that were not right.” Modigliani thus largely echoed Eichenbaum’s evaluation.148 McCallum (1989b, 338–40), Gavin (1996), and Ireland (2011) all gave retrospectives on Friedman’s presidential address. Largely in keeping with the assessments of Eichenbaum and Modigliani, these analyses affirmed the validity of the address’s emphasis on the central bank’s inability to peg the unemployment rate in the long run, but they treated the address’s argument for constant monetary growth as having been rendered obsolete by later monetary behavior and by advances in economic research. All three of the analyses stressed money-­demand instability as having made targeting of monetary growth an undesirable policy, and they offered other policy rules in its place: nominal income targeting in the case of McCallum, inflation targeting in the case of Gavin and Ireland. Aside from his introduction—in which he reflected on the extreme Keynes­ian literature of the early postwar period—Friedman’s presidential address actually consisted of three major sections, “I. What Monetary Policy Cannot Do,” “II. What Monetary Policy Can Do,” and “III. How Should Monetary Policy Be Conducted?” As has been seen, however, it has become standard to separate the analysis of the presidential address into two components: its critique of the permanent-­trade-­off view of the Phillips curve (which concerned section I and part of section II) and its advocacy

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of constant monetary growth (which appeared in part of the address’s section II and dominated its section III). The discussion here will follow that precedent. First, then, let us consider the paper’s analysis of the Phillips curve. Friedman’s Analysis of the Phillips Curve Blanchard (1997, 347) emphasized that Friedman and Edmund Phelps advanced their critique at a time when “the original Phillips curve still gave a good description of the data.” Indeed, the 1960s appear in retrospect to have been a golden age for the downward-­sloping US Phillips curve: Dornbusch and Fischer (1987, 468) and Blanchard (1997, 343) displayed the elegant curve that can be created by plotting the annual US (price) inflation rate against observations on the unemployment rate for the years from 1961 to 1969.149 In his presidential address, Friedman ventured to refer (albeit without providing citations) to problems in fitting Phillips curves to experiences of highly variable inflation.150 Furthermore, Rees and Hamilton (1967) had argued that there were instabilities in the empirical US (wage) Phillips curve. But neither of these statements was inconsistent with the notion that the unaugmented US Phillips curve had been behaving well in the lead-­up to Friedman’s address; in fact, it had indeed been well behaved, as just noted.151 Rees and Hamilton’s findings would not, today, be considered valid evidence against the standard, downward-­sloping Phillips-­ curve relationship. Their periods of estimation included the early postwar and Korean War years—periods that it became standard to exclude from assessments of Phillips-­curve relationships, not least because price controls rendered suspect the recorded data on inflation.152 What is more, Rees and Hamilton’s sample period ended in 1957. The years immediately following their sample period were associated with such a clear downward-­sloping Phillips-­curve relationship that the 1969 Economic Report of the President presented (Council of Economic Advisers 1969, 95) an empirical inflation/unemployment diagram for 1954 to 1968 (see also McCallum 1989b, 180–81). It is now widely agreed that the breakdown of the unemployment/inflation inverse relationship in the United States really began in 1970 (Blinder 1979, 19; King and Watson 1994b, 243; Blanchard 1997, 344). Wide agreement about the timing of the breakdown had been established by 1974, as is shown by the fact that, in congressional testimony in that year, Arthur Burns dated the breakdown of the downward-­ sloping curve to 1970–71.153 It was therefore natural, in a paper written in 1970, for Lucas (1972a, 50) to state that an inverse unemployment/inflation relationship was an established feature of the US time-­series data. At that

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stage, the key question for researchers and practitioners appeared to be the explanation for the inverse relationship, not its existence. Against this background, when Edmund Phelps (1967, 256) stated that “my criticism is founded also upon the postulated ‘instability’ of the Phillips Curve,” the postulate in question was a theoretical proposition rather than a statement of the empirical state of play. Neither he nor Friedman was really trying to solve a puzzle thrown up by empirical work; as Phelps (1995, 17) would observe, as of the late 1960s “the Keynes-­Phillips orthodoxy was sailing on smooth waters.” Phelps recalled of the mid-­1960s: I do remember I was watching the monthly data on the American inflation rate, watching it and hoping that it would be detaching from any stable Phillips curve that might have been estimated. And it wasn’t doing it over the four or five months that I was working like mad in England. (Edmund Phelps, interview, May 16, 2013)

For both Phelps and Friedman, therefore, the description Friedman gave in his Nobel address of the development of the natural-­rate hypothesis seems to apply: the late 1960s objections to existing Phillips-­curve analysis were “primarily on theoretical rather than empirical grounds.”154 Phelps and Friedman were, as Robert Lucas would recall, going “way out on a limb” with a prediction, based on theory, that an empirically successful relationship was poised to break down.155 The vindication for Phelps and Friedman was therefore all the sweeter. Phelps in the interview for this book relished “reviving all these exciting memories” of the development, scrutiny, and professional acceptance of the natural-­rate hypothesis (Edmund Phelps, interview, May 16, 2013). As for Friedman, his restrained description of subsequent events was that his address’s predictions about the Phillips curve were “not contradicted.”156 Blanchard (1997, 349) recounted the same situation in more dramatic terms: “Friedman could not have been more right. A few years later [than 1967], the original Phillips curve started to disappear in exactly the way that Friedman had predicted.” Although, as Phelps put it, the position that “the quantities of employment and production are invariant to the rate of inflation when that inflation is expected” had its “revival and formalization . . . begun by Milton Friedman and by the present author,” both Phelps and Friedman acknowledged antecedents.157 On a number of occasions during the 1970s, Friedman would emphasize David Hume as a precursor.158 Phelps (1972b, 69) referred to “the natural rate hypothesis advanced by Lerner, Fellner, Phelps and Friedman.” In the same vein, Phelps named Lerner and Fellner as antecedents in a couple of his other discussions of the matter: Phelps

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(1968b, 682) and Phelps (1995, 17).159 In addition, Lucas and Sargent (1981, xxv) cited Bailey (1962) as an early statement of the natural-­rate hypothesis, although in the present author’s view this attribution is not justified. In particular, as Friedman himself acknowledged, Bailey (1962) discussed the case in which the long-­run equilibrium output level was purely a function of real conditions.160 But Bailey did not provide a justification for how the economy would converge to that long-­run situation—what Friedman called the “theoretical link between the short-­run model and the long-­run model”—and Bailey’s post-­1962 work seemed to endorse the notion that there was no such automatic link.161 For in these later writings he gave credence to the nonvertical-­Phillips-­curve perspective that different inflation rates could, on a sustained basis, lead the economy to different real equilibria. That is, he suggested that, while it was possible that output could converge to its natural level, such convergence would occur with only one choice of the inflation rate, with other inflation rates generating a permanent divergence between output and its natural level. There is also a case for reducing the list of original exponents of the natural-­rate hypothesis in Phelps’s list to just Friedman and Phelps.162 The two economists, Lerner and Fellner, whom Phelps (1972a) named alongside himself and Friedman as authors of the natural-­rate hypothesis, eschewed the hypothesis in their later work. As we have seen, and as Phelps (1968b, 682) acknowledged, by the 1960s Lerner was not a proponent of a vertical long-­run Phillips curve.163 However much he had pointed to a long-­run vertical Phillips curve in Lerner (1949), Lerner had since become a strong proponent of a mixed demand-­pull/cost-­push view of inflation that was encapsulated in a permanently nonvertical Phillips curve, and he had used this framework in debating Friedman.164 Similarly, William Fellner broke away from his earlier work that had supported a vertical long-­run Phillips curve. In Fellner (1976, 55), he observed: “that we are not building into this analysis the concept of a ‘natural rate of unemployment.’”165 And well ahead of making this observation, Fellner had indicated that his perspective on inflation was different from that would be taken by advocates of the expectational Phillips curve. In a 1961 official report on inflation, Fellner had contended that, in the United States and other major countries, wage-­push forces played a very important part in accounting for inflation behavior (Fellner et al. 1961, 47). For his part, Friedman had left a paper trail of statements in the 1950s and 1960s criticizing the notion of a long-­run inverse relationship between inflation and unemployment (or between inflation and output).166 Thus, he remarked in Taylor (2001, 124) regarding his 1967 presidential address, “there was nothing new in that compared to what I had earlier published.” In the same retrospective, Friedman specifically pointed to his discussion

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at the April 1966 University of Chicago conference on guidelines. As mentioned in the previous chapter, Friedman had given an exposition of the hypothesis in his discussion of Robert Solow’s paper at that conference. That discussion would be cited in much of the late-­1960s literature on the natural-­rate hypothesis, including Phelps (1968b) and Solow (1969), and Friedman would make reference to it in his Nobel lecture. On the whole, however, it was the case that after the 1960s citations in the monetary-­ economics literature of Friedman’s 1966 exposition were rare, one exception being that in McCallum (1989b, 181). A couple of other discussions later in 1966, in which Friedman sketched or alluded to his critique of the Phillips curve, were in popular commentary: in an early Newsweek column titled “Inflationary Recession” (October 17, 1966) and in remarks on public television (The Great Society: The Sizzling Economy, NET, June 27, 1966). In the latter, Friedman stated, “Inflation and unemployment are not necessarily opposites,” and predicted that, in the period ahead, the US economy would have trouble with both phenomena. A less prominent early discussion was Friedman’s talk “Must We Choose between Inflation and Unemployment?,” published in the Stanford Graduate School of Business Bulletin in 1967.167 In contrast to Friedman’s 1966 printed discussion, the 1967 talk’s obscurity was deserved. The published version, apparently based on a transcript, presented a decidedly muddled account of the issues involved. On this occasion, Friedman’s off-­the-­cuff speaking style had not transferred well to print. No such danger was present for the December 1967 presidential address. In contrast to his Stanford University talk, Friedman circulated the text of his address widely before publication in 1968, and his acknowledgments thanked many readers (or listeners to the address) for comments, including Anna Schwartz, Phillip Cagan, David Meiselman, Gary Becker, Arthur Burns, and Clark Warburton. In addition, in late 1967 Friedman had given a copy of the draft to Harry Johnson, encouraging the latter to circulate the paper for comments. Johnson in turn showed the paper to his colleague at the London School of Economics, Laurence Harris, who pointed out errors in the draft and received thanks from Friedman in the published version (Laurence Harris, interview, October 30, 2015). Challenging the Consensus The Friedman-­Phelps ideas represented a clash with the economic thinking prevalent in the 1960s. The text of Samuelson and Solow (1960), in conjunction with the subsequent statements of Samuelson and Solow in the 1960s and 1970s, provides ample support for Laidler’s (1982, 296) conten-

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tion that “Paul Samuelson and Robert Solow (1960) did present the Phillips curve as a permanent tradeoff and as a stable basis for policy.”168 In this spirit, in a 1962 television appearance with Friedman, Paul Samuelson, while noting that “none of us are in favor of price increases as such,” argued that these might be necessary in order to obtain an acceptable performance in terms of real variables, as “in country after country” such a real performance had gone hand in hand with “some increase in what’s called the consumers’ price index.”169 By the late 1960s, acceptance of a permanent inflation/unemployment trade-­off was pervasive among both academic economists and the financial community.170 Opinion in the academic world will be considered in detail presently. In the financial world, a prominent endorsement of the empirical relevance of the permanent-­trade-­off view appeared shortly before Friedman gave his presidential address, in the form of remarks by Paul Volcker. Volcker, who at the time was vice president of Chase Manhattan Bank—but who was destined to spend most of the following two decades in policy making—stated: “the past two years . . . also illustrate that we have not yet learned how to reconcile full employment with price stability. And that is a difficulty that arises more in labor markets than in money markets” (Volcker 1967, 31). As far as academic opinion was concerned, in the summer of 1965 G. L. Bach summarized the existing state as one in which a typical economist believed “that the Phillips curve is real (though vague), and he is faced with a trade-­off at somewhere around present levels of employment and prices; and he doesn’t want to see prices faster than they are now without an appreciable offset in [the form of ] improved employment” (Bach 1967, 351). In particular, key Keynesians of this period endorsed permanent-­Phillips-­ curve ideas both in their writings and in conversations with colleagues.171 When, in April 1967, Samuelson was confronted by a questioner with a sketch of Friedman’s position that a downward-­sloping Phillips curve must be a transitory phenomenon, Samuelson maintained that it was coherent for a model to include an equation that permanently connected the rates of unemployment and inflation.172 It should be stressed that policy views of the key Keynesians did not correspond to an endorsement of high inflation—indeed, it is possible that they amounted to a prescription of inflation rates not very different from 2 percent.173 But they did apparently reflect a view that there was a long-­ run inflation/unemployment trade-­off, or that there would be if wage/price guidelines were not brought to bear on inflation. True, a rejection of conventional money illusion as an important factor behind private-­sector decisions was already well established among economists in the 1960s. But, as stressed by Farmer (2000) and McCallum (2004), no-­money-­illusion and monetary-­neutrality results do not imply

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that there is no long-­run relationship between inflation and real output. The absence of such a long-­run relationship requires superneutrality; and standard economic theory does admit violations of superneutrality. The natural-­rate hypothesis amounted to ruling out a particular form of superneutrality. In addition, as in McCallum (1987b, 127; 1988b, 461), it is possible to regard the natural-­rate hypothesis as a generalization to a dynamic context of the condition that money illusion is absent.174 And in his discussions of the Phillips curve, Tobin (1966a, 1967) accepted that money illusion did essentially underlie the downward-­sloping Phillips curve, but he suggested that this dynamic form of money illusion would indeed prevail in practice, thereby delivering a long-­run relationship between inflation and unemployment.175 On the monetarist side of the debate, Dewald (1966), in discussing the Fisher-­effect controversy, had covered material that would be relevant to the natural-­rate hypothesis: his paper included a section titled “Can Monetary Policy Fool Some of the People All of the Time?” (521) and stated (522), “To the extent that decision makers are free of money illusion, persistent inflationary or deflationary policy actions would only have a short-­run effect on output and relative prices.” But it was the Friedman-­Phelps work that made this principle compelling for the wage/price segment of a macroeconomic model, by laying out a process in which adjustment would continue until inflation expectations coincided with actual inflation—so that the long-­run Phillips curve was vertical.176 Nor should the existence of pre-­1966 Phillips-­curve studies that contemplated a role for inflation expectations justify the inference that the natural-­rate hypothesis was not a major breakthrough. Some observers have suggested that such an inference is appropriate: For example, Brown and Darby (1985, 248) observed: “From early days in the formulation of econometric Phillips curves, an expected inflation term was added on the right-­hand side.”177 Along similar lines, Modigliani would note that Lipsey (1960) had already added an expectations term to the Phillips curve and hinted that, in that light, the natural-­rate hypothesis was not a great innovation—merely a stipulation that the expectations term have a unitary coefficient.178 And Desai (1984, 261), Bator (1987, 33), Fischer (1987, 239; 1994, 266–67), Tobin (1995, 41), and Sargent (2002, 89, 92) all pointed out that Samuelson and Solow (1960, 193) admitted the possibility that the Phillips curve could shift as expectations responded to new inflation rates. In addition, R. L. Thomas (1974, 212) and Leeson (1997b) stressed that shifts in expected inflation led to variations in nominal wage inflation in A. W. Phillips’s (1958) framework. Friedman himself acknowledged that empirical (wage) Phillips curves had typically included an inflation term on the right-­hand side of the estimated equation.179 None of the preceding points, however, overturn the fact that the pre-­

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Friedman/Phelps Phillips-­curve literature worked in a permanent-­trade-­ off environment. As McCallum (1989b, 182) observed, “the most important feature of the Friedman-­Phelps relation . . . is that it does not imply the existence of a steady-­state tradeoff between inflation and unemployment.” That feature requires a unitary coefficient on inflation expectations in the Phillips relationship—a parameter restriction that Modigliani (1977, 5) called a “very basic implication of Friedman’s model”—and not merely the presence of inflation expectations in the Phillips-­curve equation.180 Viewed in this light, the discussion in Samuelson and Solow (1960) to the effect that expectations can shift the Phillips curve does not adequately capture the notion embodied in the natural-­rate hypothesis. Samuelson and Solow considered a scenario in which the curve could shift, but in which the curve remained nonvertical after the shift. And even the acknowledgment of shifts was not a major element of their paper’s analysis: it was merely part of a discussion of what was “conceivable” (Samuelson and Solow 1960, 193). In this connection, it is noteworthy that Robert Solow, although by no means a subscriber to the Friedman-­Phelps proposal, offered this retrospective on the Samuelson-­Solow paper: “all of the qualifications were there, but they were there in a purely intellectual way. And I suppose if we were writing it again, we would try to make them more real, suggest that they might have more of a role to play in real life than the text of that [Samuelson-­Solow] paper would suggest. . . . I do believe that the expectations story has to be taken seriously, and we didn’t give it enough practical weight in that paper” (Robert Solow, interview, December 2, 2013). Because they had not encountered or absorbed the natural-­rate hypothesis, those users of the Phillips curve in the 1960s who did allow for an inflation-­expectations term—which was typically proxied, at that stage, by lagged inflation—not only did not set its coefficient to unity; they also had a viewpoint that made them disinclined to do so. The unitary restriction consisted of a measure-­zero position on the edge of the parameter space. It may therefore have seemed an implausible restriction on a priori grounds. Furthermore, free estimation of the Phillips curve seemed to suggest that the actual coefficient was less than unity (Solow 1968, 1969).181 In time, as discussed in the next chapter, these tests would be shown to be flawed (Sargent 1971; Lucas 1972a), and the validity of the natural-­rate restriction would be affirmed. Friedman and Phelps Let us now move away from the position of the critics of the natural-­rate hypothesis to the views of its proponents.

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How did Friedman’s and Phelps’s theories differ from one another? Because Friedman’s expositions were verbal and outlined essentially the minimum conditions necessary to obtain the expectations-­augmented Phillips curve with long-­run vertical properties, whereas Phelps (especially in Phelps 1968b) provided a formal model that included details of the labor market, an extended discussion of the differences between their two theories would wind up being a discussion of the Phelps model rather than of Friedman’s outline. Rather than pursue that route, it is preferable to go to the heart of Friedman’s story and then consider the main differences from Phelps’s. Friedman argued that the key shortcoming of the traditional Phillips-­ curve approach was that it postulated that the private sector’s decisions concerning real quantities were, on an ongoing basis, a function of a nominal variable. In particular, wage Phillips curves pertained to nominal wage growth, Δwt , and related that variable to measures of real activity.182 Standard Phillips-­curve analysis neglected the notion that private-­sector agents cared fundamentally about real variables, this failure stemming from the fact that the analysis neglected to incorporate into the Δwt equation an inflation term, with a coefficient of unity. Inclusion of such a term would convert the equation essentially into one for real wage adjustment. Therefore, as Friedman stressed, the basic modification underlying the natural-­rate hypothesis was to change the bargaining from one for nominal wages to one for real wages.183 It was not the case, however, that the solution lay simply in moving to a specification in which current price inflation (πt ) appeared with a unitary coefficient in the Δwt equation. That modification would not resolve matters satisfactorily. On the contrary, it would lead to an expression for real wage growth (Δwt − πt ) that had nothing to say about how Δwt and πt individually behaved. Therefore, such a modified equation could not be pressed into service for the purpose of ascertaining the dynamics of inflation or capturing real/nominal interactions.184 Thus, to describe the natural-­rate hypothesis as altering the Phillips curve from a nominal-­wage equation to a real-­wage equation, while perhaps useful as a shorthand characterization, is not quite accurate in capturing the change in specification implied by that hypothesis.185 Instead of simply replacing nominal with real values, Friedman proposed a different change in specification—a modification that preserved the equation’s status as a description of the processes determining nominal wage growth and inflation, yet which still delivered a long-­run interpretation of the equation as an expression for the real wage. This proposal was to treat the Phillips curve as accounting for the evolution of perceived real wage growth: for example, Δwt − E t −1 πt .186 Underlying this modified

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Phillips curve was the idea that contracts for nominal wages were negotiated conditional on the prior period’s expectation of the current price level.187 The resulting Phillips curve was of the form Δw t = E t −1 πt + α u (ut − ut*), α u < 0.188 If π t is then substituted for Δwt via a constant-­markup assumption, there emerges the expectation-­augmented Phillips curve, π t = E t −1 π t + α u (ut − ut*).189 As Friedman put it in his presidential address: “Restate Phillips’ analysis in terms of the rate of change of real wages—and even more precisely, anticipated real wages—and it all falls into place.”190 The modification described above provided a simple way to put a prior-­ period expectation of inflation into the Phillips curve. The discrepancy between perceived and actual inflation was achieved in an expedient way by the assumption of imperfect information: specifically, a lack of access on the part of laborers to current-­period information, in which case nominal wages are (in effect) determined a period in advance. Firms, on the other hand, were hypothesized to set prices on the basis of current information. Friedman verbally offered a microfoundation for this informational asymmetry: a firm could plausibly be treated as having more information than its employees because the real wage concept that mattered for the firm was the nominal wage it paid (a variable known a period in advance) divided by its own good’s price (information on which required only knowledge about the firm’s own product, not aggregate information).191 In contrast, the real wage that mattered for the work force was the nominal wage paid by the firm divided by the aggregate price level, and information about the latter variable could plausibly be regarded as known only with a lag. This argument concerning firm/worker information asymmetries was recently revived by Cole and Ohanian (2013). This assumption made regarding information available to agents is a contrast between Phelps and Friedman’s framework. In Robert Gordon’s blunt assessment: “The difference between Friedman and Phelps is that, for Friedman, the workers are dumb and the producers are smart, whereas, for Phelps, everybody is dumb” (Robert Gordon, interview, March 21, 2013). Or as Phelps recounted it, in his analysis, in contrast to Friedman’s, “I didn’t have an asymmetric-­information basis for my argument. . . . Neither the employer nor the employees know completely what’s going on” (Edmund Phelps, interview, May 16, 2013). Phelps regarded the way in which Friedman motivated the expectational Phillips curve as constituting a “quick and dirty” approach (see Horn 2009, 254)—one that made Friedman, in Phelps’s (1971, 34) assessment, not a “particularly persuasive exponent of the natural rate hypothesis.” Friedman’s argument was consistent with, but did not lay stress on, more protracted nominal rigidities beyond the one-­period-­ahead determination of nominal wages. Long-­lasting price stickiness was actually a per-

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vasive element of Friedman’s worldview, and the presidential address affirmed: “Under any conceivable institutional arrangements, and certainly those that now prevail in the United States, there is only a limited amount of flexibility in prices and wages.”192 The one-­period information asymmetry in the framework of the presidential address can be viewed, as in chapter 7 above, as a layer of nominal rigidity in Friedman’s underlying model, one that is on top of other layers arising from long-­term contracts that imply limited (short-­run) price flexibility. But because the one-­period information asymmetry is itself sufficient to generate an expectational Phillips curve—albeit being a “quick and dirty” method of generating it, to quote Phelps—the early rational-­expectations contributions to monetary economics such as Lucas (1972b, 1973) were able to take information asymmetry of this kind and derive expectational Phillips curves in models that—in contrast to what Friedman regarded as plausible—featured perfectly flexible prices.193 Another important distinction between Friedman’s and Phelps’s presentations was that Phelps was more formal and more rigorous. Phelps’s early work was written just ahead of the launch of microfounded macroeconomic models (to which Phelps would contribute seminally as an editor and contributor in Phelps 1970a, 1970b) and predated the rational-­ expectations revolution, but it was mathematically spelled out in a way Friedman’s 1960s natural-­rate work was not. “What distinguishes me, I’d like to think, is that I worked out a model of some richness that actually has some empirical plausibility,” Phelps observed (Edmund Phelps, interview, May 16, 2013). Friedman would acknowledge that Phelps focused much more on the labor market than he did.194 One of the consequences of Phelps’s concentration on the labor market was that his framework had the unemployment rate as an explicit variable in the analysis of inflation. In contrast, in Friedman’s analysis, which was essentially a representative-­worker setup, the possibility of unemployment per se was precluded. Instead, fluctuations in labor input wholly took the form of variations in hours. For an economist of Friedman’s orientation, ever concerned with condensing the scale of models to a few key equations, explicit attention to the intensive/extensive labor margin distinction was not a priority. Friedman routinely took it for granted that one could move between output and unemployment in Phillips-­curve analysis, as well as between employment and output, and that representative-­agent analysis was acceptable.195 In keeping with these positions, Friedman usually treated labor input fluctuations due to employment variations as satisfactorily represented in a model by variations in hours. It followed that, although Friedman’s presidential address included a definition of the concept of the natural rate of unemployment, the Phillips-­

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curve analysis in his subsequent discussion did not, strictly speaking, make use of the concept; whenever he referred to unemployment deviating from the natural rate of unemployment in his theoretical discussion, Friedman was—in essence—using this gap as a metaphor for the labor-­hours gap that actually appeared in his model. Phelps stressed this distinction in his discussions of the differences between his framework and Friedman’s presidential address.196 The issue came up in the interview with Phelps for this book. When it was noted that Friedman’s paper used the term “natural rate of unemployment,” yet Phelps’s (1967, 1968b) approach was the one that had allowed for unemployment, Phelps replied, “Yeah, I thought that was a delicious irony. A painful irony (laughter), never mind delicious” (Edmund Phelps, interview, May 16, 2013). It is worth stressing that, although unemployment was absent from the verbal model of real/nominal interaction that he sketched in his address, Friedman’s address did introduce the natural rate of unemployment. In so doing, he provided terminology that became standard, as well as a definition of the concept that subsequent rigorous models of unemployment (such as Lucas and Prescott 1974) have confirmed as valid.197 With justice, Friedman could take satisfaction that the concept was one of his most influential contributions.198 The point made above is rather that, after Friedman’s paper introduced the natural-­rate-­of-­unemployment concept and provided a self-­contained verbal definition that others formalized, the verbal model of inflation dynamics that Friedman laid out in his address did not really utilize the concept.199 The fact that Friedman and Phelps worked out versions of the natural-­ rate hypothesis that had so many differences in detail is a reflection of the fact that they worked independently. Phelps confirmed (see Horn 2009, 254) that he had no interactions with Friedman at all on the issue before 1968. The two met around the 1964–65 academic year in California, and Phelps recalled: “That was I think the first time I met him. I was certainly awe-­struck by his brilliance and his expertise in areas I wouldn’t have had any reason to think he was particularly expert. . . . I think we were really talking about the theory of government, nothing about monetary policy whatsoever” (Edmund Phelps, interview, May 16, 2013). They also met on a few occasions after 1968. But, again, they did not discuss the natural-­ rate hypothesis. “We never had a chat about it. We came close a couple of times” (Edmund Phelps, interview, May 16, 2013). The Reaffirmation of the Constant-­Monetary-­Growth Rule Let us now consider the second half of Friedman’s presidential address, in which he reaffirmed his support for a policy rule of constant monetary

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growth. Many economists who incorporated the natural-­rate hypothesis into their worldview would largely endorse the first half of Friedman’s address while rejecting the second part. And, as we have seen, even economists well disposed toward policy rules and reliance on monetary aggregates in monetary analysis, such as McCallum (1989b) and Ireland (2011), have rejected the position of the second half of Friedman’s address that constant monetary growth is desirable. Is it the case that the second half is “chaff,” as Eichenbaum (1997, 236) implied, containing material that is less valuable than, and whose arguments do not follow logically from, Friedman’s outline of the natural-­rate hypothesis? It is true that some of the second half of the presidential address is detachable from the Phillips-­curve portion of the address. For one thing, monetarist relationships—in the sense of the connections between monetary growth and inflation (discussed in the address), and monetary growth and nominal income growth—do not depend on a long-­run vertical Phillips curve (see, for example, E. Nelson 2002a).200 Friedman himself did not specifically include the natural-­rate hypothesis in a catalogue of monetarist propositions that he gave in 1970.201 And later (in The Times, March 3, 1980), Friedman acknowledged that monetarism was separate from the natural-­ rate hypothesis.202 Once the latter is brought into the analysis, however, it sits well with other monetarist propositions, and the natural-­rate hypothesis has therefore sometimes been deemed a component of monetarism—as in Laidler (1993a, 1072) and McCallum (2008), for example.203 But nonmonetarists can embrace the natural-­rate hypothesis—a point stressed early on by Harry Johnson (1976b, 15) when he observed that the long-­run-­vertical Phillips-­curve framework “was pointed out independently by Milton Friedman (some people’s arch-­fiend of monetarism) and E. S. Phelps (no ‘monetarist’ even in his worst enemies’ imagination).”204 Indeed, Phelps’s (1967) outline of the natural-­rate hypothesis put monetary policy in the background and made fiscal policy the source of variations in aggregate demand, although the title of his book-­length treatment of the issue (Inflation Policy and Unemployment Theory: The Cost-­Benefit Approach to Monetary Planning: see Phelps 1972a) indicated an acknowledgment of the monetary policy issues involved. The key point, however, is that Phillips-­curve analysis is primarily concerned not with how variations in nominal spending originate but with how a given change in nominal spending splits between inflation and real output growth, as well as with how output relates to potential output. Monetarist propositions, in contrast, are concerned primarily with somewhat separate issues: relationships between money and nominal spending or between money and prices, along with the corresponding relationships between time derivatives of these series. One can discuss the natural-­rate hypothesis without referring

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to the demand function for money or the IS equation; the same is not true of a discussion of monetarism. Consistent with this demarcation, Friedman’s advocacy of a constant-­ monetary-­growth rule predated his elucidation of the natural-­rate hypothesis. The natural-­rate ideas reinforced his case for the rule. The uncertainty associated with estimating a variable’s natural rate could be added to economists’ lack of knowledge about lags and other aspects of model uncertainty that had hitherto underpinned Friedman’s support for a constant-­ monetary-­growth rule. But the natural-­rate hypothesis did not constitute a crucial addition to the case for that rule.205 Nor did the acceptance of the natural-­rate hypothesis by the profession lead to widespread support for the rule. On the contrary, many economists accepting natural-­rate ideas disagreed with Friedman’s recommendation of fixed monetary growth. The contrast in the degree of the profession’s acceptance of the two ideas was magnified once the empirical reliability of money-­demand relationships was called into renewed question in the 1980s. In sum, consideration of the merits of the constant-­monetary-­growth rule involves issues that overlap only very partially with the debate over the validity of the natural-­ rate hypothesis. Even if the purely monetarist elements of the presidential address are removed, however, it would be wrong to suggest, as Krugman (2007, 28) does, that the address does not count as part of what “Friedman said about . . . monetary policy.” Friedman certainly considered the entirety of the address to be about monetary policy. His choices of title for the paper as a whole and for its individual sections, as well as his description in 1968 of the paper as one that “discussed the general problem of monetary policy,” attested to this fact.206 Both halves of the address have contributions to offer to the making of monetary policy—contributions that transcend monetarism, narrowly defined, and which have relevance for analysts who would not place emphasis on monetary aggregates. Let us therefore now consider the paper’s contribution to the monetary policy literature. The first practical contribution that the address made to the formation of monetary policy was through the improvements it provided to monetary theory. In discussing this matter, a terminological issue needs to be confronted, because whether the term “monetary theory” covers matters beyond money demand and money supply is a question whose answer depends on the context. Friedman himself found it useful to refer to “monetary economics, broadly interpreted,” so that monetary analysis included considerations related to fiscal policy and the consumption function (Instructional Dynamics Economics Cassette Tape 6, December 1968).207 And even with that broad definition of monetary theory, the issue of whether price setting and the Phillips curve fall into monetary theory is not

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a matter on which one can be categorical. Friedman went to the heart of the matter in the 1976 edition of Price Theory when he stated that Phillips-­curve analysis “rests uneasily between price theory and monetary theory.”208 An important basis for viewing the natural-­rate hypothesis as part of monetary theory is that the hypothesis refines the specification of the price-­ setting equation used in models for monetary policy analysis. Although a number of discussions in the research literature would take Friedman’s critique as implying that a relationship between inflation and a real variable (unemployment—more precisely, the unemployment gap—or the output gap) could not be written down, that is not the case. Rather, as already indicated, the Friedman argument amounted to a proposed modification of the specification of the Phillips curve, consisting of (i) a more specific statement of the concept of full-­employment unemployment rate that should enter as the reference point in the unemployment-­gap term in the relationship; and (ii) the addition of an expected-­inflation term with a coefficient of unity. Of these two changes, the first is less consequential: Friedman’s natural-­ rate concept was essentially a restatement (albeit in terms appropriate for general equilibrium analysis) of the full-­employment concept already used in the Phillips-­curve literature. The second modification therefore constituted the more fundamental change to the existing practice of policy analysis. Both Friedman’s presidential address and Friedman and Schwartz’s contribution to the NBER Annual Report of 1967 had referred to this restriction as the innovation of the hypothesis.209 Through this innovation, the natural-­rate hypothesis contributed to monetary analysis—not by casting aside the Phillips curve but by improving the specification of the Phillips-­ curve equation. In the specification of a model for the purpose of monetary policy analysis, some equation establishing real/nominal interaction is essential. As Friedman put it in his presidential address, the Phillips curve was an important contribution, and he aimed to overcome a defect in that contribution.210 Phelps provided a related perspective on his own work: “I wouldn’t have said, ‘What I am doing is destroying the Phillips curve.’ What I would have said is, ‘What I’m doing is trying to restore a little common sense to the discussion of inflation control and monetary policy and making expectations central to the discussion’” (Edmund Phelps, interview, May 16, 2013). Subject to Friedman’s caveat that the 1967 address restated ideas that he had already voiced, that address can be regarded as the occasion on which he completed his articulation of his model, having already laid out the aggregate-­demand side. David Laidler offered a similar assessment: “my reading of that [Friedman’s 1968 article] was that he basically closed the system” (David Laidler, interview, June 19, 2013).

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Another vital respect in which the natural-­rate hypothesis contributes to monetary theory lies in its value as a rebuttal to nonmonetary theories of inflation. As has been stressed in previous chapters, Friedman’s views on inflation pitted him against multiple Keynesian theories of inflation. His most important battles were on two fronts. In the first of these, his opponents were the believers in a permanently downward-­sloping Phillips curve (for whom the addition of a cost-­push disturbance term then turned the downward slope into a trade-­off problem).211 His second set of opponents believed in a pure cost-­push (especially wage-­push) view of inflation. Advocates of pure cost-­push analysis of inflation actually would gain strength after the breakdown of the simple Phillips curve. That breakdown seemed to be consistent with their view that, over a wide range, inflation was insensitive to the output gap, rather than having the continuous connection to the gap posited by the simple Phillips curve.212 But the augmented Phillips curve with long-­run verticality provided a rebuttal to the advocates of cost-­push theories—because it provided a framework that rationalized seemingly arbitrary output-­gap/inflation combinations, yet one that, conditional on expected inflation, preserved a continuous relationship between real activity and inflation and affirmed the proposition that inflation was an endogenous variable. The natural-­rate hypothesis therefore put forward a decisive case against pure cost-­push views of inflation, and (provided monetary policy could affect aggregate demand) it reclaimed inflation as a monetary phenomenon. Other than his contributions to the 1966 conference on wage/price guidelines, most of Friedman’s replies to the cost-­push theorists were scattered across short commentaries and speeches. But the natural-­rate hypothesis was embedded in these rebuttals. Two other early discussions of the natural-­rate hypothesis did, however, use it more heavily as part of a comprehensive reply to cost-­ push theorists: Cagan (1968) and, magisterially, Phelps (1968b). Just as the material on the natural-­rate hypothesis in the presidential address has had important implications for monetary theory and positive monetary policy analysis, so too has the normative discussion in Friedman’s address left an enduring mark. Eichenbaum (1997, 236) noted that the address conveyed the widely heeded message that the “primary objective of monetary policy should be long-­run price stability or at least a low average rate of inflation.” Along the same lines, David Laidler viewed the development of the natural-­rate hypothesis in Friedman’s presidential address as a “means of clarifying the arguments why trying to go after an employment target wasn’t going to work and why going after a stable inflation target was the only thing that was consistent with the way the economy worked” (David Laidler, interview, June 19, 2013). The work of Bernanke, Laubach, Mishkin, and Posen (1999, 310–11) fit in with this tradition, as

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these authors virtually echoed the words of Friedman’s presidential address when they urged a “focus on what monetary policy can do (maintain long-­run price stability), rather than on what it cannot do (create permanent increases in output and employment through expansionary policies).” Discussions of a dual mandate (i.e., output gap and inflation objectives), or of “flexible inflation targeting,” also reflect a version of this message, even though they entail more direct monetary policy responses to real activity variables than Friedman favored.213 Modern statements of real policy objectives have cast policy maker’s criterion as minimization of the deviation between output or unemployment and their corresponding natural values and have explicitly recognized the independence of the natural rate from monetary policy. For example, the Federal Open Market Committee’s January 2012 statement of its long-­run goals and policy strategy stated: “The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment” (Federal Open Market Committee 2012). In a similar vein, Svensson (1999, 626) noted with regard to other countries, “motivations for inflation targeting, by governments, parliaments and central banks, put much emphasis on the natural-­rate hypothesis, and it can be argued that the hypothesis constitutes one of the foundations of inflation targeting.” Svensson further observed that for inflation, “the level goal (that is, the inflation target) is subject to choice. For output . . . the level goal is not subject to choice; it is given by [the natural level of output].” Indeed, the natural-­rate hypothesis is embedded, via the form in which real goals are expressed, into the specification of both the “targeting rules” that Svensson favors and the simple policy rule of Taylor (1993). The connection between Friedman’s research on monetary policy rules and his position concerning the Phillips curve was something that impressed Taylor when, in the late 1960s, he first became involved in work on the development of dynamic macroeconomic models (John Taylor, interview, July 2, 2013). Along similar lines, Bean (2003a) argued that the late 1960s witnessed “a fundamental challenge . . . in the person of Milton Friedman” to preexisting approaches to stabilization policy. That Friedman himself regarded the coverage of appropriate goals as an important part of his presidential address is underscored by the fact that in 1977, he recalled the presidential address in the following terms: “The essence of my argument in that paper was that the monetary authorities had a monetary instrument with which they could ultimately control only monetary variables, such as the price level and nominal income; that it is not possible to use monetary instruments to achieve a real target, whether

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that real target be the real interest rate or real output or unemployment rate.”214 That argument joins together both the first and second halves of Friedman’s paper. It is only in the closing paragraphs of the paper that Friedman focused on his “own prescription” of constant monetary growth, motivating it—as he had in publications since 1957—by the lack of firm knowledge about the short- and medium-­run connections between money and other variables, particularly the price level.215 It is on this conclusion, rather than on the implications for monetary policy that Friedman gleaned from the natural-­ rate hypothesis, that later writers would most part company with Friedman. Most monetary economists would now reject Friedman’s position that the connections between monetary instruments and inflation are too loose for the latter to be targeted directly. In addition, they would not today accept his contention that a policy of constant monetary growth provides a means by which US monetary policy can avoid being a source of economic disturbances—although many would likely concede that this contention was more accurate in 1967–68 than subsequently. And a subset of these economists would have a greater degree of confidence in policy makers’ capacity to measure the natural levels of real variables than that Friedman expressed in 1968. Two examples illustrate the absorption of the natural-­rate hypothesis by economists, of a later generation than Friedman’s, who were critical of other aspects of Friedman’s monetary work. The first example is that of Charles Goodhart. Although Goodhart put weight on monetary aggregates in his work, he would be a vocal critic of Friedman’s views on money-­supply determination and monetary control, and he explicitly came out on the Tobin side of that debate.216 But in the area of Phillips-­curve analysis, Goodhart pointed to the absence of any “serious challenge to the claim that the medium- and longer-­term Phillips curve is vertical, and hence that monetary policy should focus primarily, if not solely” on nominal variables (Goodhart 1992, 315). The second example is that of Alan Blinder. Blinder was no adherent to many of Friedman’s positions regarding monetary aggregates and policy rules, but he would take the natural-­rate hypothesis as an important principle for the setting of monetary policy (for example, in Business Week, February 15, 1988).217 Indeed, Blinder (1997, 4) seemed willing to go further than acceptance of the natural-­rate hypothesis: he endorsed the validity for Europe (though not the United States) of a further line of argument that Friedman had advanced in his presidential address—that estimates of the natural rate of unemployment were too uncertain to enter monetary policy decisions. Even for the case in which the natural rate of unemployment can be esti-

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mated reliably, a disputed question in the literature is whether the natural-­ rate hypothesis’s message is a negative one. Bernanke, Laubach, Mishkin, and Posen (1999, 15) implied that this was the case when they referred to “the optimistic view of the capabilities of monetary policy that was dominant in the 1960s,” their rationale being that in the 1960s it was believed that monetary policy could select the steady-­state unemployment rate.218 But a somewhat different characterization of the natural-­rate hypothesis is available. This more nuanced characterization, offered by Friedman in late 1971, is compelling. “In one sense, this view is pessimistic,” Friedman suggested, “because it means that higher rates of inflation cannot long be used as a means to achieve lower levels of employment. In another sense, this view is optimistic, because it means that there is no long-­run conflict between high employment and price stability. A policy directed at reducing inflation will produce only temporary unemployment, which will disappear when price stability becomes widely expected to continue.”219 In the same spirit, in remarks published in 2005 Friedman rejected the characterization of his perspective on economic policy as pessimistic.220 One aspect of Friedman’s optimism was that, as he stressed in his presidential address, he believed that nonmonetary policies could move the economy to a more efficient posture and reduce the natural rate of unemployment.221 Along these lines, in late 1968 Friedman called for a disinflation policy (which would entail initially raising unemployment in relation to the natural rate) alongside policies—specifically, holding the minimum wage constant in the face of productivity increases—to reduce structural unemployment (Instructional Dynamics Economics Cassette Tape 7, De‑ cember 1968).222 Another enduring theme of Friedman’s presidential address was the emphasis on expectations. The natural-­rate hypothesis not only pointed to a focus of monetary policy on nominal variables; it also highlighted the role of expectations in inflation determination. In 1978, in a moment of introspection in the wake of the rational-­expectations revolution, Friedman noted that his presidential address was one in which expectations were given a central role in the analysis—and was one that stressed their endogeneity even more so than his previous work had.223 Phelps also noted the connections that the natural-­rate hypothesis created between monetary policy and expectations: “central bankers are always talking about controlling the expectations of inflation. And that’s what my 1967 paper was about” (Edmund Phelps, interview, May 16, 2013). The natural-­rate analysis in the presidential address was the last in the series of what Thomas Simpson called the “earthshaking” research findings Friedman laid out during the 1960s (Thomas Simpson, interview, May 29, 2013).224 The economics profession’s reaction from 1968 to 1975 to his

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address closely followed a “shock-­denial-­anger-­acceptance” pattern. One economist, Harry Johnson, a colleague but not a good friend of Friedman’s, initially was in denial. As has been noted, he affirmed the validity of a long-­ run curve in Harry Johnson (1969b), and Johnson went on to embrace the initial, flawed, empirical critiques of the natural-­rate hypothesis (see Laidler 1984, 606–9). But during the first half of the 1970s, Johnson moved, like so many others, into “acceptance” posture, as the gracious remarks of Harry Johnson (1976b) indicated. James Tobin, in contrast, remained somewhere between the “denial” and “anger” modes during the late 1960s and much of the 1970s. One key part of his initial reaction was to say that he did not regard the natural-­rate hypothesis as a devastating critique because Phillips-curve inflation equations should be regarded as necessarily dynamic-­adjustment equations, not as equations that should be scrutinized for their steady-­state properties (see, for example, Tobin 1968). In fact, however, as Edmund Phelps pointed out, inflation equations were commonly presented in the economic literature as immutable parts of the structure of the model.225 And, as Lucas (1981a, 560) stressed, later suggestions that a long-­run vertical Phillips curve was already embedded in economic thinking before the advent of the Friedman-­Phelps arguments are belied by the published Keynesian structural models of the 1950s and 1960s. These models featured wage-­adjustment equations that were in nominal terms even in the long run.226 Furthermore, it was clear that Tobin himself was not really happy with the idea of a long-­run vertical Phillips curve unless it could be consigned to some long run that did not bear importantly on policy choices. He opposed the “strong a priori conviction” that there was a long-­run unit weight on inflation expectations in the Phillips curve (Tobin 1968, 50). In his discussions during the 1960s and the bulk of the 1970s, it seemed that insofar as Tobin was willing to accept the restriction of no long-­run inflation/unemployment trade-­off, he viewed the restriction as pertaining to a horizon so distant that the restriction did not need to be incorporated into policy makers’ representation of the economy’s laws of motion. Consequently, he viewed the downward-­sloping Phillips curve as relevant for policy purposes over any reasonable horizon. He made this viewpoint clear with his remark (Tobin 1968, 53) that, even if it was the case that the natural-­rate hypothesis accurately described the ultimate situation, a nonvertical Phillips curve still prevailed “for years, even decades.”227 And four years after Friedman and Phelps laid out their critiques, Tobin was still maintaining: “For at least a quarter of a century, economists have known that a modern industrial democracy cannot simultaneously achieve more than two of the following three goals: full employment, price stability, uncontrolled and decentralized determination of wages and prices.”228

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Robert Solow described his own reaction to the natural-­rate hypothesis as follows: “I have never been sold on the standard Friedman/Phelps natural-­rate-­of-­unemployment model. . . . And of course, on the downside, the whole thing is nonsense: Nobody really believes that you would get accelerating deflation at the other end of the Phillips curve. So I’ve never believed much in that” (Robert Solow, interview, December 2, 2013). However, as indicated in the comments from Solow quoted earlier as well as those in Klamer (1983), Solow did move considerably in the direction of the natural-­rate hypothesis after his strong skepticism between 1968 and 1970. One element of Friedman’s address that Solow and other Keynesians seized on was a passage that they took as evidence that Friedman himself regarded the horizon at which the vertical Phillips curve applied as a very distant one. Specifically, Friedman’s statement that “full adjustment” to a shift to a new inflation rate would take “a couple of decades,” has been interpreted as implying that removing inflation would take twenty years of above-­normal unemployment.229 In early December 1972, Friedman learned that such an interpretation of his presidential address had appeared in the London Times. This occurred at a time when Friedman was conscious that he was shortly due to have a major operation—for life-­ threatening heart problems.230 He promptly availed himself of what might be his final opportunity to correct the record. Friedman wrote a letter to The Times (dated December 6, and published on December 12) to clarify that by full adjustment he had meant resettling at the steady state. “The important point is that while the ‘full’ adjustment may well last several decades, the period of unusually high unemployment is far shorter, more like two to five years.” Unfortunately for Friedman, his choice of a London newspaper’s letters page as the forum in which to make this clarification meant that this elaboration barely reached the consciousness of US-­based researchers. Roughly ten years after the letter was published, Robert Solow was still highlighting the passage in the original presidential address as evidence that Friedman believed that the conditions associated with a vertical Phillips curve manifested themselves only decades after an initial monetary policy action (in Klamer 1983, 135). More of Solow’s response to the natural-­rate hypothesis will be considered presently. But it should be noted first that it was actually James Tobin who was most active after the 1960s on the Keynesian side of the Phillips-­ curve debate, most notably in his own American Economic Association presidential address (Tobin 1972b).231 Tobin was gracious toward Friedman in remarks Tobin made concerning the natural-­rate hypothesis at the time of Friedman’s Nobel award in 1976 (Economist, October 23, 1976a). At that stage, Tobin may have still hoped to overturn the hypothesis. But as

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Buiter (2003, F586) observed, Tobin “did not succeed in providing a fully ‘Lucas-­critique-­proof ’ theory of a long-­run non-­vertical Phillips curve.” As has already been indicated, Tobin eventually did capitulate in the debate. In a monograph written near the end of the 1970s, Tobin (1980) acknowledged the validity of the natural-­rate hypothesis.232 It was Edmund Phelps, rather than Friedman, who really bore the brunt of Tobin’s reaction to the natural-­rate hypothesis. Phelps and Tobin continued to see eye-­to-­eye on many aspects of economics, and under Tobin the macroeconomics centers at Yale University continued to welcome Phelps as a guest.233 Nevertheless, for some years, Phelps’s status as a co-­ originator of the fully-­expectations-­augmented Phillips curve was a source of strain in his relations with Tobin. Phelps recalled: Yeah, it was maybe the most unpleasant part of my career. We had a nice relationship. I was his student, and he had been very generous to me. And I admired him greatly. And then when we differed on this . . . [it was] uncomfortable. He finally solved that problem by blaming the natural rate entirely on Milton Friedman and never mentioning me. (Edmund Phelps, interview, May 16, 2013)

In the aforementioned 1980 Tobin monograph that granted the validity of the natural-­rate hypothesis, Tobin made amends to Phelps by referring to the hypothesis as “the Phelps-­Friedman hypothesis” (Tobin 1980, 39, 41). In the early reactions to the natural-­rate hypothesis, it was not only Tobin who followed the route of sole attribution to Friedman. Consequently, in a vigorous defense of the natural-­rate hypothesis, Phelps (1971, 34) had occasion to observe: “The other tactic I notice is a tendency to associate the natural rate concept and the models supporting it solely with Milton Friedman.” One of the references Phelps cited, Solow (1969), was a case in point. Solow had devoted guest lectures given at Manchester University in the United Kingdom to critiquing and testing the natural-­rate hypothesis. In the monograph that flowed from his lectures, Solow, like Tobin, cited only Friedman’s work in representing the natural-­rate hypothesis.234 In Phelps’s (1971, 34) assessment, this may well have been a device intended to associate the natural-­rate hypothesis with Friedman’s other positions (particularly those concerning the money stock).235 Phelps would also observe that Solow’s citation practice may have reflected a situation in which “he decided to, in his eyes, save me [from criticism].” However, Phelps’s reaction to this lack of citation by Tobin and Solow was “I didn’t like it”—he would far rather have been explicitly cited (Edmund Phelps, interview, May 16, 2013).236 The reality that Phelps and not just Friedman had advanced the natural-­

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rate hypothesis posed a dilemma for leading Keynesians. Not only was Phelps not a monetarist, he was also much more mathematically rigorous and technical than Friedman was in his writings by the late 1960s. Friedman was very far from being regarded as a technical master, so it would not be appropriate to suggest that his technical command could not be questioned.237 If Friedman’s presidential address had appeared in isolation, it might have been easy to discount the address’s verbal outline of the natural-­rate hypothesis as hand waving, which might well not withstand scrutiny in a rigorous, explicitly model-­based, analysis. But the fact that Phelps was concurrently offering a rigorous treatment that also supported the natural-­rate hypothesis ruled out this possibility. In the face of this situation, Keynesian resistance in the late 1960s and early 1970s to the natural-­rate hypothesis took two forms: attempts to find more elaborate models in which the natural-­rate hypothesis would not hold (this was the unsuccessful strategy attempted by Tobin) or attempts to find that the natural-­rate hypothesis, while theoretically coherent, did not hold in the data. The latter strategy was taken to some extent by Tobin and, especially, was embraced by Solow (1969). If, however, Solow wanted to engage Friedman by targeting his views, he would be disappointed. Solow’s (1969) book seemed to register with Friedman only about five years after it was published, and when he did cite it, it was in footnotes indicating that Solow’s tests of the natural-­rate hypothesis were invalid because Solow had put other variables (alongside unemployment and expectations proxies) into his estimated Phillips curve.238 By the mid-­1970s, the economic literature had reached the conclusion that even without these extra variables, Solow’s evidence against the Phelps-­ Friedman hypothesis, as well as similar tests that had appeared in Brookings Papers on Economic Activity in the early 1970s, was not, in fact, valid evidence. These initial tests were early victims of the rational-­expectations revolution. The strength of the critique of existing tests of the natural-­rate hypothesis, combined with emerging empirical evidence in favor of the hypothesis, meant that economists were well into the “acceptance” phase of the natural-­rate hypothesis by the mid-­1970s: opposition to the natural-­ rate hypothesis evaporated. The process of acceptance is described further in the next two chapters. Strangely enough, Friedman largely played the role of onlooker in the post-­1967 debate on the natural-­rate hypothesis. The extent to which Friedman was able to set the agenda for that debate with his presidential address deserves emphasis. His address had presented no equations, contained no empirical evidence, and provided very little discussion of the Phillips-­curve literature.239 Its title did not include the phrase “the natural-­rate hypothesis.” Nor did that phrase appear the title of anything else Friedman ever

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wrote; no book or article of Friedman’s had a “natural-­rate hypothesis” or “natural-­rate theory” in its title. The closest was an op-­ed Friedman wrote for the Wall Street Journal (September 24, 1996).240 That latter-­day piece was also a rare example of Friedman’s discussion of the natural-­rate theory in his popular writings. In his heyday as a popular writer during the 1960s and 1970s, the coverage he provided of the theory had been sparse, as had been his use of the term “natural rate of unemployment.”241 Yet, despite the limited follow-­up that Friedman offered on his address, that address had a momentum of its own. It helped define the natural-­rate hypothesis and had changed the terms of the debate on inflation. Friedman participated very little in the 1970s debate on the Phillips curve, as his disengagement from the exchanges regarding Solow’s book demonstrates. The fact that he was mentioned in almost every subsequent exchange in the debate attests to the power of his presidential address. Friedman did expound the hypothesis several times in the 1970s, but they were typically ex cathedra occasions not conducive to a back-­and-­ forth exchange with colleagues who specialized in the research field.242 For example, Friedman discussed the hypothesis in a Business Week conference in late 1969, in a speech in late 1971 to the American Philosophical Society and one in Yugoslavia in 1973, and briefly in a 1974 television debate (University of Chicago Round Table: The Nation’s Economy Out of Control, PBS, May 1, 1974). In addition, he had a few words on the matter in introductory remarks for a chapter of the second collection of his Newsweek columns, published in 1975.243 He gave a presentation in London on the Phillips curve to the Institute of Economic Affairs in 1974, and he finally delivered his Nobel talk on the subject at the end of 1976.244 But Gordon’s (1976a, 58) puzzled observation was justified: “I find it surprising that monetarist authors have done so little empirical research on price behavior.” McCallum (1994a, 234) expressed a similar judgment, observing that empirical contributions on Phillips-­curve-­related issues on the part of Friedman, Schwartz, Brunner, or Meltzer were rare.245 Indeed, as of September 1974 Friedman did not seem to be keeping up with the empirical Phillips-­curve literature: at that point, Friedman observed that estimated equations predominantly suggested coefficients on expected inflation less than unity.246 In contrast, Gordon (1976a, 58) viewed the empirical finding that the coefficient could be taken to be unity as having been established in 1972 and being thenceforth widely accepted by debate participants.247 If Friedman had a low profile in the Phillips curve debate of the late 1960s, the man himself—A. W. (Bill) Phillips—was invisible. His research agenda had changed, and so his publications and teachings had little concern with the Phillips curve. Sadly, he died in 1975, just as Friedman was starting to dwell on the issue again.248 Edmund Phelps’s account of his own

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mid-­1960s stay at the London School of Economics provides a postscript on Phillips’s perspective: “Phillips was around. But, for one reason or another, I didn’t see him at lunches or at other casual get-­togethers at the LSE until towards the end of my stay. Once, I remember, there were four or five of us sitting around and talking, and I think I had a chance to say something to him about, look, I think you have to worry about the possibility that the inflation rate moves with expectations. And he quickly agreed with me, and that was the end of that” (Edmund Phelps, interview, May 16, 2013).249 Friedman experienced a similar reaction from Phillips, as Thomas Sargent recalled: “There’s something else that Friedman told me. It’s about the Phillips curve. He knew Phillips. . . . [And] he said to Phillips, ‘Didn’t you make a mistake? Didn’t you really want to have the real wage instead of the nominal wage?’ And Friedman said that Phillips said, ‘Yes’” (Thomas Sargent, interview, January 24, 2014).250

III. Personalities, 1967–68 K arl Bru nner In 1970, with the debate on the role of money having crossed over from academic to general-­audience discussions, the London Times asked Karl Brunner of Ohio State University to write an article for the newspaper. Accompanying Brunner’s article was The Times’ description, “Dr. Karl Brunner and his friend and working associate Professor Milton Friedman are two of the founding fathers of modern monetary theory” (The Times, September 7, 1970). It is possible that The Times felt it had to draw the connection between Friedman and Brunner because Brunner did not mention Friedman even a single time in his article. But The Times’ way of describing the Friedman-­Brunner relationship would likely have produced raised eyebrows from both economists. Brunner and Friedman were friendly, but they were not close friends. Brunner would recall in early 1983 that, although he got to know and observe Friedman when Brunner visited the Cowles Commission (at that time, of course, stationed at the University of Chicago) from January to August 1950, “I never really developed a close personal contact with him.”251 By the same token, a later London Times description of the Friedman/ Brunner relationship went too far in the opposite direction, referring to Brunner as “the American-­based Swiss economist said to have embraced monetarism even before Milton Friedman” (The Times, August 17, 1984). In contrast to this characterization, Brunner (1980a, 404) credited Friedman with helping to shape his own views on the subject of money, recalling of his 1950 visit to the University of Chicago: “My encounter with

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Milton Friedman opened indeed new and astounding vistas.” That said, after 1950 Brunner and Friedman were never “working associates” (as the 1970 Times article had claimed): they were not collaborators on research, nor did they even regularly carry out exchanges of views. Their encounters were sporadic. For example, Brunner, Allan Meltzer (who, unlike Friedman, really did meet the description of Brunner’s “friend and working associate”), Friedman, and Schwartz all attended a major conference on monetary economics in 1962, but Brunner and Friedman rarely met over the rest of the decade, and they corresponded only infrequently.252 The 1970 Times article’s description of Friedman and Brunner as “two of the founding fathers of modern monetary theory” is also imprecise. A much more natural description, even at the time, would have been “two of the founding fathers of monetarism.” Brunner himself had used the term “monetarists” in the opening paragraph of his Times article. Indeed, a vast number of authors have credited the term “monetarist” or “monetarism” to Brunner, including J. Stein (1976b, 1), Meltzer (1977; 1981, 43), Cross (1984, 79), Blinder (1986, 117), Cagan (1987), Congdon (1992, 219), and many dictionaries of economics. It is true that Brunner embraced the term “monetarism” and that he used “monetarists” in the text of a 1968 Federal Reserve Bank of St. Louis Review article “The Role of Money and Monetary Policy” (Brunner 1968b) and titled a 1970 article “The ‘Monetarist Revolution’ in Monetary Theory” (Brunner 1970). But when asked if he had invented the term “monetarism,” Brunner replied that he was not sure (Wall Street Journal, March 22, 1983). In fact, Brunner did not coin the term “monetarist” or “monetarism.” These terms had appeared in debates regarding cost-­push and monetary causes of Latin American inflation in the economic literature of the early and mid-­1960s. For example, a 1963 book titled Evolution or Chaos: Dynamics of Latin American Government and Politics (Schmitt and Burks 1963) stated (103): “In Latin America, the so-­called monetarists argue that inflation is destructive of economic growth, producing distortions and bottlenecks in the economic system. To halt inflation, they advocate the adoption of monetary and fiscal controls.” In a paper for a 1963 OECD conference, Roberto de Oliveira Campos, Brazil’s ambassador to the United States, had a subsection titled “The Catchwords: Monetarism and Structuralism in Latin America” that began: “I feel I deserve to pay penance for having coined [in de Oliveira Campos 1961] the words ‘monetarism’ and ‘structuralism’ to describe the current debate in Latin America, on the diagnosis and therapy of inflation.”253 No doubt, the fact that the monetarist literature emerged in what was essentially a predigital age helped make the origins of the words “monetarism” and “monetarist” very much a matter of conjecture. But as early as

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1976, the reality that Brunner did not originate the terms could have been ascertained from the Oxford English Dictionary (Oxford University Press 1976, 1007) whose entries on “monetarist” found hits for the term in discussions in the Economist in 1963 of the Latin American debate.254 The fact that the term originated in the Latin American debates was seldom recognized in the subsequent UK and North American economic literature on monetarism; exceptions included Kirkpatrick and Nixson (1976, 131) and Laidler (2001). It is possible to go further and state that the term “monetarists” was used in the US monetary debate, and in the context of discussing Friedman’s views, well before Brunner’s 1968 article. The earlier discussion actually took place in 1963 in the far-­from-­obscure location of the American Economic Review. In the pages of that journal, Bronfenbrenner and Holzman (1963, 602) stated: “A typical postwar monetarist position on inflation is provided by Friedman.” In addition, Brunner does not appear to have been the first US-­based monetarist to use the term in print, for Dewald (1966, 509) referred to “the ‘monetarist’ conclusion that monetary policy has been destabilizing because of procyclical variation in the money supply.”255 Dewald recalled, however, that he and Brunner decided in the mid-­1960s that the term was a useful one (William Dewald, interview, April 25, 2013). Irrespective of the origins of the word, what is clear is that Brunner liked the term “monetarism” and Friedman did not. Friedman, in fact, took a dislike to the term almost as soon as it entered US monetary debate. Anna Schwartz would suggest that one reason for Friedman’s reservations about the word “monetarism” lay in his doubts about Brunner as a wordsmith: “I think he attributed it to Karl Brunner, who was not really a master of English.”256 On economic substance, Friedman also often publicly criticized the terms “monetarist” or “monetarism.” In an interview with The Times in 1976, Friedman said, “It is not a new position, and that is one of the reasons why I don’t like the word monetarism” (The Times, September 13, 1976). Similarly, in 1983 Friedman observed, “Personally, I dislike the term ‘monetarist.’ The theory that now goes by that label has a perfectly respectable ancient name, namely the quantity theory of money.”257 As Friedman saw it, he was not espousing a new theory, but bringing quantity theorists’ work “down to date.”258 In this way, he believed that the fundamental insights of the quantity theory could be applied to the “bad old present.”259 But Friedman confessed that merit existed in using the term “monetarism” because there were some elements of older quantity-­theory work that he and other critics of Keynesianism had discarded.260 For example, an aspect of earlier quantity-­theory analysis that Friedman explicitly rejected

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was the perception of velocity behavior as the outcome of an institutionally determined payments process, instead of as the result of households carrying out utility maximization and choosing to hold a certain amount of real money balances in that light.261 However much he disliked the term “monetarist,” Friedman resigned himself to using it: “we can’t avoid usages that custom imposes on us,” he acknowledged in the early 1980s.262 In fact, Friedman’s public use of the term began, albeit guardedly, as early as November 1968, shortly after Walter Heller deployed the term in his debate with Friedman at New York University on November 14.263 Friedman also used “monetarist” to describe his own position when giving a public talk at MIT in May 1969 (The Great Economics Debate, WGBH Boston, May 22, 1969). Several months later, Friedman referred to “myself and other monetarists” (Instructional Dynamics Economics Cassette Tape 38, November 19, 1969), and in 1970, he was using the terms still more often, most notably in an address at the University of London in September of that year.264 Further into the 1970s, Friedman referred to the “whole monetarist movement” (Instructional Dynamics Economics Cassette Tape 193, June 1976, part 2). What was the role of Brunner in this movement? Brunner himself had a high profile in the United States and continental Europe, but it is clear that he was concerned that the monetarist movement was being perceived as having a single major leader and representative, namely Friedman. That sentiment on Brunner’s part is obvious enough from his reaction in the early 1970s to Nicholas Kaldor’s (1970, 1) assessment that “monetarism is a ‘Friedman revolution’ more truly than Keynes was the sole fount of the ‘Keynesian revolution.’” Brunner (1971b, 36) erupted at this characterization, which he contended was either a reflection of Kaldor’s “substantial ignorance” of the US intellectual debate or an invalid inference from the frequent mentions of Friedman in the financial press. Notwithstanding the tensions that arose from the widespread perception of Friedman as the face of monetarism, Brunner and Friedman actually stepped on each other’s toes very little in their work. Indeed, an unintended division of labor emerges when one compares the work of the two monetarists. As McCallum (1994b, 234) noted, Brunner did relatively little empirical work on money demand, business cycles, or inflation, and he did not produce a historical treatise of the Monetary History type.265 Furthermore, Brunner’s own activities in three main areas of monetarism happened to be those to which Friedman’s contributions were limited.266 The first area of Brunner’s activity was his work with Meltzer on modeling the supply function for money (for example, Brunner and Meltzer 1964a, 1964b, 1964c, 1964d; and Brunner 1973). Meltzer (1965) was very critical of the emphasis on proximate determinants of the money stock

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in the Monetary History, and he urged that a deeper analysis of the supply process be conducted.267 And, around the same time, Friedman acknowledged that it was Brunner and Meltzer rather than himself who had made the running with regard to research on the money-­supply function and on monetary control.268 This judgment, given in the 1960s, was consistent with Pierce’s (1980, 82) later reference to “the pioneering work of Brunner et al.” in the area of the analytics of money-­supply determination. Brunner and Meltzer’s work on the money supply was not microfounded as that term would be understood today. It was more formal than Friedman’s work, however, as Brunner and Meltzer linked the behavior of the money multiplier (and its components) to behavioral equations describing commercial banks’ and households’ behavior. The Brunner-­Meltzer research on the money-­supply process, although focused on M1 rather than the M2-­type aggregate Friedman favored, brought out several important matters on which they and Friedman had the same view. Brunner and Meltzer’s work recognized that commercial banks’ credit creation and deposit creation tended to occur in unison (a point of special relevance for Friedman’s work, with its wider deposit definition). Together with Friedman’s various commentaries, the Brunner-­Meltzer work thus provided a counterexample to Goodhart’s (2002, 18) claim that monetarists “ignore[d] the interaction between (bank) credit and monetary growth,” and to Congdon’s (1992, 174) assertion that Friedman and Brunner “continue[d] to theorize about economies with commodity money.”269 Going hand in hand with the recognition on the part of Brunner, Meltzer, and Friedman of credit/money interaction was the stress they placed on the fact that money and credit were, nevertheless, separate variables. In addition, a point on which monetarists, especially Friedman, would place great weight was that, however much bank credit and deposits might move together, total credit—including the United States’ large supply of nonbank credit—and monetary aggregates need not and often did not move together.270 Brunner and Meltzer’s money-­supply work also had the effect of underscoring the point that monetarist analysis did not rely on a mechanical version of monetary-­base/money-­multiplier analysis. Rather, it modeled the money multiplier as endogenous.271 And in their analysis of the behavior of commercial bank reserves and the monetary base, Brunner and Meltzer investigated the implications of the realistic case in which the central bank uses the short-­term interest rate as a policy instrument.272 Therefore, the monetary base, too, was recognized in their formal work—as it also was in much of Friedman’s narrative analysis—as in practice endogenous. The second area of monetarism in which Brunner and Meltzer made a more extensive contribution than did Friedman was in the formalization

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of the transmission mechanism and the development of the IS function in particular. Meltzer would observe that “for me and Karl it was rather fundamental that the transmission wasn’t just from money to output; it was from money to something which eventually got to output” (Allan Meltzer, interview, April 21, 2013). In making explicit the transmission mechanism, Brunner and Meltzer drew to some extent on the occasional contributions Friedman had provided on the subject, most notably his article in 1956, “The Quantity Theory of Money: A Restatement.” Although Brunner (1957) was initially highly critical of Friedman’s 1956 restatement, Brunner would later come to see the paper’s emphasis on a variety of substitutes of money as a key part of the multiple-­yield transmission mechanism embodied in monetarist thought. Meltzer observed of the development of his and Brunner’s work on the transmission mechanism, “part of the inspiration for [our] going that route—only part, but part—was his essay on the demand for money where all these relative prices enter” (Allan Meltzer, interview, April 21, 2013).273 Brunner (1971c, 168) acknowledged the consistency of the Brunner-­Meltzer and Friedman views of the transmission mechanism, in which many yields mattered in the IS equation (as well as the LM equation), and money-­supply changes exerted influence on these yields not only by affecting the path of the short-­term interest rate but also by altering the spreads between different yields.274 Benjamin Friedman (1976) showed the algebraic equivalence of Brunner and Meltzer’s framework and that of Tobin’s (1969a)—an equivalence that had earlier been acknowledged by Brunner (1971a, 109). In some quarters, this equivalence was taken as evidence that the emperor was naked and that monetarists had not established a different theoretical framework from that of Keynesians (see, for example, Paul Samuelson’s remarks in the Economist, June 25, 1983). What this negative interpretation neglected was that in Brunner and Meltzer’s explicit analysis, as in Friedman’s implied framework, money acquired prominence both as a key quantity mattering for yield spreads and as a good index of the behavior of the yields in the IS equation. Tobin, in contrast, played down the difference between money and other assets, and he did not highlight the significance of money as an indicator.275 Furthermore, as discussed in section I of this chapter, Tobin came to the view that, notwithstanding the multiplicity of yields in his analysis, the spectrum of yields that mattered for aggregate-­demand determination was in fact well summarized by a single asset-­price variable, namely Tobin’s q.276 Finally, Tobin, as has also been seen, deprecated the importance of the nominal/real interest-­rate distinction, on which monetarists put such stress. These first two areas of Brunner’s contribution to monetarism—the

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money-­supply process, and the transmission mechanism of monetary policy—demonstrated that Brunner and Meltzer were far more interested in formally modeling monetarist ideas than Friedman was.277 Brunner and Meltzer clearly made valuable contributions on this score, and their analysis was accordingly cited in the work of Bernanke and Blinder (1988). But the formal analysis in the papers by Brunner and Meltzer, although extensive, was, frequently, far from elegant. This analysis also suffered from the problem that it typically did not deliver a compact dynamic model of a kind that would be easily translatable into a modern dynamic general-­ equilibrium framework.278 Indeed, the fact that their modeling analysis used now-­obsolete procedures has contributed to making many of the Brunner-­Meltzer papers of the 1960s and 1970s less accessible and enduring than Friedman’s (far less mathematical) work of the same period. A third respect in which Brunner contributed to monetarism lay in the fact that Brunner, much more than Friedman, engaged his critics in debate and created forums for discussions of key issues in the Keynesian-­monetarist debate and in successor debates. Friedman ran hot and cold on the issue of responding to critics of his work. After the “AM/FM” and opportunity-­cost debates were out of the way in 1965–66, he attempted to institute a policy under which he would not write articles replying to his critics. Thus, in contrast to Anna Schwartz, who was a frequent contributor to the debates on the Monetary History, Friedman reserved most of his published replies to critics of the History for the footnotes of his and Schwartz’s Monetary Trends.279 With respect to other areas of his monetary research, a string of replies that Friedman made to critics between 1970 and 1972 was followed by a resumed attempt at an abstention.280 As David Laidler observed: “Milton’s intellectual style was: he wrote an article and basically let the chips fall where they may, and got on with the next one, and didn’t get himself bogged down in answering critics left, right and center. That Gordon volume [i.e., the debate recorded in Gordon 1974a; see the next chapter] was a bit of an exception, I think, to his general style. [Whereas] Brunner was much more conscientiously academic, and in particular he wanted to take on Jim Tobin” (David Laidler, interview, June 3, 2013).281 Indeed, Brunner wrote a stream of articles in the 1960s, 1970s, and 1980s consisting of often-­unsolicited replies to critics of monetarism—Brunner (1971b) (focused on Kaldor) and Brunner (1983) (focused on Tobin) being just two. Brunner also played a leading role in setting up the infrastructure for debates on monetarism, via his creation of institutions. He was the founding editor of the Journal of Money, Credit and Banking in 1969, and in 1973 he cofounded, with Meltzer, the Carnegie-­Rochester Conference Series (whose first proceedings would enter print in 1976). From the mid-­1970s to the mid-­1980s—a period during which Friedman increasingly withdrew

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from academic-­style research—Brunner was on the front line as editor of another journal: the Journal of Monetary Economics, which he founded in 1974–75.282 In addition, in 1973, Brunner and Meltzer formed the Shadow Open Market Committee (SOMC), a group of monetarist economists who would meet to produce solo- and joint-­authored statements on current economic policy issues. Anna Schwartz was a member of the SOMC from day one. But Friedman was never going to be part of such a group, observing on one occasion that he “didn’t particularly go in for team sports. Never have.”283 It is likely that Friedman’s nonparticipation in these activities was somewhat beneficial from Brunner’s viewpoint. Back when Brunner had been at UCLA, Robert Solow had referred to “the ‘Chicago School’—with branch offices as widely scattered as Charlottesville, Virginia and Los Angeles, California” (Banker, November 1964, 710)—thereby characterizing Brunner’s position as within a hierarchy headed by Friedman.284 Just as Brunner reacted strongly to the suggestion that Friedman was the sole face of monetarism, he also likely regarded it as important that it be understood that his own enterprises were separate from those of Friedman. Forums like the SOMC gave Brunner prominent outlets in which he could make this fact clear. Despite his hefty workload as an editor and general impresario of economists’ debating forums, Brunner continued to publish articles prolifically. There was a catch here, however. Although he liked words and relished writing in English, what emerged from Brunner’s writing efforts was typically not the epitome of clarity. His work often featured compelling arguments, but the accessibility of his solo-­authored writings was often compromised by curious word choices, oppressive sentence constructions, and occasional obscurity. Some idea of these characteristics is conveyed by the fact that a subsection of Brunner (1969a, 271) is titled “The Misuse of Qualifying Modalities.” Another example is provided by Brunner’s (1980a, 404) attempt to describe Friedman’s impact: “He violated the prevalent pattern of suggestively vague criteria addressed to the selection and evaluation of professional work.” Robert Rasche worked closely with Karl Brunner on the Shadow Open Market Committee from 1973 onward, and Rasche’s research built on the Brunner-­Meltzer work on the money-­supply process (see, for example, Rasche and Johannes 1987). With respect to Brunner’s writing style (as opposed to the underlying analysis in Brunner’s work), Rasche offered this contrast: “You know, you can pick up Friedman’s stuff, and you never fall asleep reading it; at least, I never fell asleep reading it. And I will confess, I’ve fallen asleep more than once trying to read Brunner’s stuff ” (Robert Rasche, interview, May 6, 2013).

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Anna Schwartz, whose work with Brunner on the SOMC would eventually span fifteen years, would recall that she had once thought that Brunner constructed sentences in a Germanic manner and that his writings in German must read better, but that she had since been told that even Brunner’s German-­language writings did not read well (Anna Schwartz, email to author, February 20, 2003). Both she and Friedman found Brunner’s work hard going, on account of Brunner’s writing style.285 On one occasion, Schwartz contrasted the writing styles of Brunner and Friedman in the following manner: “Milton has a kind of simplicity that can be understood by almost anyone. Karl can be turgid” (Wall Street Journal, October 7, 1981, 1).286 Friedman’s reservations about Brunner’s exposition should not, however, obscure the fact of their considerable mutual admiration. Anna Schwartz observed: “Karl in a sense was a disciple [of Friedman]. I mean, he had enormous respect for Milton, and so many of Milton’s ideas were adopted by Karl” (Anna Schwartz, interview, April 21, 2003). Brunner would give a talk in Friedman’s honor when the American Economic Association convened an event in 1977 in recognition of Friedman’s Nobel award (see Brunner 1979c). Brunner and Meltzer would also later refer to Friedman’s “outstanding contribution to monetary analysis, a contribution generally respected by scholars” (Wall Street Journal, October 20, 1986). For his part, Friedman would associate himself with Brunner when in the early 1980s he referred to “the theoretical arguments advanced by people like myself, Allan Meltzer, Karl Brunner, and others.”287 In addition, in the mid-­1980s, Friedman and Schwartz contributed an article to a special issue of the Journal of Monetary Economics that commemorated Brunner’s stepping down from the post of editor of the journal.288

R ichard N ixon Friedman lacked the same degree of involvement with Richard Nixon’s 1968 election campaign that he had had with Barry Goldwater’s in 1964— not least because Rose Friedman had said “Never again!” when recalling Friedman’s stint as a principal economic adviser in the 1964 Republican campaign (Fortune, June 1, 1967, 148). Nevertheless, Friedman was an enthusiastic supporter of Nixon, who as the Republican Party’s presidential candidate emerged victorious over Democratic candidate Vice President Hubert Humphrey and third-­party candidate George Wallace. In November, speaking a few days after Election Day, Friedman pronounced himself “delighted” with the result (Instructional Dynamics Economics Cassette Tape 2, November 1968).289 Friedman believed he had several reasons for pleasure at the victory.

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First, he was confident that Nixon’s economic team would discard guideposts and guidelines and focus on removing inflation through a gradual slowdown of nominal aggregate demand. This, Friedman argued, would be a contrast with the “complete mismanagement by the prior administration of both domestic and international financial policies.”290 Second, Friedman expected that Nixon would arrest and reverse the increase in the role of government that had occurred in the Kennedy-­Johnson years. “Of course he can’t just go in and abolish the agencies we’ve been living with for years,” Friedman remarked. “But in effect Nixon will start moving in a new direction, and that direction will be toward less authority” (St. Louis Post-­Dispatch, November 11, 1968). Friedman drew a connection between this proposed direction of policy and the prospects for relieving the recent discontent of the US population. Friedman was highly critical of the university student protest movement, seeing it as a disruptive rather than an intellectual force (see, for example, Chicago Tribune, February 6, 1969), and he praised the University of Chicago’s administration for disciplinary measures that had reined in protest activities on the campus.291 Friedman did, however, view the military draft as a legitimate basis for students’ grievance, and he saw the Nixon administration as likely to alleviate matters by dismantling conscription. More conjecturally, he thought that other protests, such as urban riots, would diminish if government intervention in economic and social matters was reduced (Chicago Tribune, March 3, 1968). Against this background, and shortly after Nixon’s election victory, Friedman spoke of the prospect of a shift to lower government intervention (Instructional Dynamics Economics Cassette Tape 2, November 1968): “I do believe that he will try to set a tone along this line. I am optimistic enough to believe that he will be successful. And I’m even more optimistic in believing that if [he is] successful, you will see in the next few years a dramatic decline in the discontent in the population.” Third, Friedman felt that Nixon shared his vision of the operation of government. Friedman believed that government instrumentalities had become more politicized during the Kennedy-­Johnson period. One example he cited was the Council of Economic Advisers, which he regarded as having been more detached in its analysis of the economy during the early Eisenhower years, and for which he believed the best practice was that members not speak publicly in favor of specific administration initiatives.292 But Friedman’s more serious concerns about politicization pertained not to examples like this, which simply reflected different opinions about the appropriate mission of the agency in question, but to instances of abuse of power. Friedman had little esteem for the character of President Lyndon Johnson. Indeed, venturing far from ordinary economic commentary, Friedman expressed the view that Johnson used government as

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a spoils system, and, in remarks appearing after Johnson’s death, Friedman implied that Johnson had used his political clout for personal financial gain.293 Friedman believed that Nixon would set a more dispassionate tone that discouraged such abuses and that was also conducive to the apolitical functioning of government agencies. Fourth, Friedman believed that under Nixon there was an opportunity to shake off the United States’ Bretton Woods obligations. Friedman put pen to paper on this issue in a memorandum to Nixon, drafted in October 1968 and submitted to the president-­elect in December. In the memorandum, Friedman recommended the abolition of the United States’ various exchange controls, as well as repeal of the gold-­price peg and abstention by the US authorities from intervention in the foreign exchange market. Friedman urged Nixon to “take these bold measures at once” upon taking office, partly because such a sudden change could be justified as a reaction to the economic situation inherited from the Johnson administration.294 Exchange rates and the draft would prove to be essentially the only issues on which the Nixon administration’s record would provide Friedman with satisfaction. Within five years, Friedman’s hopes that Nixon’s election would usher in an era of low inflation, smaller government, administrative integrity, and a more united nation had all been dashed.

C ha p te r 14

Debates on Regulation and Aggregate Supply, 1969 to 1972 I. Events and Activities Related to Regulation and Aggregate Supply, 1969–72 By the close of the 1960s, Friedman’s work commitments had reached such a scale that his daily activities must have seemed, to the outside observer, to be hardly distinguishable from chaos. During the roughly half of the year in which he was located in the city of Chicago, he had various local speaking engagements; he would take many calls from various newspapers to supply short reactions to specific developments; he gave lengthy interviews to the Chicago area’s newspapers (one of several he gave in the period covered in this chapter being that in Chicago Today, May 10, 1971), to the national press, and to newspapers specific to other cities (one example being Cleveland’s Plain Dealer, February 28, 1969); and he appeared as a guest on local television programs both in Chicago and other cities.1 During the roughly half of the year in which he resided at his second home in Vermont, Friedman continued with his hectic schedule of engagements. For example, an interview filmed at his home was used as an insert in a national television program on inflation, broadcast in December 1969 (The Great Dollar Robbery: Can We Arrest Inflation?, ABC, December 15, 1969). And both his Chicago and Vermont locations were used as bases from which Friedman set The views expressed in this study are those of the author alone and should not be interpreted as those of the Federal Reserve Board or the Federal Reserve System. The author thanks David Laidler for comments on an earlier draft of this chapter. The author is also indebted to Miguel Acosta, George Fenton, William Gamber, and Christine Garnier for research assistance on this chapter. See the introduction for a full list of acknowledgments for this book. The author regrets to note that, in the period since the research for this chapter was begun, four of the individuals whose interviews with the author are drawn on in this chapter—Henry Manne, David Meiselman, Sir James Mirrlees, and Charles Schultze—have passed away.

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off on numerous working trips. For example, during November 1969 he gave talks in New York City, at a First National City Bank (aka Citibank) event (Daily News, November 7, 1969), and in Phoenix, at a banking conference held on the subject of the monetarist critique of the New Economics (Phoenix Gazette, November 24, 1969).2 Shortly before these two events, he had served as a discussant at a Federal Reserve Bank of Boston conference in October 1969 on exchange-­rate systems.3 Furthermore, between 1969 and 1971 Friedman made multiple visits to Washington, DC, to deliver congressional testimony and have meetings with members of the Nixon administration.4 Friedman’s remarks during these travels drew considerable attention beyond the host cities. As recently as 1967, Robert Solow had confined the list of academic economists whose statements could move financial markets to one person, John Kenneth Galbraith.5 But by the end of the 1960s, Friedman—flush from his success in predicting the ineffectiveness of the 1968 tax increase—had clearly joined this list, with Associated Press reports on two occasions in November 1969 alone noting stock market movements that were apparently in reaction to Friedman’s public statements.6 Furthermore, with passenger-­jet travel having become a more routine phenomenon, and with Friedman’s status as a highly sought after commentator increasingly stretching beyond the United States, his international travel escalated starting in the late 1960s. Friedman's itinerary from 1969 to 1972 included visits to Japan in September 1969 and April 1972, as well as a set of appearances at public policy and academic events in the United Kingdom in September 1970.7 Alongside his many interviews and speaking engagements over these years were Friedman’s written contributions to the public debate, which included his Newsweek column every three weeks and numerous letters to the editor in other publications (for example, that in New York Times, August 21, 1969). And all this bustle of activity occurred during a period over which Friedman’s project with Anna Schwartz continued, with the authors ostensibly committed to two further books once they completed their monetary-­ statistics volume in 1969–70. This was also a period when conferences on monetary policy, along with economic-­research journals, were devoting a great amount of attention to the work that Friedman had already released. Most of these journal and conference discussions proceeded without Friedman’s participation. In particular, they typically lacked formal replies from him to criticism of his work. For, writing around the turn of the decade, Friedman observed that he would need to be endowed with eighty-­hour days if he was going to respond to all articles that critiqued his positions.8 Amid all this tumult, Friedman’s teaching commitments at the Univer-

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sity of Chicago continued. It is not true that Friedman cut down his teaching load in the later 1960s: Friedman ended the decade as he had entered it, running his money workshop and teaching two quarters of graduate economics classes.9 The classes he taught through 1964 comprised a two-­ quarter Price Theory course, and this arrangement would gradually recommence starting in the 1973–74 academic year. As of the late 1960s, however, the classes Friedman taught consisted of two one-­quarter courses: one on monetary theory and one on macroeconomic theory (the latter called “Income, Employment and the Price Level”). Ann-­Marie Meulendyke, who took both of these courses in the late 1960s, recalled that Friedman did not allow his expanding role as a public figure to trespass on his course-­ teaching obligations. Friedman, she observed, “was very conscientious about not missing classes that he was teaching, but he did miss money-­ and-­banking workshops from time to time. He would not accept an outside consulting or speaking appointment, as a rule, if it would have interfered with his being in his regular class meeting. . . . And I was one time [visiting him] in his office, when I was working on my thesis, trying to organize how I was going to do it. And he got a call while I was in there; and it’s funny, one of those things that just stuck in my memory.” Meulendyke recalled that the caller requested Friedman’s presence at an event and that Friedman replied, “Well, yes, I’d be glad to do that someday, but not on the day you’re suggesting. I teach a class that day, so I can’t do it.” Meulendyke further recalled: “And then [he said], ‘No, I don’t cancel classes for things like this. It would have to be a real emergency for me to cancel a class.’ You know, ‘Well, I appreciate that, but that’s the day I teach class and I can’t do it that day.’ That was it.” Meulendyke observed, “the message was very clear. . . . And I was impressed” (Ann-­Marie Meulendyke, interview, April 29, 2013).10 Samuelson and Friedman Paul Samuelson was the closest to being in the same boat as Friedman in his mix of activities.11 The period covered in this chapter is one in which Samuelson’s engagements in the macroeconomic research field were tapering off—indeed, to such an extent that, as discussed later in this chapter, Robert Gordon ruled Samuelson out as a participant in a Journal of Political Economy debate between Friedman and a set of key critics of his monetary framework. But Samuelson remained highly active in several other fields of economic research—“when you look at the second half of his career, he [still] wrote many important papers,” Robert Hall observed (interview, May 31, 2013)—as well as in graduate teaching and supervision, and Samuelson therefore shared with Friedman a double life consisting of

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public engagements and full academic responsibilities. The similar scale of their media profiles, together with their images as representatives of the opposite ends of the Keynesian-­monetarist debate, led to the continuation, between 1969 and 1972, of the pre-­1969 pattern of occasional exchanges between the two of them on television.12 Most of all, the way in which their contrasting economic perspectives were brought out was in the column space they shared in Newsweek. By the early 1970s, Friedman and Samuelson had each produced a sufficient number of columns for Newsweek that a book collection of their columns could be issued: An Economist’s Protest by Friedman in 1972, and The Samuelson Sampler in 1973.13 And while Friedman and Samuelson would continue to overlap as Newsweek columnists for several more years—their total period as joint columnists being 1966 to 1981—by the early 1970s a verdict on the quality of their respective columns started to emerge. The verdict was in Friedman’s favor. This verdict was not the obvious one to be expected a priori. In light of the fact that Friedman and Samuelson were, by 1966, both very eminent members of the profession, one might perhaps have expected that their columns would be rated equally highly. Indeed, one can go further. Samuelson was widely considered the better economist of the two—an estimation that, as discussed in chapter 4, was amply justified by Samuelson’s wider and more fundamental contributions to modern economics than Friedman’s, and one that remained a valid judgment even after the latter’s spurt of influential contributions during the 1960s. One might have expected ex ante that Samuelson would similarly have the edge over Friedman in popular writing. As has already been noted, Samuelson had been regularly writing op-­ed pieces for major news publications since the early 1950s. Indeed, he prided himself on being “one of those rare scientists who can communicate with the lay public.”14 It is worth cataloguing some of Samuelson’s other advantages, as part of the process of obtaining an understanding of why Friedman ultimately bested Samuelson as an op-­ed writer. Samuelson had much broader interests than Friedman did. When it came to economic topics or looking at policy issues from an economist’s angle, Anna Schwartz found Friedman hard to beat: “He’s truly an innovative person, and there isn’t any issue you can pose to him where he won’t come up with something that nobody else has mentioned.”15 But her praise did not extend to his discussions of issues outside economics. In this connection, Schwartz remarked, “It was always stimulating to have a conversation with Milton, but I never believed that a verbatim account of his remarks was worth having” (Anna J. Schwartz, email to author, January 25, 2007). Schwartz felt that some of Friedman’s attitudes on art and culture were close to philistinism—exemplified by his declaration to her, ahead of a visit Friedman made to Europe in the early 1950s, that he had no interest

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in visiting the continent’s museums and art galleries.16 This lack of interest was something that Friedman, evidently, partly reversed over time. By the late 1960s, he had developed an interest in paintings, and he mentioned in a Newsweek column (December 1, 1969) that he had purchased a limited-­edition book of reproductions of paintings by an artist he admired.17 In the case of music, however, Friedman’s stance was more long lasting and more extreme. When in 1970 he likened rock music to noise pollution, this did not reflect an antipathy specific to that genre of music. Rather, Friedman had no appreciation of music, with an acknowledged tin ear that prevented him from enjoying musical pieces.18 These characteristics contrasted sharply with Samuelson, who showed many signs of being steeped in culture.19 Another point that might seem to work in Samuelson’s favor was that Friedman was also less naturally humorous than Samuelson. In his writings, Friedman tended to prefer to augment analytical points with historical anecdotes or other curiosa rather than jokes. Along similar lines, in his direct interaction with others he was frequently noted for his good cheer rather than humor per se. Jokes that he did use in speeches tended to be labored. In contrast, Robert Shiller—a graduate student at MIT from the late 1960s through 1972—recalled: “Samuelson had kind of a quixotic sense of humor. It wouldn’t win on one of these nighttime comedy shows. But I sort of liked it” (Robert Shiller, interview, September 26, 2014). Friedman also had a weaker grasp of matters concerning the international stage and world history than Samuelson. His knowledge of geography and of ancient history was weak.20 Friedman had a good command of American history and a respectable knowledge of UK developments since the nineteenth century, but his command of the history of continental Europe and beyond was mediocre. This situation was, perhaps, foreshadowed by the fact that he had received a C in a European economic history course as an undergraduate (a result, however, that Friedman said had been a reprimand for being late to classes: see Australian Business Monthly, October 1993, 54). He knew some French for reading purposes, but he acknowledged that his pronunciation of French was “terrible.”21 Furthermore, Friedman did not attempt, after his 1950 spell in Europe, to maintain a strong and continuous command of details of developments in France or other countries in continental Europe. He would, it is true, broaden his knowledge about international affairs over time. And as he himself evolved into a figure on the world stage, Friedman would develop an interest in foreign policy—leading him for a time in the mid-­1970s to steer his Newsweek column away from economics topics and to devote a few columns to geopolitical punditry (see E. Nelson 2009b, 92–93). But even with this expanded interest in world affairs, Friedman’s attention to economic de-

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velopments in continental Europe remained sporadic. Samuelson made a more sustained effort than Friedman to be well informed on such matters. Apart from his latter-­day interest in foreign policy, Friedman did have some interests of long standing that were outside economics, including card playing (bridge), carpentry, films, mystery novels, and gardening. Furthermore, as stressed in chapter 4, an important theme in Friedman’s approach to economics in the postwar period, brought out both in his research with L. J. Savage and his advocacy of the negative income tax, was that economic analysis could and should be applied to topics beyond those traditionally considered within the province of economics. In addition, Friedman’s interest in the economic-­freedom/political-­freedom connection frequently led him into discussions, including in his Newsweek column (for example, that of June 3, 1974) that would be considered more closely connected to the field of political science than to economics. But for all this, Friedman certainly did not display the vigorous interest in an interdisciplinary command that Samuelson exhibited. Samuelson famously entered the fray of the debate over Friedman’s article on methodology, registering a dissent (Samuelson 1963b) whose content likely reflected, in part, Samuelson’s own study of the methodology of other social sciences. In contrast, Anna Schwartz (1992, 959) accepted that Friedman had little familiarity with the literature on the history of methodology: to her, the surprise was not this fact but that others would expect that he would have such familiarity. Additionally, in the hard sciences and engineering—fields that economists often liked to regard as sister disciplines to their own—Friedman’s interests were decidedly limited. Reflecting his move away from technical work, he did not replace his fading interest in mathematical statistics with a curiosity about, for example, physics.22 He did keep an eye on developments in medical research. But this interest took a practical form stemming from his own health concerns: Friedman would cite his monitoring of emerging medical findings as the reason why he gave up smoking around 1955, and he would indicate that his heart surgery of 1972 gave rise to an interest in developments in cardiac research.23 He would comment that the conversations he had had with scientists about economics convinced him that they had little to contribute to economics.24 As for economists who had a strong knowledge of science, Friedman respected them but he showed little inclination to emulate them, being personally doubtful of the synergies between the natural sciences and economics. This combination of attitudes was reflected in a remark that Friedman once made to William Brainard: “You know too much physics.”25 Friedman’s lack of great interest in science contrasted sharply with the attitude of Paul Samuelson. Samuelson was known for his interest in the

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sciences and for being well read in them. Robert Shiller remarked that, alongside Samuelson’s humor, there was “the other thing I liked about Samuelson, which I don’t think most people appreciated: he wasn’t always just witty; he tended to talk about science, I mean, real science. Like, he would quote physicists. And he wouldn’t quote them for something frivolous; he’d quote one of their equations, and say that ‘what we’re saying here is analogous to some Planck law,’ something like that. So I always felt more favorably disposed towards Samuelson than most of my fellow students did. Because I like science, you know? And I thought Samuelson was original and just different from other people” (Robert Shiller, interview, September 26, 2014).26 But Samuelson’s formidable array of advantages over Friedman as a general-­interest writer did not translate into success in the contest with Friedman in their Newsweek columns. By almost universal estimation, when judged as material relaying economics to popular audiences, Friedman’s series of columns is regarded as having been more successful than Samuelson’s. In part this outcome actually reflected Samuelson’s wider range of interests, for Samuelson strayed from economic topics earlier and more frequently than did Friedman. “In the Christmas week issue [of Newsweek],” a newspaper writer noted in early 1970, “Samuelson wrote about ‘love’” (Newsday, January 5, 1970).27 But a more pervasive problem was Samuelson’s apparently lackadaisical approach to the writing of his column. This came under scrutiny when, in 1973, Business Week reviewed the aforementioned book collection of Samuelson’s columns, The Samuelson Sampler. The review observed: The friends and admirers of Nobel laureate Paul Samuelson in the economics profession have always wondered about the casual attitude with which he seems to toss off those periodic columns in Newsweek. Milton Friedman approaches the same task with zeal, never missing a chance to spread the quaint principles of his libertarian faith. Yale economist Henry Wallich is always thoughtful and careful, and sometimes even innovative, in his columns in the same magazine. Not so for Professor Samuelson. With a few sparkling exceptions, his columns usually seem to have been hastily thrown together without much thought. This collection of his journalistic forays reinforces the impression that he lavishes little care on his popular writings in comparison with his fellow economic pundits. As one of the great thinkers and educators of modern economics, Samuelson knows that his place in history is secure. But it is disappointing that he is content to rest on his reputation. (Business Week, July 14, 1973)

The same negative verdict on Samuelson’s Newsweek columns, especially when compared with Friedman’s, is also found among many econo-

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mists. For example, Bennett McCallum has observed (personal communication, July 30, 2013): Friedman’s columns were almost always concerned with economic policy analysis, analytically sound yet exposited in a nontechnical manner that could be understood by non-­economists. The topics were about current issues part of the time and ongoing issues part of the time. Samuelson’s columns had some of this educational aspect but were more on general political matters, “conservative” vs. “liberal” (in the misleading terms of newspaper language) and were more designed (it seemed to me) to be entertaining rather than educational. They were heavy on name-­dropping and items in general intellectual history, apparently designed to be impressive. They were more “lively” than Friedman’s and less clear.

As McCallum’s observation implies, Samuelson allowed more humor into his column than did Friedman. In following this tactic, Samuelson could sometimes be highly effective. Most notably, his very first column (Newsweek, September 19, 1966) included his observation that the stock market had predicted nine of the previous six recessions. This quip was so memorable that President Reagan used it in a speech given after the 1987 stock crash, while the New York Times quoted the relevant Samuelson column in its 2009 obituary for Samuelson.28 Furthermore, the quip relayed an important position—the disconnection of equity prices from US economic activity—for which many more economists would join Samuelson as advocates. Among these was Friedman, whose doubts about both the dependence of the stock market on economic fundamentals, and the feedback from equity prices to the economy, would deepen in the late 1960s and shift him toward a very Samuelsonian perspective on the stock market’s significance.29 On other occasions, however, Samuelson’s reliance on humor in his columns seemed excessive and to distract from the points he was making.30 Some contrast between the Friedman and Samuelson columns is brought out by comparing instances in which their subject matter overlapped. In an April 30, 1979, Newsweek column, Samuelson wrote: “What sex is to the single-­minded Freudian, the money supply is to the monetarists. . . . My colleague Robert Solow has termed monetarism an advertising campaign still in search of its product. I must spend much of my time studying the many forces that alter the velocity of circulation of our money supply because sad experience has shown that predictions based solely on the money aggregates suffer needlessly large errors.” In a February 7, 1972, Newsweek column, Friedman wrote: “Economic research has established two propositions: (1) there is a close, regular and

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predictable relation between the quantity of money, national income and prices over any considerable period of years; (2) the same relation is much looser from month to month, quarter to quarter, or even year to year.” Both the Friedman and Samuelson passages relay the fact that the money/nominal income relationship is loose in the short run. But the Friedman quotation does so more effectively. The Samuelson passage blurs the message by inserting two jokes as well as using the technical term “velocity,” which was jargon of the kind Friedman avoided in his columns. The Samuelson quotation also brings out two aspects of Samuelson’s popular writing that, although they were testament to the breadth of his interests, may not have been helpful in getting his message across. First, he invoked other disciplines (in this case, in the reference to psychology). And second, Samuelson’s discussion implied that he himself did extensive research on monetary relations (an implication that Friedman avoided making about himself in the column by referring generally to economic research). This example underscores the fact that Samuelson’s columns had considerable value; but on the whole, it is indeed appropriate to conclude that Samuelson was outdistanced by Friedman in the role of economics columnist, and that Samuelson underperformed on the criterion of providing clarity to lay readers. A Growing Media Profile Friedman’s New Year resolution for 1970 was “not to make so many public speeches or statements to the press” (Newsday, January 3, 1970). During the previous year, Friedman’s media profile outside the pages of Newsweek continued its sharp upward trajectory. Newsweek’s rival, Time magazine, profiled Friedman early in 1969 (January 10, 1969), leading a Chicago Tribune columnist who frequently met with Friedman to observe (March 2, 1969): “Friedman’s own stature is such that he recently was profiled in Time while contributing . . . to Newsweek. How about that?”31 This coverage would, however, be overshadowed by the December 19, 1969, issue of Time magazine. A portrait of Friedman appeared on the cover of that edition. The choice of Friedman as the subject for the magazine’s cover story (December 19, 1969a) was poignant not only in view of Friedman’s status as an employee of Time’s rival, but also because Time’s front-­cover treatment regarding Friedman paralleled the magazine’s treatment of Keynes almost exactly four years earlier (December 31, 1965).32 Although the profile of Friedman in the body of the magazine was limited to one page, his prediction (discussed in the next chapter) of a recession for 1970 formed the basis of a longer article in the same issue of Time (December 19, 1969b).33Around the same point at which this article appeared, the

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Economist (January 10, 1970) used the precedent of Time’s Keynes cover as evidence that “the economic debates of the past have an increasingly wide appeal,” going on to remark, “Any day now they may spread into the pages of the color supplements.” This observation, intended as facetious, within weeks became reality when the New York Times Sunday magazine supplement devoted its cover, and main story, to Friedman (in the edition of January 25, 1970). For the year 1970 as a whole, New York Times items referring to Friedman numbered about 90, compared with about 20 in 1966 and virtually none in 1960.34 Part of this higher profile reflected the election of Richard Nixon as president in November 1968 and the perception that this change implied that a greater weight would be put on Friedman’s views in policy circles. Much press coverage of Friedman during 1969 played up this angle, with a New York Times report (June 17, 1969) one of many that described Friedman as a Nixon administration adviser.35 Although Friedman did not have any official economic-­policy-­related post in the administration, there was considerable truth to Meigs’s (1974, 31) characterization, “When President Nixon came into office in 1969 his economic advisers gave monetary policy, and the money supply in particular, far more weight in their statements and plans than had their predecessors of the Kennedy-­Johnson Administrations. . . . Milton Friedman himself was believed to be an unofficial White House adviser, as his fiscalist counterpart, Paul Samuelson had been in the early days of the Kennedy regime.” The title and text of a chapter in Friedman’s memoirs would accept the label of an adviser to Nixon. As we have seen, Friedman certainly served as an economic adviser to Nixon ahead of Nixon’s inauguration; and, as discussed in the next chapter, he would talk to Nixon during the latter’s first term sporadically, from late 1969 through late 1972. He would also interact with key economic policy personnel in the administration on a much more frequent basis. The Nixon Administration’s Welfare Proposals As discussed in the previous chapter, Friedman looked askance at proposals for welfare reform in which a negative income tax would be superimposed on the existing federal transfer-­and-­expenditure system. The Nixon administration’s own reform proposals of 1969–70, advanced as the “Family Assistance Plan,” would fall into this category to a considerable extent. The proposals consequently attracted criticism from Friedman, who went so far as to declare in his Newsweek column: “I would vote against the bill in the form in which it passed the House” (Newsweek, May 18, 1970). Furthermore, this negative reaction stemmed primarily not from the modifications that Congress had made to the bill but to the underlying Nixon ad-

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ministration proposals. Concern about effects on labor supply played a key part in Friedman’s objections. In his columns (May 18 and September 7, 1970) and in other discussions, including his November 1969 testimony to the House of Representatives’ Committee on Ways and Means, Friedman distinguished between Nixon’s broadcast speech of August 8, 1969, and the actual plan proposed by the administration. Friedman regarded the stated plan as failing to adhere to the principle that acceptance of employment opportunities should raise a household’s take-­home pay.36 Somewhat lost among Friedman’s many negative remarks about the Family Assistance Plan proposal was his observation, in his November 1969 testimony, that the proposal was qualitatively “a major and welcome step” in the direction he wanted. The Friedman critique focused on provisions in the plan that, in his view, needed to be altered in order to prevent the plan from being quantitatively a retrograde step when judged against existing arrangements.37 At the time when the Family Assistance Plan was put forward, Friedman hoped that the proposal could be modified so that, although it would not amount to the comprehensive welfare reform Friedman favored, a more efficient welfare system was secured. Friedman’s belief that reform that went partially toward his ideal was politically feasible was brought out in his use in the testimony of a version of his familiar dictum that “we want to be very careful not to let the best destroy the good.”38 When, however, his recommended modifications were not taken on board by the Nixon administration or by Congress, Friedman’s opposition hardened—a hardening reflected in his declaration that the Family Assistance Plan as proposed had been “absurd” (Newsweek, May 18, 1970). Subsequent developments would lead to a still further change in Friedman’s perspective, and he would adopt a more generous attitude toward Nixon’s early record in a number of areas of domestic policy. For example, as will be discussed in the next chapter, the Nixon administration’s U-­turn on economic management in August 1971 would cause Friedman to emphasize the similarities of stabilization policy as conducted between 1969 and 1971 and his own preferred policy. Similarly, the lack of interest on the part of successive administrations in the years after 1970 in comprehensive welfare reform would lead Friedman to look back on the Family Assistance Plan more favorably. In these retrospective accounts, he would acknowledge that the plan, if implemented, would have “consolidated and eliminated” many programs. Along the same lines, Friedman would speak sympathetically of the plan and other proposals by Daniel Patrick Moynihan to reform welfare, as described in Moynihan (1973), that Moynihan had advanced when serving in the Nixon administration.39 By the time Friedman was giving these favorable assessments, however, the Family Assistance

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Plan was very much past history, having failed to secure congressional ­approval.

II. Issues Related to Regulation and Aggregate Supply, 1969–72 T he S ocial Resp ons ibilit y of Business An article that Friedman published in the New York Times Magazine of September 13, 1970, provides an illustration of how a position that is relatively unexceptionable among economists—particularly the macroeconomics-­ oriented segment of the profession—can seem inflammatory to non-­ economists. The position taken by Friedman in the article was that firms did not have a social responsibility distinct from their responsibility to shareholders. Firms’ sole responsibility, according to Friedman, was to maximize profits. This article provoked something of a firestorm, one reflected in the multiple engagements that Friedman had in 1971, 1972, and 1973 in connection with the piece. Friedman’s post-­1970 discussions of the social responsibility of business included a radio program—Conversations at Chicago: Milton Friedman Discusses the Social Responsibility of the Corporate Structure—that was transmitted in areas beyond Chicago (see Capital Times, March 6, 1971). He was also interviewed on the subject in the Spring 1972 issue of Business and Society Review. And Friedman participated in a debate entitled “Is Social Responsibility a Necessary Component of Corporate Policy Making” with executive Eli Goldston in New York City on October 14, 1973.40 As was the case with some of his other popular writings that provoked a strong reaction, the 1970 contribution did not articulate a new position on Friedman’s part. The view that firms should maximize profits and eschew other goals was one that Friedman had already voiced in the 1950s and 1960s.41 Indeed, Capitalism and Freedom’s chapter 8 had been titled “Monopoly and the Social Responsibility of Business and Labor.”42 New or not, Friedman’s argument was perceived by critics as reflecting extremely ideological polemics on Friedman’s part. Yet he was simply advocating for actual firm behavior what was routinely assumed in economic analysis concerning firms. The vision of firms as profit maximizing was by no means limited either to Friedman’s side of macroeconomic debates or to the literature in which he participated. It was prevalent in the study of firms’ purchases of capital goods—an area of macroeconomic research to which Friedman barely contributed—including work done by Keynesians. For example, Tobin and Brainard (1990, 543) observed, “q-­theory works best if managers act in the interests of the stockholders. Yes, q-­theory is in

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that sense a neoclassical theory of corporate investment.” The treatment of firms as profit maximizers was a standard position in mainstream economic research, especially in macroeconomics.43 In the course of the debate on the social responsibility of business, Friedman did not shirk from his position that firms should maximize profits. The debate did, however, witness a change in Friedman’s views on the interpretation of actual firm behavior. In particular, the 1970s witnessed an odyssey on Friedman’s part about the empirical relevance of what in 1962 he called “a true divorce between ownership and control,” and what in economics falls into the category of the principal/agent problem.44 The fact that Friedman had defended profit maximization as an empirical approximation in his 1953 methodology paper suggested that he did not regard principal/agent problems as very important in practice. His belief in the validity of that approximation had been echoed by Robert Solow in 1967. In response to Galbraith’s (1967) contention that large firms in the modern US economy followed arrangements in which corporate managers disregarded shareholders’ objectives, Solow argued that the postulate that firms were profit maximizers remained a decent empirical approximation.45 In 1970, however, it appeared that Friedman’s own confidence on this point had been shaken. Friedman’s dedication in 1970 of a full article (his aforementioned New York Times Magazine piece of September 13) to the subject of the social responsibility of business indicated a concern that firms in practice were deviating, on a large scale, from the objective of profit maximization.46 This reflected his perception that firms’ managers were making decisions about investment and about production processes that reflected considerations other than profit maximization. In October 1972, however, legal scholar Henry Manne used the opportunity of being on the program for a University of Virginia conference in Friedman’s honor to challenge Friedman’s interpretation. “I was critical of Milton because I thought that we had been a little bit naïve about what most corporations were really doing when they engaged in so-­called corporate social responsibility,” Manne recalled (interview, April 30, 2014). “I don’t think there is a corporate conscience, and I don’t think that they [firms] were very interested in social responsibility. But they are interested in the bottom line. And most of this [ostensibly socially motivated behavior] is public relations of one sort or another, or it was government relations; or, occasionally, it could be used to attack a competitor. For instance, if you had—for one reason or another—put in costly environmental controls and equipment, you’d like to require your competitors to do it because that would be an additional cost for them. So there were a lot of other reasons, other than the one that Milton was properly criticizing, why corporations might do this.” Manne’s analysis, subsequently published as Manne (1975),

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reinterpreted actions taken by firms in the name of social responsibility as profit-­maximizing behavior. Manne went into the 1972 event expecting a backlash against his argument from conference participants, including Friedman. The initial reception to his paper seemed to confirm his expectations. “The audience was visibly hostile that I was standing there at a Festschrift for Milton Friedman criticizing him. And so, then, some of the early comments were, I guess, critical [of Manne].” The situation changed in the course of the paper’s floor discussion. “Milton came up to the platform, grabbed the microphone, and he said, ‘I want this audience to know, I agree with every word that Henry said’” (Henry Manne, interview, April 30, 2014). Friedman had been won back to the view that deviations by firms from profit maximization were minor, and in 1976, echoing Manne’s analysis, he interpreted corporations’ use of television advertisements, in which firms stressed their social responsibility, as self-­interested behavior on the corporations’ part.47 The same year, when discussing Galbraith’s views, Friedman was dismissive of the principal/agent problem as a factor in manager/ shareholder interaction, declaring that he knew of no empirical evidence in its favor.48 This was a considerably more categorical statement than Solow (1967) had made in his own critique of Galbraith. Indeed, Friedman had likely gone from harboring excessive doubts about the profit-­maximization hypothesis earlier in the 1970s to overconfidence in its applicability. Certainly the economic research world did not share Friedman’s now wholly dismissive perspective on the principal/agent problem, for the mid-­1970s onward saw a burgeoning of the literature on that subject in the wake of Mirrlees (1975, 1976) (see S. Grossman and Hart 1983).49 Not keeping up with developments in the theory of the firm, Friedman was likely largely oblivious to this emerging literature in the 1970s. For the same reason, he appears to have been mostly unaware of the extent to which his 1970 New York Times Magazine article on the social responsibility of business became a subject of discussion in the economic-­research literature. To be sure, Friedman was conscious of the early commotion that his article produced. “It was a very fashionable topic some 20 years ago, and then it sort of died down,” he stated in Time magazine (May 20, 1996, 41). Friedman believed that the article had survived via business and law-­ school courses and texts on corporate ethics, and he did not seem, even as of 2002, to think that there had been much follow-­up debate on the topic among economists.50 However, Friedman’s article exerted an influence on economic research because it became a benchmark paper in the microeconomic literature on the firm, with a research paper by Bénabou and Tirole (2010, 11) citing it as “a well-­known piece.”51 This microeconomic literature has not put Friedman’s article in an altogether favorable light. Experts

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in the area of the economics of the firm have dissented from Friedman’s narrow conception of the remit of a corporation, arguing instead that companies’ fiduciary duty to shareholders does not simply coincide with maximizing shareholder wealth (Hart and Zingales 2017).52 Oliver Hart (interview, December 29, 2014) viewed the 1970 Friedman analysis as reflecting Friedman’s lack of expertise concerning the nature of a firm—a lack of expertise that, as was noted in chapter 3, Friedman himself candidly acknowledged. In the macroeconomic area, however, the notion that firms should be modeled as profit maximizers is much more widely accepted. One position is that the principal/agent problem has a degree of importance that calls for its routine incorporation into standard macroeconomic models (see Gale 1983, 155). But that position has certainly not become the predominant one. Principal/agent conflicts have been embedded only infrequently in models intended for monetary policy analysis (with one such model that does embed the conflict being that of Gertler and Karadi 2011). Profit maximization by firms has become the predominant specification. The undoubted merits of conducting a deeper analysis of corporate behavior for the purpose of microeconomic analysis need not preclude the validity of profit maximization as the benchmark assumption in macroeconomic modeling. An example of the use of this benchmark assumption was provided by the celebrated study of Christiano, Eichenbaum, and Evans (2005). These authors treated firms as maximizing profits and transferring the resulting profit streams to shareholders, and the model featuring these elements was used to match the empirical behavior of real profits and several other key macroeconomic aggregates. Such modeling of firms as maximizing profits for the benefit of shareholders lined up both with Friedman’s 1953 advocacy of this benchmark and his 1970 insistence that profit maximization was indeed the appropriate objective for firms.

Money and Regul ation Q In the NBER’s Annual Report for 1969, Friedman and Schwartz stated that their new book, Monetary Statistics of the United States, “was sent to press in May 1969 and will soon be in print.” As so often occurred with the output of the Friedman-­Schwartz monetary project, the authors proved to be overly optimistic in their projected publication date. Friedman and Schwartz were unhappy with the way in which their statistical tables were laid out in the galleys of their new book, and so further delays in publication occurred as the tables were reformatted. It was not until mid-­1970 that the book was finally issued by Columbia University Press—an occasion the New York Times marked, not with another profile of Friedman, but with an interview with New York City’s Anna Schwartz (New York Times, July 12, 1970).53

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The tabulation in Monetary Statistics of historical data on monetary aggregates ensured the book’s durability as a standard reference work. Findings that the authors emphasized in the text portion of their book, however, would prove far less enduring. Indeed, it would be more accurate to say that these findings became obsolete during the period over which the authors completed the volume. Friedman and Schwartz finalized Monetary Statistics at a time when two of the tenets that were embedded in their work on US monetary relationships were demanding reconsideration. The first tenet, on which great emphasis was placed in Monetary Statistics, was an empirical one: that the M1 and M2 monetary aggregates moved together, and so the issue of which of the two series should be preferred in monetary analysis did not seem to be of the first order of importance. The second Friedman-­Schwartz tenet was conceptual in nature. It amounted to the position that the creation of deposits was an act in which the commercial banking system as a whole could engage but one that any individual bank could perform only in the very short run—its ability to expand its own deposit liabilities becoming unreliable over longer horizons. Both of the preceding tenets would require major modification in light of developments in the US financial environment during the 1960s. The resulting modifications left intact many of the Friedman-­Schwartz generalizations regarding the relationship between money and the economy. Nor did these modifications overturn Friedman’s basic messages about the feasibility of monetary control. But the fact that these modifications were needed at all reflected a phenomenon—the interaction of financial innovation and commercial banks’ behavior—that would come up again and again in monetary analysis in subsequent decades. From now on, the measurement of money would be a far more involved and problematic matter than it had been when Friedman and Schwartz were writing Monetary History and Monetary Statistics. The closeness of the relationship between M1-­type aggregates and M2-­ type aggregates came increasingly under question as the 1960s progressed. The trend rates of growth of the two series had long diverged. As a corollary, so had the trend behavior of M1 and M2 velocities—with M1 velocity exhibiting a rising trend in the postwar period and M2 velocity much flatter behavior, especially from the mid-­1950s.54 But the growth rates of the two aggregates tended to be highly correlated. In their Monetary Statistics, accordingly, Friedman and Schwartz played down the importance of the choice between M1 and M2 definitions, observing: “important substantive conclusions seldom hinge on which definition is used. . . . We have tried to check many of our results to see whether they depend critically on the specific definition used. Almost always, the answer is that they do not.”55 In a similar vein, Meltzer (1969b, 97)—who, in contrast to Friedman and

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Schwartz, favored M1 over M2—stated: “I don’t know of any period in which there would be a substantial difference . . . using one rather than the other definition of money as an indicator of monetary policy.” In a lecture given in New Orleans in December 1971, Friedman continued on the theme sketched above when he made what was now becoming an increasingly tenuous assertion: “I know of no single important issue of an empirical kind or of a policy kind that really depends on whether you choose to use M1 or you choose to use M2.”56 Because his lecture covered the period up to the late 1960s, Friedman’s claim could be defended as valid when taken in context. But it was also a claim that would be highly inappropriate for monetary analysis applied to US data beyond the mid-­1960s. From that time onward, M1 and M2 growth rates would give different signals for protracted periods. The possibility of a divergence between M1 and M2 was foreshadowed by Friedman in 1959 in his lectures at Fordham University. On that occasion, Friedman noted that Regulation Q, which prohibited interest on demand deposits and limited the interest rates on commercial bank time deposits, was a potential source of discrepancies between the growth rates of M1 and M2.57 Being interest-­bearing, the non-­M1 component of M2 stood a better chance than did currency and demand deposits of remaining attractive to holders in a rising-­interest-­rate environment. Situations could therefore emerge in which M1 growth was particularly weak in relation to M2 growth. Once market rates exceeded the time-­deposit rate ceiling, however, the attractiveness of all commercial bank deposits suffered in relation to short-­term securities (and, to some extent, to thrift deposits). In that situation, both M1 and M2 (as defined in Friedman and Schwartz’s work) might exhibit weakness—a scenario that was, in fact, realized during the 1966 credit crunch, as discussed in chapters 11 and 12 above. An additional complication—which became an important factor in the behavior of the monetary data once the variability of market interest rates stepped up in the mid-­1960s—was that commercial banks tended to adjust their time-­deposit rates sluggishly in relation to movements in rates in short-­term securities markets. This sluggishness was itself an element making for flows in and out of time deposits and was consequently a further source of discrepancies between the growth rates of M1 and M2. In the face of all these newly important factors, Friedman observed in 1969: “In 50 years of data before the past few years, you at no time have such wide discrepancies between the movements of different monetary totals” (Instructional Dynamics Economics Cassette Tape 16, February 1969). In a June 1971 memorandum to the Federal Reserve Board, he further remarked that the rule of thumb that M1 and M2 moved together had been reliable until the mid-­1960s, but that it had frequently been violated thereafter.58

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Still another dimension to the problem was the development in the 1960s of a sizable wholesale deposit market for US commercial banks. This impacted both on the measurement of money and on the interpretation of the second Friedman-­Schwartz tenet given above, concerning the controllability by the central bank of deposit money that was created by the commercial banks. The wholesale market began in earnest when, beginning with the First National City Bank of New York in 1960–61, large US commercial banks began to issue marketable, or “negotiable,” certificates of deposit (CDs). These instruments differed from ordinary time deposits in being tradable in organized financial markets and in being large-­denomination deposits. Negotiable CDs further differed from ordinary commercial bank time deposits because the latter could in practice be redeemed by their holders with the issuing bank at short notice.59 In contrast, commercial banks could count on negotiable CDs as providing funds that would remain in their aggregate liabilities until the stated maturity date. As Huertas (1983, 24) put it: “For the first time[,] the CD gave banks a true time deposit.” The new CD instrument also put large US commercial banks in a position to obtain extra funds in response to new circumstances, and so to tailor the volume of their total liabilities to the scale of their lending-­and-­ investment business. The advent of the CD market is therefore widely accepted as marking the onset of large-­scale wholesale deposit business in the United States and as the facilitator for “liability management”—­ instead of “asset management”—as the business model for major commercial banks. As a result of the launch of the market for wholesale deposits, an elegant discussion of theories of deposit creation in Phillip Cagan’s book The Channels of Monetary Effects on Interest Rates, was thrown into question. In this book—published in 1972, but initially drafted in the 1960s—Cagan had written: Bankers used to deny that they created deposits: from their point of view, deposits created by expanding loans were withdrawn by the borrowers and disappeared from the books of the lending bank. The question was finally resolved by drawing a distinction between individual banks and the banking system, as is now commonplace in money and banking textbooks. (Cagan 1972a, 113)

But if negotiable CDs and other wholesale deposits were considered money, the “finally resolved” question was reopened again, as the wholesale market gave an individual bank the wherewithal to generate new deposits for itself on a sustained basis.60 Therefore, the question that has already been alluded to arose. How should monetary analysis proceed in

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the presence of wholesale deposits? In particular, were wholesale deposits “money”? Friedman grappled with this question in the late 1960s and early 1970s. At first, he followed the then-­reigning Federal Reserve convention in simply counting negotiable certificates of deposit as part of time deposits, and, accordingly, as among the deposits that appeared in his definition of M2. (The Federal Reserve Board did not, as of the late 1960s, produce its own, official M2 aggregate.) Thus in his Newsweek columns in 1967 and 1968 Friedman plotted and tabulated the behavior of an M2 series that included CDs.61 But precisely because CDs were at this point treated by US officialdom as a variant of ordinary time deposits, CDs were subject to Regulation Q ceilings on time deposit rates. And once Regulation Q became regularly binding from 1966 onward, commercial banks’ scope to deploy CDs as a liability-­management instrument was impaired. The banks’ longer-­term response to this obstacle was, however, not to curtail liability management but instead to market other funding instruments that were not subject to Regulation Q. Among the instruments employed in this endeavor were bank-­issued medium-­term securities, bankholding-­ ­ company-­ issued commercial paper, and Eurodollars (that is, US-dollar-­denominated deposits situated in non-­US locations, most not­ ably the United Kingdom). This practice added to Friedman’s reasons for being critical of measures like Regulation Q and the foreign exchange controls introduced in the United States in the 1960s. In relying on these tools, Friedman argued, policy makers had not achieved their goal of restricting US commercial banks’ balance-­sheet expansion. Rather, the regulations had encouraged that growth to occur through Eurodollar issuance, and the burgeoning of the Eurodollar market had in turn boosted the status of London in relation to New York City as a financial center.62 The Federal Reserve’s immediate reaction to commercial banks’ attempts to evade Regulation Q was to widen the regulations imposed on banks. In this connection, Romer and Romer (1993, 78) noted that the Federal Reserve in September 1966 decided to make commercial banks’ issuance of short-­term notes both subject to reserve requirements and covered by Regulation Q. In a related vein, Laffer and Miles (1982, 271) discussed the Federal Reserve’s imposition during the late 1960s through 1971 of reserve requirements that were linked to US banks’ Eurodollar borrowing.63 And Kaufman (1972, 26) and Meltzer (2009a, 470, 568, 648) considered the practice the Federal Reserve Board followed over this period of reclassifying various commercial bank liabilities as deposits or imposing regulations on a wider class of bank liabilities. Irrespective, however, of whether bank liabilities of the CD or Eurodollar sort should be regarded as money, both Friedman and Schwartz felt that

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imposing extra regulations was not the appropriate response to the new liabilities’ emergence. For example, in the UK context Schwartz (in Banker, February 1985, 100) would later state: “As each control failed, a new one was introduced with similar results.”64 As discussed below, whether wholesale instruments were counted as money or not, Friedman continued to see open market operations, rather than regulations restricting those instruments, as the appropriate method of monetary control. Friedman switched in 1969 to using a definition of money that excluded large CDs. His rationale for doing so, however, evolved. At first, he was still inclined to believe that CDs were money-­type instruments, much like other time deposits. That being the case, his basis for excluding large CDs from the definition of money lay in the fact that when commercial banks were losing CDs, this was an effect of Regulation Q (Newsweek, May 26, 1969), as well as in the regularity that, by 1969, the banks were largely making up for these lost CD liabilities by increasing their Eurodollar issuance. Friedman accordingly saw CD runoffs in the late 1960s as largely reflecting a switch on banks’ part from CD issuance to reliance on other liabilities, particularly Eurodollars. He regarded this as a bookkeeping operation that affected his M2 measure because CDs were included in M2 and Eurodollars were not.65 To free his measure of the resulting distortions, Friedman concentrated on M2 minus CDs (hereafter, “M2-­CDs”) as the money concept. This justification for using the M2-­CDs total allowed for the possibility that wholesale deposits such as Eurodollars and CDs were money-­like—in which case a “M2 + Eurodollar deposits” concept of money might be as appropriate as, or more appropriate than, M2-­CDs.66 Within a very short time, however, Friedman had advanced a different rationale for excluding large CDs from M2—a rationale that he and Schwartz settled on in their Monetary Statistics. The Friedman-­Schwartz criterion for defining money stressed the demand for money. Their position was that the money total used in monetary analysis should be one in which different deposit categories were included, provided that the nonbank private sector—especially households, whose behavior was at center stage in Friedman’s money-­demand theory—regarded these different deposits as largely interchangeable for the generation of monetary services.67 In light of this criterion, Friedman and Schwartz’s basis for distinguishing between large negotiable CDs and other time deposits centered on the fact that the CDs in question were high-­denomination marketable instruments. In consequence, large CDs were likely to be treated by their holders as more substitutable for nonmoney assets such as commercial paper than as substitutes for currency, demand deposits, or other time deposits.68 In essence, Friedman and Schwartz were responding to the post-­1960 coexistence of wholesale and retail banking by defining money (other

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than currency) as consisting solely of retail deposits.69 In their reckoning, wholesale deposits were more akin to commercial-­bill-­like securities than to money.70 Friedman and Schwartz’s Monetary Statistics discussion did grant that settling on a total like M1, M2, or a broader aggregate, for which the included deposits were weighted equally was not the theoretically ideal procedure. They observed that it would be more appropriate to construct an aggregate in which different financial assets were weighted according to their varying level of money-­like qualities, with the weights potentially changing over time.71 The “Divisia money” literature that materialized in the 1980s took this idea and ran with it, with Barnett (1981, 2013) stressing the Friedman-­Schwartz Monetary Statistics passage on the issue as a breakthrough discussion.72 For the more practical and immediate issue of defining conventional or simple-­sum measures of money, the Friedman-­Schwartz approach to CDs and the definition of money proved to be very influential. Having crossed the Rubicon by excluding large negotiable CDs from money, Friedman and Schwartz could no longer simply refer—as Friedman had been able to, just prior to the decision to omit certain CDs—to their own definition of money as “currency plus all commercial bank deposits.”73 But, having made the case for a definition of money that excluded large negotiable CDs, Friedman and Schwartz would, in effect, soon see their argument receive the blessing of officialdom. In 1971, the Federal Reserve finally started publishing an official M2 series (R. Anderson and Kavajecz 1994, 2). In designing the official definition of M2, the Federal Reserve Board was perceived as being guided by Friedman and Schwartz’s recent analysis (Berkman 1980, 76). This influence was specifically manifested in the fact that the official M2 definition omitted large negotiable CDs from the time-­deposits total.74 The influence of Friedman and Schwartz was felt again later still, when the Federal Reserve Board redefined the monetary aggregates in 1979–80. Although the M2 definition was broadened on that occasion, so as to incorporate thrift accounts and money mutual fund shares, the Board’s basic criterion for defining the M2 money concept continued to be that used in 1971: a currency-­plus-­retail-­deposits total, which could be motivated as corresponding to the money concept that would arise from a focus on a household money-­demand function (Whitesell and Collins 1996).75 Wholesale deposits continued to be largely excluded from M2 in the 1979–80 redefinition, instead being placed in the non-­M2 portion of M3. Another part of Friedman’s reaction to the wholesale market’s introduction was his stress on the point that wholesale deposit creation was sensitive to monetary policy actions.76 Indeed, although the Friedman-­Schwartz definition of money (with its focus on retail deposits) implied that the central bank’s influence over wholesale deposits was not necessary for control

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of the money stock, the balance of opinion came to be that such an influence did exist: creation of wholesale deposits, like that of retail deposits, was affected by open market operations.77 This verdict contrasted with the position of some nonmonetarist analysts, who saw the advent of large-­scale liability management by commercial banks as having ushered in an age in which intermediaries could expand their liabilities irrespective of reserve constraints.78 To monetarists, this characterization invalidly generalized from the options available to an individual bank to those possessed by the aggregate banking system. In William Dewald’s succinct characterization of the monetarist position, commercial banks, viewed in aggregate, could “run but not hide” from a central-­bank-­imposed restriction on total bank reserves.79 Such a characterization was consistent with Friedman’s observation (Instructional Dynamics Economics Cassette Tape 128, August 29, 1973) that open-­market sales by the central bank “force the banks to reduce their liabilities.” So the advent of liability management implied that Cagan’s (1972a) above-­noted contrast between the roles of the individual bank and the overall banking system needed to be qualified. But Cagan’s bottom line remained basically valid. For the retail-­deposit, asset-­management world that Cagan was describing, individual banks did not see themselves as able to increase deposits in response to a central-­bank injection of reserves— but the aggregate implications of banks’ behavior meant that commercial banks did, in fact, figure crucially in deposit creation.80 Analogously, in a wholesale-­deposit, liability-­management world, it could be said that, although an individual bank might see itself as able to create new wholesale deposits at will, the amount of reserves supplied to the commercial banking system by the central bank actually put a brake on the expansion of aggregate wholesale deposits. The central-­bank-­imposed limit on the amount of bank reserves implied a configuration of asset prices that constrained the overall banking system’s incentives and scope to issue new wholesale deposits. Liability management by commercial banks, in the face of restrictive monetary policy, would lead to a reshuffle of liabilities across banks, but not to an increase in aggregate bank liabilities.81 In practice, the emergence of a wholesale deposit market appears to have implied that commercial bank credit creation can diverge for sustained periods from growth in M2-­type aggregates, because non-­M2 bank liabilities tend to respond more slowly to open market operations (Beebe 1977). But it does not appear to have prevented a longer-­term link from existing between open market operations and total liability issuance by commercial banks and similar institutions.82 A related, but more far-­reaching, message that came out of Friedman’s analysis of the Eurodollar market was that monetary control was feasible

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in the face of financial innovation. Financial innovation might broaden the variety of financial assets traded in markets, and it might also call for redefinitions of monetary aggregates, but in the new environment open market operations could still be counted on to affect asset prices and deposit creation. Monetary control did not rest crucially on regulation of the banking system. In particular, as discussed in chapter 2, Friedman maintained repeatedly that monetary control remained feasible in a zero-­reserve-­ requirement environment.83 Ad hoc additional regulations, such as reserve requirements on new types of bank liability, were a poor substitute for open market operations, and they could be counterproductive as they encouraged innovations designed to evade the controls and made measured monetary aggregates less meaningful. An influence of financial innovations on the money multiplier did not vitiate monetary control via open market operations, Friedman argued, as open market operations could be adjusted as necessary to offset the effect of these innovations on the money stock.84 These positions of Friedman ran contrary to those of many monetary economists, including some monetarists, who saw the imposition of extra reserve requirements as the only way to maintain monetary control as new deposit-­type instruments arose (see Cagan 1979b; Mayer 1982b). But Friedman’s positions were also in keeping with the views of some fellow monetarists.85 They also line up well with modern discussions such as Woodford (2000, 2009). Much like these modern discussions, Friedman advanced the contention that a central bank’s power over financial institutions’ behavior did not stem fundamentally from the imposition of regulations. Instead, it arose from the tendency of financial institutions to gravitate toward central-­bank liabilities as their chosen transactions medium.86 The absence of “supervisory or regulatory” authority over a depository institution, Friedman underlined, did not allow that institution “to escape the discipline of the Fed’s monetary actions” (Wall Street Journal, June 30, 1975). Confining monetary analysis to monetary aggregates that excluded wholesale deposits still left Friedman with puzzling monetary behavior to explain in the early 1970s. Allan Meltzer (1969b, 97) had stated that, once Friedman’s practice of excluding CDs from M2 was followed, “M1 and M2 . . . move together.” But even with an M2 series so defined, the growth rates of M1 and M2 deviated from one another notably during 1970–71—indeed, so much so that Friedman devoted a Newsweek column, “Money—Tight or Easy?” (March 1, 1971), as well as a good deal of his June 1971 memorandum to the Federal Reserve Board, to the coexistence of fairly slow M1 growth and very rapid M2 growth.87 The discrepancy between M1 growth and M2 growth that Friedman had to explain in early 1971 seemed formidable: M1 had risen at an annual rate

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of 3.5 percent between August 1970 and January 1971, and M2 at a rate of 10.4 percent (Newsweek, March 1, 1971). Subsequent revisions to the monetary data reduced this discrepancy, and the 1979–80 redefinitions of M1 and M2 made it still smaller. Consequently, the later readings on monetary developments do register a pickup in both M1 growth and M2 growth in the second half of 1970: see table 14.1. That said, it remains the case that the pickup in M2 growth was much sharper than that in M1 growth. A principal source of the M1/M2 growth discrepancy was one whose potential importance Friedman had, as already noted, been highlighting since the late 1950s: differences in the returns on time deposits and on short-­term securities. As securities-­market interest rates had declined in the second half of 1970, time deposits had become more attractive. Indeed, while the federal funds rate peaked early in 1970 and was sharply lower in the second half of 1970 than in the first half—what Friedman had called an “absolutely dramatic and almost unprecedented” decline in interest rates on short-­term securities (Instructional Dynamics Economics Cassette Tape 63, December 16, 1970), the own rate on (modern) M2 (that is, the weighted interest rate on funds included in the aggregate) actually rose slightly in the second half of 1970.88 Because he saw the decline in market interest rates as a permanent decline—one reflecting the Fisher effect—Friedman was inclined to see some of the strong M2 growth as a permanent shift toward higher holdings of real balances by the community. He believed that M2 growth consequently overstated underlying monetary growth (Newsweek, March 1, 1971, and October 16, 1972). In the event, the monetary easing of 1971 and 1972 would be so great, and so sustained, that it produced conditions in which the decline in inflationary expectations, and the fall in interest rates, observed during 1970 and 1971 were completely reversed. The downward pressure in the early 1970s on interest rates, which occurred in the wake of the economic slowdown at the start of the decade, did not prove lasting. Correspondingly, the opportunity cost of holding real balances did not prove to be an enduring source of increase in real money holdings in the 1970s. What ensued was that inflation in the mid-­1970s closely mirrored the behavior of M2 growth in the early 1970s—doing so, in fact, far more than Friedman had expected in 1971–72. As table 14.1 shows, M1 and M2 growth rates moved into closer agreement over 1971 and 1972. By either definition of money, monetary growth was rapid in both years—a point that Friedman would come to emphasize in his analysis of the post-­1972 inflation.89 This rapid monetary growth would, in turn, also be readily reconcilable with Federal Reserve policy actions.90 In fact, the 1970s and 1980s would resemble prior decades in the sense that the growth in bank reserves and in the monetary base (if both

198 C h a p t e r f o u r t ee n Table 14.1. Six-­Month Growth Rates of Money, 1969 to 1972 (Percent Change at Annualized Rate US monetary aggregate: Six months to: June 1969 December 1969 June 1970 December 1970 June 1971 December 1971 June 1972 December 1972

Old M1

Old M2

New M1

New M2

5.6 2.3 4.5 5.3 8.7 4.7 7.9 9.0

 5.9  0.7  4.3 10.3 14.9  8.0 11.4 11.0

5.3 2.5 3.7 6.4 7.8 5.4 7.4 9.4

 5.3  3.0  2.1 10.3 14.9 11.9 11.5 14.1

Note: Growth rates for old M1 and old M2 data are computed from the data in Lothian, Cassese, and Nowak (1983), which incorporate data revisions through 1977; these rates therefore differ somewhat from those on which Friedman based his 1971 and 1972 commentaries. Growth rates for new M1 and new M2 are computed from the series in the Federal Reserve Bank of St. Louis’s FRED portal.

series were adjusted for changes in reserve requirements) would be closely connected to M1 growth, and also related—probably less closely, but still very significantly—to M2 growth (see Rutner 1975, 8; Hafer 1981; Hein 1983, 83). The reasons for the Federal Reserve’s abandonment of its 1969 policy of restraint, in favor of the rapid monetary growth of the 1970s, will be discussed in the next chapter.

III. Personalities in Debates on Regulation and Aggregate Supply, 1969–72 Robert G ordon Monetary Statistics was not received as a contribution to monetary policy discussion in the way that Friedman and Schwartz’s Monetary History had been. In the authors’ own assessment, Monetary Statistics was a study that “provides raw material for analysis but little economic analysis.”91 It was, nonetheless, in the area of economic analysis, and specifically theoretical analysis, that Friedman’s work was having a large impact. Notwithstanding Friedman’s own misgivings about approaches that concentrated on economic theory, he had to a considerable degree set the agenda on theory among monetary economists by 1970. Writing in the Journal of Finance that year, Friedman’s former student Gregory Chow, observed: “Milton Fried-

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man, more than any other individual, has reshaped the thinking of contemporary economists and economic policymakers on monetary theory and policy.”92 And Robert Clower, in an article titled “Theoretical Foundations of Monetary Policy” for a September 1970 conference, had acknowledged: “Contemporary discussion of monetary policy centers upon the work of Milton Friedman.”93 At the same time, however, Clower complained that Friedman had so far not laid out “a reasonably precise, logically coherent, and empirically acceptable conception not merely of the role of money in economic activity but also of related dynamic interrelations among real and monetary magnitudes.” Such a conception, it has been argued in the present book, could be pieced together from Friedman’s various pre-­1970 writings and statements. As of 1970, however, there were hopes that Friedman would go further—that he would provide an explicit and self-­contained mathematical model that encapsulated his positions on monetary matters. The title of a paper that Friedman published that year, “A Theoretical Framework for Monetary Analysis,” certainly seemed to validate those hopes. Important impetus for the publication of this article came from Robert Gordon, who had received his PhD from MIT in 1967, and who, after a temporary teaching position at Harvard University in the 1967–68 academic year, had been a colleague of Friedman’s at the University of Chicago since 1968. Into Gordon’s lap fell the role of editor of the University of Chicago Press’s venerable Journal of Political Economy.94 Robert Hall, who had been a classmate of Gordon’s at MIT and who would see Gordon several times a year in the half century after their graduation, felt that Friedman’s “[AEA] presidential address, which was not crazy-­technical” played a key role in the creation of the new article. “When Bob Gordon was in the Chicago department, he became one of the editors of the JPE, and he had this idea. . . . He said, ‘OK, Milton, I want you to write down the equations’” (Robert Hall, interview, May 31, 2013). Gordon pressed Friedman in this direction both as a workshop participant from 1968 onward and as JPE editor when the final three of the four Friedman JPE articles in the area were published in 1970–1972. “A Theoretical Framework for Monetary Analysis” was envisioned as a chapter in the Friedman-­Schwartz Monetary Trends book. However, Friedman developed it into a free-­standing article. The article and a 1971 follow-­ up, “A Monetary Theory of Nominal Income,” appeared in the Journal of Political Economy.95 Gordon in turn solicited commentaries from Friedman’s critics, and these, along with Friedman’s reply, took up much of another issue of the Journal of Political Economy in late 1972. Finally, a light revision and synthesis of Friedman’s 1970–71 papers was published together with the critics’ articles in book form as Milton Friedman’s Monetary Framework:

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A Debate with His Critics in 1974.96 Often the book version of the exchange has been the one cited, with the result that many articles have referenced Friedman’s views not by citing Friedman directly, but by citing Gordon (1974a). The Invited Participants When the debate between Friedman and his critics was published in 1974, Gordon mentioned that he had solicited the critics’ articles by sending invitations and “almost all of my invitations were accepted” (Gordon 1974b, x). This raises the question: Who were the critics who turned down the invitation to submit articles? This is not a question to which the interviews for this book produced an answer. Some prominent names were, indeed, absent from the published exchange. Gordon saw the debate on monetary economics as primarily “Yale/MIT versus Chicago. It’s hard to remember anybody else, including anybody at Harvard, who had any real part in this debate” (Robert Gordon, interview, March 21, 2013). But MIT-­affiliated economists were also absent from the JPE debate.97 This fact largely reflected Gordon’s choices. Paul Samuelson and Robert Solow had both challenged Friedman’s monetary work, but they had largely done so in the media or semipopular forums such as commercial-­banking journals; and Solow’s (1969) recent lengthy critique of Friedman’s views on the Phillips curve was a UK rather than US publication. “I would not have invited Samuelson or Solow,” Gordon observed. “Solow was known for growth theory, not for monetary economics. And Samuelson’s portfolio was very broad, but it would not have involved this” (Robert Gordon, interview, March 21, 2013).98 Gordon also opted not to invite Franco Modigliani, in part on the grounds that Friedman had already debated Modigliani at length in 1965’s “AM/FM” exchange (Robert Gordon, personal communication, April 15, 2013).99 The basis for excluding Modigliani from the debate applied with even greater force to Walter Heller, whose November 1968 public debate with Friedman on monetary versus fiscal policy had been published in 1969. Heller’s qualifications for participation in the Journal of Political Economy exchange were undermined by the recent vintage of that bilateral public debate with Friedman. Another factor working against Heller’s participation was the fact that, by the end of the 1960s, Heller had reached a position that Friedman himself would find himself in several years later: in engaging himself so much in public discourse on economic policy, Heller had stepped away from the frontier of academic discussions. In the 1970s, Heller would debate Friedman directly on multiple occasions—but on television, not in print.

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It was, nonetheless, something of a missed opportunity not to have Heller among the critics facing Friedman in the Journal of Political Economy exchange, for Heller—much more than any of the participants in the JPE symposium—was an old-­style Keynesian to whose positions Friedman’s emphasis on monetary policy made the starkest contrast. Friedman himself, in his 1968 debate with Heller, observed that in the Economic Reports of the President of 1962 through 1964 that appeared under Heller’s stewardship of the Council of Economic Advisers, the impression conveyed was that money did not much matter for aggregate demand.100 David Meiselman regarded Heller as a “down-­the-­line” Keynesian whose advocacy of fiscal policy went hand in hand with doubt about the effectiveness of monetary policy. That perspective, Meiselman added, made Heller “completely different from Tobin” (David Meiselman, interview, July 16, 2014). Indeed, a motivating factor for Heller’s shift from analytical research to policy work was likely a judgment on his part that the theoretical issues had largely been settled during the early stages of the Keynesian revolution. “Today’s talk of an ‘intellectual revolution’ and a ‘new economics,’” Heller wrote in a 1966 preface to lectures he gave on the implementation of Keynesian policies under Presidents Kennedy and Johnson, “arises not out of startling discoveries of new economic truths but out of the swift and progressive weaving of modern economics into the fabric of national thinking and policy.”101 The rise of a strong monetarist challenge to “modern economics” was distinctly unwelcome to Heller, as he made clear by largely shunning David Meiselman when the latter served as visiting professor at the University of Minnesota from 1966 to 1968.102 “Walter Heller regarded me as one of the enemy. . . . He didn’t like me very much” (David Meiselman, interview, July 16, 2014). Another major Friedman critic during the 1960s, John Culbertson, was also absent from the Journal of Political Economy debate. He had so faded in prominence in the decade since his exchange with Friedman that he was not likely to be asked to be part of the exchange. Furthermore, the analysis given in Culbertson (1968) and especially in his February 1967 congressional testimony (Joint Economic Committee 1967b) showed that Culbertson had converged in considerable part to the Friedman perspective on money and the business cycle. Culbertson had, in particular, come round to sharing Friedman’s emphasis on variable monetary policy, as measured by monetary growth, as a source of postwar US cyclical fluctuations. Those who did take part in the Journal of Political Economy debate were, other than Friedman, Paul Davidson, Don Patinkin, Karl Brunner and Allan Meltzer, and James Tobin. Much of the analysis Friedman provided in the 1970–72 contributions to this debate has been covered in earlier chapters. In the discussion that follows, the coverage is restricted to selected topics

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brought out by Friedman’s 1970–71 papers and his 1972 exchange with each of his critics.103 A Narrow “Theoretical Framework” An important point to be stressed about the model Friedman laid out in his 1970–71 articles is one made by Friedman himself in 1972 and by others subsequently: that the model did not capture all the important elements of his monetarist theoretical framework.104 In particular, Friedman’s focus in that debate was on contrasting his own positions with those of Keynes’s General Theory. To that end, the distinctions Friedman emphasized were: (i) That he, unlike Keynes, treated wages and prices as endogenous, and, in particular, sensitive to the output gap in a continuous manner, with price adjustment specified so that full price flexibility was allowed in the long run. (ii) That he, unlike Keynes, was optimistic about the extent to which, in conditions like those of the Great Depression, money creation by the authorities would flow through into downward pressure on interest rates and positive responses of aggregate private spending. In short, Friedman rejected both the price-­rigidity assumption and the liquidity trap. Reflecting his focus on these issues, Friedman, in his 1970–71 analysis, used an IS-­LM framework together with an expectational Phillips curve. In so doing, however, he abstracted from three major areas in which he had marked himself out from many recent Keynesian economists. First, as he acknowledged, his overall setup, although it postulated some delay in reactions of nominal income to money, did not capture the lagged reactions of nominal income and its components to monetary movements that he had long emphasized and that he would further refine in other work in the early 1970s (see the next chapter).105 Second, his aggregate-­supply comparisons focused on the demand-­pull versus cost-­push debate on inflation, at the expense of the contest between the permanently downward-­sloping and vertical-­long-­run Phillips curve. Thus, Friedman characterized both his opponents and himself as putting a unitary coefficient on expected inflation in the Phillips curve, and he concentrated on beliefs about the output-­gap coefficient as the source of debate. Third, Friedman’s aggregate-­demand analysis focused on the repercussions of different values of the interest elasticities in the IS and LM equations, while taking for granted the position inherent in the basic IS-­LM analysis that the various interest rates in the IS and LM relationships can be consolidated into a single rate. Friedman allowed for the Fisher distinction, but in the 1970–71 pieces he followed custom in making the real interest rate in the IS equation a single interest rate, and he likewise put only a single nominal rate in the LM equation. It is the third of the preceding simplification that most prevents Fried-

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man’s “Theoretical Framework” from being a definitive exposition of his monetary analysis. In writing down a model, he had simplified the aggregate-­demand side of his underlying model in a way that removed from the model key monetarist propositions concerning the transmission mechanism. This is not to say that the simplification did not have benefits. It allowed Friedman to focus on the topics of aggregate supply and of monetary policy in a depression that were most prominent in the contrast between his views and those expressed by Keynes in the General Theory.106 A corollary was that, in laying out the issues separating Keynesians from quantity theorists in the analysis of conditions other than that of depressions, Friedman could zero in on matters concerning the behavior of aggregate supply—­ specifically, the interaction of real and nominal variables.107 This focus did not amount to a new approach on Friedman’s part: he had previously used an IS-­LM framework to bring out certain contrasts between himself and the Keynesians about the determination of real and nominal series.108 Furthermore, Robert Hall has argued that the 1970–71 “Theoretical Framework” highlighted an area in which Friedman was a pioneer. Friedman, Hall noted, presented a monetary analysis in which an IS-­LM system was confronted with a short-­run nonvertical, but long-­run vertical, Phillips curve. Thus, Hall observed, “Milton was the first New Keynes­ian!”109 Hall added that in Friedman’s exposition, “the Phillips curve, which is sort of the heart of the New Keynesian model, was right there—and, of course, it was his kind of a Phillips curve.” Hall observed: “I always thought that was a considerable contribution that Bob [Gordon] made to force Milton to sit down and be a more of a model guy” (Robert Hall, interview, May 31, 2013). Did the Debate Diminish Friedman’s Standing? Gordon and coeditor Harry Johnson put Friedman’s continuation article in seventh place behind the six other full-­length articles in the March/April 1971 issue of the Journal of Political Economy. To Gordon, the low technical level of the mathematical modeling in the 1970–71 papers diminished Friedman’s standing: “From today’s perspective, you wouldn’t allow a graduate student to write an article like that” (Robert Gordon, interview, March 21, 2013). Michael Bordo shared this view. “The arithmetic was already out of date . . . the type of math that he did, differential equations and stuff. . . . He had a bunch of students that kept doing that stuff, but it’s not done anymore.” Bordo added that Friedman’s analysis, which was not explicitly stochastic, would soon look even more primitive when judged against Robert Lucas’s work.110 Bordo went on to note that, by conducting analysis in terms of a struc-

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tural model, and presenting the bulk of the model as a theoretical framework common to himself and Keynesians, Friedman undermined his association with one of his long-­standing positions. This was his position that the knowledge needed for a structural model that could be reliably used for short-­term monetary analysis had not yet emerged and that reduced-­ form work had to fill the void in the meantime. “In a sense, Friedman always, until that time, had said, ‘Look, this is my approach, and it is single equation. Hit the data, hit the problem from all different respects with different types of data, and different approaches. But I’m not going to write down a model. I’m not going to do general equilibrium.’ And he was critical of general equilibrium, and he was critical of big models. . . . He’d [now] moved out of his comfort zone” (Michael Bordo, interview, July 23, 2013).111 William Brainard likewise felt that Friedman was unwise to engage in a debate with Tobin that dwelt so much on specific modeling issues. The JPE exchange, Brainard observed, “was a game being played on a field which Jim was, I would say, pretty much in complete control of and Milton was not” (William Brainard, interview, March 5, 2014). Michael Bordo judged of the exchange between Friedman and his critics that “he lost that debate.” The so-­called simple common model that Friedman had laid out in his 1970–71 papers had led him to being “clobbered by a lot of people,” including other monetarists, and “in a sense, that was a big shock to him. Anna [Schwartz] told me this. It was a really big deal” (Michael Bordo, interview, July 23, 2013).112 There is, however, considerable evidence that Friedman felt that he came out reasonably well in the wake of the debate provided that his final, 1972, entry in the debate was taken into account. His unhappiness with his contribution to the debate stemmed mainly from the modeling material, especially the IS-­LM component, of his 1970–71 papers as well as the critical fire that that material received. Friedman seems to have been far more satisfied with his 1972 reply to the critics. With that reply capping his contribution to the exchange, Friedman was happy to have the whole debate reprinted in Gordon (1974a); and Robert Gordon (personal communication, March 5, 2014) did not recall Friedman telling him that he regretted his participation in the debate. Indeed, Friedman and Schwartz would rework much of the 1972 reply to critics into the Monetary Trends book a decade later. Friedman was also evidently pleased with the discussion of fiscal policy in the 1972 reply (which did not make it into Monetary Trends, whose coverage excluded fiscal matters), labeling it “my JPE exegesis” and indicating that it was clearer than his prior expositions on fiscal policy.113 These facts reinforce the inference that Friedman’s regret about his contribution to the JPE debate was concentrated on the algebraic analysis in the 1970 and 1971 papers that Friedman submitted into the exchange. In

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this connection, Friedman observed to John Taylor in 2000: “It was really a waste, I think, trying to reconcile the Keynesian thinking with the monetarist thinking” (Taylor 2001, 119).114 Tellingly, although Monetary Trends would reuse much of the verbal account of Keynes and the quantity theory that had appeared in the 1970–71 papers, including the discussion of the liquidity trap and aggregate supply, the “simple common model” of the 1970–71 articles—with which Friedman had attempted to represent Keynesian and monetarist propositions in an IS-­LM system—was largely dropped. Friedman noted in the aftermath of the debate that he had found it a “cumbrous” exercise to map his own views into IS-­LM terms.115 Crucially, and as already indicated, the traditional IS-­LM framework did not capture the multiple-­yield view of monetary policy transmission that monetarists generally had stressed and that Friedman had emphasized on a number of occasions—most especially in a number of prominent pieces in the early 1960s.116 This multiple-­yield view underpinned the monetarists’ preference for monetary growth, rather than any single interest rate (real or nominal), as a summary of monetary policy. Even in the original 1970–71 JPE articles, Friedman had indicated that the level of aggregation of assets implicit in the IS-­LM approach was not desirable for many purposes. For example, he stated that “it may be important to classify assets still more finely” and noted that the analysis presented was provisional on “stick[ing] to a single interest rate.”117 But the initial JPE articles did not stress that rejection of the single-­rate framework helped explain monetarists’ focus on money as a summary of monetary policy’s effects. After publication of the articles, Friedman grasped that the omission of this aspect of monetarist thinking from his JPE articles had been a serious one. Consequently, in weaving the articles together into an NBER monograph, he added a passage that underscored monetarists’ belief in a spectrum of yields through which money injections mattered for aggregate spending.118 The fact that these passages added words, but not equations, to the previous draft brings out a larger point about the 1970–72 debate. The most enduring and valuable contribution that Friedman made in his “Theoretical Framework” and the related papers was not the explicit mathematical model, which was inadequate as a representation of his monetary analysis. Rather, the contributions made by surrounding passages—containing his rendition of doctrinal history and his clarification of his own positions— are what most contribute to an understanding of Friedman’s framework. Brunner-­Meltzer Brunner and Meltzer, Friedman’s only monetarist opponents in the 1972 exchange on his “Theoretical Framework,” naturally took him to task for

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presenting a model that abstracted from some key aspects of monetarism. Brunner (1970, 20) had stated that for monetarist analysis “the use of the IS-­LM apparatus tends more to obscure than to clarify,” and, accordingly, Brunner and Meltzer (1972) objected to Friedman’s use in 1970–71 of IS-­LM. Friedman largely accepted this criticism and, in his reply to Brunner and Meltzer, quoted the words on the transmission mechanism included in his 1971 rewrite of “Theoretical Framework.”119 Patinkin Friedman’s interest in a transmission mechanism that was centered on substitution effects put him at odds with one of his critics in the 1972 debate, Don Patinkin, one of the developers of the theoretical basis for the real balance effect. Long before the 1970s, Friedman had concluded that real balance effects were empirically unimportant and that Patinkin’s view of the transmission mechanism was accordingly misconceived. Gordon recalled: “One thing that I sharply remember is that there was a comment—I think it was an early draft of Friedman’s response, which I think I got him to take out or he took out—that Don Patinkin has had a lifelong love affair with the real balance effect” (Robert Gordon, interview, March 21, 2013). Patinkin, however, spent a good deal of his commentary (Patinkin 1972a) not on this area of disagreement but, instead, on elaborating his position, previously articulated in Patinkin (1965a, 1969), that Friedman’s conception of the quantity theory corresponded largely to the monetary analysis in the General Theory and did not stem from the University of Chicago’s traditions in monetary economics. This Friedman/Patinkin debate was considered in detail in Leeson (2003b, 2003c). The debate is beyond the scope of this book, but a few points should be made here. First, the notion that the quantity theory can be viewed as a theory centered on the demand for money has considerably more backing from the literature prior to the General Theory (including items other than those originating from University of Chicago) than Patinkin seemed to credit (see chapter 6 above). Second, in discussions dating back to the 1950s (including Patinkin’s 1959 remarks to Friedman in Leeson 2000b, 740), Patinkin displayed a tendency to apply the label “Keynesian” to any analysis in which the demand for money had a nonzero interest elasticity. In contrast to this characterization, however, Friedman appears to have been on firm ground in suggesting that work by Keynes and others before the General Theory, including that of Hume, incorporated a nonzero interest elasticity of the demand for money. Furthermore, as was discussed in chapter 12, the ramifications of a nonzero interest elasticity of money demand tended to be greatly overstated by key Keynesians. Contrary to their conclusions,

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such a parameter setting did not imply results regarding the long-­run impacts of monetary policy on interest rates and inflation that contradicted the quantity theory. Third, in arguing that Friedman, as well as 1940s-­vintage writers like the University of Chicago’s Lloyd Mints, were simply making refinements of Keynes’s monetary theory, Patinkin (1972a, 1974, 1976) took Keynes as rejecting the liquidity trap. Yet Friedman in his 1972 reply provided many examples of Keynes’s attachment to the liquidity trap.120 Friedman’s reply also endeavored to link up his own views with those of his University of Chicago predecessors. The fact that Patinkin focused his 1972 critique of Friedman on doctrinal history reflected both the reality that this had long been a major area of interest on Patinkin’s part and his unhappiness at Friedman’s often-­ impressionistic outlook toward the body of prior economic literature. As AEA president, Friedman had helped found the Journal of Economic Literature, but, although launched in 1969, this was not a journal to which he himself contributed until the 1990s.121 He did dip into the older literature, and he had heroes such as Smith, Fisher, and Marshall, although his command of even these authors’ works was hardly encyclopedic. There is no gainsaying the fact that, as David Laidler noted (personal communication, September 2, 2014), “all in all, . . . Milton was not much interested in the history of thought for its own sake.” This was an assessment echoed by David Meiselman, who observed: “Friedman was never very interested in the history of thought. . . . He just wasn’t that involved in the intellectual battles of who said what first” (David Meiselman, July 16, 2014).122 Friedman’s perspective on this area of research activity was brought out by his remark in 1969 that Samuelson’s (1968) paper “What Classical and Neoclassical Monetary Theory Really Was” had been “an article that I may say I found both instructive and persuasive.”123 That remark indicated that Friedman did not regard intellectual history as a front of battle with Samuelson.124 The remark further showed that Friedman was inclined to defer to, and draw on, Samuelson’s knowledge of the pre–­World War II economic literature. In contrast, monetary economists more attuned to the history of thought, such as Harry Johnson (1970b, 440) and Patinkin (1972c), raised objections to Samuelson’s characterization of the older literature. In fact, Friedman was, in essence, following in Samuelson’s footsteps with the interpretation of the General Theory that Friedman gave in the 1970– 71 papers. This interpretation, although documented by Friedman with his own references to Keynes, was essentially a retread of the characterization outlined by Alvin Hansen, Samuelson, Modigliani, and other writers of the 1940s and early 1950s. In their characterization, Keynes was portrayed as endorsing the liquidity trap (as well as assuming a fixed nominal wage and/

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or price level). This interpretation permeated Samuelson’s 1948 textbook.125 The picture of Keynes as an adherent to the liquidity trap had become more controversial over time, and by the early 1970s both Samuelson and Tobin had repudiated that interpretation of Keynes’s views.126 But it was an interpretation had once been standard among US economists’ discussions of Keynes, and so, in advancing such an interpretation, Friedman was adhering to the older practice. This precedent for Friedman’s interpretation, however, did little to placate Don Patinkin who, as indicated above, had developed an interpretation of the General Theory in which the liquidity trap played no role. Paul Davidson recalled: “Patinkin objected to this word ‘dialogue,’ and he said that ‘dialogue’ means people are communicating with each other, and with Milton you can’t communicate; so [he said] it’s better to be called a ‘debate’” (Paul Davidson, interview, May 3, 2013). Davidson Paul Davidson himself fell, with Patinkin, into the category of a critic of Friedman who had formidable knowledge of Keynes’s work. The youngest of the participants in the 1972 exchange, Davidson had earned his place in the debate via his rapid drafting and circulation of an unsolicited article that criticized Friedman’s 1970 “Theoretical Framework” paper and objected to that paper’s characterization of the analysis in the General Theory. The article caught Robert Gordon’s attention when, in late 1970, he began seeking out articles from Friedman’s critics (Gordon 1974b, x), and Davidson joined the list of invited debaters. “When he [Friedman] wrote this thing in the JPE, I immediately looked at it and said: ‘Oh my God, this is just so wrong.’ . . . So I wrote an article basically criticizing the JPE article.”127 Davidson recalled that the next step was that Gordon “wrote me and these other guys and said, ‘Would you like to have a dialogue with Milton Friedman?’” Although delighted to be included in the debate, Davidson was taken aback by the tone of Friedman’s draft response to his critics. “Friedman wrote a reply, and Gordon sent it around, and it was really a very nasty type of thing. The tone was different. There were a lot of adjectives, not only to me but to all the other guys, which indicated [Friedman’s view] that we didn’t understand him.” In the course of the editorial process, as already indicated, Friedman’s response was toned down. The final version remained withering about Davidson’s arguments, but Davidson took this treatment in his stride. “My answer was: Hell, I don’t care whatever Friedman called me as long as he spelled my name right. I was a young guy at the time, and this was going to make me get some notice in the profession.” Davidson and Friedman would find themselves in adjacent seats at a September 1974 White House economists’ conference on inflation. Although

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he and Friedman amicably discussed Rutgers University—at which Davidson was then teaching—Davidson did not succeed in steering their conversation back to their debate on the General Theory. “I started to try and talk to him about some of these things, and he just didn’t want to talk about it. . . . I could not get him to discuss the debate: It was finished, he’d gotten rid of me; at least that’s the impression he left with me” (Paul Davidson, interview, May 3, 2013). Tobin James Tobin, Friedman’s most regular opponent on monetary issues, completed the list of critics. As he had in much of his earlier exchanges with Friedman, Tobin was at pains to emphasize that a belief in the effectiveness of monetary policy was not synonymous with monetarism. “Tobin had a plaque on his desk that said ‘Money matters,’ quite prominently,” his former graduate student, Duncan Foley, recalled (interview, October 2, 2014). “Which makes sense, because Tobin did a huge amount of very creative work on the way that short-­term money markets actually function. And he certainly believed the monetary policy was extremely important. So he was not in the camp of the old-­fashioned Hansen Keynesians, who seemed to ignore money pretty much altogether; their theory of aggregate demand was almost entirely fiscal policy.” Reflecting the high rating that both he and Friedman gave to effects of monetary policy on output, and notwithstanding Tobin’s differences from the early Keynesians, much of Tobin’s JPE case against Friedman had Tobin defending the power of “pure” fiscal policy actions.128 To this end, Tobin (1972a) made much of Friedman’s use, in the recent JPE papers, of an interest-­elastic money demand function. In so doing, Tobin overlooked the occasions in the 1950s and 1960s when Friedman had readily granted that money demand was interest elastic. In his reply to Tobin, Friedman drew attention to some of these statements. In addition, Friedman once again emphasized that monetarist propositions did not rest on a zero interest elasticity of the demand for money. Furthermore—in contrast to Tobin’s focus on the slope of the LM curve as the decisive factor in discussing the effectiveness of “pure” fiscal policy—Friedman pointed out reasons for believing that deficit spending that was not monetized might have very limited effects on nominal aggregate expenditure even when the demand for money was interest elastic. Among these reasons, Friedman included what would later be called Ricardian equivalence.129 However, one weak aspect of Friedman’s reply to Tobin was Friedman’s rejection of the characterization of himself “regard[ing] a change in M as both a necessary and sufficient condition for a change in [nominal

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income].”130 Tobin did not provide a specific reference when attributing this view to Friedman, and Friedman denied holding it. But the Friedman-­ Schwartz paper “Money and Business Cycles” in 1963 had actually come close to such a statement. In that article, the authors had stated that “appreciable changes in the rate of growth of the stock of money are a necessary and sufficient condition for appreciable changes in the rate of growth of money income.”131 Tobin could have quoted this statement and cited the article in which it was made, but he did neither. Perhaps this was because Tobin had not expected a challenge to the characterization that he had given of Friedman’s views. Another possible reason was that, by the time of the JPE debate, the acrimony between Tobin and Friedman had reached such a degree that Tobin may seldom have been able to bring himself to look in detail at Friedman’s work. Meghnad Desai underlined the significance of the JPE debate between Friedman and his critics when he observed that the debate represented “the profession coming to terms with Friedman” (Lord [Meghnad] Desai, interview, January 9, 2015). As editor of the symposium, Robert Gordon had played an important role in facilitating this event. Over exactly the same years, 1970 to 1972, Gordon was also pivotal in a process that, in retrospect, can be regarded as economists’ coming to terms with the Friedman-­ Phelps version of the Phillips curve. The Brookings Meetings and the Phillips-­Curve Debate For all Friedman’s emphasis in his 1970–71 JPE articles on the “missing equation” in monetary analysis—the structural price-­setting relationship that was crucial in determining interactions between nominal and real variables—Friedman did not devote considerable research effort over this period to estimating that relationship.132 In contrast, over the same period in which he was overseeing the debate between Friedman and his critics, Robert Gordon was at the forefront of the efforts to estimate the Phillips curve in the United States. Gordon provided his Phillips-­curve estimates over these years via his contributions of research papers to conferences of a regular gathering, or “panel,” of economists, at the Brookings Institution in Washington, DC, and to the institution’s publication, launched in 1970 and titled Brookings Papers on Economic Activity.133 The Brookings Institution panel meetings have come to be seen as the main battleground in which the debate on the Phillips curve took place. Initially this new bastion of Keynesian economics reacted in a most hostile manner to Phelps’s and Friedman’s natural-­rate hypothesis. “Go back and look at the Brookings economic papers and you see that they were treated like crackpots,” Robert Lucas observed in 1982.134 Lucas did not point to

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specific articles, but the one that Robert Gordon published in the inaugural issue of Brookings Papers—an issue recording the conference proceedings for the first Brookings panel of April 16–17, 1970—was likely one of the key contributions that Lucas had in mind. This article (Gordon 1970a) would be spotlighted by McCallum (1989b, 183), King and Watson (1994a, 1994b), and Sargent (1999) as the epitome, with Solow (1969), of the early, flawed literature—appearing in response to Friedman and Phelps’s theoretical work—claiming to give empirical rejections of the natural-­rate hypothesis.135 McCallum (1989b, 183) cited Gordon’s (1970a) paper as the most prominent empirical study of the US Phillips curve published during the late 1960s/early 1970s period. The same Gordon article also attracted considerable media attention upon its publication. An Associated Press report on Gordon’s article appeared in the Kansas City Star of June 12, 1970, under the title, “Low Unemployment or Stable Prices? Can’t Have Both, Economist Says.”136 The article read, in part: “The United States can have low unemployment or stable prices but not both together, a University of Chicago economist suggested. . . . As a basic finding, Gordon concluded that if the unemployment rate remains unchanged the rate of price increase eventually becomes a steady rise, rather than an accelerating and increasingly severe inflation as economists have maintained.”137 Alan Blinder, who was completing graduate studies at MIT at this time, recalled: “The view then was that Friedman and Phelps had made, and were making, a very coherent and sensible theoretical argument that, for one reason or another, the data did not support” (Alan Blinder, interview, December 6, 2013). Gordon’s rejection of the natural-­ rate hypothesis contrasted with the attitude of a number of graduate students to whom he was teaching macroeconomics at the University of Chicago. These students had been persuaded by the argument that there was no long-­run unemployment/inflation trade-­off, and they tried in class to persuade Gordon of the merits of the Friedman position (Warren Coats, interview, October 21, 2013). For the moment, Gordon was unconvinced, largely on empirical grounds. Gordon reaffirmed his negative results concerning the natural-­rate hypothesis in another Brookings Papers article, published later in 1970. Its title really said it all: “Prices in 1970: The Horizontal Phillips Curve?” (Gordon 1970b). Gordon’s next Brookings paper on the Phillips curve, Gordon (1971), was another rejection of the natural-­rate hypothesis. Prior to his presentation of the paper at the Brookings panel, however, Gordon presented it in early 1971 in Friedman’s money workshop at the University of Chicago.138 A regular workshop attendee, Gordon had given papers to the forum before, but on this occasion he had a particularly rough ride. “And I went through that process several times successfully, but then, one time, I de-

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veloped some theory that he [Friedman] was able to convince the audience within the first minutes was logically incoherent” (Robert Gordon, interview, March 21, 2013). James Lothian, a graduate student who was a workshop attendee, recalled: “He said to Bob, ‘Well, Bob, we’re not going to discuss the first twenty pages, because they’re totally wrong. But I think there might be something in the empirical results.’” Lothian recounted that Gordon started to defend his analysis, but Friedman then “said, ‘No, Bob, it’s all wrong. And let me tell you what’s wrong with it; let me put it straight’” (James Lothian, interview, October 24, 2013). Gordon recalled: “So we sort of spun out ideas, theories on how he would approach the stuff ” (Robert Gordon, interview, March 21, 2013). The published version of Gordon’s 1971 Brookings paper continued to reject the natural-­rate hypothesis. But, as noted, Friedman found the empirical results of the paper of interest. And not surprisingly. For Gordon had abandoned his fleeting pursuit of a horizontal Phillips curve and was again affirming a downward-­sloping Phillips curve. But the curve’s long-­ run shape was more vertical than Gordon had earlier reported. In 1970, Gordon had reported the lagged-­inflation term in the Phillips curve to have a coefficient of about 0.45.139 Although Gordon’s 1971 paper found, as he had in 1970, the coefficient on lagged inflation in the Phillips curve to be significantly below unity, the coefficient estimate had moved closer to the unitary value that he and many others associated with the natural-­rate hypothesis. Furthermore, around the same time, Sargent (1971) was showing that the economy’s underlying Phillips-­curve relationship might be consistent with the natural-­rate hypothesis even when estimated Phillips curves had coefficients on lagged inflation below unity. However, the situation with the US data was itself fluid in the early 1970s. Just when Sargent’s analysis was casting doubt on the evidence derived from historical US time series, the addition of new data points was weakening the findings against the natural-­rate hypothesis, rendering obsolete the coefficient estimates reported in the work that Sargent critiqued. In particular, the 1971 Gordon paper established that the properties of empirical Phillips curves were coming closer to the long-­run steepness predicted by Friedman and Phelps. And this was the case even if one took the view (challenged by Sargent) that the natural-­rate hypothesis automatically implied that lagged inflation terms in the Phillips curve had a unitary coefficient sum. Indeed, the Brookings Papers would become the vehicle through which the profession came to accept the natural-­rate hypothesis. In retrospect, the Brookings panel was an ideal forum in which arguments about the Phillips curve could be hammered out. Superficially this might not appear to have been the case. Gordon’s first Brookings paper had as its discussant Robert

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Solow, who shared the negative perspective on the natural-­rate hypothesis that Gordon initially took.140 Thus, the initial combination of author and discussant in the Brookings panel did not seem conducive to a profession-­ wide exchange of views. Furthermore, Friedman described the Brookings Institution as “a home away from home for out-­of-­office Democratic intellectuals” (Newsweek, September 25, 1972).141 Over time, however, Friedman would come to have considerable respect for the Brookings Institution as a major center for economic research (Newsweek, May 18, 1981). He would also acknowledge that studies released by the organization had in some respects lined up with his own analysis of government policies.142 He would cite several Brookings Papers articles over the years, a practice that reflected that periodical’s status as a research journal rather than an advocacy publication or a source of ephemeral economic commentary. Charles Schultze, a longtime affiliate of the Brookings Institution, noted, “Art Okun and Joe Pechman . . . meant it [Brookings Papers] to be a serious kind of economic background for policy. You got people from both sides. I think there was apparently some criticism. . . . But, in general, it was reasonably neutral” (Charles Schultze, interview, July 9, 2013). Gordon, although he noted that the original panel chosen by Okun was “very MIT-­oriented,” observed that the youth of many of the original panel members made them anxious to write “serious papers” that could help them obtain academic tenure. “Okun was also a very demanding critic back in those days” (Robert Gordon, interview, March 21, 2013). In addition, the choice of Solow as a discussant of Gordon’s work proved to be something of an anomaly. The more usual situation was that the Brookings panel discussions were genuine back-­and-­forth exchanges. As Schultze noted, non-­Keynesian economists were brought into the forum from the beginning. Although Friedman never attended a Brookings panel, those sympathetic to his positions figured at the gatherings from the outset, with Alan Greenspan and Friedman’s former student David Fand attending the first meeting. Another Brookings regular for the panels of the early 1970s was William Poole. Recalling those panels, Poole would underline the fact that the Brookings Papers became the key conduit through which the profession reconciled itself to the natural-­rate hypothesis.143 In particular, the research presented at Brookings proceedings after 1970 would both reverse Gordon’s initial findings on the Phillips curve and firm the Brookings Papers’ credentials as a research journal. And Gordon himself would come to see the role he played on the Brookings panel in those years as one of helping “to bridge the gap between Chicago and MIT” (Robert Gordon, interview, March 21, 2013). Gordon’s research from 1970 to 1972, as documented in his Brookings articles, took him from rejection to acceptance of the Friedman-­Phelps

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Phillips curve. As Poole put it, Gordon found a larger coefficient on expected inflation every year.144 The results in Gordon (1971) amounted to another apparent rejection of the natural-­rate hypothesis, but, as already noted, the paper reported a rejection of the hypothesis that was numerically less decisive than that registered in Gordon (1970a). The 1971 study relayed part of what Gordon (1976a, 55) would look back on as the “steady upward drift in estimates of the slope of the long-­run Phillips curve.” This process continued in subsequent years. Indeed, the following year, 1972, was particularly important. Early in the year, Brookings conference regular Robert Hall could still note with respect to the natural-­rate argument: “The logical force of this argument is considerable, although its empirical validity is in doubt.”145 Within months, this statement was out of date, thanks to Robert Gordon’s new findings. As Gordon (1976b, 193) put it, “the gradual acceleration of inflation during 1966–70 caused the computer to yield ever higher values of [the expected-­inflation coefficient] α as the passage of time provided additional observations until finally, as demonstrated by Gordon (1972), tests with a sample period including early 1971 were unable to reject statistically the hypothesis that α = 1.”146 Alan Blinder observed, “by 1972 already, the garden-­variety Keynesian Phillips curve, as represented by Bob Gordon in the Brookings panel, like, once a year, had accepted and embraced the Friedman-­Phelps view of the long-­run Phillips curve being vertical. So, that was quite a difference from what I’d learned in graduate school. So, say, in ’69, ’70, it was, ‘Well, it makes sense—the argument that it should be vertical in the long run—but [empirically] it doesn’t look that way.’ By ’72, it looked that way. So, to my mind, by ’72-­ish, that controversy is over” (Alan Blinder, interview, December 6, 2013). Robert Gordon’s empirical work had brought him round to the natural-­ rate hypothesis. At the time he first worked in the area, the Phillips relationship in the US data had delivered a near-­textbook downward-­sloping scatter of inflation and unemployment combinations. “And then,” Gordon observed, “the economy goes through exactly what he [Friedman] had said [in 1967] would happen. This is a very important combination of genius and coincidence that helped to cement his influence and completely turned the tables.” Gordon would come to reflect on the late 1960s and early 1970s in these terms: “In those days, Friedman was sort of leading the way toward a macro that was much more oriented to an inflationary environment” (Robert Gordon, interview, March 21, 2013). In addition, Gordon (1976b) acknowledged that his 1970 and 1971 empirical rejections of the natural-­ rate hypothesis had been flawed, being subject to the critique of Sargent (1971) and Lucas (1972a)—both of whom had pointed out that, when lagged inflation was used to proxy expected inflation, a finding of α < 1 might well

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emerge in conditions in which the natural rate hypothesis prevailed. The 1960s data had not been evidence against the Friedman-­Phelps position after all, but merely an artifact of the combination of reasonably stable inflation expectations and stationary inflation data. By the time he came to reflect on these issues for a 1974 conference, Gordon (1976a, 56) was referring to “the expectational Phillips curve framework accepted by both groups”—that is, by both Keynesians and monetarists. This way of describing the state of professional thinking was a prescient description of the consensus prevailing among US economists by around 1982. But it did not convey the reality that during the first half of the 1970s the debate on inflation behavior actually intensified between monetarists and many key Keynesians, specifically on the issue of whether cost-­ push forces had become an important factor behind inflation.147 Gordon’s description does, however, capture the notion that by 1972, among US academics, the contest in the research literature between long-­ run nonvertical and long-­run vertical Phillips-­curve specifications had been resolved in favor of the latter.148 In this connection, Harry Johnson— another figure initially resistant to the natural-­rate hypothesis (see Harry Johnson 1970a; and Laidler 1984, 606–8; as well as the previous chapter)— would observe (Harry Johnson 1976b, 15): “the arguments of Friedman and Phelps, and even more the usefulness of their ideas in applied research on inflation, have converted inflation scholars of all descriptions to ‘the expectations-­augmented Phillips curve hypothesis.’” Johnson added that “this hypothesis is quite capable of explaining the facts of ‘stagflation.’” In the same vein, Lucas (1981a, 560) would remark: “Friedman and Phelps were right. It really is as simple as that.” How much did Friedman keep tabs on the Brookings deliberations about the Phillips curve? We know that Friedman had seen Gordon (1971). And William Poole conjectured (interview, April 30, 2013), that Friedman, in endeavoring to stay current on economic research, likely at least glanced at Brookings Papers articles as they appeared in print in the early 1970s. A slightly later occasion on which Friedman very likely read the Gordon Brookings papers occurred during the 1972–73 academic year, when the University of Chicago’s economics department was deliberating on whether to grant Gordon tenure. Gordon had received attractive outside offers, including from Northwestern University, of more senior positions than that he enjoyed at the University of Chicago. The University of Chicago’s economics department would keep Gordon only if it opted to promote him immediately, and, as part of its deliberations on this matter, Gordon’s research output was reviewed. Gordon had written in the areas of both understanding inflation behavior—his main research topic in macroeconomics—and output/price mea-

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surement—an area bordering on macroeconomics but, with its heavy use of disaggregated price and quantity series, closer to applied microeconomics. Gordon recalled that “my PhD thesis was entirely about measurement. . . . Friedman was fundamentally uninterested in the kind of stuff I did for my thesis (Robert Gordon, interview, March 21, 2013).”149 When Friedman was asked to review Gordon’s research as part of the tenure deliberations, Gordon remembered: “Friedman said, ‘I’m not going to read any of the stuff on measurement; I’m just going to look at what he did on macro.’ So he would throw out half of my stuff. That, again, is an indication that while he was an extremely versatile economist—you’re talking about somebody who wants an all-­volunteer army, wants to legalize drugs, and all the other things he said in Capitalism and Freedom, much of which I agree with—there were just some parts of economics he wasn’t interested in.”150 It has been emphasized in previous chapters that members of the economics department at the University of Chicago always included figures who disagreed with or were uninterested in Friedman’s approaches to monetary economics and econometrics. There is nevertheless no reason to question the observation of Marc Nerlove (interview, September 18, 2013) that “Friedman was extremely powerful in that department, as I later was to discover when [between 1969 and 1973] I was a member of that department.” Nerlove went on, “And I discovered really that in a department meeting about new appointments, especially, there were only two votes that counted, and they were Friedman and Stigler. And the administration would always know what the vote was and who voted what way. So that was an interesting facet of his career.” Friedman had supported Gordon’s hiring in the late 1960s, but—reading Gordon’s articles while convalescing in Palm Springs around early 1973—Friedman now took a less positive attitude toward Gordon’s work.151 Unfortunately for Gordon, the material that Friedman was reviewing consisted in good part of Gordon’s (1970a, 1970b, 1971) critiques of the natural-­rate hypothesis, and the tenure deliberations preceded much of the later Gordon work that endorsed the hypothesis. “He [Gordon] did not get tenure, moved to Northwestern, and then he was there forever,” observed Nerlove (interview, September 18, 2013).152 Gordon remembered that Friedman “was largely responsible for me not getting tenure at Chicago,” while also relating that Friedman years later wrote, to a mutual acquaintance, “a note that said, ‘Bob Gordon was my greatest mistake’—about the tenure decision” (Robert Gordon, interview, March 21, 2013). Whether Friedman, at the time of the tenure deliberations, grasped from Gordon’s 1972 Brookings article that Gordon had come round to the natural-­rate version of the Phillips curve is not clear. What is clear is that, before long, Friedman recognized that Gordon had become an ally on the

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matter of the Phillips curve. The two of them were shoulder-­to-­shoulder in the 1974 debate on indexation partly for this reason.153 In addition, Friedman cited Gordon’s post-­1972 work on inflation respectfully in his Nobel lecture.154 In the initial period after Gordon’s conversion to the natural-­ rate hypothesis, Friedman was decidedly less gracious. When, shortly before concluding his period at the University of Chicago in 1973, Gordon presented further Phillips-­curve work at the money workshop, Friedman did not hesitate to remind Gordon of the latter’s former adherence to a long-­ run unemployment/inflation relationship.155 James Lothian recalled, “two years later [after Gordon’s 1971 workshop presentation], he came back with another paper on the Phillips curve, and Milton couldn’t resist. He said, ‘Well, what happened, Bob? Did the previous model blow up?’” (James Lothian, interview, October 24, 2013).

R al ph Nade r Friedman and consumer advocate Ralph Nader had some close encounters in the late 1960s and early 1970s. Friedman and Nader testified on the same day (October 6, 1969), although not in the same session, at Joint Economic Committee hearings in Washington, DC, on the efficiency of government. And they appeared on a PBS panel discussion about Nixon’s first State of the Union address in 1970, albeit in different television studios and without direct exchanges (State of the Union/’70, WNET, January 22, 1970). But the 1970s saw more direct confrontations between the two, and at the end of the decade Friedman remarked that had debated Nader many times (Donahue, NBC, September 6, 1979). It was a sparring that stretched beyond the 1970s, as borne out by the fact that in August 1995 Friedman and Nader had an exchange in the Wall Street Journal on the relationship between economic growth and government regulation (Wall Street Journal, August 1 and 29, 1995). In remarks delivered in 1977, Friedman judged Nader’s consumer-­ protection movement as having turned Nader “into a multinational conglomerate . . . [with] many imitators and many successors.”156 Even in Capitalism and Freedom—a book written before Nader had become the face of consumer protection—Friedman had questioned the merits of governmental safety regulations.157 But the movement of which Nader became the spearhead brought pressure for a sharp increase in product regulation, and Friedman discussed Nader’s movement on numerous occasions, including in a Newsweek column of June 5, 1967, “Auto Safety Standards.” Friedman acknowledged that Nader’s efforts (a key part of which was Nader’s 1965 book Unsafe at Any Speed) had stirred public opinion sufficiently to prompt federal legislation imposing new automobile-­safety requirements,

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and Friedman conceded that the new measures might well make currently produced cars safer than otherwise. But he criticized the legislation for not taking into account the opportunity cost associated with devoting more resources to car safety, and he argued that, by discouraging innovation, the new regulations might make cars less safe in the longer term. In later years, Friedman would also critique Nader’s basic research, arguing that Unsafe at Any Speed’s indictment of the Corvair car had not stood up to scrutiny.158 Part of Friedman’s grievance regarding the Nader drive for car-­safety regulation likely reflected his own status as an enthusiastic motorist, and the personal nature of his objections was reflected in Friedman’s complaint that “I am required by law to buy specified ‘safety’ equipment on cars ‘for my own good’ whether I want to or not.”159 Friedman also used a Newsweek column (June 3, 1974) to complain about mandatory wearing of seatbelts. The last objection was not one that many economists would share. Indeed, as we shall see, the whole area of consumer protection is one in which there is considerable controversy over the source of Friedman’s position. According to one interpretation, he was basing his arguments against Nader and others on economic analysis. The contrary interpretation is that he was adopting a heavily libertarian perspective whose implication was that the criterion that individuals be left to their own devices was allowed to trump the application of economic analysis to the situation. Before that controversy is considered further, it should be stressed that there was a considerable amount of economic content in Friedman’s objections to safety protections. He argued that uniformity of safety requirements was a less efficient system than one in which consumers were permitted to choose the amount of safety features their car had: “the consumer should be free to decide what risk he wants to bear.”160 Instead, however, consumer-­protection policy followed the trend set by the automobile-­safety measures, leading Friedman to observe in 1980: “Ever since the Corvair affair, the U.S. government has increasingly been muscling in between buyer and seller in the marketplaces of America.”161 As discussed below, Friedman contended, following on from the theme in his 1967 Newsweek article on automobile safety, that the trend toward greater consumer-­protection measures was an inappropriate preemption of consumer choice as well as being a deterrent to economic growth and technological innovation. Friedman’s position on consumer protection drew criticism from Paul Krugman when he discussed the issue six months after Friedman’s death. Krugman wrote (New York Times, May 21, 2007): “I blame the food safety crisis on Milton Friedman, who called for the abolition of both the food and the drug sides of the FDA [Food and Drug Administration]. What would protect the public from dangerous or ineffective drugs? ‘It’s in the self-­interest of pharmaceutical companies not to have these bad things,’

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he [Friedman] insisted in a 1999 interview. He would presumably have applied the same logic to food safety (as he did to airline safety): regardless of circumstances, you can always trust the private sector to police itself.” In a 2008 column, Krugman went on to mock Friedman’s seeming suggestion in the same 1999 appearance that the threat of private lawsuits provided adequate incentives for firms to be concerned with product safety. Krugman took Friedman’s position as reflecting a peculiar degree of faith in the convoluted and protracted US legal process. “Friedman, unlike almost every other conservative I can think of, viewed lawyers as the guardians of free-­market capitalism” (New York Times, June 13, 2008). Although he relied on a very latter-­day discussion by Friedman as his source, Krugman was certainly on solid ground in suggesting that Friedman saw food safety (and pharmaceutical-­drug safety) as largely ensured by private incentives without regulation.162 Friedman had made remarks of this kind well before 1999—during the heyday of his public policy activity in the 1970s and early 1980s. What Friedman once awkwardly called “nutritive services” were in his view best delivered through the market without government intervention.163 Friedman stated in 1977 that “it is in the self-­interest of the entrepreneur to protect the consumer,” and in the same appearance, he remarked that firms’ need for return customers encouraged them to avoid producing shoddy products.164 In addition, during the period covered by the present chapter, Friedman wrote an introduction to a book by Mary Bennett Peterson titled The Regulated Consumer that applied, to the food-­and-­drug area, the free-­market critique of consumer-­safety regulation. Friedman ended his introduction to Peterson’s book by stating: “I commend it to you.”165 That commendation is notable because the book contained a passage outlining the argument that Krugman would come to associate with Friedman: Most drug firms do extensive testing themselves—for their own self-­ interest—before any drug is marketed. Should a harmful or defective drug be sold and cause harm or death, the guilty firm could be sued for heavy damages, as they can be even on FDA-­approved drugs. The risk of costly suits and of damage to reputation is so great as to virtually preclude all but the most irresponsible firms from purposely marketing harmful or misrepresented drugs. (Peterson 1971, 70)

Along similar lines, on a number of occasions during the 1970s, Friedman himself stated that an individual harmed by a firm’s product could bring suit against the firm.166 Thus, Krugman also appears to be on firm ground in supposing that Friedman viewed the prospect of private litigation as an effective deterrent

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to firms’ issuance of harmful products. It was nevertheless an invalid leap for Krugman to infer that Friedman had confidence in the efficiency of the existing US legal process. For who ever said that Friedman’s plans for reform of the US economy would leave the legal system untouched? Admittedly, to consider what sort of shake-­up of the legal system Friedman would have countenanced is to go into territory that was only very lightly covered in his body of work. There are few areas connected to US domestic political and economic arrangements on which Friedman left a more meager body of writings and statements than that of legal reform. He had little systematic to say regarding the reform of the legal system or about the application of economic principles to reform of that system. Several economists who were colleagues of Friedman at the University of Chicago delved deeply into the intersection of economics and law. So too did Friedman’s son David in a 2000 text on the subject (D. D. Friedman 2000). But the subject of the law was not an area in which Milton Friedman engaged heavily. Gloria Valentine, Friedman’s secretary from 1972 onward, concurred that Friedman kept away from writing on legal matters, “maybe [because] that just wasn’t something he felt comfortable doing” (Gloria Valentine, interview, April 1, 2013). Friedman’s own statements reinforce this impression: “I am not an expert on commercial law.”167 “I’m not a lawyer.”168 “I am no lawyer.”169 “I am not accustomed to speaking to lawyers.”170

We do know, however, that, sketchy though Friedman was in laying out his vision of the ideal legal system, that ideal was very different from US practice. The fact that Friedman opposed law licenses attests to this fact.171 Of course, abolition of licensure cannot be considered a proposal that would carry wide support, among either economists or non-­economists. Nevertheless, it seems appropriate to conclude that Krugman’s critique of Friedman, which was to the effect that Friedman exalted the existing US legal system as a protector of consumer rights, is invalid because the totality of Friedman’s reform proposals concerning regulation in the United States would presumably involve measures that both reduced consumer-­ protection rules and endeavored to make the US legal system less complex. Friedman’s case against consumer protection did not, therefore, constitute an endorsement of the US legal system. It could nevertheless be con-

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tended that Friedman’s arguments did rest on overoptimistic informational assumptions, and, in particular, on overconfidence in consumers’ knowledge of the product market. Arthur Okun took this position, arguing that “Milton talks as if it’s a perfect—or perfectible—marketplace, where everyone has perfect information and perfect understanding when he makes his marketplace decisions” (New York Times, January 25, 1970, 83). Lawrence Summers similarly assessed that Friedman “was insufficiently recognizing of anything about imperfect information, in that people would often make bad choices for themselves left to their own devices. . . . And I think he was quite insensitive to people’s difficulty in making sensible choices” (Lawrence Summers, interview, November 22, 2013). Friedman had an answer of sorts to critiques of the kind. He contended that the case against consumer-­product regulation did not require the assumption that all customers possessed high levels of information. Rather, what was required was the presence of an informed purchaser who could ascertain the reputable sellers of a product and let other consumers know through word-­of-­mouth.172 However, it could be argued that this was not an acceptable alternative to regulation. Legal prohibition of unsafe products amounts to society making a statement about the unacceptability of unsafe products—a declaration that it is inadmissible to put such products up for sale. In contrast, Friedman’s scheme would see unsafe materials’ production discouraged only indirectly via the operation of market forces, including consumer word-­of-­mouth. In some cases, the latter alternative may conceivably be preferable, particularly for those instances in which it is desirable for products to be made in different gradations of safety. But in other cases, there may be a strong presumption that the legal framework rather than the market should be used to drive a product out of market transactions. “My example was always: Nobody really wants to buy an unsafe baby seat,” observed Lawrence Summers. “It’s actually quite hard to tell whether a baby seat is safe or not; and so the idea that you regulate baby seats to a minimum standard actually has a fair amount of logic to it, even though there will be some people who might be priced out of the baby-­seat market as a consequence; and . . . [it] could be better than giving them completely free choice” (Lawrence Summers, interview, November 22, 2013). Another objection Friedman made to the consumer-­protection movement was that it placed too little of the onus on the potential purchaser to scrutinize the product before making a transaction—and so was contrary to the principle of caveat emptor.173 To this it could be objected that the caveat emptor principle—as opposed to, say, the notion of consumer sovereignty—is really one that is more rooted in libertarianism than in economic analysis proper, and so it was not a principle on which Friedman could appeal to a professional consensus. Baumol (1974, 205), for example, stated

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that “caveat emptor is not really to me an acceptable rule for public welfare.” Some of the preceding arguments against the laissez-­faire position on consumer protection were captured in Adler’s (1971, 10) pithy observation that “where the product is one that is dangerous or defectively made, such as pharmaceutical drugs, then there is the obvious risk that the consumer may be eliminated before the product.” There are, therefore, numerous valid objections to Friedman’s attitude to consumer protection. Nevertheless, it should again be underscored that Friedman’s reservations about consumer protection partly comprised the standard economist’s position on these issues and, in particular, they invoked the notion of opportunity cost. Even Paul Samuelson, in an appearance with Friedman in 1969, offered only qualified opposition to Friedman’s position on regulation. “The food and trade regulations are good things,” Samuelson remarked, “although I do realize that powerful arguments can be made against them” (The Great Economics Debate, WGBH Boston, May 22, 1969). Samuelson even shared some common ground with Friedman on the position that lawsuits had a role to play in regulating product quality. In this connection, Samuelson observed: “Using civil suits to penalize undesired behavior after it takes place is indeed often a better social device than expensive and unpleasant inspection prior to behavior” (New York Times, December 26, 1970, emphasis in original; see also Samuelson 1973b, 248). In some respects, therefore, Friedman was speaking for the profession in the case he articulated in opposition to Ralph Nader’s perspective. One particular aspect of Friedman’s discussion of Nader, however, went well beyond what could be justified by economic analysis or, for that matter, by reasonable definitions of fair comment. Friedman’s generation defeated Hitler, but it also was one that was often too quick to invoke Hitler and Nazism in domestic public debate. Friedman was guilty of this practice in a commencement speech at the University of Rochester on June 6, 1971. On that occasion, he said: “Heaven preserve us from the sincere fanatic who knows what is good for us better than we do, and who knows that it is his duty and his obligation to make us do what is good for us—whether his name be Torquemada, Lenin, or Hitler, or on a minor scale, Marcuse, or Nader. The sincere fanatic has done vast harm in the course of human history.”174 The qualification “on a minor scale” is not enough to overturn the conclusion that Friedman’s drawing of parallels between Hitler and Nader was grotesquely inappropriate.175 In recalling the commencement speech a few years later, Friedman was unapologetic about the comparison, although he hinted that it had been poorly received by the audience (Instructional Dynamics Economics Cassette Tape 157, November 6, 1974). But when Friedman repeated the comparison in a 1977 speech, an already-­

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hostile portion of the audience caused such a commotion that the event was interrupted. And when a published version of this 1977 talk appeared in the 1983 collection Bright Promises, Dismal Performance, the Hitler reference was dropped—an omission that perhaps reflected a tasteful judgment on the part of that volume’s editor, William R. Allen.176 This intemperate language on Friedman’s part was only the most extreme manifestation of the fact that, in debating Nader on consumer protection, Friedman did not acquit himself very well. He could have been ambassador for the economics profession in these debates—an analytical economist facing a nonanalytical non-­economist—but, for the most part, he did not serve that role. Instead, he frequently acted more like a representative of a brand of libertarianism than of economics, and he used incendiary language that was not conducive to the presentation of arguments based on economic analysis. But Friedman would come closer to performing the function of economists’ representative when he turned to another area in which Nader was active—that of the environment. Nader would become associated with the issue of environmental protection, and Friedman made many interventions on this subject as it rose in prominence during the early Nixon years. Here he saw a valid case for government intervention as existing in principle, on account of the presence of externalities. But Friedman saw the case being made by environmentalists for government intervention as emotional and lacking a sense of perspective. As of 1970, much of the environmental debate focused on industrial pollution. And here Friedman saw the debate as being cast incorrectly as a good-­guys-­versus-­bad-­guys story, in which firms created pollution capriciously. Firms that generated pollution were not “evil devils who are deliberately polluting the air,” Friedman said (Sun-­Herald, August 16, 1970, 104; see also Center for Policy Study 1970, 2): they were doing so because consumer demand for their product created a demand for a certain amount of pollution. “The people responsible for pollution are the consumers. It is the people who buy the products who create a demand for the pollution,” Friedman told a rowdy meeting between University of Chicago students and academic staff on the issue of pollution in April 1970.177 He had earlier observed: “If people find the cost of controlling pollution too expensive, let’s be honest about it and say we would rather have pollution than pay for it to be cleaned up” (Chicago Tribune, February 1, 1970). Friedman was distressed by the extent to which anti-­pollution measures were being imposed by the federal government on corporations by regulatory fiat without the implied costs to consumers being brought into the open. However, Friedman was not averse to governmental measures against pollution that were focused on the consumer. Indeed, in a June 1970 television

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appearance, Friedman affirmed his support for a gasoline tax as an anti-­ pollution measure.178 In addition, on repeated occasions in the early 1970s, Friedman endorsed the Pigovian solution of a tax on firms, that is, a tax linked to their issuance of pollutants.179 Although some non-­economists have taken Friedman’s advocacy of this measure as implying that the tax would only have support among hard-­line free-­market advocates, that is not the correct interpretation. Advocacy of a Pigovian tax fell into the category of orthodox opinion among economists, rather than an innovation or idiosyncrasy on Friedman’s part.180 A preference for a tax-­based instead of a regulatory approach to pollution control has been and remains prevalent among economists. This fact has been borne out by Paul Krugman’s recent observation, “Textbook economics isn’t anti-­environment; it says that pollution should be limited, albeit in market-­friendly ways when possible” (New York Times, November 28, 2014). Notably, even in the late 1970s—by which time he had become very well disposed toward “public choice” theorists’ negative perspective on governmental measures against externalities—Friedman remained an outspoken advocate of pollution taxes. The government, he affirmed, did have a role to play in limiting pollution (Chicago Tribune, July 20, 1980, 21). “I don’t think there is any good way to handle the kind of pollution problem we have,” Friedman observed in 1979, “but the least bad way is through effluent taxes which, in effect, convert the right to issue pollutants into private property.”181 The Friedmans also advocated a Pigovian tax in the book version of Free to Choose in 1980.182 Friedman favored tax-­based measures on the grounds that they fostered conditions in which private-­sector decisions could be based on a cost-­ benefit calculation with explicit prices. Such a situation would allow “the demand for clean air to be effective” in production and consumption decisions yet would also permit society’s basic demand for a positive amount of pollution to emerge (Instructional Dynamics Economics Cassette Tape 48, April 15, 1970). Tax-­based measures against emission that allowed the costs of households and firms’ actions to enter their decisions were “the right kind of intervention,” whereas uniform regulatory standards imposed by fiat were not.183 The scenario that Friedman saw as likely to flow from the imposition of a pollution tax was one in which the creation of pollution would be discouraged and firms would minimize production costs in light of the tax.184 And—in a part of his outlook that provides a counterexample to the Krugman characterization of Friedman as someone who put his faith in the legal system to treat externalities—Friedman and his wife pointed out that an advantage of pollution taxes over pollution regulations was that the tax mechanism would reduce the reliance on the courts as a mechanism for enforcing environmental protection.185

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On environmental issues, to a considerably greater extent than in the area of consumer protection, Friedman’s opposition to the Nader position represented a case in which Friedman was speaking for the profession as a whole. As of the early 1970s, it did not seem unrealistic to expect that US government measures against pollution would ultimately take the form of tax measures. A prediction along these lines was voiced by Daniel Walker (1971, 5) at a conference held for executives on the subject of environmental protection. But, instead, regulatory devices continued to figure prominently among environmental-­ protection measures introduced in the United States over the 1970s. In the face of this trend, Friedman would stress environmental restrictions as a major new impediment to the construction of residences and factories (Newsweek, June 12, 1978). The failure of the authorities to use explicit taxes and the price system for the control of pollution had, in his view, meant that environmental measures by the government had failed to reflect “a sane balance among competing objectives” (Newsweek, December 31, 1979). As the 1970s closed, and the post­1973 slowdown in productivity growth became ever clearer, Friedman cited the growth in both environmental and consumer protection as factors that had deterred US economic growth and technological innovation (Proprietary Association 1979, 28; Chicago Tribune, July 15, 1979)—an indictment that he would reaffirm in his 1995 debate with Nader (Wall Street Journal, August 1, 1995).186

C ha p te r 1 5

Monetary Policy Debates and Developments in Stabilization Policy, 1969 to 1972 I. Events and Activities Related to Monetary Policy Debates and Developments in Stabilization Policy, 1969–72 Looking back on Friedman’s career after his death, Anna Schwartz pointed to his American Economic Association presidential address of 1967 and observed, “That was the peak.”1 Laidler (1995, 324) had earlier entered a similar, but stronger, judgment when he stated that Friedman’s “major contributions to the academic literature on monetarism had virtually all been completed” by 1970. The same conclusion underlay an overview titled “Some of Milton Friedman’s Scientific Contributions to Macroeconomics” that Thomas Sargent presented at a tribute to Friedman held in mid-­1987. In Sargent’s piece, the most recent Friedman-­authored reference included in the bibliography was dated 1969 (Sargent 1987c, 14). It is difficult to disagree with these assessments. Two post-­1968 Friedman papers received, and continue to receive, a large volume of citations. One of these was “The Optimum Quantity of Money,” the opening (and only non-­reprint) chapter of a volume Friedman published in 1969, The Optimum Quantity of Money and Other Essays.2 But, as has been stressed in The views expressed in this study are those of the author alone and should not be interpreted as those of the Federal Reserve Board or the Federal Reserve System. The author thanks David Laidler for comments on an earlier draft of this chapter. The author is also indebted to Miguel Acosta, George Fenton, William Gamber, and Christine Garnier for research assistance, and to participants in the University of California, Berkeley, Economic History seminar, including J. Bradford DeLong, Barry Eichengreen, Martha Olney, Christina Romer, and David Romer, for comments on a presentation of portions of this chapter. See the introduction for a full list of acknowledgments for this book. The author regrets to note that, in the period since the research for this chapter was begun, four of the individuals whose interviews with the author are quoted in this chapter—Gary Becker, Lyle Gramley, Allan Meltzer, and Richard Muth—have passed away.

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  227

chapter 8, “The Optimum Quantity of Money” was not really part of Friedman’s main line of monetary research. The paper used different modeling simplifications from those in the bulk of Friedman’s monetary research, and it highlighted the merits of a different monetary policy rule from the constant-­monetary-­growth rule emphasized in his policy-­oriented writings. In addition, the paper was not truly innovative in its theoretical analysis, being essentially a recapitulation of results from Friedman’s and others’ writings from earlier in the 1960s.3 On the policy side, it is true that, upon the book’s publication, Business Week (July 19, 1969) attempted to trumpet the policy implications of Friedman’s “Optimum Quantity of Money” chapter and portrayed Friedman as opening a new theater of combat in policy debates. In addition, Paul Samuelson reported that there was a degree of puzzlement created in academia and policy circles by the chapter’s content, with some wondering if Friedman was repudiating his advocacy of a constant-­monetary-­growth rule designed to deliver price stability.4 But in contrast to Friedman’s earlier writings, the “Optimum Quantity” article was not intended to play a significant part in practical discussions of monetary policy, nor did it do so. And, as has been noted in chapter 8, Friedman closed the article with an explicit indication that, although he had highlighted the benefits of a policy rule that induced mild deflation in the price level, he had not become an advocate of such a rule for the United States. That is to say, he was not recanting his previous position that monetary growth should proceed at a rate consistent with price stability. Friedman’s continued advocacy—the “Optimum Quantity of Money” analysis notwithstanding—of his standard constant-­monetary-­growth rule was underscored by his remarks in many forums over the 1969–72 period, most notably in his Newsweek column “The Case for a Monetary Rule” (Newsweek, February 7, 1972). A second widely cited post-­1968 Friedman paper was his 1977 Nobel lecture on inflation and unemployment. This talk, rather than staking out new positions, drew together and reiterated Friedman’s views on the Phillips curve. The theoretical observations contained in the Nobel lecture could be found in Friedman’s writings of the 1950s and 1960s. And Friedman and Schwartz’s Monetary Trends volume of 1982 would be indispensable as a source that shed light on Friedman’s analytical framework, but the attention it received among monetary economists failed to approach that given to his pre-­1969 work. Its existence does not contradict Laidler’s characterization, quoted above, regarding Friedman’s research. Friedman did, however, remain active in research between 1969 and 1972. Furthermore, his work in 1971–72 on the lags in the effect of monetary policy, although it would receive only a meager amount of bibliographical

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citations in the research literature, provided findings that formed part of what became Friedman’s most familiar propositions. Therefore, this research is something of an exception to the generalization that Friedman’s fundamental work on monetary matters was basically completed by the late 1960s. The research on lags is discussed near the end of this section, after several other research activities of Friedman’s in the field of money from 1969 to 1972 are considered. The coverage of Friedman’s commentary and interaction on monetary developments between 1969 and 1972, and in particular the policies of the Nixon administration and the Martin and Burns Federal Reserve, is reserved until later sections of this chapter.5 The NBER Monetary Project As the Friedman-­Schwartz monetary research project continued, their original book continued to enjoy sales success. The Wall Street Journal (November 4, 1969) reported that, to date, 8,300 copies of A Monetary History of the United States had been sold or given away. In addition, by December 1970, 8,748 copies of The Great Contraction, 1929–1933, the 1965 paperback reprint of chapter 7 of the Monetary History, had been sold.6 Meanwhile, an obscure 1900 tome titled Essays on the Monetary History of the United States, by one Charles J. Bullock, had been brought back into print by Greenwood Press in 1969 in a none-­too-­subtle effort to capitalize on the fame of Friedman and Schwartz’s work. Further indication of the success of the Monetary History came in March 1971, when Princeton University Press informed the authors that it planned to issue a paperback edition of the Monetary History in fall 1971, with an initial print run of 4,000 copies, along with 1,000 copies of a fifth impression of the hardback edition.7 Almost fifty years after this paperback edition first appeared, it remains in print. One could be forgiven for thinking, from the description Friedman and Schwartz gave of their work in the NBER’s Annual Report for 1969, that a stream of further Friedman-­Schwartz volumes would shortly be appearing. In addition to foreshadowing the release of the Monetary Statistics volume, the authors stated: “The main analytic use of our monetary statistics will be made in this volume on trends, which we hope to complete in 1969, and in a companion volume on cyclical movements that we shall turn to in 1970.”8 However, the Monetary Trends book—portrayed in that 1969 discussion as all but completed—did not actually end up going to press until 1981.9 Friedman’s travels, interviews, and commentary on current events meant that work on the Trends study of the United States and the United Kingdom was put in the slow lane. Friedman and Schwartz attributed the initial delay in finishing Monetary

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Trends to the completion of Monetary Statistics and indicated that, nonetheless, they expected the Trends draft to be completed by the end of 1970.10 An early sign that this would not happen was contained in Friedman’s remarks to an audience of monetary economists in Sheffield (United Kingdom) in September 1970. On that occasion, Friedman noted: “Mrs. Anna Schwartz and I are currently engaged on a comparison of U.S. and U.K. monetary trends. . . . I had initially hoped to present a paper on this work at this seminar, but unfortunately the research did not go rapidly enough.”11 Both in that presentation and in lectures Friedman gave in 1971 and 1972 on his work with Schwartz, the material offered was confined mainly to discussions of data plots.12 Friedman and Schwartz’s write-­up of their finding of the similarity in the behavior of UK and US monetary velocity series, for the NBER Annual Report in 1972, made a minor splash in the form of a news report on their findings in the American Banker (October 17, 1972). The same NBER Annual Report, however, indicated that readers should not expect the Trends volume any time soon. Friedman and Schwartz admitted: “Our estimate of the time it would take us to complete the manuscript on monetary trends has been unduly optimistic in the past so we shall refrain from projecting a date for completion.”13 By then, the emergence of a Monetary Cycles volume looked like an even more distant possibility. At the start of the decade, Friedman had listed his research as comprising “Monetary Cycles and Trends” (American Economic Association 1970, 143). But speaking on his cassette commentary series in late 1971, Friedman indicated that work on the cycles volume remained only at an extremely early stage, and “having made so many commitments in the past that I’ve had to eat my words on—I really don’t want to say when that one will be available” (Instructional Dynamics Economics Cassette Tape 84, October 20, 1971). On account of the delays that Friedman and Schwartz encountered in finishing Monetary Trends, the planned Cycles volume would be abandoned altogether.14 The one new Friedman-­ Schwartz book to appear in the 1970s was therefore the volume that was discussed in the previous chapter: Monetary Statistics, which saw print in mid-­1970. Tobin on Causality Mid-­1970 also saw the publication of an issue of the Quarterly Journal of Economics in which Friedman had one of his most celebrated exchange with James Tobin. The lead article in the exchange was Tobin’s (1970a) article “Money and Income: Post Hoc Ergo Propter Hoc?,” which had been widely circulated in the years ahead of publication.15 The model Tobin laid out in the paper was one in which monetary policy was incapable of affect-

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ing real and nominal income, yet the form of the money demand function was of a kind that gave rise to time-­series patterns in which movements in money led movements in income. The model’s properties were therefore offered as a challenge to the interpretation of empirical money/income correlations given in Friedman’s writings, in which the positive relationship between money and income, as well as the fact that money generally led income, had been taken as evidence supporting the effectiveness of monetary policy. The Tobin paper has been given much credit for bringing the reverse-­ causation issue into the open. It is doubtful whether this credit is deserved. What is certain is that there has been much exaggeration of the extent to which Tobin’s article advanced arguments Friedman had hitherto overlooked. For example, Blinder (1983, 69) claimed that the “possibility . . . that money simply reacts passively to real activity” was “raised first by Tobin” in the 1970 article. But such a characterization neglected Friedman’s own pre-­1970 discussions of the issue, among them his 1954 Stockholm lecture; a ten-­page section of the concluding chapter of the Friedman-­Schwartz Monetary History; the 1963 article “Money and Business Cycles” with Schwartz; and his 1964 progress report on the NBER’s monetary studies.16 Indeed, even ahead of the 1963–64 period Friedman had remarked on television that the “64-­dollar question” in interpreting money/income correlations was whether they reflected a role for monetary forces in determining the behavior of nominal income. In that television program, Friedman elaborated that his conclusion that they indeed reflected this role arose from focusing on cases in which “changes in the stock of money can be attributed to particular factors which have nothing to do with the contemporaneous movement of income.”17 It is against this background that Friedman noted in the late 1960s that he was a “veteran of many years’ standing” of confronting the argument that his empirical findings were a reflection of the importance of income for fluctuations in money, and not the reverse.18 As he elaborated in 1970, the putting forward of the argument that positive money/income correlations did not reflect powerful effects of monetary policy had been part of the response by US Keynesians to his monetarist work for a decade or more.19 Friedman’s contention that the reverse-­causation critique was far from new by the 1970s was echoed by a number of other commentators. Brunner (1973, 531), for example, observed: “Assertions of possibility or probability of a substantial ‘reverse causation’ have been the standard answer of every Keynesian to practically every regression equation ever presented by monetarists.”20 The criticism was familiar enough by the end of the 1960s that the final Economic Report of the President to be issued by the Johnson administration—in a section that criticized Friedman’s views on money but

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that did not identify him by name—had used the “reverse causation” terminology and claimed that advocacy of a constant-­monetary-­growth rule rested on a “one-­sided interpretation of these relationships.”21 Nor was it just the Keynesian critics who had raised this question when scrutinizing Friedman’s work. On a number of occasions, Friedman and Schwartz implied that the skepticism with which their own work had been greeted at the NBER arose partly because of the attitude of the generation of NBER business cycle researchers who had preceded them. These early NBER investigators had typically taken money/output comovements, insofar as they were apparent in the data, as reflecting reverse causation and not as suggesting the importance of money or monetary policy for the cycle.22 And, when taking a longer-­term perspective on the controversy, Friedman would note that from the earliest debates on the quantity theory of money, successive critics of the quantity theory had embraced reverse-­causation arguments.23 Tobin’s May 1970 article gave rise to a reply by Friedman in the same issue—Friedman’s first contribution to the Quarterly Journal of Economics since 1936, and his last.24 As Friedman stressed in that reply, his conviction regarding the importance of monetary policy for cyclical fluctuations drew on a number of pieces of evidence other than evidence on lags. Such additional evidence included historical episodes in which the forces driving money were in large part independent of income. This aspect of Friedman and Schwartz’s identification scheme was, of course, later stressed by Romer and Romer (1989, 1994b), as well as Miron (1994). In the latter reference—a retrospective review of the Monetary History—Miron (1994, 19) observed: What is required is an occasion when the stock of money changed in a way that was unusual relative to the normal behavior of money and output. Only if such an experiment exists can one compellingly determine whether money plays an independent role.

As Miron went on to discuss, the idea that Friedman (either in his work with Schwartz or in his other writings) brushed aside causation and identification issues until Tobin had forced him to confront them is not justified. On the contrary, as Laidler (1995, 329) observed, Friedman’s writings were replete with coverage of the income-­to-­money feedback that he was “so often accused of ignoring.” Nonetheless, the caricature of Friedman as having been brought to account in 1970 on an issue that he had previously neglected has persisted. Indeed, it has been perpetuated in later discussions of the Tobin (1970a) study by Sims (2012) and Hoover and Perez (1994), the latter paper describing itself as being in the “spirit” of Tobin’s

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approach. However, Miron’s discussion and Bernanke’s (2002b), along with the Romer-­Romer narrative-­based work, have so stressed the Friedman-­ Schwartz approach that it has become untenable to claim that the issue of reverse causation was glossed over in Friedman’s monetary research. It has been indicated above that the specific question at issue in the 1970 Tobin/Friedman exchange was the validity of timing evidence in ascertaining the role of money in cycles. Although Friedman acknowledged that timing was not the be-­all and end-­all in settling causation issues, it should also be underscored that timing evidence should not be wholly dismissed.25 Tobin’s paper did, it is true, lay out a model in which causal influences based on timing evidence are invalid. But it is not the case that Tobin’s paper established a plausible alternative model for explaining money/ income correlations and timing relations.26 His model required a nonstandard money-­demand function to generate these properties, as Tobin (1970b, 329) acknowledged.27 Trying to obtain an analogous result with a standard money-­demand function and an empirically plausible model would likely have taken Tobin outside his area of expertise, as empirical work on monetary relations was not a major part of Tobin’s research. Marcus Miller studied under Tobin during the 1970s and remains a strong advocate of the relevance of Tobin’s work for modern macroeconomics (see, for example, Driffill and Miller 2013). But Miller felt that the “Money and Income” paper of 1970 is one Tobin contribution whose significance is not as great as it seemed at the time. Miller observed: “To me, the biggest shock was to read that paper of Tobin’s [again]. When he presented it, it seemed like devastating logic to which there’s no answer. . . . [But] read it now, and you think, ‘Oh, my gosh. What a thing of its time’” (Marcus Miller, interview, April 16, 2014). Friedman’s Revised Assessment of Lags All this said, there is a sense in which much of Friedman’s evidence on lags published in the 1950s and early 1960s was precarious and produced results that were not very germane to the relationship between money and income. Friedman’s work, including that with Schwartz in the early 1960s, used as its criterion for ascertaining lags the relationship between the growth rate of the (nominal) money stock and the detrended level of economic activity (the latter typically in volume—that is, real-­quantity rather than nominal—terms).28 As Culbertson (1960) stressed, and as recalled in the subsequent critical discussions by Samuelson (1970c, 151) and Sims (1992, 978), a contemporaneous relationship between the growth rates of two variables X and Y was likely to imply a lag between the change in X and the level of Y. Money’s leading-­indicator role for income was not well

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established by the growth/level comparison, as the reported lead of money over income could simply reflect the phase shift between growth rates and levels of series that would arise when money was measured in growth-­rate terms.29 Friedman recognized the preceding point.30 It nevertheless seemed to take him some while to realize that a concentration on comparisons of monetary growth and income growth was the way to proceed, as those comparisons provided the basis for more convincing evidence of the existence of lags. Friedman had, in fact, been intermittently using comparisons of the growth rates of money and of income for some time. The way Friedman characterized matters in 1969 (in Instructional Dynamics Economics Cassette Tape 32, August 7, 1969) was that his popular writings emphasized the growth-­rate-­to-­growth-­rate relationship, while the analysis given in his research writings focused on the monetary-­growth/income-­level relationship.31 This demarcation did not hold completely, as growth-­rate/growth-­ rate comparisons had featured sporadically in his research output. But, until the late 1960s, Friedman’s stress in his research work was indeed on the monetary-­growth/income-­level comparisons. He made some attempts to defend the growth/level comparison as valid. One reason he advanced was that the different properties of income and money justified different filters for each series.32 Another justification that Friedman offered was based on an analogy with automobile driving. According to this analogy, the growth/level comparison captured the lag between stepping on the accelerator pedal and the time at which the car has completed its move to a new speed, with the growth-­rate/growth-­rate comparison recording the initial time at which the car changes speed (Instructional Dynamics Economics Cassette Tape 32, August 7, 1969). But these arguments gained little traction with the economics profession. Friedman and Schwartz were taken to task for their use their monetary-­growth/output-­level comparisons not only by outside critics but also by the senior officials at the NBER. “They certainly didn’t believe that money was the touchstone for what happens cyclically,” Schwartz recalled. “I think not only Burns but [also] Geoffrey Moore, who was next in command [in the NBER hierarchy], thought that our use of rates of change of money was not really justified.”33 After the Monetary History appeared, Friedman evidently bowed to the force of the arguments that had been marshaled against his previous way of computing lags. It was observed in 1980 (Financial Times, October 15, 1980) that Friedman had in recent years dropped his comparisons of monetary growth and income levels and that he now clearly focused on growth rates of both money and income. The same 1980 discussion contained the conjecture that Friedman had made this change in acknowledgment of the

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validity of the criticism of the monetary-­growth/income-­level comparisons. There is likely much merit in this conjecture, which is consistent with the dearth of monetary-­growth/income-­level correlations, and the abundance of monetary-­growth/income-­growth correlations, in Friedman and Schwartz’s 1982 Monetary Trends. But it does not quite tell the whole story. For Friedman’s transition between 1969 and 1972, to a state of affairs in which he derived estimates of lags solely from data on growth rates, proceeded in two stages. In the first stage, he shifted to an increasing usage of monetary-­growth/income-­growth comparisons, instead of the growth/ levels comparisons. In the second stage, Friedman further adjusted his rules of thumb with respect to lags once he recognized the difference in the length of the lag of inflation behind monetary growth from the length of the lag between monetary growth and income growth. The first of these changes essentially occurred in 1969–70. The growth-­ rate/growth-­rate comparisons tended to suggest a six-­to-­nine-­month lag from monetary growth to nominal income growth, and that became Friedman’s rule of thumb in many writings from 1969 onward.34 This was the case not only in his popular writings (for example, Newsweek, May 26, 1969; New York Times, August 21, 1969; The Times, December 12, 1972) but also in those intended for a more research-­oriented audience.35 The findings produced by the research department of the Federal Reserve Bank of St. Louis, which were discussed in chapter 13 and that began to appear in earnest in late 1968, were surely a key influence on Friedman’s thinking on this matter. That body of work established that respectable money/nominal income relations were obtainable with first differences (and so, most likely, also with percentage changes) of the post–­Korean War US quarterly data.36 Previously, Friedman had found the post–­World War II correlations between first differences of money and spending to be weak. It is likely that, as a consequence of this finding, he had been discouraged from focusing on these correlations. In retrospect, however, it would appear that the correlations Friedman found (for the period 1948–58) were probably depressed by the inclusion of the Korean War period in the sample—­ although it is notable that, even with the Korean War data included, the lag from monetary change to nominal income change that Friedman reported, of six months, was in keeping with his later rules of thumb.37 It was shortly after the onset of the Federal Reserve Bank of St. Louis’s work that Friedman made the rates-­of-­change relationships more central in his own discussions. For example, in a December 1968 commentary, he referred to a six- or nine-­month lag from monetary growth to nominal income growth (Instructional Dynamics Economics Cassette Tape 7, December 16, 1968).38 By May 1969, Friedman was citing the relationship between monetary growth and nominal income growth as carrying signifi-

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cance, with a six-­month lag between monetary growth and income growth describing their average relationship (The Great Economics Debate, WGBH, May 22, 1969). And by 1975, he was referring to “my usual six- to nine-­ month lag” for such comparisons (Instructional Dynamics Economics Cassette Tape 181, November 1975, part 2).39 Thus, although Friedman did not make a specific announcement that this was how he would henceforth proceed when examining lags between money and income, it became clear from early 1969 onward that his near-­ sole focus was on growth-­rate/growth-­rate comparisons.40 The straight growth-­rate/growth-­rate comparisons established a clear lead of monetary growth over nominal income growth.41 At the same time, reliance on these comparisons meant that there was no longer a need to appeal to questionable analogies, of the kind to which Friedman had resorted when defending the growth-­rate/levels comparisons, and it also freed Friedman from the criticism that he was relying on data comparisons that built in a near-­ automatic lead of money over economic activity. These growth-­rate-­to-­growth-­rate lag estimates applied to comparisons of monetary growth and nominal income growth. They also implicitly applied to comparisons of monetary growth and real income growth.42 Prior to 1970, however, Friedman did not pay sufficient attention to the lag between monetary growth and the inflation component of nominal income growth. That omission was to be redressed from 1970 to 1972, as the second phase of the change in Friedman’s thinking on lags proceeded. In the process, Friedman added the last major piece to his list of monetarist propositions: that concerning the lag from monetary growth to inflation. By the late 1970s, Friedman had communicated widely his belief in both a six- to nine-­month rule of thumb for the average relationship between monetary policy actions and the most pronounced response of output growth, and a two-­year lag from monetary policy actions to inflation.43 In this vein, K. Davis and Lewis (1981, 187) referred to the “now-­famous” lags given by Friedman of six to nine months from monetary growth to output growth and of eighteen to twenty-­four months from monetary growth to inflation. Similarly, Goodhart (1989b, 112) had occasion to mention “Friedman’s famous three-­quarters lag before output typically responds[,] and the two-­year [monetary growth to inflation] lag.”44 Yet these authors did not provide references for the origin of Friedman’s “famous” lag regarding the monetary growth/inflation relationship. Indeed, pinning down the reference in which Friedman first set out this lag is a task that has defied many investigators. Laidler (1990, 56) expressed dissatisfaction with having to resort to a latter-­day Friedman reference—the New Palgrave entry on the quantity theory of money published in 1987—for statements of the six- to nine-­month and eighteen- to twenty-­four-­month rules of thumb for

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the lags (from monetary change) to output growth and inflation, respectively.45 In this connection, Laidler acknowledged: “I have not been able to find so clear-­cut and concise an exposition of the point in Friedman’s earlier work” (Laidler 1990, 56). Leeson (2000b, 751) gleaned that, sometime between 1965 and 1980, Friedman arrived at his position that, over a two-­year period, the effects of monetary policy shift from being largely felt in an output reaction to being largely manifested in inflation. But Leeson provided no more specific accounting of the development of Friedman’s thinking on this issue. Indeed, in some instances, Friedman’s 1960s work has been characterized—incorrectly, it would seem—to have articulated his familiar rules of thumb about the reaction times of output growth and inflation. Both Benjamin Friedman (1990, 3), implicitly, and Anna Schwartz (1983, 14), explicitly, attributed the finding to the two Friedman-­Schwartz 1963 studies, Monetary History and “Money and Business Cycles.” But the finding is not to be found in those studies. Both of the 1963 Friedman-­Schwartz references emphasized the gradual character of the response of prices to monetary actions. However, neither of them reported a finding that the reaction of inflation to monetary actions was distinctly more delayed than that of aggregate real quantities.46 Greg Walker (1983, 78), in contrast, cited Friedman’s paper “The Lag in Effect of Monetary Policy” (an article published in 1961 in reply to Culbertson 1960) as the basis for contending that “Friedman estimates the real income and employment lag to be 6–9 months and the prices or inflation lag to be 12–18 months.” But the 1961 Friedman paper on lags actually presented no evidence that pertained specifically to the lag from monetary actions to inflation. Indeed, that paper seemed to register little interest in distinguishing responses of real variables from those of nominal variables, because Friedman moved from a discussion of the money/output connection, on which Culbertson had focused, to an analysis of correlations between nominal variables (including the correlations between money and nominal income, and between their growth rates). Furthermore, Friedman’s October 1965 and June 1966 memoranda to the Federal Reserve Board took the lag from monetary growth to inflation as the same as that from monetary growth to nominal income growth.47 Along similar lines, his Newsweek column of June 3, 1968, took inflation and growth in physical production as having an identical lag behind monetary growth. Thus, although Friedman, in his work over the course of the 1960s, was occasionally prepared to countenance monetary-­growth/income-­ growth relationships and did not confine himself to the monetary-­growth/ income-­level patterns that had predominated in the Monetary History’s account, he had not embraced clearly a belief in a distinct difference in tim-

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ing between the response of output growth to monetary actions and that of inflation. To be sure, Friedman had long believed that US prices had considerable stickiness.48 For example, in 1969 he had written: “Inflation has an inertia of its own. Many prices and wages are determined long in advance” (Newsweek, August 18, 1969). But, prior to 1970, he evidently believed that sizable (though incomplete) responses of inflation to monetary policy actions appeared at the same time as output responses. This belief led him to predict in August 1969 that US inflation would begin declining by the fourth quarter of 1969 (Dominion Post, August 24, 1969). The failure of inflation to do so in turn led to his admission on national television in June 1970 that the impact of the 1969 monetary policy tightening on inflation was “coming later than many of us hoped or expected” and that “I thought that we would be further along the path of disinflation by now than we are.”49 This puzzlement was all the more acute because, as of the first half of June 1970, Friedman still saw a six-­month lag from a change in monetary growth to a sizable reaction of inflation as the relationship that should be expected (Daily News, June 12, 1970). Later in the month, however, in the aforementioned television appearance, he indicated that he was reexamining the evidence on lags. The upshot of this reexamination was that, in September 1970, Friedman gave the lag from monetary growth to inflation as about twelve to eighteen months.50 He repeated this estimate on television early the following year, when he observed that the interval between movements in monetary growth and inflation was “composed of two parts,” with six to nine months from monetary actions to real spending, and another six to nine months before the appreciable reaction of inflation (The Advocates, PBS, January 5, 1971). In time, rules of thumb along these lines would become part of the standard beliefs held by the economics profession about the effects of monetary policy in advanced economies.51 But, even after Friedman first articulated them, it took some time for these rules of thumb to gain traction in Friedman’s own conception of the transmission process. There was evidence of backtracking. In particular, as of the spring of 1971, he had apparently not fully aligned himself with the position that a lag of a year or more was typical before monetary-­growth patterns had a counterpart in the behavior of inflation. Indeed, in his Newsweek column of May 3, 1971, Friedman stated that current high rates of monetary growth could threaten an outbreak of inflation by year-­end: “if the Fed were to continue monetary growth at anything like the present rate, rapid acceleration of inflation by late 1971 or early 1972 is all but inevitable.” A more definitive change in Friedman’s position, in favor of the view that there was a longer lag from monetary growth to inflation than to out-

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put growth, came at the end of 1971, when Friedman delivered a paper to the American Economic Association meetings. This paper reexamined the postwar US evidence and found an eleven- to thirty-­one-­month lag from monetary growth to inflation.52 From this finding, and the strong confirmation of the result that the US data for 1973 and 1974 then provided, sprang Friedman’s later summary of the evidence that there was a two-­year lag from monetary growth to inflation and that “output responds more quickly than prices.”53 What was notable here was not so much the notion that prices respond with a longer lag than output: Friedman himself acknowledged that this was “a qualitative result that we all expected” on theoretical grounds.54 Furthermore, Arthur Burns had earlier sketched such a result in qualitative terms during the analysis of inflation that he provided during the brief period of his tenure as Federal Reserve chairman that preceded his switch to a nonmonetary view of inflation.55 The notable aspect of Friedman’s late-­1971 analysis was, instead, that he gave this notion a quantitative dimension that proved very enduring and influential. The two-­year rule of thumb for the reaction of inflation to monetary policy actions, which entered Friedman’s framework at the end of 1971 and became a staple part of it thereafter, has, as already implied, since become a standard part of practical monetary analysis.56 This rule of thumb has become part and parcel even of discussions of monetary policy that do not use monetary growth as a measure of policy actions. For example, Bernanke, Laubach, Mishkin, and Posen (1999, 319– 20) stated that “research regarding how long it takes monetary policy to influence inflation . . . indicates that the lag is on the order of two years (a common estimate).” The two-­year lag between monetary growth and inflation that Friedman found in 1971 has also been verified and rediscovered by others for the United States and other countries, sometimes—or typically—without reference to Friedman. For example, in a paper, titled “Inflation and Monetary Policy in the Twentieth Century,” that contained no mention of Friedman’s work on money, Christiano and Fitzgerald (2003, 22) reported that in the post–­World War II US data, “inflation lags money [growth] by about two years.” And in a study of industrialized countries— again, one that did not mention Friedman’s work—Van Hoa (1985, 115) stated: “we found that it was the change in the monetary growth rate two years previously . . . that had a clear positive relationship with the rise in the CPI.” Friedman did not, of course, claim that the two-­year lag was a universal regularity. He granted that a sustained experience of decidedly higher rates of inflation would produce changes in private-­sector behavior in a direction that promoted faster adjustment of prices to monetary changes.57 Never-

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theless, Friedman was struck by the wide applicability of the two-­year lag. He was fortified in this view in the spring of 1974, when rereading work by W. Stanley Jevons on UK economic relations of the nineteenth century.58 Friedman found a passage (Jevons 1884, 107) stating that “an expansion of the currency occurs one or two years prior to a rise of prices.”59

II. Issues Related to Monetary Policy Debates and Developments in Stabilization Policy, 1969–72 F rom G radualism to the New Ec onomic P olicy During 1969 and 1970, Friedman found much to applaud about the approach to stabilization policy taken by the Nixon administration. An early indication of his satisfaction with the new tone of policy was his favorable reaction to the announcement of several nominations to the administration’s economic team, including those of David Kennedy (as secretary of the treasury), Robert Mayo (as director of the Office of Management and Budget), and Charls Walker (as undersecretary of the treasury). Another posting that Friedman welcomed was that of Paul Volcker to another undersecretary of the treasury position (that concerned with domestic and international monetary issues). Friedman noted of Volcker, “I have met him, but I don’t know him well,” while also indicating that Volcker’s high reputation was a reason to be pleased with the appointment (Instructional Dynamics Economics Cassette Tape 12, January 1969).60 Among the economic appointments, the one with the most direct connection to the University of Chicago economics scene was that of George P. Shultz, who would serve as a member of the cabinet almost throughout the Nixon presidency. Prior to working at the University of Chicago’s business school, Shultz had spent a long period being employed at MIT. Shultz recalled of Friedman: “I first met him when I was a young faculty member at MIT in the economics department there, and he came to give one of the evening talks that we happened to have, and of course I had read things that he had written. And he was very impressive. . . . What I recall was [at the talk] he and Paul Samuelson had a kind of a running argument. It was fun to see two terrific minds going back and forth” (George Shultz, interview, May 22, 2013). The role that Shultz subsequently played at the University of Chicago was as an economics professor in the University of Chicago’s Graduate School of Business. Shultz’s years at the business school, which began in 1957, included service as dean of the school from 1962 until his move to the Nixon cabinet—initially as secretary of labor—in January 1969.61 “When I was offered the job at the University of Chicago, obviously one of the rea-

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sons that you say, ‘Yeah, let’s go to Chicago,’ was that’s where Milton was” (George Shultz, interview, May 22, 2013). Shultz had had considerable interaction with Friedman during Shultz’s years at the University of Chicago, a situation that reflected both the traditionally close ties between the economics department and the business school and the arrival of George Stigler at the university in 1958. “When we recruited George Stigler to be a business school professor,” Shultz recalled, “he was also a member of the economics faculty, but his office was in the business school building, and right across the hall from mine when I was dean. And George and I became very close friends—we played golf a lot together, saw a lot of each other. As a result, I saw a lot of Milton in an informal way through George.” Shultz and Friedman stayed in contact throughout Shultz’s period in the Nixon administration, including when Shultz served as director of the Office of Management and Budget (1970– 72), succeeding Mayo, and as secretary of the treasury (1972–74). “I kept in touch with Milton and talked to him about one thing and another. He had very good practical advice” (George Shultz, interview, May 22, 2013). Friedman “was very, very close with George,” recalled Arthur Laffer, who went on leave from the University of Chicago’s business school to spend two years (1970–72) working for Shultz in the Nixon administration (Arthur Laffer, interview, June 4, 2013). By the time of Shultz’s service in the administration, he and Friedman saw eye to eye on many issues, particularly those concerning reliance on market mechanisms in domestic and international markets. They nevertheless had significant differences in perspective. It would be wrong to infer from their close friendship that Friedman and Shultz had an identity of views on economics. That such an inference would be invalid is underlined by the fact that Robert Solow, for example, also names Shultz as one of his closest friends.62 As the discussion later in this section will make clear, it is particularly important not to overstate the extent of agreement between Shultz and Friedman on monetary matters. Another major economic appointment was that of Herbert Stein, as one of the members of the Council of Economic Advisers. Stein was a family friend of long standing of both Friedman and Anna Schwartz. Although Stein had received his PhD in economics from the University of Chicago in 1958, he had started graduate studies at the university in the mid-­1930s and had known Friedman in that era.63 Stein had joined the Nixon team as an adviser during the 1968 campaign. This appointment had apparently been on Friedman’s recommendation, and Stein’s subsequent CEA affiliation resulted from Friedman’s encouragement of the Nixon team to nominate Stein.64 In 1972, Stein would move up to become head of the CEA, but at the

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start of the Nixon administration that post was filled by Paul McCracken. McCracken had described the path along which his thinking had trended in recent years as “more Friedmanesque” (Plain Dealer, February 28, 1969, 1).65 The harmony of views between Friedman and members of the new government, including McCracken, was manifested on several fronts. One of these concerned the importance of monetary growth. More specifically, McCracken associated historical monetary policy mistakes with periods of alternately high and deficient monetary growth (McCracken 1969, 7–9; see also Meigs 1972, 72). Another area of agreement was brought out in McCracken’s discussion, at a March 25, 1969, Senate committee hearing “High Interest Rates,” of the Fisher effect and the nominal/real interest-­ rate distinction. “This tendency for interest rates to rise sharply in periods of sustained inflation is clear from our own and international experience,” McCracken testified. “As we look abroad, we find that nations experiencing high rates of inflation usually have high nominal interest rates. And as measures to cool the inflation became effective, these rates decline. Indeed, this tendency for a strong economy to exert upward pressure on rates has occupied the attention of economists going back at least to the early part of the last century—for example, Keynes, Irving Fisher, Wicksell, Ricardo, and Tooke.”66 In keeping, therefore, with Friedman’s hope (expressed in Instructional Dynamics Economics Cassette Tape 6, December 1968) that a “more academic” style of the CEA would emerge under McCracken, McCracken was at pains to underline the historical roots of the administration’s position regarding interest rates. “Now I might add, Mr. Chairman,” McCracken testified in the aforementioned Senate hearing, “that I had a little research done on this matter of the interrelationship between price changes and interest rates going back over quite a period, and it is interesting how frequently this same statement, in one form or another, recurs in books of economists, going back for well over a century.”67 Notwithstanding McCracken’s nods to the historical literature, there was no doubt that the revival of concern with the Fisher effect at the policy level reflected the brute facts of recent US interest-­rate/inflation experience as well as the influence of Friedman’s work. Indeed, as discussed in chapters 6 and 12, there had been precious little research on the Fisher effect in the United States in the 1950s and 1960s other than that from the Friedman stable. And McCracken’s sketch of the different short-­run and long-­run repercussions of monetary expansion for the behavior of nominal interest rates was clearly modeled on that Friedman had outlined on multiple occasions in addresses between 1966 and 1968.68 The Nixon administration also adopted Friedman’s position that the long-­run Phillips curve was vertical. Herbert Stein (1996, 539), Romer and

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Romer (2002b), Romer (2007, 10–11), and DiCecio and Nelson (2013) have all documented the administration’s rejection, from the beginning, of a permanently downward-­sloping Phillips curve. One example of this rejection came in the new Council of Economic Advisers’ statement in 1969 that “there is no fixed relationship or ‘tradeoff ’ between unemployment and inflation” (in Joint Economic Committee 1969, 334).69 The Johnson administration’s plot of a downward-­sloping Phillips curve in its final, January 1969, Economic Report of the President (Council of Economic Advisers 1969, 95), was therefore immediately treated by the Nixon administration as dead letter. In contrast to the academic debate on the Phillips curve, which was spread out over 1966 to 1972, the debate in policy circles had been short-­ circuited by officials’ adoption in 1969 of the Friedman-­Phelps position concerning inflation/unemployment interaction. The Nixon administration’s attitude regarding the appropriate fiscal/ monetary policy mix was not quite as compatible with Friedman’s position. Certainly, the administration accepted the importance of monetary policy as an influence on aggregate demand and the value of monetary aggregates as monetary policy indicators. But Friedman acknowledged that the Nixon economic team viewed government purchases and taxes as a more important influence, for given monetary growth, on total spending than he did (Instructional Dynamics Economics Cassette Tape 12, January 1969).70 Partly for this reason, in 1969 the administration secured an extension of the Johnson administration’s income tax surcharge, albeit at an eventually reduced rate, until June 1970 (McLure 1972, 61). Friedman expressed disdain for this move, while also hinting that key economists in the administration shared this disdain: “If I were in the government, I might have to compromise myself on the surtax now, as some of the fellows there who really don’t believe in it are doing” (Plain Dealer, February 28, 1969, 7). Another tax-­raising measure, after a fashion, that the administration took was its suspension of the investment tax credit. This action did meet with approval from Friedman, who reiterated his long-­standing arguments against the investment tax credit (Instructional Dynamics Economics Cassette Tape 25, May 25, 1969).71 Although the positions taken by the Nixon administration about the fiscal policy/monetary policy mix had some differences with those of Friedman, its overall anti-­inflation strategy sat well with him. From the start, the administration articulated a policy of gradualism: a disinflation obtained by slowing down the growth of nominal aggregate demand and eschewing wage/price guidelines or controls. For Friedman, “Some retardation in growth and some increase in unemployment is an inevitable, if unwelcome, by-­product of stopping inflation” (Newsweek, August 18, 1969). This was so both because the economy was starting from unemployment below

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the natural rate and because a rise in unemployment above the natural rate was an interim cost of restoring price stability. But a step-­down in monetary growth that was carried out gradually could, he argued, avoid “too large a wrench for the economy” and so limit the peak in unemployment associated with the period of policy restraint (Newsweek, January 20, 1969). The new US government took a similar position. The Nixon administration had a large number of economic officials in its early years who were permitted to give public statements about economic policy. Friedman himself complained that too many speeches were being given by US economic officials (Washington Post, June 2, 1970). This situation would lead President Nixon, in June 1971, to centralize the administration’s economic message. At that time, in order to curtail the perception that his government was delivering mixed messages on economic policy, Nixon made the then secretary of the treasury, John Connally, the leading economic spokesman (Nixon 1978, 517). But in the initial year of the Nixon administration, notwithstanding the proliferation of official voices, a remarkably uniform message about economic policy came from the various economic personnel. “The economy must be permitted to experience a sufficient period of slower growth,” stated the budget director, Mayo (Los Angeles Herald-­Examiner, October 11, 1969). Along similar lines, CEA chairman McCracken described the official policy as one designed to “cool off a long-­overheated economic situation” (The Great Dollar Robbery, ABC, December 15, 1969). And Arthur Burns, who served as a full-­time White House adviser (counselor to the president) in 1969, would judge that a “cooling-­off process will help us put the economy in shape for orderly economic growth.”72 The Nixon administration supported monetary restraint as part of this policy. One of the notable statements of the administration’s stance— made more poignant in light of his leading role, a decade and more later, in the setting of monetary policy—came from Paul Volcker. Speaking to the OECD in February 1969, Volcker declared that the Nixon administration’s number-­one economic priority was to control inflation. “If that means a restrictive monetary policy,” Volcker said, “so be it” (Milwaukee Journal, February 16, 1969). Accompanying the administration’s stand on fiscal and monetary restraint was its rejection of the use of incomes policy. In July 1969, White House spokesman Ronald Ziegler issued an official statement: “The president is not for wage and price controls. He has consistently taken that position. This administration is consistently pursuing a course of action to cool the economy. The strategy does not include wage and price controls. The administration has ruled out wage and price controls as a way of dealing with inflation under conditions that are now foreseeable” (Washington Post, July 17, 1969). Furthermore, the incoming Nixon administration, unlike its

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predecessor, did not lay out wage/price guidelines—a situation that led Walter Heller to lament that the federal government was “eschewing all appeals in price/wage matters” (Washington Post, October 21, 1969). Reliance was therefore placed very heavily on a slowing down of aggregate demand in the strategy against inflation.73 With respect to the path of disinflation that was intended to flow from this slowdown, Friedman believed that both McCracken and Secretary Kennedy shared his view that inflation should be brought down from about 5 percent to 3 percent initially.74 The next step, Friedman suggested, would be reductions of about 1 percentage point per year in the following two years (Instructional Dynamics Economics Cassette Tape 20, April 7, 1969).75 Friedman devoted a good deal of his energy over the period from 1969 to 1971 to articulating the rationale for this disinflation policy and to urging the US citizenry to support what he called the “perfectly correct and right line of the administration” (Instructional Dynamics Economics Cassette Tape 29, June 30, 1969). In both public and private, he also attempted to fortify the Nixon administration’s resolve to persevere with the policy.76 Friedman would ultimately fail to get the administration to hold the line. Consequently, Paul Volcker and others at the Federal Reserve in the late 1970s would have to carry out a version of the disinflation that had been promised in 1969, but starting out from inflation rates that were in or near double digits—in contrast to what Friedman contemporaneously described as the “pretty sizable and shocking rate” of about 5 percent prevailing at the end of 1968.77 But Friedman’s public advocacy of the gradualist policy in the 1969 to 1971 period did leave a body of public statements, several of them discussed below, that have stood the test of time. In particular, his analysis compares favorably with the positions that most other leading US academic economists were taking over the same period. For Friedman, of course, the success of the disinflation policy rested with the Federal Reserve. In January 1969, shortly before the new administration took office, Friedman called for the veteran Federal Reserve chairman, William McChesney Martin, to step down. Although Martin was due to retire in January 1970, Friedman wanted his departure fast-­tracked, telling Time magazine (January 10, 1969): “It would be a very good thing if he went early.” As support for this position, Friedman had cited a statement Martin had once given conceding there was merit in the idea that a new president should be able to appoint a new head of the Federal Reserve. In keeping with this prior statement, Friedman argued, the appropriate course was for Martin to submit his resignation when President Nixon assumed office and Nixon to accept the resignation (Instructional Dynamics Economics Cassette Tape 8, December 1968, and Tape 9, January 1969).

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Friedman had put himself in an awkward position with these remarks, as he was due to attend the Federal Reserve Board’s academic consultants’ meeting on January 23 and he would see Martin there.78 Martin, however, was gracious in receiving Friedman at the meeting, and the two had a brief discussion of monetary-­control issues at the end of the event, before Friedman left to catch his flight home. Friedman wrote to Martin in a letter dated January 29, thanking him for their friendly discussion and offering to set up a task force, comprising members of the University of Chicago’s Workshop on Money and Banking, Federal Reserve Board staff, and Federal Reserve Bank of New York personnel, to investigate possible modifications to operating procedures, specifically those focusing on control of total bank reserves, that could improve control of monetary aggregates. By the time of this letter’s arrival, Martin had already written to Friedman (on January 30) indicating that the Federal Reserve Bank of New York would follow up with Friedman on his suggestions regarding monetary control. But when, in an April 7 letter, Martin specifically considered Friedman’s proposal of a task force, Martin poured cold water on the suggestion. Friedman would take consolation in Martin’s acknowledgment in the letter that it was “quite true” that more precise control of money was feasible. Martin, however, went on to express doubt that stabilization of monetary growth was actually desirable.79 William Poole watched the late Martin period from his position as a staff economist at the Federal Reserve Board in the late 1960s and early 1970s.80 Poole believed that Martin “was bemused by the academic debate. He didn’t really care [about it]” (William Poole, interview, April 30, 2013). Martin and Friedman would again cross paths ten years after Martin left office, when Martin was a guest panelist in an episode of Friedman’s television program Free to Choose. Martin recalled that Friedman “came down and gave us advice from time to time.” “You’ve never taken it,” Friedman replied. Martin shot back: “And I’m rather glad we didn’t take it all the time.”81 In the same television appearance, Martin maintained that the Federal Reserve’s capacity to restrain monetary growth during his time as chair was constrained by the need to finance the federal government’s budget deficits.82 This was a position that Martin had also taken during his years in office.83 Furthermore, it was also a position that Friedman had encountered in his interaction with Federal Reserve Board governor (and former chairman) Eccles in 1951 and that in the 1970s he would encounter in exchanges with Chairman Burns. It was not a position with which Friedman had much sympathy: he regarded it as more a description of what central bankers

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thought they had to do than a valid characterization of what they actually had to do. Friedman did acknowledge the existence of links between fiscal and monetary policy, but he did not see a connection between budget deficits and monetary growth as occurring automatically.84 And, in contrast to pre-­1979 Federal Reserve chairmen, who tended to characterize the Federal Reserve’s debt-­management responsibility as entailing an obligation to monetize budget deficits when they arose, Friedman saw debt management as a task that was consistent with control of monetary growth. Friedman’s position in the post-­Accord era was as it had been during the early postwar debates over the bond-­price peg: the authorities should allow market interest rates to adjust by the amount necessary to reconcile debt management with monetary control. The dictum that Marriner Eccles had pressed on Friedman in 1951—“you cannot engage in large-­scale deficit financing with a fluctuating interest-­rate pattern”—was one from which Friedman emphatically dissented.85 In sum, Martin clearly did not accept monetarist positions concerning the scope for the Federal Reserve to achieve full monetary control unilaterally, the merits of changes in the procedures the Federal Reserve used to influence monetary growth, and the desirability of stable monetary growth. That said, Martin in the later 1960s did make considerable concessions to the monetarist position on the matter of the interpretation of monetary stance—one instance of this change in outlook being his renewed focus on the Fisher effect, as discussed in chapter 13. With regard to the actual course of monetary policy, Friedman viewed the Federal Reserve’s actions during 1968 as having gone in the wrong direction from the point of view of achieving disinflation, with a shift toward ease having occurred in the late-­spring/early-­summer period (Instructional Dynamics Economics Cassette Tape 1, October 1968). At the turn of 1968–69, Friedman judged the Federal Reserve’s attempts to reverse this easing to have been far too limited in scope. When the Federal Reserve Board raised the discount rate by 25 basis points in December 1968, Friedman judged this to be a “minor reaction to the inflationary process which it itself had caused by its earlier rapid monetary expansion,” and likely to be small in relation to the increase warranted by inflationary expectations and the economic expansion.86 Friedman would, however, later view a major tightening phase as indeed having begun in December 1968 (Instructional Dynamics Economics Cassette Tape 41, December 31, 1969). A December 1968 shift to tightening is consistent with the chronology of periods of tightening that Romer and Romer (1989, 135, 139–40) derived from their analysis of FOMC deliberations.87 Friedman’s own identification of the tightening was based on the observed shift to slower monetary growth, for both M1 and M2 (News-

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week, May 26, 1969).88 It took time for that pattern to emerge clearly. In the early months of 1969—the period that Friedman would later regard as witnessing the early stages of the tightening—Friedman had stressed that the current state of monetary conditions was difficult to discern because the different monetary aggregates were giving inconsistent signals. As was discussed in the previous chapter, the divergences in the behavior of M1 and M2 primarily reflected, in Friedman’s estimation, the distortionary effects of Regulation Q. Readings on the monetary base, too, were clouded. In this case, a key factor producing noise was the degree of fluctuations in the US Treasury’s holdings of deposits at commercial banks and with the Federal Reserve—a source of variability that Friedman ascribed to “government incompetence, if you’ll pardon me for using such a strong word” (Instructional Dynamics Economics Cassette Tape 16, February 1969) and about which he complained at the tail end of the correspondence he had with Chairman Martin in early 1969. The Federal Reserve, like Friedman and the administration, was signed up to a gradualist disinflation strategy in 1969. Federal Reserve Board governor George Mitchell described monetary policy as in line with this approach when he spoke to an interviewer as the new administration was taking office. Mitchell foreshadowed aggregate demand restraint for “as long as escalating prices and inflationary psychology persist,” with the restraint intended to hold down economic growth “without plunging the country into a business recession” (U.S. News and World Report, January 20, 1969, 25). But, over the course of 1969, what the Federal Reserve saw as a policy consistent with the strategy of gradual disinflation struck Friedman as far too drastic a policy shift. As of midyear, he was not too concerned: in May 1969 (Instructional Dynamics Economics Cassette Tape 25, May 25, 1969), Friedman observed that, although monetary growth had been slowed down too rapidly, this slowdown had not been as severe as in the 1966 crunch. Along the same lines, at an American Bankers Association conference in Copenhagen in June, he characterized the 2 to 3 percent rate of M2 growth observed of late as “somewhat too low, but I’d rather have it this way than the other” (New York Times, June 22, 1969). That assessment on Friedman’s part was one that he would revise once monetary growth underwent a further shift down. In retrospective evaluations, he would categorize the Federal Reserve as having gone from moderate restraint from December 1968 to mid-­1969 to a new phase, in the period from June 1969 to December 1969, of severe restraint and overkill (Newsweek, August 18, 1969; Instructional Dynamics Economics Cassette Tape 46, March 11, 1970). At the time when the new US government took office, Friedman had seen the ideal policy as first getting monetary

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growth down to about 7 percent, after which it could be brought down in steps to his preferred 3 to 5 percent range—a policy that he believed would achieve the gradual disinflation path mentioned above (Newsweek, January 20, 1969).89 But he predicted at that time that a more violent shift down in monetary growth was likely, and in his August 18, 1969, Newsweek column titled “Monetary Overkill,” Friedman indicated that this prediction had been realized. “The Federal Reserve System is at it again,” his column began. “Once more, it is overreacting, as it has so often in the past.” This theme continued in Friedman’s commentaries for the rest of 1969, with Friedman observing that the money stock appeared to have been roughly constant since May (Newsweek, December 22, 1969). In his congressional testimony of October 6, 1969, Friedman stated that there were already signs that the economy, too, was slowing down.90 By early November 1969, Friedman feared a recession. Appearing the first week of that month at a First National City Bank (Citibank) conference in New York City, Friedman called for some relaxation of monetary policy. “If the Federal Reserve maintains the present degree of tightness, the economy is heading for a severe recession” (Daily News, November 7, 1969). Later in November 1969, at a conference in Phoenix, Friedman said that in light of the Federal Reserve’s shift to an “extremist” policy of a constant money level, “it is difficult to see how, in another three or four months, we can avoid a recession similar to the one we experienced in 1957 and ’58.” He urged the return to a more “gradual and orderly” disinflation policy entailing an increase in monetary growth to about 4.5 percent (Arizona Republic, November 24, 1969). He added that a case could be made for temporary elevation of monetary growth to an 8 percent rate, to make up for the period of a basically flat money stock (Phoenix Gazette, November 24, 1969). In his final Newsweek column for the decade—in the Newsweek issue that reached the stands roughly concurrently with his Time magazine cover—Friedman suggested that a “minor recession on the 1960–61 scale is just about unavoidable,” with a severe recession like 1957–58 continuing to be a serious prospect “if the Fed continues its present unduly restrictive policy” (Newsweek, December 22, 1969).91 The enormous attention directed toward Friedman at the close of the decade, already discussed in the previous chapter, included coverage of his congressional testimony of both October and November 1969, and it was capped by a call from President Nixon to Friedman in the early evening of December 18, 1969.92 In this conversation—apparently their first since Nixon took office—the president likely had occasion to congratulate Friedman on his appearance in the current issue of Time. But the main reason for the call was another piece of good news for them both: Arthur Burns, whom Nixon had nominated for Federal Reserve chairman, had been confirmed for that position by the US Senate.93

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Friedman—whose relationship with Burns during the late 1960s and early 1970s is discussed in detail in section III of this chapter—hoped that Burns’s arrival would see actions that relieved the monetary squeeze (Newsweek, February 2, 1970). At the time of the changeover from Martin to Burns, Federal Reserve policy makers had been divided over Friedman’s critique. Board governor George Mitchell defended Federal Reserve policies in a debate with Friedman on the NBC Today show in late 1969.94 But it subsequently became known—when the summary of the September 1969 FOMC meeting proceedings was released, after the then-­customary three-­ month lag—that Mitchell, too, had been concerned that monetary policy was too tight and voted for a policy easing, a dissent that he had first registered in the August meeting (Washington Post, December 9, 1969).95 In contrast, the vice chairman of the Federal Reserve Board, J. L. Robertson, suggested that still tighter policy might follow in 1970 if inflation did not recede (Los Angeles Times, December 11, 1969). The executive branch of government, for its part, sympathized with Friedman’s concerns, with Secretary of Labor George Shultz calling publicly on January 6, 1970, for an easing of monetary policy. “I guess I would have to say in my own view that the monetary policy of the Federal Reserve Board [sic; the FOMC] is too tight right now,” Shultz said. “It is my own personal view. The money supply has been held practically constant for some months now. . . . I think a policy of restraint, but not such a drastic policy, is called for at this point.”96 In the early months of 1970, the FOMC under first Martin and then Burns did move to ease.97 Although, as discussed below, Friedman by mid-­1970 was already concerned that the correction of the excessively tight policy was showing signs of going too far, for the first four months of 1970 he was heartened by the end of the seemingly extreme monetary restriction of the second half of 1969. With the FOMC’s policy actions during the second half of 1969 making themselves felt, it became clear as 1970 unfolded that Friedman’s prediction of a recession was being realized. The NBER subsequently dated the peak of the business cycle to December 1969.98 But the recession was the mildest that had thus far occurred in the postwar period. The associated decline in output was less even than that in the 1960–61 recession. One factor accounting for why Friedman’s fears of a severe 1970 recession were not realized was that the 1969 monetary restraint had not been as great as he had thought at the time. In December 1970, large corrections by the Federal Reserve of its estimates of bank deposit “float” led to sizable upward revisions to the money stock data. These revisions established that the 1969 monetary squeeze was considerably less stringent than the initial monetary data had suggested.99 Another possible reason for the mildness of the slowdown was outlined by Friedman in a memorandum to the Federal Reserve Board in June

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1970.100 Nominal income growth had been stronger in relation to monetary growth than it had been in previous recessions, Friedman suggested, because interest-­rate behavior had been different. Longer-­term interest rates, in particular, had not exhibited their usual cyclical decline. Rather, they had reached new peaks in the early months of the recession. There had not, therefore, been the same degree of downward pressure on velocity that usually occurred in recessions, and so velocity growth had not reinforced the contribution of monetary growth to slower nominal income growth, as it had in prior episodes. Friedman attributed the failure of longer-­term interest rates to decline to the failure of longer-­horizon—five to ten years ahead—expectations of inflation to decline in response to the monetary restriction. The fact that the strength of nominal income in 1970 surprised Friedman brings out a difference between this episode and the previous occasion, in 1967, on which he had predicted a recession. The 1970 recession, like the slowdown in 1967, caught Friedman off guard in its mildness, but unlike in 1967, there was not a rapid response of inflation to the monetary restriction. The CPI data for December 1969 showed an increase in 6.1 percent over the previous year—the highest rate since 1951 (Kansas City Times, January 20, 1970). CPI inflation continued to be strong in early 1970, as indicated previously. The administration and the Federal Reserve found themselves on the defensive in light of the unpalatable combination of restrictive monetary policy, record post–­Korean War inflation, and falling industrial production indices (which, as 1970 proceeded, would be followed by a decline in aggregate US output).101 Friedman himself was in a difficult position, owing to the fact that during 1969 he had predicted that inflation would clearly respond to monetary actions by late that year. In his Newsweek column of May 26, 1969, Friedman had written that by “fall at the latest, the pace of price rise should start coming down.” Even in November 1969, Friedman was stating that he expected inflation to be running at about a 4 percent annual rate by the end of 1969 and at a 3 to 3 1/2 percent rate by mid-­1970 (Instructional Dynamics Economics Cassette Tape 38, November 19, 1969). The prediction that inflation would peak by the end of 1969 was not, in itself, too wide of the mark: the four-­quarter CPI inflation rate stood at 5.6 percent at the end of 1970 after peaking in the first quarter at 6.2 percent. But the degree of improvement in inflation that Friedman had projected for 1970 had not materialized. From mid-­1970 to the end of 1971, Friedman went through the process of rethinking his views on lags—a reassessment that has already been discussed in section I of this chapter. On the basis of this review, he dropped his position that much of the reaction of inflation to monetary policy actions occurred at the same time as the output reaction, in favor of

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  251

his emphasis on a lag of about two years between monetary policy actions and the peak response of inflation. Friedman saw early-­1970 policy settings—in particular, the state of those settings after the easing under Chairman Burns in February 1970, discussed below—as more satisfactory than those in the latter part of 1969. One reason for this judgment was Friedman’s feeling that, as in 1966–67, a very tight monetary policy would produce a recession so severe that it would prompt a U-­turn in which monetary growth went back to inflationary levels. Thus Friedman had warned that “an overtight money policy is basically an inflationary step” (St. Petersburg Times November 7, 1969; see also Daily News, November 7, 1969). With the stance of monetary policy in the first half of 1970 being, in his view, about right, Friedman saw the next order of business as simply to maintain that posture. It had been widely reported in late 1969 (for example, in Newsday, December 3, 1969) that the business community was skeptical about the Nixon administration’s resolve to maintain aggregate-­demand restraint, and Friedman in early 1970 had noted that government officials had given a number of speeches aiming to persuade business that there would not be a policy U-­turn in the next four to five years (Instructional Dynamics Economics Cassette Tape 42, January 15, 1970). The resilience of expectations of inflation, as embedded in longer-­term rates, during 1970 likely reflected the anticipation of a policy reversal. Furthermore, the disappointingly high inflation rates, just noted, that accompanied the 1970 output downturn meant that the administration had few benefits to which it could point from its announced policy of aggregate-­demand restraint. In this environment, Friedman attempted through his public statements and private advice to shore up the Nixon administration’s position and forestall a U-­turn. He stated in early March 1970 that the 1970s could see nominal interest rates averaging only 5 to 6 percent, around 3 percentage points below their values in 1969. But, Friedman cautioned, achievement of this situation would require “the courage and determination to resist” an excessive shift to ease during 1970. “I believe what happens this summer and fall is going to be of great importance, not only for this year but for the whole decade of the 1970s” (Newsday, March 6, 1970). Speaking from Chicago for an NBC television news interview the following month, Friedman elaborated on the argument. “The recession is very mild, there is little chance—no chance—that it will develop into a major economic problem, and on the other side of the picture we are at long last, much later than some of us had hoped, starting to have an impact on the rate of inflation. Prices are still going up, but there are some signs that they are going up a little less rapidly than they were going up beforehand. There are even more signs that if we can only have some patience, keep our

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cool, not get excited and panicky, we will have the inflationary spiral under real control in the course of the next year or so” (NBC Nightly News, April 28, 1970). He went on to write an article for the June 1970 issue of Readers Digest, in which he urged readers to “help the Nixon Administration to stand firm” (202) against calls for the adoption of major stimulus efforts, while he also underlined the fact that inflation had already begun to come down. During the first half of 1970, the administration itself relayed a very similar message. For example, Assistant Secretary of the Treasury Murray Weidenbaum observed in March 1970: “In the period immediately ahead—1970 and 1971—the American economy will be undergoing an adjustment. . . . For more than a year now, the federal government has pursued a policy of economic restraint, designed to dampen the inflation and to do so without precipitating a major downturn in the economy as a whole. . . . The results thus far are mainly a clear slowing-­down of what was an overheated economy. Inflation is continuing, but not at the accelerating rate that characterized earlier periods. It is our expectation that the rate of inflation will decline measurably in the coming year and that this will set the stage for the subsequent real and sustainable growth in production, employment and living standards” (Weidenbaum 1970, 85). In his Readers Digest piece, Friedman ventured to be quantitatively specific about the future scenario of the kind Weidenbaum had sketched. Friedman indicated that the benefits to be expected from perseverance included a situation of expanding output alongside 2 percent inflation by mid-­1971.102 By late August 1970, however, in light of his ongoing reexamination of lags, Friedman judged that this scenario was not in fact achievable until 1972.103 One of Friedman’s highest-­profile appearances in 1970 was an interview, already referred to, on Meet the Press on the NBC television network on June 28, 1970. On that occasion, Friedman reemphasized that the recession was “relatively mild,” stressed that there was “a good deal of evidence” that inflation was declining, and indicated that monetary actions already taken suggested an upturn in the economy was likely to start in the third and fourth quarter of 1970.104 This prediction paid off, as the economy did begin recovering in the fourth quarter, with the trough of the recession (according to the modern NBER business cycle chronology) occurring in November 1970.105 Friedman also affirmed his confidence in the disinflation policy in face-­ to-­face discussions in Washington with President Nixon during 1970. One of these meetings took place in April 1970, when he and four other economists met with President Nixon, giving Friedman an opportunity to give Nixon the stay-­the-­course message in person (Instructional Dynamics Economics Cassette Tape 49, April 29, 1970).106 A second meeting took place on November 19, 1970.107 This was a

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  253

smaller gathering than that in April, with Nixon conferring only with Friedman and OMB director George Shultz. Shultz recalled that the president “knew I was a friend of Milton’s, and, generally, when he met with the president, I was there too. . . . They never let Milton meet with him alone. Why not? Because Milton was so persuasive.” Thus there had “to be somebody there checking” that Nixon did not impulsively agree to an initiative suggested by Friedman (George Shultz, interview, May 22, 2013). At the meeting, Friedman presented an upbeat message about economic prospects—an assessment in which Nixon took comfort.108 By this point, Friedman was pleased not only with the administration’s support for aggregate-­ demand restraint, but also with what he perceived as an appropriate course correction by the Federal Reserve that had seen monetary growth step up from the low rates recorded over much of 1969. Monetary Policy Conduct A key factor that had, in Friedman’s view, led monetary policy astray in 1969 and required the course correction of 1970 was that the Federal Reserve’s continuing focus on interest rates had given it the impression that its policy was consistent with moderate restraint, when monetary growth told a different story (Newsweek, August 18, 1969). He viewed the weakness of monetary growth at the close of the 1960s as a reflection of Federal Reserve efforts to keep short-­term interest rates up (Instructional Dynamics Economics Cassette Tape 40, December 17, 1969). Developments at the start of the new decade held out the prospect of preventing a recurrence of this situation. In January 1970, in a move made under Chairman Martin but subsequently continued by Arthur Burns, the Federal Reserve seemed to make a major concession to Friedman’s position by stating that the behavior of monetary aggregates would be its criterion for policy decisions, and by assigning itself a target rate for M1 growth. Although the target rate was varied over the year, during 1970 the FOMC’s monetary-­growth objective was essentially to lift M1 growth from its low late-­1969 values and have it settle at an annualized rate of about 5 percent.109 In the event, this move by the FOMC did not prove to be a substantial change in either the target or instrument of monetary policy, with Poole (1979, 475) noting that the January 1970 decision was “more a change in form than anything else.”110 One revealing sign of the continuity of monetary policy before and after 1970 was that the federal funds rate continued to be the FOMC’s policy instrument. The federal funds market deepened in the mid-­1960s (Fuhrer and Moore 1995b), and the federal funds rate prevailed over other candidate short-­term interest rates as the rate on which Federal Reserve policy focused. This was acknowledged officially,

254 C h a p t e r f i f t ee n

as when, in May 1969, Federal Reserve Board governor Sherman Maisel stated: “What the Federal Reserve does is to influence the marginal cost of money to banks.”111 For his part, Friedman granted that the federal funds rate was a “very interesting rate” (Instructional Dynamics Economics Cassette Tape 22, April 1969), and he was aware that it was what the Federal Reserve was using as its operating target.112 According to the new policy instituted in 1970, the federal funds rate target would be adjusted at each meeting so as to be consistent with the monetary-­growth target. Friedman had a consistently negative perspective on this approach. He acknowledged that achieving a monetary-­aggregate target while using a short-­term interest rate as an instrument was “in principle, possible.”113 But he doubted the feasibility of this combination in practice because of the tendency for the federal funds rate target to be adjusted sluggishly. Friedman would come to see this tendency as indeed what did prevail when he looked back on the record of US monetary policy during the 1970s, which he regarded as characterized by a situation in which the FOMC altered its federal funds rate target “only slowly and belatedly to changing [credit] market pressure.”114 This pattern reflected what Friedman saw as the defect of a federal funds rate instrument compared with a monetary-­base or bank-­reserves instrument. Use of a quantity instrument, he believed, would ensure that the interest-­rate adjustment associated with achievement of a monetary-­aggregate target occurred automatically and rapidly. In addition, he viewed the continuation of a federal funds rate instrument as a symptom of the fact that monetary aggregates were still subordinate to interest rates in central bankers’ minds. There was clinching evidence of the latter phenomenon, Friedman believed, by the late 1970s. He noted that the Federal Reserve had had an “excellent record” in hitting its interest-­rate targets but a poor record in achieving the very monetary-­ growth targets that had ostensibly shaped the FOMC’s choice of values for its interest-­rate instrument.115 The continuing emphasis on an interest-­rate instrument, adjusted gradually, was a reason why Friedman worried that the 1970 official change in favor of money would not be a watershed in monetary control but would turn into a continuation of an interest-­rate instrument arrangement of the 1950s and 1960s (Instructional Dynamics Economics Cassette Tape 52, June 10, 1970). In particular, he was concerned that the protracted ups and downs in monetary growth that had so far been associated with the prior arrangement would continue. This concern turned out to be justified. As Poole (1979, 476) observed: “It is widely understood that a major reason for procyclical monetary growth is the Federal Reserve’s effort to control interest rates in the short run. This situation did not change under Arthur Burns.”

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  255

The 1970 change was in fact one in a long series of shifts in US monetary policy operations that seemed to make concessions to Friedman’s position but that in practice did not amount to a major change in the conduct of policy. For example, the FOMC directive from the spring of 1966 started making reference to a “bank credit proxy,” consisting of the deposit liabilities of commercial banks that were members of the Federal Reserve System (Holmes 1969, 71; Meulendyke 1998, 41). Friedman acknowledged that this series behaved much like M2 (Instructional Dynamics Economics Cassette Tape 14, February 1969). But he stressed that the FOMC’s references to the series did not signify an interest in monetary aggregates per se. Instead, these references simply reflected a continuation of the Federal Reserve’s long-­standing interest in commercial-­bank-­issued credit, on which (as its name implied) the bank credit proxy was designed to provide an indirect reading.116 Friedman did note in 1969 (Instructional Dynamics Economics Cassette Tape 14, February 1969) that the Federal Reserve over recent years, and “more particularly” in recent months, had shifted attention to monetary aggregates. A couple of months later, however, Friedman observed ruefully that “I have been fooled so many times in the past” into believing that the Federal Reserve had moved from a focus on interest rates in favor of much greater attention to money (Instructional Dynamics Economics Cassette Tape 20, April 7, 1969). In time, as already indicated, Friedman would view the 1970 change as a just another example of this pattern. In this connection, Friedman remarked in 1979 that “those of us who have long favored such a change have repeatedly licked our wounds when we mistakenly interpreted earlier Fed statements as portending a change in operating procedures” (Newsweek, October 22, 1979). As this 1979 quotation implies, however, Friedman initially was inclined to see more substance in the Federal Reserve’s 1970 change in procedures. He took the Federal Reserve as serious about its monetary target, his June 1970 memorandum to the Federal Reserve Board referring to “the rate of monetary growth aimed at by the FOMC.”117 Along similar lines, in a public talk Friedman gave a couple of weeks later he remarked, “The anti-­ inflationary policy of the Nixon Administration has widely been regarded— and with some justice—as based on monetarist views. [So have] . . . changes in Federal Reserve methods of operation.”118 Just as it did not turn out to constitute a major change in operations, the 1970 announcement by the FOMC did not signify a change in policy makers’ basic model of aggregate demand and inflation. To be sure, in academia and the public debate Friedman’s approach to monetary economics had made considerable ground: he himself referred in 1970 to “the widespread publicity and acceptance that monetarism has had.”119 A manifes-

256 C h a p t e r f i f t ee n

tation of this shift was the fact that in the previous year, two notable figures in the academic discussion—George L. Bach, previously considered neutral in the Keynesian-­monetarist debate, and John Culbertson, once so critical of Friedman’s monetary work—both supported a proposal (a precursor to those that Congress actually accepted between 1975 and 1977) that the Federal Reserve be required to specify a target range for monetary growth and to explain any deviations from that target (Milwaukee Journal, February 25, 1969). But the opposition Friedman faced in academia and, especially, monetary policy circles remained considerable, and it is in that context that the FOMC’s 1970 policy change needs to be understood. As discussed in Batini and Nelson (2005, 27–29) in the case of UK monetary targeting, a money-­supply objective is compatible with a number of nonmonetarist approaches to economic policy, including those that emphasize credit aggregates over the money supply in analyzing policy transmission and those that see inflation as largely determined by nonmonetary factors. These nonmonetarist lines of reasoning did, in fact, prevail at the Federal Reserve over much of the 1970s. The FOMC’s 1970 policy change did mark a further move away from the wholly dismissive attitude to Friedman’s research prevalent in Federal Reserve circles a decade earlier. But it was very far from an absorption of Friedman’s positions on money—in particular the centrality he put on the sufficiency of monetary control for control of inflation and aggregate demand—and on policy rules.120 It is interesting to note that in the lead-­up to the 1970 policy change, officials at the Federal Reserve Board and the Federal Reserve Bank of New York had made public criticisms of monetarism in speeches and articles, examples including those of Gramley (1969), R. Davis (1969), and Daane (1969). As Meigs (1972, 70) put it, “Notwithstanding the fact that control of the money supply had become a central part of the administration’s economic strategy, high Federal Reserve spokesmen launched scathing criticisms of monetarism in general and Milton Friedman in particular.” Revealingly, criticisms of this kind continued after the 1970 change in the FOMC directive.121 Brunner (1972, 104) assessed that the policy change did “not mean that the Federal Reserve authorities have accepted the monetarist interpretation,” and public statements by Federal Reserve officials were highly consistent with Brunner’s assessment. These statements made explicit the fact that the 1970 change did not signify an endorsement of monetarism in toto. Board governor Mitchell stated in April 1971: “This greater emphasis upon measures of monetary growth does not represent a commitment to a monetarist theory of central banking nor a radical change in the theories underlying central banking in the United States.”122 Along similar lines, Stephen Axilrod of the Federal Reserve Board’s senior staff observed in 1971: “Greater emphasis on aggregates is consis-

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  257

tent with a variety of economic theories, and it does not necessarily imply any particular judgment as to the importance for the economy of monetary flows relative to interest rates and credit conditions.”123 Paul Samuelson— able to speak with authority on the matter through his regular dialogues with the Board governors—observed: “Not a single member of the Federal Reserve Board has succumbed to monetarism” (Washington Post, August 1, 1971). The ostensible adoption of a form of monetary targeting by the Federal Reserve thus occurred in an environment in which key figures in the making of monetary policy remained noncommittal or hostile regarding key monetarist propositions. And, in any event, the rapid monetary growth that occurred in the early 1970s would indicate the loose relationship between the monetary targets and actual policy. Another Board governor, Andrew Brimmer, also made it clear that the degree to which monetarism was given credence by policy makers actually declined after the 1970 policy change, particularly from March 1970 onward (Brimmer 1972). The distance between Friedman’s views and the doctrine underlying actual US policy would indeed widen sharply during the course of 1970, because of changing official views about the inflation process. It is this change that will dominate the discussion of domestic economic policy for the rest of this chapter. In particular, it will occupy the remainder of this subsection and much of the coverage of Arthur Burns in section III. Officialdom’s Nonmonetary Perspective on Inflation As has been described in previous chapters, the view that inflation was a cost-­push phenomenon was one that Friedman had confronted and critiqued sporadically over the 1950s and 1960s. But the idea that, when the economy was below full employment, inflation was a pure cost-­push phenomenon—that is, altogether insensitive to the output gap—although prevalent in the economics profession and the officialdom of other English-­ speaking countries, had few adherents among US economists and policy makers as of the end of 1969. Extreme cost-­push views, and the advocacy of wage and price controls that flowed from these views, did have a powerful hold on the public imagination, and so Friedman often had to offer rebuttals to those views in his media appearances. When, for example, in a PBS news special in early 1970, a fellow panelist said of the option of direct wage/price controls, “I know that economists oppose this, but I personally would like to know and I rather think a lot of the American people would like to know why we shy away from it,” Friedman replied: “The reason we shy away from it is because it doesn’t work.”124 But there is no gainsaying the fact that, until the early 1970s, it was rare for Friedman to encounter extreme cost-­push views among major US

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economists. An exception, of course, came in Friedman’s occasional skirmishes with John Kenneth Galbraith, one of the most recent of which had occurred in a December 15, 1969, ABC news special, The Great Dollar Robbery: Can We Arrest Inflation? During that program, Friedman was asked to rebut Galbraith’s case for price controls in key industries. Friedman replied that “experience in this country and every other country has shown that such laws fixing maximum wages and maximum prices are honored far more in the breach than in the observance. They’ve also shown that such laws do an enormous amount of harm. They attack the symptoms of inflation, not the cause of inflation.” But, notwithstanding his prominence in public discussions and his prestigious position as an economics professor at Harvard University, Galbraith was widely acknowledged as being far removed from mainstream economics. Indeed, what is remarkable about events during 1970 is the extent to which mainstream US macroeconomic thinking on inflation moved toward the position on inflation previously associated with Galbraith and with economists in the United Kingdom. In the course of that year, pure cost-­push views became prevalent among major US economists and policy makers. Increasingly, major Keynesian academic economists, economists in government and business, and policy officials were judging that market power of labor and government had so altered the United States’ wage- and price-­setting mechanisms that, instead of merely responding inertially to economic slack, inflation now did not respond to negative output gaps at all. According to this school of thought, the breakdown of the traditional Phillips-­curve relationship between inflation and unemployment reflected not the validity of the Friedman-­Phelps version of the Phillips curve but the result that, over a wide region, the supply/demand balance was unimportant for the determination of inflation (see E. Nelson 2005b). By late 1971, Friedman was granting that, unlike himself, “many other economists” saw inflation in the United States as reflecting pressure from union and business power (Newsweek, October 18, 1971). The most prominent convert to the pure cost-­push view was the new Federal Reserve chairman, Arthur Burns. During 1970, Burns shifted from adherence to the view that aggregate-­demand restraint was all that was needed to end inflation, to a belief in the necessity for some form of incomes policy as part of an anti-­inflation strategy. Burns’s first articulation of the case for incomes policy, in a speech given on May 18, 1970 (Arthur Burns 1970), provoked a sharp response from Friedman, as discussed later in this chapter. Unlike Burns’s statements beginning just a few months later, however, the arguments that Burns advanced in May 1970 seemed compatible with Friedman’s basic standpoint on inflation. In his May 1970 talk, Burns called for a return to guideposts to speed up the shift of US

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  259

prices and wages to paths consistent with the authorities’ disinflationary policy. This position, Friedman acknowledged, could be reconciled with a purely monetary view of inflation, as the guideposts might be a transitional measure. In particular, Friedman granted that an incomes policy that was administered in conjunction with a shift to monetary tightness could push prices and nominal wages toward values consistent with adjustment to the new monetary settings. Such a policy combination could moderate the real costs (in terms of transitory falls in output and employment) that would otherwise occur as the economy adjusted to a disinflationary policy (Instructional Dynamics Economics Cassette Tape 55, May 27, 1970; Newsweek, June 15, 1970).125 Friedman, unlike Burns, perceived logistical problems that would prevent wage/price guideposts from serving this useful function in practice and, therefore, he dissented from Burns’s proposal. But, at this time, Friedman and Burns remained in harmony on an analytical level because, as of May 1970, Burns continued to see inflation as a monetary phenomenon. Later in 1970, however, Burns permanently shifted to a nonmonetary, or pure cost-­push, view of inflation, according to which inflation was insensitive to the level of economic slack and nonmonetary tools like incomes policy were needed to remove inflation (Poole 1979; Romer and Romer 2002b, 2004; E. Nelson 2005b). The rationale for incomes policy that this vision provided did not cite the role that it could play in speeding up the process of disinflation and containing the short-­run real costs of demand restraint. Instead, the cost-­push view pointed to incomes policy as an instrument that was capable of bringing down inflation, in a way that monetary instruments—or, indeed, other instruments, such as those of fiscal policy, that might also be able to affect the level of aggregate demand— could not. In addition, over 1970 and 1971 Burns became more congenial to compulsory wage/price controls, and Congress in 1970 had given the president the power to impose such controls. Friedman was concerned by this change in Burns’s attitudes. Friedman was further aware that the business community might well support controls, as employers often generalized from their firm-­level experience to the economy as a whole, leading them to the conclusions that wages drove prices, and that wages were driven by autonomous forces (Newsweek, September 28, 1970). The Nixon administration had, as already noted, repeatedly rejected the adoption of wage/price guidelines or controls, and Friedman assigned himself the role of keeping up support for this position among members of both the administration and the general public, in the face of the agitation for controls coming from Burns, Congress, the business community, and many economists. Adoption of an incomes policy, Friedman wrote in January 1971, would trigger

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an abandonment of demand restraint, and would, in light of the unhappy experience with incomes policy in Canada and the United Kingdom, be a case of “imitating failure” (Newsweek, January 11, 1971). As for monetary policy over this period, Friedman had said in an interview in June 1970 that monetary growth in the year so far had been too high. This result, he judged, reflected the continuation by the Federal Reserve of interest-­rate-­oriented operating procedures—the pursuit of which was now delivering rapid monetary growth, after having been consistent with low monetary growth in 1969. But Friedman also indicated that he expected that the Federal Reserve would slow down monetary growth in coming months (New York Times, June 11, 1970). Friedman relayed the same judgment in his June 1970 appearance at the Federal Reserve Board’s consultants meeting: monetary growth, he said, had been “frighteningly high” from February to May—at annualized rates of 9.4 percent for M1 and 10.2 percent for M2 excluding large CDs—but much of this growth, he granted, could be justified as a makeup for the weak growth in money observed during the second half of 1969.126 For the period ahead, he wrote, the “right policy—again, it will surprise no one—seems to me to be to try to get on a steady path of about 4 to 5 percent monetary growth” from a December 1969 base.127 Although the easing since January–­February had been overdone in Friedman’s view, he judged that it had not yet proceeded long enough to jeopardize the disinflation strategy. Indeed, in a letter to Secretary of the Treasury David Kennedy dated June 24, Friedman wrote: “So far, we have done incredibly well in maintaining monetary and fiscal restraint despite many handicaps, and the whole economic team deserves much credit for this accomplishment.”128 Friedman had been happy that, in a televised address to the nation, President Nixon gave monetary growth for 1970 as 6 percent—which, as it was below the rate observed in the second quarter, Friedman interpreted as indicating that Nixon favored slowing down monetary growth over the rest of the year (Newsday, June 18, 1970). Friedman could not, therefore, have been pleased when just a few weeks later, Secretary of the Treasury Kennedy, citing the sluggishness of the economy and signs that inflation was falling, told reporters that “I think that the Fed can err on the liberal side” (The Evening Star [Washington, DC], July 16, 1970). Indeed, for all the praise Friedman offered during 1970 for the Nixon administration’s courage, a persistent concern of his was to forestall an excessive easing in response to the tight policy of 1969. He would later recall resisting President Nixon’s entreaties, in the year or so prior to the launch of the New Economic Policy in August 1971, to help the president encourage Burns to speed up monetary growth.129 Friedman was unsympathetic regarding such calls. In February 1971, he criticized the administration for publicly urging the Fed-

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  261

eral Reserve to shift to a more relaxed policy stance and warned that such a move would be a “serious mistake” (Daily News, February 3, 1971). The Federal Reserve’s shift during 1970 to a less restrictive policy stance had, he believed, been a sufficient change in posture. When the data for 1970 were in, it emerged that four-­quarter monetary growth rates for the fourth quarter of 1970 were 4.9 percent and 7.2 percent, respectively, for the series that became, in 1971, the official Federal Reserve Board definitions of M1 and M2.130 (The corresponding rates are 5.0 percent and 6.1 percent for the modern definitions of these series.) Friedman would characterize the Federal Reserve in 1970 as having exhibited a “shift to a very vigorous [monetary] expansion” in February after the 1969 tightness.131 But for the year as a whole, the shift had not, he believed, gone too far: Friedman regarded monetary policy for 1970 as having been “neutral” (Instructional Dynamics Economics Cassette Tape 99, May 17, 1972), and in December 1970 he praised Nixon and Burns for sticking with the disinflation policy (Instructional Dynamics Economics Cassette Tape 64, December 31, 1970). This would be a judgment to which Friedman tended to adhere subsequently. Although he was already displeased in 1970 with Chairman Burns’s advocacy of incomes policy, Friedman would usually characterize 1971 rather than 1970 as the year in which monetary policy strayed from a noninflationary path.132 This was, however, probably too generous an assessment of the United States’ monetary policy of 1970. Although monetary growth was indeed substantially lower in 1970 than in 1971, its pickup late in the year (which is particularly pronounced in the case of the modern monetary series) can be seen in retrospect as flowing from that year’s shift to ease and as forming part of the period of excessive monetary growth that ushered in the severe inflation of the mid-­1970s.133 As early as 1974, Henry Wallich—who was then a new Federal Reserve Board governor—in effect cast 1970 as the point at which impatience with the gradualist policy triggered a premature policy easing (Washington Post, May 31, 1974). In the same vein, Orphanides (2003, 657) traced the sequence of monetary policy decisions that launched the Great Inflation to February 1970. These retrospective judgments are borne out by the pattern of interest-­ rate behavior. Friedman noted that the months after the middle of 1970 witnessed “one of the sharpest[,] if not the sharpest[,] decline[s] in [short-­ term] interest rates in the US economic record.”134 The course of short-­ term interest rates was striking also in its departure from the trajectory of longer-­term interest rates: see figure 15.1. In December 1970, Friedman noted the “extraordinary” spread of longer-­term rates over short-­term rates that had emerged in the wake of the decline in the latter rates.135 The behavior of this spread in turn suggests that the decline in short-­term inter-

262 C h a p t e r f i f t ee n Percent 9 Federal funds rate Ten-year Treasury bond rate

8 7 6 5 4 3 2 1

1968

1969

1970

1971

1972

F igu r e 1 5 . 1 . Short-­term and long-­term interest rates, 1968:Q1–1972:Q4. Sources: Federal funds rate consists of the quarterly average of the monthly effective federal funds rate from the Federal Reserve Bank of St. Louis’s FRED portal. The ten-­year Treasury bond rate is the quarterly average of the monthly series in the Federal Reserve Board’s H.15 data release, also in FRED.

est rates was not attributable to a decline in inflationary expectations. Evidence that the short-­term interest-­rate decline instead reflected monetary ease is provided by Taylor’s (1999, 337) plot of the Taylor (1993) rule prescription, which declined only slightly during 1970, even as the federal funds rate declined by about 400 basis points over the course of the year. As of early 1971, Friedman remained pleased with policy settings. At the turn of the year, he praised the “willingness of the Nixon Administration to maintain its policy in the face of so much criticism” (Instructional Dynamics Economics Cassette Tape 64, December 31, 1970). He followed this up in a Newsweek column (February 15, 1971) that declared that what was needed was “more of the same.” In a March 1971 talk in Detroit that continued on this theme, Friedman pointed to the fact that inflation had fallen from rates of around 6  1/2 percent in late 1969 and early 1970, to rates of 4 to 41/2 percent more recently, as a sign that the policy of disinflation was making progress.136 Friedman was, however, already concerned about renewed rapid growth, in recent months, in M2. And, as the monetary data through March emerged, Friedman’s disquiet turned into alarm. Friedman’s Newsweek column of May 3, 1971, was titled “Money Explodes.” The behavior of mone-

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tary growth had itself provoked an explosive reaction from Friedman in this column. For both M1 and M2, Friedman observed in the column, the double-­digit rates of growth recently observed “have not been exceeded in any other two-­month period in the past quarter century!” Speaking in Philadelphia in the week of the column’s appearance, Friedman said that the growth rates partly reflected the Federal Reserve’s continued use of the federal funds rate as its policy instrument, a practice that he regarded as a hindrance to the execution of the FOMC’s directives concerning monetary growth (American Banker, April 27, 1971). Friedman reiterated his concerns when in Washington, DC, in midyear. On June 8, 1971, Friedman met President Nixon in the Oval Office. As in November, George Shultz also participated in the meeting. Thanks to the taping system that Nixon had installed in early 1971, the conversation has been maintained for posterity. Although, as noted above, Friedman remembered this conversation mainly as one in which Nixon urged him to encourage Burns to ease monetary policy, only a small part of the conversation really lent itself to this interpretation. In that portion, Nixon expressed a concern to Friedman that the latter would urge on Burns too tight a policy. Friedman was quickly able to steer the conversation toward his own worry that monetary policy was currently very loose. Friedman told Nixon: “As of January [or] February, I would say you couldn’t ask for anything better. We were on an upward path with the economy, at a slow enough rate so it won’t start inflation up again but a fast enough rate so you’ll have the unemployment coming down sharply in ’72.” “What’s so annoying,” he explained, was that monetary policy since early in the year had jeopardized this scenario by pushing monetary growth to an excessive rate. This stimulus was not needed, and the recovery would continue if monetary growth was pared back. “The economy is on the way up, and the problem is not to let it go too fast,” Friedman observed. He also observed: “I think the great thing you’ve been able to do, Mr. President, is to take a long view and not let yourself get buffeted back and forth from week to week. I think that’s the right thing to do. And at the moment—just hang on.”137 The day after his meeting with Nixon, Friedman delivered a memorandum to the Federal Reserve Board at another consultants’ meeting. In that document, he noted that M2—now officially defined so that CDs were excluded—had gone from a growth rate of 9.8 percent per year from February to August 1970 to 10.4 percent in the August 1970 to January 1971 period to 19.4 percent in January to April 1971.138 “It was desirable to accelerate monetary growth in February 1970,” he contended, but it “was not desirable to accelerate monetary growth sharply in January 1971.”139 In late April, Friedman had expressed the conviction that rapid monetary growth would likely “not be permitted to continue” and, insofar as it

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was followed by a step-­down to moderate monetary growth, he was “very optimistic” about the economic outlook (American Banker, April 27, 1971). By June, distressed by the accretion of further rapid monetary-­growth numbers, he was doubtful that the increase in money would be held down by enough to prevent inflation reviving somewhat, but he affirmed that the Federal Reserve still had a chance to “get the car back on the road” (Philadelphia Evening Bulletin, June 4, 1971).140 A significant cutback in monetary growth for the rest of the year was accordingly the advice he proffered in his June memorandum to the Federal Reserve Board.141 Importantly, while Friedman regarded actual monetary developments in early 1971 as inconsistent with the gradualist disinflation strategy, he did not view it as a conscious abandonment of that strategy. Rather, he regarded it as primarily a monetary policy mistake. Indeed, Friedman said: “I have no doubt whatsoever that the Federal Reserve Board is just as unhappy about the [monetary growth] outcome as I am” (Chicago Today, May 10, 1971, 23). “The Fed has made a mistake,” was how Friedman pictured things to Nixon when they met on June 8. Friedman did not, however, reckon on the scale of the pressure that policy makers would come under for a conscious and material U-­turn. Nixon had already made a concession toward cost-­push views by introducing, in mid-­1970, an “inflation alert,” consisting of government machinery designed to notify the public about prominent price increases. Friedman at the time discounted this action, seeing it as a political move that did not constitute a change in economic strategy (Newsday, June 18, 1970).142 At the end of 1970, Friedman believed that the push for an incomes policy had been beaten back and said that there was no chance of such a policy being introduced in the United States in 1971 (Instructional Dynamics Economics Cassette Tape 63, December 16, 1970). But in the first week of January 1971, President Nixon remarked off air to a television interviewer that “I am now a Keynesian in economics” (New York Times, January 7, 1971; Chicago Tribune, January 8, 1971).143 A decade later, when Nixon’s domestic economic moves from August 1971 were widely agreed to have been misconceived, Friedman was able to view Nixon’s January 1971 remark as signifying “the end of an era”—that is to say, an event that amounted to the culmination of the Keynesian era, for which Nixon’s wage/price controls would prove to be the last chapter (Newsweek, July 27, 1981).144 But at the time, the Nixon statement was perceived not as a last gasp of the Keynesian movement but as a major concession on the part of the president to his critics and as putting Friedman on the defensive. In November 1969, a front-­page article in the Wall Street Journal had quoted an anonymous economist claiming, “Milton Friedman may well go down as the most influential economist of our time” (Wall Street Journal,

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November 4, 1969, 1).145 And shortly afterward, of course, Friedman made the cover of Time magazine. In early 1971, however, Time now ran a new, much more circumspect article on Friedman, titled “Milton Friedman: An Oracle Besieged” (February 1, 1971). The article, which seized on Nixon’s statement, reported: “The unwelcome combination of recession and inflation is also spreading doubts about Friedman among businessmen, politicians and economists.” It may seem peculiar that the combination of inflation and recession was seen as a challenge to Friedman’s conceptual framework, as that framework had two prominent elements (lags of inflation behind spending, and an expectational Phillips curve) that could explain dynamic phenomena of this sort. But, as detailed above, Friedman’s views on the empirical length of monetary policy lags were in flux during the very early 1970s, and so he had put on the public record a number of inflation predictions that, as he acknowledged in 1972, were “overoptimistic.”146 The Time article argued that the United States was beset with cost-­push phenomena whose presence might refute Friedman’s view of inflation: “do Friedman’s theories suffice in today’s part-­free, part-­regulated U.S. economy, where industrial oligarchies can virtually dictate some prices and monopolist labor unions can virtually dictate some wages?” The article quoted a commercial-­bank economist as saying that “important structural changes” rendered “Friedmanite solutions unrealistic.” The Time piece also suggested, in what turned out to be an accurate assessment of Nixon’s position, that “Nixon’s half-­successful jawboning against steel-­price increases suggests that Friedman may have lost his most illustrious convert.” The corollary was that Nixon was coming round to Arthur Burns’s position on inflation control. Burns himself perceived that this was so, observing in testimony in March that “I think the moral power of the presidency is very great, and I am very pleased to find that the president, who at first was opposed to jawboning, is now engaging in it. I think he is doing it quite effectively.”147 Quoted in the February Time piece, Friedman zeroed in on one key issue: “The test is whether the administration and the Federal Reserve will have the guts to keep the present relatively moderate expansion policy and let inflation taper down.” A second issue, and largely the flipside of the first, was whether the Nixon administration would succumb to the position that wage and price controls were an appropriate weapon against inflation. At the beginning of 1971, Friedman had had yet another debate with Galbraith on the merits of controls, this time on the television discussion program The Advocates.148 “There has been much talk here about unions producing inflation,” Friedman observed, but he pointed out that unionization was lower in the United States than in many other countries, and that, in any event, “you have had inflations with and without unions.” Friedman also

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objected to the notion that his advocacy of monetary restraint against inflation amounted to directing an untested instrument against inflation. “The theory that I am speaking of has not only been tried; it is the only one that has ever worked over history.” In contrast: “Wage and price controls have been tried over and over again, [and] they have never worked” (The Advocates, PBS, January 5, 1971). Over the subsequent months, however, the pressure to introduce wage/ price controls mounted. Representative Reuss, House chairman of the Joint Economic Committee, had advocated controls in 1970, citing the inadequacy of monetary and fiscal policies as tools against inflation (see E. Nelson 2005b).149 This continued to be Reuss’s position the following year, and in a congressional hearing on June 22, 1971, he lamented “our bollixed-­up economy—6 percent inflation, 6 percent unemployment, and only using 75 percent of the plant and equipment that we now have in place in this country.”150 Inflation was in fact not as high by mid-­1971 as Reuss indicated: data for midyear would show that four-­quarter inflation was at or somewhat below 5 percent. In addition, economic slack was considerably less in mid-­1971 than policy makers thought at the time (Orphanides 2003, 645; 2004, 164). But Reuss’s assessment reflected and reinforced a common perception that insufficient progress had been made on either the inflation or unemployment front. Nevertheless, in the early summer of 1971, Friedman regarded the administration as having once again largely resisted the criticism of its anti-­ inflation strategy, and he wrote a column expressing this judgment, titled “Steady as You Go” (Newsweek, July 26, 1971).151 That column praised Nixon’s “will power and moral courage” in resisting pressure to reverse course. But Friedman would later describe his rollout of the column as amounting to a “masterpiece of bad timing” (Newsweek, May 14, 1973), acknowledging, for good measure, that the column was “not one of the more stellar bits of clairvoyance that I have ever engaged in” (Instructional Dynamics Economics Cassette Tape 119, April 25, 1973). Within a month of the appearance of the column, the perception that insufficient progress had been made with respect to either inflation or unemployment led President Nixon to announce his New Economic Policy. Nixon did so in a national broadcast on Sunday, August 15, 1971.152 Into Controls The principal domestic policy initiative in the New Economic Policy was a ninety-­day wage/price freeze. The comprehensiveness of the freeze, in its application to domestic products, put in perspective the administration’s modest efforts at jawboning in 1970. Indeed, Nixon was imposing wage/

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price controls that were more sweeping than even John Kenneth Galbraith had been proposing in the first year of the administration. In ABC’s December 1969 television special, the Galbraith proposal that Friedman had been asked to critique had consisted of wage and price control proposals applied only to key sectors. Friedman’s reaction was that the measures were “purely cosmetic in nature, not therapeutic” (New York Post, August 16, 1971, 39). He added: “The effect will be to conceal price and wage increases, not prevent them. Our experience from World War II and other times proves that people will find ways to evade the freeze” (Louisville Courier-­Journal, August 16, 1971). On Nixon, Friedman observed: “I think on the whole Mr. Nixon has done a fine job on the economy, and from my point of view, I think he backslipped tonight. I realize he is under enormous pressure” (Detroit Free Press, August 16, 1971). In contrast, the freeze was applauded not only by Burns and Galbraith but also by leading Keynesian economists like James Tobin, Walter Heller, Arthur Okun, and Gardner Ackley (see E. Nelson and Schwartz 2008a, 842–44).153 One of the most prominent supporters was Paul Samuelson. The August 17, 1971, edition of the ABC Evening News provided both Friedman’s and Samuelson’s reactions, and the result was a study in contrasts. Friedman: “From my point of view, I believe the wage/price freeze is wholly bad. I think it’s highly undesirable. I regret very much that the president found it necessary to take that measure. Why is it undesirable? It’s undesirable because it suppresses the symptoms of inflation without attacking the disease. It’s purely cosmetic. It has no therapeutic effect” (ABC Evening News, August 17, 1971). Samuelson: “I don’t think that a ninety-­day freeze is going to solve the problem of inflation. But it’s a first move toward some kind of an incomes policy. Benign neglect did not work. It’s time that the president used his leadership. . . . We’re better off this Monday morning than we were last Friday. Last Friday was an untenable situation” (ABC Evening News, August 17, 1971). Samuelson’s support for the controls clashed somewhat with his assessment in Samuelson (1970c, 147) that Friedman, along with Frank Knight and Henry Simons from the previous era at the University of Chicago, had earned an “honored place in the history of economic thought in influencing economists to appreciate the merits of market pricing as against direct government interventions.”154 Samuelson’s endorsement of the Nixon wage/price controls underlined the highly qualified nature of his confidence in the price mechanism. Samuelson was, of course, long on record having suspicions about the scope of the stock market, viewed as a whole, to deliver equity-­price values that were justified by market conditions (an

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issue on which Friedman, as discussed in chapter 14, was by the early 1970s already moving into close agreement with Samuelson). But Samuelson’s early-­1970s discussion of cost-­push factors indicated that he believed that wages and product prices could no longer be left to the market—even less so than when he had supported wage/price guideposts in the 1960s. A possible reconciliation of Samuelson’s various comments on the price mechanism may lie in the notion that Samuelson regarded price signals as playing an important role in households’ choices among consumer goods, but that he viewed the supply side of the US economy as having been so permeated by cost-­push forces that nominal wage growth and inflation could not be viewed as susceptible to the influence of the aggregate-­demand/ aggregate-­supply balance. Friedman had warned earlier in 1971 that proponents of incomes policy regarded it “as a substitute for demand restraint, not a supplement,” and, in his first Newsweek column after the New Economic Policy was introduced, Friedman predicted that it would lead to the attitude: “Full speed ahead. The price freeze will hold back inflation.”155 This was indeed the reaction of key Keynesians to the onset of the freeze. Against this background, Friedman relayed the following to President Nixon in their next, and final, face-­to-­face conversation in the White House, in September 1971: “Now on the domestic side, there are two questions involved. And one is the technical problem of how you unwind the price control—what you substitute for it. But I think there’s a more fundamental and basic problem. The great danger that I see in the path that we’re now on is that—under cover of suppressing the inflation—the true inflationary forces will be increased. And that’s the real danger, because the Congressman says, ‘Why do we have to deal with inflation legislatively [through spending restraint]? Here’s the CLC [Cost of Living Council]—they’re taking care of it for us.’ Now that’s a very real danger. . . . The same danger with the Fed: that it says, ‘Now we can print more.’” Friedman then outlined the longer-­term political costs that this scenario would generate for Nixon. “Now, from your point of view and our point of view, we want to look forward not only to ’72, but beyond that. We don’t want to—We want a victory in ’72, but we don’t want a victory which has to be followed by a course of action that puts the Democrats in power for twenty years.” He acknowledged the short-­term political gain for Nixon: “if you let the inflationary pressures build up over us, you may be able to hold the dam through the election.” But beyond that point, the dam would not hold; rather, the chances were “70/30, it will collapse. And when it does, you’ll have a great upsurge in inflation. And then there will be again pressure for stepping on the brakes hard again. We will have thrown away the advantages of what we gained at the cost of the 1970 recession.

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You will have to have an even worse recession, [and] if in 1974 you’re forced to superintend a severe recession, that’s going to put the Democrats back in for twenty years.”156 The economic prediction in Friedman’s outline proved accurate, his political projection less so, as the Democratic party would regain the White House for only four years in the wake of the turmoil—which was, of course, not just economic in nature—of Nixon’s post-­reelection years in office, 1973 and 1974. It was not immediately evident that a U-­turn of the kind Friedman sketched to the president was going to occur on the fiscal policy side. Nixon’s announcement had contained a proposal to cut taxes and government spending by equal amounts, which Friedman said was a “very good” part of the New Economic Policy (ABC Evening News, August 17, 1971) as it “represents a reduction in the size of government” (American Banker, August 23, 1971, 8). By the time of his meeting with Nixon, however, Friedman was disabused of the notion that fiscal restraint would be forthcoming.157 Federal Spending under Nixon Friedman had already expressed disappointment at the Nixon administration’s lack of interest in reducing government expenditure. In his Meet the Press appearance in 1970, for example, Friedman had said that beginning with the Johnson administration, “spending on nonmilitary purposes has risen at an incredibly rapid rate,” while noting also that his preference would be to “cut $6 or $7 billion out of the useless and wasteful subsidies” to agriculture as well as to reduce welfare spending.158 Modern vintages of data show that, after two years of decline, the ratio of federal outlays rose as a percentage of output in fiscal year 1971, despite a continuing decline in the share of national income devoted to defense expenditures (Council of Economic Advisers 2011, table B-­79, 284). In February 1971, Friedman labeled the $229 billion spending total in the federal budget plan that Nixon submitted for fiscal year 1972 as “much too big” (Daily News, February 3, 1971), and in August 1971 Friedman characterized fiscal policy, like monetary policy, as having been “extremely expansive” in the lead-­up to the New Economic Policy (ABC Evening News, August 17, 1971). The reduction in outlays mooted in Nixon’s August 1971 announcement did not occur. Rather, a still more expansive posture emerged, so much so that Friedman would see fiscal policy in Nixon’s early years as commendably restrained. He would eventually consider the goal of public-­ expenditure control to have been “adhered to rather well” during that earlier period. In this connection, he would cite a reduction in the growth of nominal federal spending from over 13 percent per year from calen-

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dar years 1965 to 1968 to less than 7 percent in the 1969–71 period.159 But Friedman also judged that Nixon’s first term had, over time, witnessed “an evaporation of restraint on federal spending,” culminating in 10.7 percent federal spending growth in 1972.160 The growth in government spending—both real and nominal, and in both the transfers and purchases components—contrasted markedly with Assistant Secretary of the Treasury Murray Weidenbaum’s projection in March 1970 (Weidenbaum 1970, 89) that federal purchases would decline cumulatively in real terms by about 15 percent from 1969 to 1975—a cutback that Weidenbaum saw as largely offsetting a prospective large rise in transfer spending and as leaving real federal government outlays in 1975 only modestly higher than their level at the start of the decade. The difference between Weidenbaum’s projection and actual developments highlighted the fact that cutbacks in US defense spending took place alongside a major expansion in nondefense areas of federal spending. Friedman’s disillusionment with this emerging situation is brought out by the contrast between his comments on a television panel on the day that Nixon took office that “1969 is going to be as significant a year in American history as 1933 was, because it’s going to mark . . . a trend toward less reliance on government” (State of the Union, WNET, January 20, 1969) with his observation three years later that he was disappointed that Nixon had presided over such a large increase in public spending (Firing Line, PBS, January 5, 1972, pp. 12, 13 of transcript). Another disappointment for Friedman in the area of fiscal policy was the fact that the investment tax credit was restored, as part of the New Economic Policy. Although Friedman was disappointed with the direction taken by Nixon on fiscal matters after 1971, this shift had fewer implications for monetary policy than he sometimes implied at the time. As has been discussed in previous chapters, during the 1960s Friedman believed that monetary growth and deficit spending, which typically went hand in hand in wartime and other extreme conditions, were likely to be closely linked even under milder conditions, even though they did not have to be. This remained his position during the early Nixon years. Thus Friedman observed that inflation “isn’t always a result of deficit, but most of the time it’s to help pay government expenses,” and he traced the inflation of the late 1960s to the “disgracefully inflationary policy followed by the Johnson Administration” (The Advocates, PBS, January 5, 1971).161 This line of thinking was also evident in Friedman’s observation early in Nixon’s incumbency that “unless the administration can at least slow down the rate of spending, it will be unable to achieve its other objectives and it will disappoint many of the voters who elected it” (Plain Dealer, February 28, 1969, 7). And—anticipating some of the terms in which the later literature such as Sargent and Wallace (1981) would characterize the deficit/monetary-­growth/inflation link—Friedman

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observed that holding down the federal budget was necessary to make an undertaking to reduce monetary growth “a credible policy” (Instructional Dynamics Economics Cassette Tape 25, May 25, 1969). However, as previous chapters have also indicated, the experience of the 1970s would leave Friedman impressed with the degree to which deficit spending and inflation could be decoupled in practice. He was voicing observations to this effect even in the late Nixon period, and in particular he would reject analyses in which the rapid monetary growth of the 1970s was treated as basically due to fiscal policy. Even prior to making this empirical judgment, Friedman reaffirmed that the link between fiscal policy and monetary policy could in principle be broken by conducting a nonaccommodative monetary policy in response to deficits.162 Thus, although it was not helpful for the achievement of monetary restraint, the Nixon administration’s move to fiscal expansion did not, in Friedman’s judgment, preclude the possibility of a noninflationary monetary policy being carried out. Fearing a Recession Such monetary restraint did not occur. Instead, on the monetary side, too, Friedman’s fear of excessive expansion—which had already been stirred by the data for the first half of 1971—was realized for 1971 and 1972 as a whole. Monetary growth did slow down somewhat in the second half of 1971. Indeed, for a while in late 1971 and early 1972, Friedman was concerned about economic weakness. He believed that the uncertainty engendered by the wage/price freeze had led to an increase in the demand for money, so that the freeze had had “a chilling effect on the recovery” (Instructional Dynamics Economics Cassette Tape 90, January 13, 1972).163 In Friedman’s estimation, the monetary slowdown, together with this perceived decline in velocity, threatened a major economic slowdown (Daily News, November 11, 1971; Business Week, November 13, 1971; Newsweek, January 10 and May 22, 1972). Friedman’s fear on this score was so acute that he dramatically opened a December 1971 letter to Burns with the words, “What in God’s name is happening?” The letter was in reaction to a slowdown in monetary growth—to what Friedman described in his audio commentaries as essentially no growth in M1 in the July–­December period and little growth in M2 (Instructional Dynamics Economics Cassette Tape 88, December 15, 1971). For a time, he feared that another recession was in prospect (Newsweek, January 10, 1972; Financial Times, February 22, 1972).164 It happens that this period is one for which subsequent revisions and redefinitions of the monetary data have a large bearing on the interpretation of developments. Although, when measured by the old M2 series that Friedman was using, monetary growth fell from double-­digit annualized rates of increase from the first half of 1971 to single digits in the second half

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of 1971, the modern M2 data register double-­digit growth in both halves of the year.165 Both series, however, attest to double-­digit monetary growth in the first half of 1972, and in April 1972 Friedman accurately predicted that the “last half of 1972 will be very much a boom period” ( Japan Times, April 15, 1972).166 In addition, both M2 series recorded rapid growth in calendar-­ year terms: in 1974, Friedman reported 11.8 percent M2 growth for 1971 and 10.2 percent growth for 1972; the modern M2 data suggest monetary growth of 13.4 percent for 1971 and 13 percent for 1972.167 In all, the authorities’ decisions had led to what Friedman in mid-­1972 called an “incredibly expansive fiscal and monetary policy” (Newsweek, May 22, 1972). Continuing to Support Nixon By some accounts, including his own, Friedman broke with Nixon after the president imposed price controls. As detailed above, Friedman was highly critical of the freeze, and in remarks added in July 1972 to the collection, An Economist’s Protest, of his Newsweek columns, Friedman stated: “The actual execution of policy falls into two sharply demarcated parts: before August 15, 1971 and after August 15, 1971.”168 Indeed, it was later stated (in Time, October 25, 1976) that “Friedman quit as a Nixon adviser” once the controls were announced.169 However, contrary to the impression given by these statements, it would not be correct to suggest that Friedman broke off ties with the administration once the New Economic Policy was instituted, or that he ended his support for the administration.170 He actually both maintained ties with the administration and supported the president’s reelection. In part, this was because, from the beginning, he sympathized with Nixon’s predicament. Friedman contended that Nixon’s imposition of controls occurred in the wake of “the snow job the Democratic politicians and the Democratic economists have accomplished” concerning pre–­August 1971 economic conditions (Chicago Tribune, August 16, 1971, 1).171 Friedman felt that the economic expansion had been “vigorous” in the seven months ahead of the freeze announcement and that this fact had been lost amid much critical commentary on the administration in the period up to August (Newsweek, September 27, 1971). On this score, Gordon (1976a, 55) took issue with Friedman. Gordon gave economic growth for 1971 up to August as running at an “anemic” rate of 3.2 percent. In the same vein, as already indicated, Paul Samuelson regarded the economic course prior to August 1971 as untenable. But data revisions since 1971 have had the effect of bolstering Friedman’s assessment. Modern data on real GDP suggest that output growth proceeded at an annualized rate of over 6 percent for the first two quarters of 1971.172

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In March 1971, Friedman had laid out his own position in some detail: the economic expansion should be allowed to proceed at a rate that allowed unemployment to decline but that still kept output below potential for an extended period, thus fostering a continued decline in inflation (Detroit Free Press, March 9, 1971). He continued: “We have a wonderful opportunity now: we have paid a moderate price to slow down inflation; we must not throw that away by expanding so rapidly that we start the inflation up again.”173 As he noted around the same time: “The temptation to speed up is the big one the president will have to resist” (Cleveland Press, March 8, 1971). President Nixon did not resist that temptation, and Friedman’s warning that the actual problem was “to keep the economy from going too fast” (American Banker, April 27, 1971; also quoted in Time, June 14, 1971) went unheeded.174 As far as the wage/price controls were concerned, Friedman’s position during the latter part of 1971 and over 1972 was that Nixon remained personally ill disposed toward controls—an assessment on which the evidence is mixed, as discussed below. Friedman therefore felt that Nixon would be inclined to dismantle the controls at an early point. At the same time, Friedman knew that a lesson from the history of controls was that they initially seemed to work. “Experience in other countries suggests that for about a year such controls generally look good; after about two years, they collapse” (Newsweek, January 31, 1972a, 75). Thus, Friedman observed after the freeze was imposed that Nixon had seized the tiger by the tail and “will find it hard to let go” (Newsweek, August 30, 1971, 22). Friedman made the case for an early end to controls and avoidance of a lasting U-­turn in the September 24, 1971, meeting with Nixon and George Shultz at the White House. As already indicated, he did so by outlining a scenario, labeled by Friedman a “horror story,” in which the combination of wage/price controls and overstimulation of aggregate demand put Nixon’s party out of office for a protracted period after 1976.175 Of this scenario, Nixon conceded, “it’s possible, I understand,” but when the freeze period ended the following November, Nixon simply moved to a Phase 2 of controls and, as noted above, fiscal and monetary settings turned still more expansionary. This meeting was not acrimonious, in part because Friedman spent much of it—as he had in testimony to the Joint Economic Committee the previous day—talking about international aspects of the New Economic Policy, the component of the policy of which he largely approved.176 In his memoirs, Friedman did recall one sharp exchange in which, urged by Nixon not to blame Shultz for the move to controls, Friedman said, “I blame you, Mr. President.”177 In his interview for this book, George Shultz brought up this exchange of words in his own recollection of the meeting, a fact that

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boosts the likelihood that the exchange actually occurred. But Friedman’s memoirs indicated some doubts about his memory of the recollection, and when in May 2002, Friedman finally got to listen to the recording of the conversation, he found that the relevant segment of the conversation was inaudible.178 There are, in fact, two portions of the conversation that resemble what Friedman and Shultz recalled, but language as strong as “blame” does not appear, and both portions in question were more lighthearted in tone than the blunt exchange of Friedman’s recollection. In the first portion, Nixon joked that it was Shultz who had proposed controls, to which Friedman replied that this was “the pot calling the kettle black.” In the second portion, which occurred at the point in the conversation mentioned in Friedman’s recollection, Nixon told Friedman not to worry about Shultz, with Friedman replying that he was not, in fact, worried about Shultz but instead about what the president might do.179 Although Friedman did not meet Nixon in person again until well after the president’s resignation, Friedman’s informal ties with the administration continued over 1971 and 1972.180 He found himself at odds with some of the economic personnel around Nixon—such as John Connally, the secretary of the treasury when the New Economic Policy was announced— and he disapproved of the extent to which the CEA had returned to the Kennedy-­Johnson pattern of playing an active role by speaking in public in favor of administration policies, a change Friedman clumsily labeled the “politicalization” of the CEA (Instructional Dynamics Economics Cassette Tape 92, February 9, 1972).181 But Friedman retained good relations with Shultz as well as a high regard for the membership of the CEA. “If you want a literary rating, their report for 1972 is the best one that’s ever been written,” Friedman observed of the 1972 Economic Report of the President, which the council had produced (National Journal, August 12, 1972, 1281). “But the only rating that counts is the quality of the advice they are giving the president in the privacy of his office, and that nobody can ever know.” This last statement—although unexceptionable at the time—would within a year have an ironic ring. Nixon’s secret taping system, whose existence was revealed publicly in July 1973, actually permanently preserved the advice that the president was receiving in the Oval Office from 1971 onward (including that given by Friedman in 1971). Shultz and Stein on Monetarism and the Controls One piece of information that Friedman did have in 1972 about the advice going to Nixon was that CEA chairman Stein shared Friedman’s disdain for wage/price controls. Stein’s attitude was based on both economic and moral grounds. Early in the administration, Stein had remarked in refer-

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  275

ence to a milder form of incomes policy, namely wage/price guideposts: “We don’t think they worked in the past and we particularly don’t think they will work in this kind of circumstance, where we have a rapid inflation still going on. Furthermore, many of us, including me—perhaps most particularly me—don’t like it even if it works because it’s just an unseemly way to run a country. It degenerates into arm-­twisting, blackmail, and threats” (Milwaukee Journal, May 15, 1969). Friedman had long voiced similar sentiments, and he applied them to the Nixon wage/price controls in a two-­part series for the New York Times, “Morality and Controls” (October 28 and 29, 1971). Among Nixon’s economic team, George Shultz, too, had established himself prior to August 1971 as a prominent opponent of wage/price controls. The bureaucratic aspect of controls was the angle that Shultz emphasized in his June 8, 1971, meeting with Friedman and Nixon, on which occasion Shultz warned the president of “all the annoyances and problems that go in trying to enforce a big set of controls.” However, although opposition to controls was common ground among Friedman, Stein, and Shultz, the latter two had a different perspective on various monetary and fiscal matters from that of Friedman. These differences serve to underline the fact that Friedman’s views never prevailed comprehensively in economic policy making in the Nixon administration. As the administration’s 1969 actions regarding the tax surcharge suggested—and as confirmed by the advice that they gave internally during the Reagan years, when both urged tax increases—neither Shultz nor Stein held the sanguine views about fiscal deficits (for given monetary policy) that Friedman held. Nor did either of them seem enamored of the starve-­ the-­beast argument. When Friedman brought up the argument in the June 1971 meeting with Shultz and Nixon, his interlocutors did not pursue the topic. Furthermore, neither Shultz nor Stein shared Friedman’s goal of a drastic reduction in the role of the government in the economy. This was acknowledged by Friedman himself in the case of Shultz when he remarked, “George is a man of principle, but he is not an ideologue like I am” (Guardian, June 13, 1972).182 For his part, Herbert Stein was concerned that, insofar as the starve-­the-­beast hypothesis provided a valid description of how federal spending was determined, it could well imply that tax cuts would lead to cutbacks in defense spending—a development that he considered undesirable. In addition, Herbert Stein had only a limited degree of agreement with Friedman’s arguments against nondefense public sector activity. He dissented in particular from Friedman’s contention that a government-­ operated post office was inimical to individual liberty (Ben Stein, interview, March 18, 2015). It was also the case that neither Herbert Stein nor George Shultz sub-

276 C h a p t e r f i f t ee n

scribed to Friedman’s view of aggregate demand determination. Both of them gave more weight to fiscal policy as an influence on aggregate spending behavior than Friedman did. Prior to entering public service, Stein had written a study of US economic policy focused on the power of fiscal policy actions (H. Stein 1969). He regarded fiscal expansion as having had a role separate from monetary expansion in generating inflationary pressure in the late 1960s, and he would later cite fiscal imbalance as a source of the take-­off in inflation after 1972.183 A similar perspective was taken by Shultz. Shultz was sometimes characterized in the press as a strong subscriber to monetarism.184 In addition, Arthur Laffer, who, as noted earlier, served as an assistant to Shultz from 1970 to 1972, and who would regard Shultz as one of his mentors, nominated monetary policy as one area in which he tended to disagree with Shultz—Laffer’s view being that Shultz’s position on monetary policy was too much like Friedman’s (Arthur Laffer, interview, August 11, 2014). But this impression may have stemmed primarily from the commonality of views of Friedman and Shultz with respect to exchange rates rather than from their positions regarding money/income relationships. For his part, Shultz put distance between himself and Friedman upon being confirmed as secretary of the treasury in May 1972. Shultz took the opportunity to sketch the differences between Friedman’s views and his own, emphasizing his own regard for fiscal policy as an important influence on economic fluctuations and noting, “I don’t feel as sure about the money supply as Milton does” (Wall Street Journal, May 26, 1972). These differences that Stein and Shultz had with Friedman’s economic positions should not obscure the fact that they both shared his antipathy to wage and price controls, nor the fact that both of them argued unsuccessfully against the August 1971 wage/price freeze.185 With regard to President Nixon’s own attitude regarding controls, Friedman expressed a variety of opinions from August 1971 onward. Usually, as already indicated, he treated Nixon as personally inclined against wage/price controls and as acquiescing to political pressure to adopt them. In the two years starting in August 1971, Friedman took it for granted that Nixon was a person of integrity who could be relied on to keep his word.186 “I understand from the political point of view why you did what you did, but I don’t approve of what you did,” Friedman told Nixon in their September 1971 conversation, while distinguishing this behavior from “losing the faith.” This interpretation of Nixon’s actions was one under which the president used controls as a political quick fix and did not subscribe to the view that they were an effective tool against inflation. It remains a common interpretation of Nixon’s actions (see, for example, Meltzer 2009b). Such an interpretation is flawed because it neglects the intellectual support for in-

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  277

comes policy that cost-­push views of inflation provided. These views, as articulated by Arthur Burns in particular, likely helped sway Nixon toward controls. As Herbert Stein noted to Friedman in a subsequent discussion the two had on television: “the controls had a theory [behind them] which had a certain respectability in the economics profession, although not in Chicago” (University of Chicago Round Table: The Nation’s Economy Out of Control, PBS, May 1, 1974). In addition, Friedman’s position about the president’s personal inclination does not receive wholehearted support from the record. In particular, Nixon’s Oval Office conversations certainly did not show him to have been altogether reluctant about adopting an incomes policy. On April 26, 1973, the president remarked that he had never liked wage/price controls; but this observation occurred after the controls had come under severe pressures.187 Earlier, on June 20, 1972, the president had replied, “Sure,” when his aide Charles Colson remarked that wage/price controls were working well (Washington Post, May 1, 1977, A15). With both political parties signed on to wage/price controls, and some prominent figures within the administration being against the controls, Friedman indicated in January 1972 that he would support the president’s reelection. “I support Mr. Nixon,” Friedman remarked in a television appearance, “even though I object to these policies and I regret that he follows them.”188 Criticism of Monetarism The fact that Nixon had moved away sharply from Friedman’s prescriptions was not lost on commentators. Writing in April 1971, prior to the New Economic Policy, Friedman had proclaimed: “The bull market in monetarism has only recently begun. It has much further yet to go.”189 But within months, Nixon’s policy switch, together with alleged empirical problems in the money/income relationship, led to obituaries for monetarism in the US press. In this series of obituaries, Paul Samuelson had gotten in early. Nixon’s declaration that he was a Keynesian was initially downplayed by Friedman, who likened it to his own misunderstood statement in 1965 to Time magazine (Chicago Tribune, January 9, 1971). Samuelson, however, attached more significance than had Friedman to Nixon’s remark, and within weeks of that remark Samuelson perceived shifts by the administration in the areas of incomes policy and fiscal policy (Sunday Telegraph, January 24, 1971; Newsweek, February 8, 1971). In the weeks ahead of the New Economic Policy, Samuelson had stated in his Newsweek column (August 2, 1971) that “monetarism is selling at a huge discount on the markets of informed opinion,” and he penned a Washington Post article (August 1,

278 C h a p t e r f i f t ee n

1971), titled “Plague and Problem of Monetarism,” that declared: “Monetarism has been doing us much harm.”190 For Samuelson, therefore, the New Economic Policy was the culmination of the Nixon administration’s rejection of Friedman’s positions on the determination of aggregate demand and inflation. Continuing the negative media commentary that Friedman’s monetary positions had received early in the year, the financial press also in large measure treated the year 1971 as pointing up the invalidity of Friedman’s empirical propositions. A Wall Street Journal article in October catalogued false signals that monetary aggregates had supposedly given of late and concluded of the monetarists, “This hasn’t exactly been their year.” The article reported that monetarists were believed to have met their “Waterloo” in 1971 in the form of a decline in velocity that confounded their forecasts (Wall Street Journal, October 22, 1971). Three months later, a commentary in the Boston Globe asked: “Whatever happened to monetarism?” (Boston Sunday Globe, January 16, 1972). And when an interviewer observed to financial columnist Eliot Janeway that the “emphasis on the money supply seems to have died down,” Janeway replied, “Oh, that’s discredited” (Detroit Free Press, January 23, 1972). These claims of the demise of the money/income relationship turned out not to be well founded. The St. Louis equation relating nominal income growth to M1 growth proved to describe developments during the early 1970s well, without predictive breakdown (Carlson 1978; see also Francis 1972).191 So, too, did the equation, of which Friedman kept track during 1971 and 1972, that related the percentage change in nominal personal income to the prior behavior of M2 growth.192 Another barometer of the money/income relationship—money-­demand functions—was also said by some at the time to have experienced instability during 1971, at least in the case of the M1 aggregate. But these assessments likewise turned out not to be valid.193 Indeed, as has already been noted, the period up to and including 1973 came to be seen as a “golden age” of stability for US money-­ demand functions, as well as a period in which reduced-­form time-­series predictions of monetary velocity performed creditably (Rasche 1987). Consistent with the last finding, little out of the ordinary occurred in terms of the behavior of series on monetary velocity from 1969 to 1972, once final data on national income were used for the calculation of velocity. M1 velocity proceeded basically along its postwar upward trend, and M2 velocity exhibited the stationary (though variable) postwar behavior that characterized it until the 1990s. See figures 15.2c and 15.2d. This assessment of velocity behavior is based on modern monetary series, but the old definitions of monetary aggregates behaved much like the modern definitions over these years—see figures 15.2a and 15.2b. Therefore, the 1980 changes to the definitions of money do not have an important bearing on the result.



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282 C h a p t e r f i f t ee n

All in all, the years 1969 to 1972 did not produce behavior of aggregate spending in the United States that was a challenge to Friedman’s propositions, and his contention that developments in nominal income were well predicted by prior M2 behavior holds up well. At the same time, the short-­run relationship continued to feature what Friedman called “a good deal of looseness,” reflected in a sizable standard error of estimate of his nominal personal income equation.194 To Friedman’s irritation, during the late 1960s and early 1970s Federal Reserve officials, including the Federal Reserve Bank of New York’s President Hayes, attributed to Friedman a belief in a very close short-­run relationship, and a resulting position that constant monetary growth would deliver smooth nominal income growth (Hayes 1970, 22).195 Friedman, in contrast, reaffirmed between 1970 and 1972 the position he had stated when he first advocated the constant-­monetary-­growth rule in the late 1950s: that it was the looseness of the short-­run relationship that reinforced him in his view that a constant-­monetary-­growth rule was difficult to improve on in practice.196 As for the real-­output growth and inflation components of nominal income growth, and in particular the course that inflation would take with the institution of the New Economic Policy, Friedman’s predictive record was more frayed. The problem was not the behavior of inflation from 1969 to 1971, even though this was the basis at the time of much criticism of Friedman and monetarism. Once Friedman had undertaken his work, discussed in section I above, in 1970 and 1971 on the lags from monetary growth to inflation, it became clear that the reaction of inflation to monetary actions was not deviating substantially from previous patterns. Friedman was consequently able to state that the monetary restraint of 1969 and 1970, although it featured within-­year swings in monetary growth that contrasted with the gradualism that he had wanted, had “worked like a charm” in reducing inflation.197 The problem instead lay in Friedman’s predictions about inflation once the New Economic Policy was introduced. He got the big picture right, as was clear from many of his remarks immediately after the controls were announced. These included his observation that wage/price control “simply stores up the problems” (Chicago Tribune, August 16, 1971, 5). Furthermore, shortly after the imposition of the controls, Friedman made a more specific prognosis, in which he would come to take pride: “The most serious potential danger of the new economic policy is that, under cover of the price controls, inflationary pressures will accumulate, the controls will collapse, inflation will burst out anew, perhaps sometime in 1973, and the reaction to the inflation will produce a severe recession.”198 Another prescient statement by Friedman was one he gave on his cassette series around the same

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  283

time (Instructional Dynamics Economics Cassette Tape 83, October 6, 1971): “You only have two alternatives. [1] . . . A much more intensive wage/ price control program. [2] . . . Step sharply on the monetary or fiscal brakes, or probably both. And that is the real danger that I see—of a severe recession in late ’73 or early ’74 as a result of an overreaction to an inflation occurring when the controls collapse.” Friedman maintained this analysis into the early months of 1972, observing that “we are headed for a real crisis in 1973” (Honolulu Advertiser, March 24, 1972). Friedman Backtracks If Friedman had stuck resolutely to these predictions regarding 1973 and 1974, he would have been left with an exemplary track record of forecasts for those years. Instead, by October 1972 he had backtracked somewhat and adopted a more benign position. Although Friedman warned that “the tapering off of inflation has, I believe, come to an end,” and called for the Federal Reserve to lower the rate of monetary growth from this point onward (American Banker, October 9, 1972), he no longer foresaw a major revival of inflation as in store for 1973. In particular, his analysis in the Newsweek issue of October 16, 1972, stated that monetary growth rates of late had been “high by historical standards and are higher than I myself favored but, for this period, they have not been dangerously high.”199 What led Friedman astray? It seems that, as of October 1972, he was far too willing to take literally the inflation data released over the previous year, notwithstanding the distortion arising from the wage and price controls. Perhaps this was because the basic contour of inflation from August 1971 through the fourth quarter of 1972 was not a surprise to Friedman. He saw inflation as on a downward course for 1971 and was concerned that the decline in inflation would be ascribed to the wage/price freeze when, in fact, prior monetary growth already pointed to a decline in inflation (Newsweek, August 30, 1971).200 In addition, Friedman successfully predicted that inflation would start rising in the second half of 1972 (Honolulu Advertiser, March 24, 1972; Newsday, May 28, 1972). The controls were evidently not wholly disguising the curve of underlying inflation during the second half of 1972. But what Friedman neglected was the likelihood that the presence of controls led the absolute level of inflation—which, as measured by the four-­quarter percentage change in consumer prices, was consistently below 4 percent during 1972—to be seriously understated. Later on, Friedman would arrive at the view that some of the inflation observed in 1974 reflected price increases that would have occurred in 1972, had price controls not suppressed them.201 When, as part of their Monetary Trends work,

284 C h a p t e r f i f t ee n

he and Anna Schwartz later examined the US data for the first half of the 1970s, they would apply to the raw price data some estimated adjustment factors. The effect of the adjustments was to reallocate much of the inflation recorded in the mid-­1970s data to the early 1970s. For the year 1972 specifically, Friedman and Schwartz inferred that inflation, once adjusted to remove the effect of controls on the series, had been around 2 percentage points higher than reported inflation.202 It should be emphasized that an estimate of this kind was designed to capture the course inflation would have taken if monetary policy been the same as it was during the controls years and if the controls had not in fact been imposed. The estimate did not embed a presumption that the controls simply led real product and price indexes to be misstated for the period over which controls were imposed and removed. On the contrary, the notion that controls held down reported inflation is consistent with the possibility that the controls overwrote normal aggregate-­supply relationships for the duration of their existence, and that they yielded for a time a greater flow of real spending for a given amount of nominal spending. With output demand determined in the short run, higher real spending implied higher real output than would have prevailed without controls. Such an outcome could have prevailed even though the controls likely had adverse effects on potential GDP—this supply effect occurring because the distortion to price signals was liable to produce misallocation of resources, as well as shortages in certain sectors. The notion that wage/price controls had real effects was in fact an important part of Friedman’s account of the harmfulness of controls, and it helped explain why he resisted analogies in which price controls’ effect was likened (merely) to breaking the thermometer.203 In the event, Friedman did not put great stress on the distorting real effects of controls in the first year and a half of the New Economic Policy—although the analyses of the controls that he gave from 1973 onward were more in keeping with an emphasis on those effects. From the beginning, Friedman had been critical of the authoritarian character of the Nixon controls and saw them as liable to promote inappropriate aggregate-­demand policies. But his assessment of the economic damage inflicted by the controls in 1971–72 was much greater in retrospect than it was at the time. His 1971–72 commentaries stressed firms’ and workers’ scope to evade the controls via covert changes in wages and prices. And some other Friedman commentaries over the same period took a somewhat different tack, by suggesting that reported wage and price inflation rates in 1971 and 1972 were similar to those that would have prevailed anyway in the absence of controls. It was the latter perspective that helped steer Friedman into his optimism in late 1972 about inflation prospects.

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  285

The sanguine posture that Friedman took in late 1972 toward the inflation outlook was seemingly supported by output-­gap estimates at the time. In 1970, Friedman had suggested that, in the years ahead, the aggregate demand restraint already in place should be continued, in such a way that the output gap would be allowed to become smaller, but remain negative, in 1972 (Instructional Dynamics Economics Cassette Tape 60, November 4, 1970). As already indicated, he gave a similar prescription during 1971. Friedman’s dismay at the New Economic Policy and the monetary explosion in 1971 amounted to a concern that the output gap would in fact be closed much more rapidly than it would have been had the US monetary policy stance of 1970 been maintained. Under the scenario that he feared, a rapid return of output to potential would occur and likely mean that the downward pressure on inflation secured in the early 1970s would be supplanted by pressures for an upturn in price increases. This concern proved well founded, for both inflation and the output gap. With regard to the latter series, the modern CBO estimates show the output gap closing in early 1972 and turning positive. In contrast, estimates at the time suggested that the gap—although less large in absolute value than in 1970—was about minus 6 percent at the beginning of 1972 and that it stayed negative throughout 1972 (Orphanides 2003, 645; 2004, 164). A corollary of Friedman’s changing view over time about the inflationary pressure that was generated during the period of the New Economic Policy was his altered assessment of the macroeconomic policy settings that were put in place during 1971 and 1972. By late 1972, Friedman, as already indicated, had begun to believe that policy makers had just managed to escape a serious problem of overstimulating the economy in the period of wage/ price controls. He would drastically reassess that judgment once a longer perspective on the controls episode became possible. The wage/price controls experiment had had “disastrous results,” he observed in 1977.204 The problems associated with the imposition of controls had been greatly magnified by the relaxation of monetary restraint: “you have to look not to 1973 but to 1972 and 1971 and ask where the problems came from, which led to the recession of 1974–75.”205 Continuity of Monetary Policy Operations In the area of Federal Reserve operating procedures, Friedman also initially greeted developments during 1972 with more optimism than he later felt had been justified. Early in the year, he criticized the Federal Reserve’s ongoing “infatuation with interest rates” and urged that the FOMC adopt a bank-­reserves instrument (Newsweek, January 10, 1972). The Federal Reserve seemed superficially to move in this direction in February by

286 C h a p t e r f i f t ee n

adopting “reserves against private deposits” (RPD) as its operating target (Meltzer 2009b, 810). After initial skepticism (voiced in Instructional Dynamics Economics Cassette Tape 101, June 14, 1972), Friedman over the second half of 1972 largely accepted this move at face value and applauded what he saw as an adoption of a reserves instrument (Newsweek, October 16, 1972). It gradually became clear, however, that Friedman’s initial doubts had been valid. The switch to RPD was not a substantive change in procedures after all, and the Federal Reserve maintained business as usual, essentially continuing to use the federal funds rate as its instrument. In late 1974, Kane (1974, 749) noted that many believed that the new arrangement “in practice . . . has not worked out to be very different from the old one.”206 An important early clue that the Federal Reserve had not shifted away from a federal funds rate target was the fact that its 1972 policy change was not accompanied by a return to contemporaneous reserve accounting (CRA). A resumption of CRA would have been a logical step if policy makers were truly aiming for close control of a reserves aggregate, such as the reserves-­against-­private-­deposits total, that encompassed both borrowed and nonborrowed reserves. Although, strictly speaking, control of a reserves total was not wholly impossible in a regime of lagged reserve accounting, it was certainly true that the lagged-­accounting system was not conducive to straightforward control by the Federal Reserve of those reserves aggregates that included borrowed reserves. By 1970, Friedman believed that lagged reserve accounting had been confirmed as an impediment not only to tight control of reserves but also to close control of the standard monetary aggregates, and that year he was involved in frayed correspondence with Chairman Burns, and indirectly the Federal Reserve Board staff, on the matter.207 Policy makers’ great concern with interest-­rate stabilization meant, in Friedman’s view, that the Federal Reserve had one hand tied behind its back when trying to control money in the short term; lagged reserve accounting, he contended, meant that it now had both hands tied behind its back (Instructional Dynamics Economics Cassette Tape 23, April 1969). Support for this argument would be buttressed by the analysis of a dissertation student of Friedman’s, Warren Coats, who critiqued lagged reserve accounting in his 1972 PhD dissertation (Coats 1972, 1976). But lagged reserve accounting continued throughout the 1970s to be the method used by the Federal Reserve when setting required reserves. Although Federal Reserve policy makers were under no misapprehension that monetary policy had really moved away from setting the federal funds rate, they were, like Friedman, likely misled by the effect of the price controls on measured inflation. Convinced that the freeze had reduced inflation expectations, policy makers permitted a decline in short-­term

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  287

interest rates in late 1971.208 The misguided motivation for this decision is brought out by the later assessment of Scadding (1979, 17): “There is no evidence that the 1971 price and wage controls had any noticeable effect on people’s perceptions about the underlying inflation rate.” Absent such an effect, a lowering of nominal interest rates constituted an easing of monetary policy—or more accurately, a continuation of the monetary easing that had already been registered in rapid monetary growth during 1971. Having mistaken their late-­1971 interest-­rate reduction for a neutral policy move, policy makers during 1972 misinterpreted their actions as a tightening. Duesenberry (1983, 135) noted that the FOMC’s adjustments to the federal funds rate in 1972 seemed to resemble the typical interest-­rate decision pattern in prior periods of monetary policy tightening. Judged by that criterion, the Federal Reserve indeed appeared to be firming policy. Furthermore, the increase in the federal funds rate in 1972 was mirrored in the behavior of other short-­term market rates. As Dornbusch and Fischer (1978, 531) noted, “Treasury bill rates rose sharply during 1972.” Dornbusch and Fischer also recorded the fact that this rate rose, on average, in every quarter of 1972, these rises cumulating to an increase of roughly 150 basis points during the year. The rise in short-­term interest rates throughout 1972 was acknowledged by Friedman in his own retrospective (Wall Street Journal, August 21, 1975) and was used by him to underscore the misleading nature of interest rates as an indicator of monetary policy stance. As Dornbusch and Fischer (1981, 568) observed, the rising interest-­rate pattern likely led the Federal Reserve to believe it was tightening, and at a satisfactory pace, during 1972—even though, in retrospect, the high monetary growth rates of that year accurately conveyed lax conditions. The price controls played an important role in muddying the waters, as they kept measured inflation down and so helped contribute to the notion that the increase in interest rates during 1972 was associated with tighter monetary conditions. In particular, real interest rates, not just nominal interest rates, rose.209 If anything, longer-­term interest rates confused the picture more, as bond traders did not excel themselves in forecasting the two peaks of US inflation in the 1970s. Friedman noted in his June 1971 conversation with President Nixon that financial markets clearly expected inflation to resume. Indeed, longer-­term interest rates as of mid-­1971 remained elevated (see again figure 15.1). But longer-­term interest rates then underwent a pronounced decline, as investors again became more complacent about US inflation prospects. Such a perspective seemed justified by the estimates of current inflation, real interest rates, and the output gap at the time. But events after 1972 would establish that, with respect to the course that inflation would take in the years ahead, these variables gave a less accurate in-

288 C h a p t e r f i f t ee n

dication during 1971 and 1972 than that being provided by data on monetary growth.

T he End of Bre t ton Wood s In considerable contrast to its shift in domestic economic policy, the direction in which the Nixon administration took international economic policy continued to find favor with Friedman after the New Economic Policy was announced in August 1971. Indeed, the August 1971 measures greatly intensified Friedman’s satisfaction with the administration’s approach to international monetary arrangements. As has just been discussed in detail, President Nixon’s August 1971 package ratified and reinforced shifts in domestic economic arrangements that followed a pattern sharply different from Friedman’s recommendations. But the same policy package featured major changes in international economic policy of which Friedman, on the whole, strongly approved. The situation was very well encapsulated in a newspaper headline of November 1971: “Friedman Likes Nixon’s Economics—If It’s Abroad” (St. Petersburg Times, November 17, 1971). By the time of that headline, Friedman had already voiced his judgment that the Bretton Woods system had met its demise. The years covered in this chapter are bracketed by the 1968 revamp of the fixed-­exchange-­rate system and the onset of widespread floating exchange rates in early 1973. This period therefore falls within the epoch that Triffin (1979, 7) referred to as “the progressive disintegration and collapse of the Bretton Woods system.” In Friedman’s estimation, however, the sequence was less progressive than Triffin’s characterization suggested. For Friedman, the Bretton Woods era was, in effect, ended by Nixon’s August 1971 measures, the events of August 1971 through early 1973 being merely a coda.210 The international monetary situation had formed part of what Friedman portrayed as a set of unfavorable initial conditions facing the Nixon administration when it took office in 1969. The increase in the balance-­ of-­payments deficit since 1960 was included along with other items (most prominently inflation) in Friedman’s indictment of the Kennedy-­Johnson economic record, and he included the sizable deficit at the end of 1968 as part of the “mess” that he believed the Nixon administration would have to deal with (Newsweek, December 9, 1968). In contrast to inflation, however, the balance of payments was emphatically not a matter to which Friedman believed the US government’s demand-­management tools should be directed. He contended that the monetary restraint that he favored would likely result in a reduced balance-­of-­payments deficit. The reason for this, Friedman felt, was that a reduction in inflation would boost US net exports and tend to lower the overall payments deficit.211 But this, as he saw it,

Monetary Policy Debates and Stabilization Policy, 1969 to 1972  289

would be an ancillary effect of a disinflationary policy and not a valid justification for that policy. Asked by Chairman Burns in November 1970 what attitude the US authorities should take regarding international considerations, Friedman replied: “We should give priority to domestic concerns, because the world is effectively on a dollar standard.”212 This was a position that Friedman had been voicing publicly for some time. For example, in 1969 he had said: “The fact is that the world is now on a dollar standard. Those are words nobody likes to speak” (New York Times, May 21, 1969, 59).213 Under such circumstances, and as has been discussed in earlier chapters, Friedman reckoned that the United States was bound to have balance-­of-­payments deficits. Although these deficits had likely been made larger than otherwise by the elevated level of US inflation, restoration of price stability would not eliminate the deficits, and US balance-­of-­payments deficits prevailing in circumstances of price stability should not be regarded as calling for a US policy response. Friedman’s attitude was that such deficits reflected world demand for US assets, rather than an economic problem that mandated US adjustment. This perspective underlay his declaration (Instructional Dynamics Economics Cassette Tape 27, May 29, 1969) that “under present circumstances the US has no balance-­of-­payments problem” and the “the US has no balance-­ of-­payments problem except . . . [by] worrying about it unnecessarily.”214 In particular, the problems that had sprung from the balance-­of-­payments deficit in the Johnson years consisted, in Friedman’s view, of officials’ reactions to the deficit, including the imposition of restrictions on investments abroad.215 As indicated in chapter 13, Friedman had privately urged that Nixon drop the $35 gold price peg and related restrictions as soon as he took office. Nixon did not take this advice, but Friedman between 1969 and 1971 believed that the peg had been dropped de facto, thanks largely to the changes to the Bretton Woods arrangements put in place under President Johnson in 1968. As has been emphasized in previous chapters, Friedman had a great deal of confidence in the United States’ scope to exercise monetary autonomy during the postwar period. That is, the US authorities had already succeeded before 1968 in insulating domestic monetary conditions from the gold-­price peg. Consequently, when Friedman urged that the peg be dropped (as in Newsweek, May 15, 1967, for example), it was the official restrictions on US residents’ right to hold gold, rather than the impact on monetary policy, that he saw as an adverse corollary of the pegging of the gold price. With the introduction in the late 1960s of changes to the mechanism, Friedman assessed that the gold-­price peg had been rendered an even more peripheral aspect of US policy making. In particular, Friedman believed that foreign

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central banks faced conditions for engaging in gold transactions with the Federal Reserve that were sufficiently restrictive to curtail these entities’ capacity to draw down the US gold stock. The arrangements in place from the late 1960s, he believed, allowed the US authorities to keep on offering gold at $35 an ounce because those arrangements also included disincentives to other countries to asking to make gold purchases from the US authorities (Instructional Dynamics Economics Cassette Tape 24, April 30, 1969; The Great Economics Debate, WGBH Boston, May 22, 1969). Along these lines, Friedman had stated in 1968 (in Instructional Dynamics Economics Cassette Tape 5, November 1968) that the $35 gold price peg was “at the moment, a pure formality; it has very little meaning.” He would state similar positions in the following years. For example, Friedman declared in 1969 (in Instructional Dynamics Economics Cassette Tape 11, January 1969) that the peg “has almost no relevance,” while in May 1971 (in Chicago Today, May 12, 1971) he even ventured to say that there was no need to change the official price of gold, as that price was used only for bookkeeping.216 In August 1971, however, Friedman acknowledged that he had underestimated the extent to which the gold-­price peg had been cast off by the 1968 changes and that foreign central banks had indeed been able to run down the United States’ gold holdings between 1968 and 1971 (Instructional Dynamics Economics Cassette Tape 81, August 25, 1971).217 Those pressures, in turn, had led President Nixon to take the action that Friedman had long advocated: abandonment of the United States’ commitment to enforce a $35 gold price. Friedman applauded Nixon’s dropping of an official gold-­price peg. Leo Melamed recalled: “In fact, he had mentioned to me after it [the gold window] was closed, words to the effect of ‘Why did he wait so long?’” (Leo Melamed, interview, June 19, 2013).218 Friedman was, however, careful to note that “closing the window on gold simply makes explicit what has, in fact, been implicit anyway” (Dallas Times-­Herald, August 22, 1971). One particularly important reason why this statement described the situation well was that it was not the case that the United States or the world was on the gold standard up to 1971 and was now off it. The fact that there had not been a gold standard in force since the 1930s was widely recognized at the time by economists and officials, but less so by the lay public. Williamson (1979, 33) suggested that one interpretation of the later Bretton Woods years was that a “gold-­exchange standard had been transmuted into a de facto dollar standard by 1971.” As indicated above, however, Friedman regarded the whole Bretton Woods era as consisting of a de facto dollar standard. When the 1971 change was announced, he argued that it did not connote a momentous new break with gold. Instead, Friedman stressed

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the continuity of Nixon’s actions with US practice that Franklin Delano Roosevelt had begun when in 1933 he terminated internal convertibility (Sunday Telegraph, August 22, 1971; American Banker, August 23, 1971).219 Friedman acknowledged, however, that the August 1971 action was historically notable because it was a “formal severing of the United States’ link with gold.” It therefore marked the final step in the sequence of actions by which the US authorities had, through formal and informal alterations to the domestic and international monetary systems, severed the valuation of gold from the internal purchasing power of the US dollar.220 Friedman further granted that, in ending even the symbolic presence of gold in the US monetary system, President Nixon had bucked the long-­ standing line of thought within the Republican Party that had cast the gold standard as an ideal arrangement, on hard-­money grounds (Wall Street Journal, August 31, 1984). This was the right thing to do, in Friedman’s view: Friedman’s conception of monetary stability included the avoidance of deflation, and it contrasted sharply with the traditional hard-­money position, in which deflations might be tolerated to achieve an exchange-­rate or gold-­price goal. Friedman therefore welcomed the fact that Nixon’s 1971 moves had rebuffed the hard-­money faction of the Republican Party. This provided Friedman with some consolation at a time when he lamented that Nixon’s simultaneous domestic policy actions had made direct controls on wages and prices a mainstream Republican Party policy. In contrast, Friedman observed, until 1971 this approach to inflation had largely been an issue on which Republicans were arrayed against Democrats, with the former group taking the anti-­controls position (Instructional Dynamics Economics Cassette Tape 151, August 7, 1974).221 As a longtime advocate of floating exchange rates, Friedman had reason to applaud the closing of the gold window, as the window had been a mainstay—albeit a symbolic one—of the postwar fixed exchange-­rate system. He proclaimed in September 1971: “The Bretton Woods system is dead” ( Japan Times, September 24, 1971). This judgment was borne out by the failure, over the following eighteen months, of attempts to restore international cooperation on exchange-­rate arrangements. But along the way to that outcome, some of Friedman’s predictions regarding future international arrangements were confounded. Although he was ahead of many commentators in seeing, in the termination of the gold window, the end of Bretton Woods, Friedman underestimated the extent of the changes in international arrangements that would occur in the wake of the end of the United States’ gold commitment. In particular, two views that Friedman had confidently voiced during 1971—that the dollar exchange rate could not be devalued by the US authorities, and that a general floating-­rate system would not emerge—had to be revised in the wake of events.

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The first of these positions was revised immediately by Nixon’s August 15 announcement. On August 11, Friedman had rejected as infeasible a proposal by Representative Reuss that the US dollar be devalued (New York Times, August 11, 1971; Instructional Dynamics Economics Cassette Tape 80, August 11, 1971).222 Being the nth (and central) country in the system, Friedman maintained, the United States could not unilaterally lower the foreign exchange value of its currency. A devaluation of the dollar would require acquiescence by the other countries—and Friedman did not see this happening. Other countries, he contended, sought on the whole to run balance-­of-­payments surpluses with the United States. So they would not allow a shift in parities and would undo any attempt by the US authorities to engineer a dollar devaluation. Having given this analysis, Friedman realized that he should have appended it with a qualification: the United States could engineer a de facto devaluation without other countries’ consent via measures to tax imports and providing a tax credit to exports (Instructional Dynamics Economics Cassette Tape 81, August 25, 1971).223 Nixon’s actions of August 1971 had, in fact, included an import surcharge, of 10 percent, as a prominent feature. As might be expected, Friedman opposed the surcharge as an impediment to free trade (Sunday Telegraph, August 22, 1971). Indeed, he warned that its continuation would trigger a trade war.224 He contended also that the surcharge would be basically unsuccessful as a means of improving the US trade balance, even if that were a desirable objective. For Friedman held that an import surcharge would end up simply diverting resources from the export sector to import-­competing industries (Instructional Dynamics Economics Cassette Tape 83, October 6, 1971; Euromoney, October 1977, 25). Unlike some critics of the surcharge, Friedman did not, of course, cite inflationary consequences as a basis for his opposition to it.225 Notwithstanding his disdain for the import surcharge, Friedman conceded that the short-­term impact of the surcharge would replicate some of the characteristics of a US exchange-­rate devaluation. In the context of the international situation of 1971, Friedman granted that the surcharge gave bargaining power to President Nixon. It provided a concrete indication to other major industrial countries that the United States would enforce a de facto devaluation even if these countries undertook operations that maintained fixed rates with the US dollar (Sunday Telegraph, August 22, 1971; Instructional Dynamics Economics Cassette Tape 81, August 25, 1971). Partly because of this leverage, the Nixon administration secured major countries’ formal agreement to a dollar devaluation—via the Smithsonian Agreement in December 1971 (discussed below)—accompanied by an end to the import surcharge. Friedman posed the question in September 1971: “If the Bretton Woods

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system is dead, what will follow it?” (Instructional Dynamics Economics Cassette Tape 82, September 27, 1971). It was his answer to this question that constituted his second major faulty prediction regarding the post–­ August 1971 exchange-­rate system. He was caught off guard by the answer that events would deliver to the question. The regime (or nonregime) that followed Bretton Woods evolved into something quite different from what Friedman had anticipated. Friedman had, of course, a strong view about what the ideal follow-­on system would be: “truly floating rates” (Sunday Telegraph, August 22, 1971, 19). “I would prefer that every currency float,” he confirmed (American Banker, August 23, 1971). On the issue of floating, Friedman had been encouraged by the trend of economists’ opinion toward this position. In early 1969, following an American Economic Association session on floating rates, he stated that he had been “enormously impressed by the tremendous change that has taken place” in the prior fifteen years (Instructional Dynamics Economics Cassette Tape 9, January 1969).226 Paul Samuelson also noted this change in opinion, declaring in a 1969 debate with Friedman: “I would like to pay a personal tribute to Milton Friedman. He was a lone voice crying in the wilderness 10 or 15 years ago in favor of flexibility in exchange rates. . . . [This] has now become the new orthodoxy in the academic profession.” Samuelson added that while officials were still resistant, “what we desperately need is more flexibility” (The Great Economics Debate, WGBH Boston, May 22, 1969).227 Later in the year (Wall Street Journal, November 4, 1969), Harry Johnson was reported as declaring Friedman’s 1953 paper on floating exchange rates a modern classic (see also Harry Johnson 1969b, 12). There were some major holdouts among academia in favor of fixed exchange rates, including Robert Mundell and MIT’s Charles Kindleberger. The latter’s analysis received a withering commentary from Friedman when he was the assigned discussant of Kindleberger’s paper at a Federal Reserve Bank of Boston conference in October 1969.228 But Friedman’s conviction that the wider profession had largely come round to his own views on exchange rates had been strongly reinforced by the final Economic Report of the President of the Johnson administration (Council of Economic Advisers 1969). In contrast to earlier years’ treatment of exchange rate flexibility as a taboo subject, the report, as Friedman noted, espoused the merits of exchange-­rate adjustment (Instructional Dynamics Economics Cassette Tape 11, January 1969). With these sentiments from the economic experts of the Johnson administration coming in the wake of the 1968 loosening of the Bretton Woods arrangements, Friedman hoped that the successor Nixon administration would step up further the momentum in favor of exchange-­rate flexibility. Friedman was therefore disappointed

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when this momentum stalled during the administration’s first two and a half years in office (Newsweek, October 19, 1970; New York Times, August 9, 1974). Nixon’s August 1971 measures on the international front, in the form of the dropping of the gold-­price peg, made up for lost time and thereby revived Friedman’s enthusiasm in the Nixon administration’s international economic policy. But, for all the hopeful auguries provided by the change in economists’ opinions and Nixon’s New Economic Policy measures, Friedman in the aftermath of the August 1971 changes did not see widespread floating exchange rates as the likely state into which the international monetary system would settle. Rather, he felt that there would likely be a continuation of the dollar standard. The prospect Friedman envisioned was one in which fixed exchange rates with the US dollar were enforced unilaterally by each of the United States’ trading partners. For a typical trading partner, extended periods of pegged rates would be interrupted occasionally by periods of a floating exchange rate, in order to relieve severe balance-­ of-­payments disequilibria. These interregna of currency floating would be followed by restoration of a fixed exchange rate at a new value for the peg. This was “not the ideal system,” Friedman emphasized, but he saw it as an improvement on the “religious” attitude to fixed exchange rates seen in the 1950s and 1960s (Instructional Dynamics Economics Cassette Tape 82, September 27, 1971). Developments over the rest of 1971 and for 1972 seemed to confirm Friedman’s assessment, as the major countries made efforts to formalize a new fixed-­rate arrangement and set a new official gold price of $38 (see, for example, Argy 1981, 65; Meltzer 2009b, 775–76).229 The Smithsonian Agreement of late 1971 was the main product of this process, and it proved to be pivotal in shaping Friedman’s opinion of John Connally, secretary of the treasury at the time of the agreement. One policy maker in the Nixon years, George Shultz, won praise from Friedman for his status as a critic of both incomes policy and fixed exchange rates. Another policy maker of the period, Arthur Burns, took a position on incomes policy that earned Friedman’s scorn, as discussed further at the end of this chapter.230 But Burns won plaudits from Friedman for his somewhat positive attitude toward a free exchange-­rate system (Instructional Dynamics Economics Cassette Tape 100, May 31, 1972).231 From Friedman’s perspective, however, Connally was in the wrong on both domestic and international economic policy. Connally was an instigator of wage/price controls. Indeed, according to former president Nixon, Connally was the leading advocate of those measures among his inner circle.232 And Connally had shepherded through the Smithsonian Agreement—an initiative that, as Friedman put it during the period when

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the agreement was being mooted, “squandered a great opportunity” for a more flexible international currency system (Newsweek, December 20, 1971). During his September 1971 trip to Washington, DC, Friedman had met with Connally and tried to persuade him of the merits of a flexible-­rate system (Matusow 1998, 172). On the basis of that meeting, at a dinner party hosted by George Shultz, Friedman indicated that he was “enormously impressed” with Connally.233 He would revise this view sharply as, over the subsequent year, Connally’s confirmed his status as a proponent of interventionist economic policies on both the domestic and international fronts. Friedman was skeptical about whether the new system of fixed rates instituted by Connally would last: “I think we have a very fragile set of ‘fixed’ exchange rates” (Honolulu Advertiser, January 11, 1972). Nor did he see the Bretton Woods arrangements as having been reinstated: “The Bretton Woods system was one of rigid but unstable exchange rates and, in my opinion, the world is well rid of it” ( Japan Times, April 15, 1972). In retrospect, it is clear that one harbinger of the approaching era of greater exchange-­rate flexibility took the form of the behavior of the US balance-­ of-­payments data. During 1971 and 1972, in contrast to preceding years, the United States recorded current account deficits (see, for example, Brown and Darby 1985, 168; and McCallum 1996, 7). Although current account surpluses returned in 1973 in the wake of the dollar devaluation of 1971, US deficits on the current account resumed in the 1980s. By providing a means by which the rest of the world could acquire US assets while running a zero overall balance of payments with the United States, US current account deficits would, in the longer term, help reconcile floating exchange rates with the international popularity of US-­denominated financial instruments. Consequently, the conditions were created for the US dollar to have a more truly floating exchange rate than Friedman had anticipated.234 In light of this development, Friedman would be able to describe the system in force after 1971 as unprecedented: one in which the United States pursued a monetary regime that was explicitly fiat in character, and so did several other major countries, with floating exchange rates widespread and the “dollar standard” no longer being a good description of international monetary arrangements.235 A more immediate sign of the emerging flexible-­exchange-­rate world was the fact that on June 23, 1972, the UK pound sterling began floating.236 Had he known of it at the time, Friedman would have been heartened by President Nixon’s reaction to the floating of sterling. Informed by his aide H. R. Haldeman about the float, Nixon turned down the option of receiving a briefing on the subject. “I don’t care about it,” Nixon said. “Nothing we can do about it.”237 Whatever shape the new international environment took, it was clear to

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Friedman by late 1971 that it would involve greater flexibility in exchange rates. The seeming restoration of a Bretton Woods-­type system at the end of 1971 did not altogether confound this expectation because, as Friedman’s comments in early 1972 indicated, he did not think that major countries would be able to stick with the new parities instituted by the Smithsonian Agreement. Against this background, Friedman in 1971–72 played an active role in helping encourage an infrastructure in US financial markets for dealing with exchange-­rate changes. In particular, he played a part in what he later called “the explosion of financial futures markets after 1971.”238 On Saturday, November 13, 1971, in Chicago, Friedman met lawyer and financier Leo Melamed to discuss the feasibility of a futures market for foreign exchange.239 Melamed recalled: “He was extremely accommodating and very, very gentlemanly, although I was a young kid, in a way. I asked him the question of whether he thought the idea of a currency [futures] market was crazy or is it an idea that’s worthwhile. He said it was a great idea, and I couldn’t believe my ears. And so I repeated it several times. ‘Are you sure you’re saying it’s a great idea?,’ and of course, he repeated, ‘Yes, it is, and you should do it.’ And I said, ‘Well, of course, no one will believe me.’ And he laughed at that. He said, ‘Well, you could tell them I said so,’ and I said, ‘Well, I doubt that they’ll believe me unless you put it in writing.’ It was then that he said: ‘Oh, you’re looking for a feasibility study on why currency would be good in a futures market, aren’t you?’” (Leo Melamed, interview, June 19, 2013). Melamed commissioned the study for Friedman’s requested fee of $5,000. Melamed’s International Monetary Market of the Chicago Mercantile Exchange published the study in 1972.240 On February 24, 1972, some time before the currency futures market was formally launched, Melamed held a seminar in the city of Chicago on the topic of currency futures. Friedman, teaching in Hawaii at the time, did not attend. Instead, the key academic economist speaking at the event was Paul Samuelson. “At the seminar, what I wanted was more or less to show that not only the free-­market economists like Milton Friedman were in favor of what we were doing. . . . [I wanted] a seminar where I could invite someone that was kind of the middle-­of-­the-­road economist, like Paul Samuelson, whose books were in every college for economics” (Leo Melamed, interview, June 19, 2013). In view of Samuelson’s praise in 1969– 70 for Friedman’s case for floating exchange rates, it might be expected that Samuelson, like Friedman, would envision a vibrant futures market in the period ahead as a result of a new era of a more flexible exchange-­rate system. This, however, did not turn out to be the case. “You know the saying, ‘Don’t come and piss on my parade’? Well, he did,” Melamed recalled of Samuelson’s talk: “I was fit to be tied at the time, because I made the invitation, and we had well over a couple of thousand people in the room—

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he was a big name. And he said, ‘You know, what you’ve done is a very, very interesting thing, but I’m afraid it won’t work, because they’re going to go back to fixed exchange rates.’ And so that’s not what I wanted to hear.” Samuelson’s talk (Samuelson 1972) stated that it was a fantasy to expect clean floating of exchange rates and implied that the same was likely true for dirty floating. Samuelson also suggested that the fixed rates instituted by the Smithsonian Agreement would hold for at least a couple of years. Although it was a disappointment to Melamed, the position that Samuelson expressed at the event was not too different from Friedman’s. As indicated above, Friedman desired floating rates but—as of early 1972—he still believed that the best outcome that could realistically be expected was a system in which major countries pegged their currencies to the dollar and adjusted the pegs more frequently than was typical in the pre-­1971 regime. But barely within a year of Samuelson’s February 1972 talk, the expectations held by both Friedman and Samuelson would be confounded, and the world would be closer to a system of fully floating exchange rates than Friedman had dared hope.

III. Personalities in Monetary Policy Debates and Developments in Stabilization Policy, 1969–72 Robert Luca s and Thoma s Sarg e n t “We can never know about the days to come. But we think about them anyway.” For the economics profession, these opening lyrics to the title song of Carly Simon’s album Anticipation had a strong topicality. The album was released in November 1971.241 That release was almost concurrent with the publication of two papers that stressed that expectations about future developments had a major bearing on macroeconomic outcomes: Thomas Sargent’s “A Note on the ‘Accelerationist’ Controversy,” published in the Journal of Money, Credit and Banking in August 1971, and Robert E. Lucas Jr. and Edward C. Prescott’s “Investment under Uncertainty,” published in Econometrica in September 1971. Sargent’s paper did not specifically cite any article of Friedman’s.242 But Friedman was mentioned in the opening line of the paper—whose central concern was the debate on the natural-­rate hypothesis in US academia in the early 1970s that Friedman’s research had helped set in train.243 The Lucas-­Prescott paper was another matter. It too did not cite Friedman; in addition, the paper did not mention him. And understandably so, for the subject of Lucas and Prescott’s paper was the demand for investment in physical capital.244 This happened to be virtually the only category of aggregate spending that Friedman’s body of research had barely covered.245

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Other work that Lucas published over the 1969–72 period, however, bore a strong mark of Friedman’s influence. One of these studies, Lucas and Rapping (1969), concerned the relevance of intertemporal-­substitution ideas for US labor-­supply data. The authors motivated their study as an application to the determination of wages of the permanent/temporary decomposition of income that Friedman had applied to the analysis of consumption behavior (Lucas and Rapping 1969, 729–30). They also noted that Friedman had himself invoked—albeit without formally modeling it—the idea of intertemporal substitution in labor supply in his Price Theory lectures.246 Lucas’s interest in formalizing Friedman’s work dated back, in fact, to the very start of the 1960s. As noted in earlier chapters, Lucas had taken Friedman’s Price Theory course in his first year of graduate study at the University of Chicago, 1960–61. Lucas adopted a practice of spending time after the classes mapping the ideas Friedman had taught into formal mathematical terms, of the kind Lucas had learned from Samuelson’s writings (Lucas 1995). Much of Lucas’s research in between 1969 and 1972 was also in this spirit—albeit applied to Friedman’s written work rather than his teachings. Asked if his work from that period could be regarded as making rigorous and putting in a dynamic, optimizing context some of the 1960s research contributions of Friedman, Lucas said, “Yes, absolutely” (Robert Lucas, interview, March 12, 2013). The impetus to follow this practice did not come from heavy interaction with Friedman after 1961. Lucas was not a member of the money workshop when he was a graduate student.247 Lucas’s PhD dissertation at the University of Chicago was under the supervision of Arnold Harberger, not Friedman; and Friedman and Lucas saw very little of each other in the years from 1962 to 1974.248 But Friedman’s 1967 presidential address proved to be a turning point for Lucas’s research agenda. The basic argument was familiar from Friedman’s Price Theory course in 1960–61: He even gave us in the Price Theory course a homework problem which was kind of a Phillips-­curve problem. And he was not a fan of it [the unaugmented Phillips curve], [even] then. But then I got to working on that stuff with Leonard Rapping, and then Friedman’s presidential address and so on came out as Rapping and I were trying to get our paper published, or finishing our paper, and that’s where I could see our paper didn’t have rational expectations. So the predictions that Milton made in his presidential address were different from the predictions we had with a routine Phillips-­ curve model. We had a disconnect there. Because we were both students of Friedman’s, we were worried, but I didn’t discover what the problem was until later. (Robert Lucas, interview, March 12, 2013)249

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Lucas and Rapping rewrote the closing sentences of their paper in recognition of the point that future work would likely need to recognize the type of endogeneity of expectations implied by the natural-­rate hypothesis (Lucas 1981b, 6).250 Their study had made expectations endogenous only to a limited degree, by employing inflation expectations that were formed adaptively. The Lucas-­Prescott paper adopted a different approach from that of the Lucas-­Rapping paper in the modeling of expectations. As the authors put it (Lucas and Prescott 1971, 660): “we shall [be] . . . assuming that the actual and anticipated prices have the same probability distribution, or that price expectations are rational.” It was not, however, the Lucas-­Prescott paper that really put rational expectations at the forefront of the agenda of macroeconomic research. Rather, as Shiller (1978, 7) would characterize developments in an early retrospective: “The most important application of these ‘rational expectations’ in the macroeconomic literature has been to the ‘natural rate of unemployment hypothesis.’” In research concurrent with, but carried out separately from, his work with Prescott, Lucas joined together the rational-­ expectations and natural-­rate hypotheses. A paper he presented at a Federal Reserve Board conference in October 1970 (Lucas 1972a) took issue with existing empirical findings against the natural-­rate hypothesis, in a critique that paralleled that of Sargent (1971).251 The crux of that critique was that most existing findings evaluated the natural-­rate hypothesis in terms of whether lagged inflation had a unitary estimated coefficient when used as the expected-­inflation variable in the Phillips curve. Yet if this lagged-­ inflation term stood in for expectations of inflation in period t or later, then a below-­unity coefficient would be implied by rational expectations if the natural-­rate hypothesis prevailed, provided that inflation was stationary (as it certainly appeared to be in the United States prior to the 1970s). The argument therefore threw into doubt the rejections that had been registered in empirical investigations of the Friedman/Phelps contention regarding the Phillips curve. As Sargent put it later, “The very few tests of the hypothesis that seem clean technically do not strongly call for rejection of the natural rate hypothesis” (Sargent 1976a, 83). Lucas’s Federal Reserve Board conference paper had stressed that a high-­priority item on the research agenda was to have “the natural rate hypothesis . . . translated into explicit theory” (Lucas 1972a, 51). In a seminal paper, “Expectations and the Neutrality of Money” (eventually published in the Journal of Economic Theory), Lucas (1972b) proceeded to do just that. Lucas viewed the paper as formalizing the natural-­rate hypothesis, as well as providing support for Friedman’s monetary work more generally. His model, Lucas (1972b, 104) wrote, generated “many of the characteristics attributed to the U.S. economy by Friedman ([in his 1968 article]

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and elsewhere). This paper provides an explicitly elaborated example, to my knowledge the first, of an economy in which some of these propositions can be formulated rigorously and shown to be valid.” Lucas acknowledged another antecedent in Phelps (1970a) because Lucas, like Phelps, worked with a formal model in which imperfect information was the source of short-­run monetary nonneutrality.252 Indeed, the reliance on imperfect information—to the exclusion of stickiness in nominal wages and in goods prices—to obtain an expectational Phillips curve was a point on which Friedman would part company with the early rational-­expectations literature, as will be discussed later. Lucas (1980b, 705) would conclude that rational expectations had provided a natural vehicle with which to formalize the natural-­rate hypothesis. Lucas’s and Sargent’s formalizations of the natural-­rate hypothesis would in turn be so substantial that they would be listed alongside Friedman and Phelps as the principal contributors to the subject. Thus, Bean (2005, 9) would recall the “theorizing about the underpinning for the Phillips curve by Milton Friedman, Ned Phelps and Bob Lucas,” and Fischer (1979, 250) referred to the “Friedman-­Phelps-­Lucas type Phillips curve.”253 More recently, the opening paragraph of Benati (2012) has contrasted modern views on the Phillips curve with the “pre-­Phelps-­Friedman-­Lucas-­Sargent consensus.”254 The Lucas-­Sargent work on the natural-­rate hypothesis can be regarded as offering a challenge to the Keynesian side of the debate on two dimensions beyond those provided by Friedman’s work. The first of these dimensions pertained to the fact that, as already noted, the Lucas (1972a) and Sargent (1971) papers offered an analytical critique of existing empirical work on the Phillips curve that challenged the validity of the empirical rejections of the natural-­rate hypothesis of the kind that had been reported by Robert Gordon, Robert Solow, and others. The second dimension of the challenge came from the fact that key contributions to the rational-­expectations literature—most notably Lucas (1972b)—were using an analysis based on optimizing behavior of the private sector (in particular, on utility maximization) and were therefore adhering to an approach that Keynesians such as Solow, Samuelson, and Tobin had used in much of their own work. It is worth elaborating on this second dimension in a little more detail. Although the leading Keynesians named above had tended not to use optimizing general equilibrium models in their work on cyclical matters, they had done so in their analysis of economic growth and optimal long-­ run inflation rates—to such a degree that Sargent (1987a, xviii) judged that those working in the general equilibrium economic-­growth literature of the 1960s had provided a direct route toward rational-­expectations macroeconomics. In contrast, Friedman worked basically outside this 1960s litera-

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ture. True, in 1970 he counted his 1969 paper on the optimum quantity of money as part of the money-­and-­growth literature, citing it alongside Tobin (1965b).255 But that Friedman article had been a breed apart from the money-­and-­growth literature because Friedman had not worked with an explicit general equilibrium model. Instead, he had used a money demand function alongside some properties of household utility, and he had considered the rest of the model in a largely verbal fashion. This practice reflected the approach that Friedman liked to call “Marshallian,” which— although it was not simply partial-­equilibrium analysis, as it did consider feedbacks between different parts of the economy—did not amount to formal general equilibrium analysis.256 Friedman’s abstention from the general equilibrium literature left open the possibility that his controversial results, most notably the natural-­rate hypothesis, would not be confirmed by formal theorizing. Instead, however, Lucas and others in the rational-­expectations literature were using an explicit general equilibrium modeling framework, and they were obtaining results that largely validated Friedman’s analysis. The fact that these results had been obtained in models in the tradition of those that Tobin and Samuelson had used would lead Lucas to reflect that “Sargent and Wallace and I were critics from within” in a way that Friedman manifestly had not been (Lucas 2001, 10). “I mean, people like Samuelson had always kind of belittled Friedman’s lack of technique and so on,” Lucas recalled, “and there was a big feeling that the Chicago guys didn’t know their trade. And so my stuff turned the tide on that, and along with Sargent’s and so on, we kind of switched gears,” providing formal analysis that backed Friedman’s work. “And Friedman was happy about that. I don’t know how he felt about all the [previous] belittling of his work and so on, but I’m sure he didn’t like it. I mean, who would?” (Robert Lucas, interview, March 12, 2013). The more rigorous work on the natural-­rate hypothesis that appeared in the early 1970s did not only strengthen the challenge to Keynesian economists of Friedman’s generation. It also helped sway younger economists on the merits of the critique of the Keynesian model. As the Robert Solow remark quoted at the end of chapter 4 indicates, the lack of mathematical rigor in much of Friedman’s work tended to harm his standing among economists younger than himself. Duncan Foley, watching events from the position as an assistant professor in MIT, viewed the material in the volume Microeconomic Foundations of Employment and Inflation Theory, edited by Edmund Phelps, as particularly effective in converting younger theorists to the natural-­rate hypothesis, including “the Phelps-­type models, in which there was an explicit modeling of the adjustment of the labor market to inflationary expectations. And I thought, when I read those things, that that was big trouble for the Keynesian point of view—big trouble.” Foley

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saw his contemporaries experience similar reactions: “the Phelps/Mortensen stuff really hit a nerve among the younger economists at that time” (Duncan Foley, interview, October 2, 2014). Lucas and Rapping (1969) had been only tentatively supportive of the natural-­rate hypothesis, but when a version of that article appeared in the Phelps (1970b) volume, it appeared alongside articles, including Mortensen (1970a), that offered more clear-­ cut support for the hypothesis, and at a time when Lucas himself had become a strong proponent of the natural-­rate idea. When one considers how Lucas would come to be viewed for a long time as the natural successor to Friedman in the literature on monetary economics, it is ironic that when Lucas (then employed at Carnegie Mellon University’s business school, the Graduate School of Industrial Administration) paid a visit to the University of Chicago—most likely in 1970—to present “Expectations and the Neutrality of Money” in the econometrics workshop series, Friedman did not attend the talk or meet Lucas during his visit (Robert Lucas, interview, March 12, 2013). His absence might have reflected the pressure of other commitments, or the fact that Friedman was located in the city of Chicago for only six months of the year (corresponding to his two academic quarters per year at the university) and was sneaking in out-­of-­town trips even when he was based in the Chicago area. Friedman was, in any case, already familiar enough by 1971 with rational expectations to use the terminology in correspondence.257 That terminology, as well as the definition of the concept, was due—as both Sargent (1971) and Lucas and Prescott (1971) acknowledged—to the work of John F. Muth (1961).258 Over the course of the 1960s, as Lucas and Sargent (1981, xi) had occasion to note, the response to Muth’s work was decidedly muted. In the terminology of film criticism, Muth’s article was a “sleeper.” The imagery that Friedman himself preferred to use to describe what had happened came from the plant world. The rational-­expectations revolution, he later wrote, amounted to the “belated flowering of a seed planted in 1961 by John F. Muth.”259 Muth’s work, Friedman contended still later, was “the real start of rational expectations,” while “Lucas’ big contribution was to make it operational.”260 It was actually a slightly earlier article of Muth’s, one published in 1960, that probably played a role in the way that a subset of the proponents of rational expectations—Lucas, Sargent, and Robert Barro not among them— came to look on Friedman’s position in relation to the rational-­expectations postulate. The viewpoint of this subset of proponents may have been influenced by the fact that Muth (1960) juxtaposed adaptive expectations and rational expectations. The 1961 Muth paper had not referred to Friedman’s work. In contrast, the 1960 Muth paper had focused on Friedman’s Theory of the Consumption Function, and it had derived conditions under

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which the adaptive-­expectations assumption used in the time-­series work in that book corresponded to an assumption that expectations were rational. Muth’s approach essentially viewed Friedman’s work as compatible with rational expectations. Muth’s analysis endowed the Friedman’s time-­series equations with a rational-­expectations interpretation, and the resulting synthesis has been labeled the “Friedman/Muth permanent income model” (C. R. Nelson and Plosser 1982, 154) or the “Muth and Friedman model” (Schwert 1987, 77). As Lucas has said of Muth, “if you look at his original work, that [Theory of the] Consumption Function stuff was his leading example for rational expectations” (Robert Lucas, interview, March 12, 2013). In the same vein, Sargent (1993, 210) took Muth’s analysis of the Friedman consumption work as the occasion when the “idea of rational expectations actually got started.” Some other advocates of rational expectations in the 1970s, however, would take a different stand. They would, like Muth, juxtapose Friedman’s writings and the rational-­expectations approach. But, in contrast to Muth, who showed the possible harmony between the two viewpoints, these commentators would emphasize the contrast between them. This interpretation would cast Friedman as basically a Neanderthal—a representative of an unreasonable old order that resisted the avant-­garde rational-­expectations movement and that endorsed research practices that attributed irrationality to agents. A prime example of criticism of this kind was provided by John Kareken, who in the 1970s was affiliated with both the University of Minnesota and the Federal Reserve Bank of Minneapolis. In the early 1960s, Kareken had written skeptically about Friedman’s work—doing so from the Keynes­ ian perspective. In particular, Kareken and Solow (1963) had presented a critique of Friedman’s work on lags from monetary policy actions to the economy.261 By the late 1970s, Kareken was no longer a Keynesian. He remained, however, a vociferous critic of Friedman—albeit now from the rational-­expectations rather than old-­Keynesian perspective. After praising Friedman’s work on the natural-­rate hypothesis, Kareken’s discussion proceeded to attack what he saw as the Friedman way of making that hypothesis operational—by putting lags of inflation (with a unit sum) in the Phillips curve: How reasonable is the Friedman expectations assumption, the adaptive expectations hypothesis, which[,] to repeat[,] says that the expected inflation rate is an average of past actual rates? I find it very difficult to accept, partly because it portrays individuals as being so dumb, so unmindful of their own interests. According to the hypothesis, they learn from the past, or rather, a tiny portion thereof, but in such a way that they can go on for-

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ever being fooled. The government has only to make the current-­period inflation rate greater than that of the period just past. And individuals will never catch on. (Kareken 1978, 11)

The position that Kareken described—one in which the long-­run vertical character of the Phillips curve was represented by a specification in which lagged inflation represented expected inflation, with unitary sum on the lags—was indeed vulnerable to the criticism that Kareken laid out.262 To have associated that position with Friedman, however, seems not to have been the appropriate inference. That Kareken’s inference was misplaced is brought about most starkly by the fact that, well before the Kareken article appeared, Friedman himself endorsed in print the same critique that Kareken articulated. Specifically, Friedman noted in his Nobel lecture that to “substitute a stable relation between the acceleration of inflation and unemployment for a stable relation between inflation and unemployment” could only be considered a stopgap reaction to the natural-­rate hypothesis. The relationship between inflation changes and the rate of unemployment would likely become unstable, he warned, if policy makers tried to use it to achieve below-­natural rates of unemployment.263 A broader point is that Friedman’s writings abounded with cautions against the mechanical use of adaptive expectations and with expressions of the notion that the observed behavior of economic time series would be sensitive to the policy regime in force. That this was the case was underlined by the fact that when laying out his famous critique of structural econometric models—a critique that embedded Kareken’s argument above as a special case—Lucas (1976b, 20) stated that the argument was “implicit (and perhaps to more discerning readers, explicit)” in Friedman’s writings.264 In this vein, the Friedman-­Schwartz Monetary History had warned against mechanical application of adaptive expectations, noting that a rise in prices did not have an unambiguous effect on inflation expectations—it could be a “harbinger of further rises” in some cases, yet it could be followed by expectations of deflation if perceived as temporary.265 Furthermore, the early 1970s saw a considerable number of occasions on which Friedman emphasized the forward-­looking character of expectations and the unsatisfactory nature of modeling expectations as a fixed distributed lag irrespective of policy regime. In a pair of discussions in June 1970—in a cassette commentary (Instructional Dynamics Economics Cassette Tape 52, June 10, 1970) and in a consultant’s memorandum to the Federal Reserve Board—Friedman took issue with a study of the Fisher effect (Yohe and Karnosky 1969) that had used adaptive expectations.266 Although he agreed with the paper’s authors that a new monetary policy regime had started in the United States around 1960, Friedman criticized

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their treatment of the private sector’s inflation expectations within that regime as having been generated by a long distributed lag of inflation.267 He voiced his preference for viewing expectations as depending on a set of variables, and he stressed that a factor driving actual expectations of inflation was the concern that the monetary authorities would not stick with a disinflationary policy. Likewise, in 1971 (Instructional Dynamics Economics Cassette Tape 75, June 2, 1971), Friedman stated that his doubts about the Federal Reserve Bank of St. Louis multi-­equation model’s treatment of the interaction of real and nominal variables stemmed partly from concern about the model’s use of a long distributed lag of inflation to approximate expectations of inflation. When he himself used adaptive expectations in laying out his 1970 theoretical framework for monetary analysis, Friedman indicated that the imperative was to make expectations endogenous rather than autonomous, and that there might be preferable alternatives to the adaptive-­expectations assumption in achieving that end.268 The 1970s witnessed further warnings from Friedman against the mechanical extrapolation of past behavior. In March 1971, for example, he cautioned against taking a perspective that “tomorrow is going to be like yesterday, without taking into account the changes that have taken place.”269 And in 1973, he referred in congressional testimony to the “enormous mistake of extrapolating present conditions to the indefinite future.”270 Still more broadly, Friedman’s body of macroeconomic work had been permeated by two key aspects subsequently associated with the 1970s literature: an emphasis on the role of expectations in private-­sector decisions, and a concern to treat those expectations as endogenous. On the first of these aspects, Charles Plosser—a student in the business school of the University of Chicago during the first half of the 1970s, and one of the first University of Chicago graduate students to have had Robert Lucas on his dissertation committee—would observe: “the role of anticipations has played an increasingly important function in economic theory since the permanent income hypothesis was advanced by Milton Friedman” (Plosser 1979, 407). And the consumption function was, in fact, only one such case in point. The Phillips-­curve case considered above was an obvious additional ­example.271 But there were myriad further examples. As detailed in chapters 4 and 5 and in the further discussion below, Friedman frequently appealed to forward-­looking behavior on the part of households and firms in his research and his economic commentaries.272 This perspective also manifested itself in Friedman’s discussion of monetary and fiscal policy rules. In particular, as was discussed in chapter 8, Friedman’s argument for a constant-­monetary-­growth rule included the position that it would have beneficial effects on expectations.273

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With respect to the matter of making expectations endogenous, Friedman’s advocacy and implementation of adaptive expectations can be seen as supportive of the same agenda as that taken up by the rational expectations movement. Under this interpretation, Friedman’s work on adaptive expectations can—in contrast to Kareken’s (1978) characterization of it—be seen as something that helped pave the way for rational expectations by insisting that expectations be treated not as constants or as externally given (“autonomous”) but as functions of observed time series. It is from this perspective that Sinclair (1983, 1) and T. D. Wallace and Silver (1988, 316) named Friedman as important in developing the theoretical treatment of expectations in macroeconomics. Friedman himself took a similar line in 1970, when he cited Theory of the Consumption Function as work that tried to help fill a gap in dynamic analysis by recognizing and modeling expectations.274 Indeed, even in his early work with adaptive expectations, Friedman did not “go to the mattresses” in defending the notion that expectations were fixed functions of past data. In 1957, for example, he had stated that his backward-­looking measure of permanent income was an “empirical specialization of a more general concept,” and the following year he and Gary Becker expressed the hope that a better theory of expectations would produce a more satisfactory proxy for permanent income.275 All told, then, Kareken’s (1978) treatment of Friedman as an advocate of modeling agents as irrational and as a hard-­line defender of adaptive expectations is not well taken. There was, admittedly, one element of validity in the Kareken critique of Friedman’s position. This element of validity lay in the fact that Friedman did, during the 1970s, take lagged inflation as a good proxy for expected inflation. For example, in 1979, Friedman stated of the connection between real and nominal variables in the US economy: “The relation is between changes in the rate of inflation, and unemployment” (San Jose Mercury News, February 12, 1979; emphasis in original). It is unlikely, however, that this statement reflected a mindset that was wedded to adaptive expectations qua adaptive expectations. On the contrary, the Nobel lecture passage cited above confirmed Friedman’s skepticism about the reliability across regimes of lagged inflation as a proxy for expected inflation.276 Friedman’s 1979 statement more likely reflected an empirical judgment (supported by subsequent work on the time-­series process of inflation in the 1970s such as McCallum 1994a, and Sargent 1999) that the US monetary regime had by the mid-­1970s rendered the time series process for US inflation similar to that of a random walk.277 In the event that inflation resembled a random walk, the rational expectation of inflation could, for the moment, be well proxied by lagged inflation (with unitary coefficient). Indeed, Friedman’s 1979 characterization of the Phillips-­curve relationship closely resembled that given by some leading contributors to rational-­expectations modeling, such as Olivier Blanchard.278

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Furthermore, despite his reputation as an exponent of adaptive expectations, some of Friedman’s empirical work had, in fact, used rational expectations. Specifically, Sims (1974, 292), Lucas (1976b, 27), and Sargent (1977a, 445–46; 1978, 673) all noted that the cross-­section data analysis in Friedman’s Theory of the Consumption Function used the assumption that household expectations of income were based on the actual probability distribution of consumption; that is to say, the assumption that expectations were rational. In addition, Sargent (1973a, 463) pointed to Friedman’s 1950s-­vintage discussions of monetary issues as showing that the notions of rational expectations and an anticipated/unanticipated distinction in the study of nominal variables “have long been important elements of macroeconomics at Chicago.”279 Furthermore, as previously indicated, the postulate of rationality ran through Friedman’s writings on private-­sector behavior going back decades. An early statement to this effect was in a Friedman-­coauthored portion of Schultz (1938, 569) that endorsed an approach to economic behavior based on “the rational method” (according to which the specification of agents’ preferences would be subject to theory-­imposed conditions). Friedman’s work in the 1940s and early 1950s on decision theory, like the expected-­utility literature of which it was part, necessarily used rational expectations as it evaluated expected payoffs via calculations of mathematical expectations.280 Friedman had, in addition, defended the optimizing-­ agent paradigm in his celebrated 1953 article on research methodology. A passage in that piece, furthermore, has been retrospectively interpreted as making a case for the rational expectations equilibrium (Blume and Easley 2006, 930, 932; Cogley, Sargent, and Tsyrennikov 2014).281 Another item among Friedman’s 1953 writings—specifically, his exchange-­rate piece—has been highlighted by Hommes (2006, 1112) as the basis for his statement: “Milton Friedman has been one of the strongest advocates of a rational agent approach, claiming that the behavior of consumers, firms, and investors can be described as if they behave rationally. The Friedman hypothesis stating that non-­rational agents will not survive evolutionary competition and will therefore be driven out of the market has played an important role in this discussion.”282 Friedman himself offered interpretations like this on occasion. Indeed—in one of his less generous assessments of the significance of the rational-­expectations revolution— Friedman remarked in correspondence with David Laidler in mid-­1984: “All of us had used in one way or another that notion and yet it never really got its due role until the term ‘rational expectations’ was invented and extreme statements about it were made.”283 In reflections made on other occasions, however, Friedman recognized that the rational-­expectations revolution had made formalizations of the concept not previously present in the literature, and in particular not

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hitherto present in dynamic models. In Parkin (1990, 100), for example, Friedman listed rational expectations as one of the most important developments in the economics field of the prior twenty years, and in Levy (1992, 8) he praised the work on rational expectations and monetary theory with which the Federal Reserve Bank of Minneapolis had been associated in the 1970s.284 As discussed below, by the 1973–74 period Friedman recognized the importance of Lucas’s work. “He had great respect for Lucas,” Arnold Harberger observed (interview, April 12, 2013). Strong testament to this attitude took the form of Friedman’s public statement, in 1981, that Lucas would be a future Nobel award winner because of the latter’s work on rational expectations.285 When he and Lucas were colleagues in the mid-­ 1970s, the synergies between rational expectations and his own body of work led Friedman to lament that his research had not led him to use the rational-­expectations concept in a time-­series context. Lucas recalled: “He said later he kind of wondered how come he didn’t get rational expectations in his work on that book [Theory of the Consumption Function]. And, you know, it is pretty close to it” (Robert Lucas, interview, March 12, 2013). Along these lines, in a 1978 retrospective, Friedman himself reflected on how expectations had played a progressively more prominent role in his monetary analysis, culminating in his 1967 presidential address, and he noted that in this respect his monetary research had been a precursor to the rational-­expectations movement.286 By the time of that 1978 discussion, the rational-­expectations revolution was sweeping the profession after its launch between 1970 and 1972. Work that did not incorporate rational expectations was looking decidedly dated. Paul Evans noted that at the University of Chicago in the first half of the 1970s, “graduate students who wanted to prosper in academia could see, of course, that rational expectations was a very popular innovation at the time. So you had a lot of graduate students writing dissertations that had something to do with rational expectations applied to some sort of problem, and a lot of those were presented in the [money] workshop” (Paul Evans, interview, February 26, 2013).287 It was against that background that Friedman commented on the rational-­expectations literature in a conference appearance he made in March 1974—a comment that led the reviewer of the conference volume to observe (Purvis 1978, 350): “It is also amusing to note, in light of subsequent developments, that a passing remark by Milton Friedman in the discussion is the only reference in the entire volume to rational expectations.” The Friedman remark (part of the discussion summary) in the volume in question Claassen and Salin 1976 (313–14) is worth quoting: Milton Friedman declared himself in agreement both with Michael Parkin and Assar Lindbeck. In fact, it is irrational for people to maintain the same

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expectation function in the light of changing phenomena. If we assume that people are forming expectations in some rational way, they ought to take into account what they know about the economic theory of the formation of prices; therefore, modifications in the behavior of monetary authorities and changing behaviors in price level formation will imply changes in the expectation functions. Models allowing for changes in the expectation function—as did [sic; as advanced by] Robert Lucas and Tom Sargent—are thus better than models assuming stable expectation functions.

The preceding remark was followed at the end of 1974 by Friedman’s warm words for the Lucas-­Sargent work in remarks he gave at the American Economic Association meetings.288 On that occasion, Friedman praised Lucas and Sargent for formalizing the work on expectations and the Phillips curve—and he added that, in having done this, they had expressed some key ideas about the role of monetary policy “far better” than he and Henry Simons had.289 Another vote of confidence that Friedman gave about this emerging literature was registered in the fact that, by the time of these late-­1974 remarks of Friedman’s, Lucas was a colleague of Friedman’s as a fellow professor in the University of Chicago’s Department of Economics. Lucas had joined at the start of the 1974–75 academic year.290 In addition, another departmental colleague of Friedman’s was, by 1973, also a strong advocate of rational expectations: Robert Barro, who had his first spell on the University of Chicago’s Department of Economics between 1972 and 1975 (Barro 2007, 132). Friedman’s praise for the rational-­expectations revolution reflected not only the consonance of the general ideas of rational expectations and forward-­looking optimizing behavior with much of his research but also specific findings coming from the rational-­expectations literature. A great deal of the research in the area of rational expectations that appeared in the 1970s buttressed many specific hypotheses he had advanced about economic behavior and policy, lending credence to Myhrman’s (1983, 63) contention that “rational expectations is quite compatible with monetarism and can be regarded as a development of it.”291 There were multiple respects in which the rational-­expectations literature provided support to Friedman’s view on economic structure: the Lucas and Sargent contributions backed him up on the natural-­rate hypothesis; Sargent’s (1973b) analysis supported Friedman’s emphasis on Fisher’s real/nominal interest-­ rate distinction; and, further along in the 1970s, the work of Barro (1974, 1978) and Hall (1978) on consumer behavior would build on the permanent income hypothesis.292 In addition, the policy prescriptions of the early literature on rational

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expectations supported Friedman’s advocacy of nonactivist rules. Indeed, Lucas (1981b, 1–2) observed, “Recent research utilizing this principle [rational expectations] has reinforced many of the policy recommendations of Milton Friedman and other postwar monetarists but has contributed few, if any, original policy proposals.”293 Lucas had also stressed the same point much earlier, when writing on July 7, 1970, to the editorial office of the American Economic Review after it had rejected his “Expectations and the Neutrality of Money” paper. Lucas’s letter pointed out that his paper had not only worked out an expectational Phillips curve, but it had also produced “the first proof ever seen that the Friedman 5 percent rule possesses a nontrivial optimality property!”294 The rationale for the constant-­monetary-­growth rule presented in Lucas (1972b) was, however, revealingly different from Friedman’s case for that rule.295 As chapter 8 above documented, Friedman granted that an activist monetary growth rule could, in principle, outdo a constant-­monetary-­ growth rule on the criterion of providing economic stabilization.296 The authorities could nevertheless, Friedman contended, be led to choose a response of money to the state of the economy that led to a magnification of the effects on output of nonmonetary disturbances. This was because, in the absence of knowledge of the true economic structure, policy makers might use misspecified models that led them to ill-­judged policy settings. In Lucas’s rationale for the constant-­monetary-­growth rule, in contrast, activist monetary rules were necessarily destabilizing; variations in monetary growth simply added a source of disturbance—monetary shocks—to output variability.297 Notwithstanding some differences in approaches to monetary issues, it is clear that Friedman undoubtedly saw the new generation of rational-­ expectations exponents as his natural successors in important respects and as having generated an impressive literature.298 In his Nobel lecture he made a brief but positive reference to “the seminal contributions of John Muth, Robert Lucas, and Thomas Sargent” in the area of rational expectations.299 When—vindicating Friedman’s prediction of many years earlier— Lucas himself received the Nobel Prize in 1995, Friedman remarked: “Any damn fool would know that everybody’s looking at the future. But to go from there and convert it into formal theory is a classic example of how a trivial idea in the right hands can yield important implications” (USA Today, October 11, 1995). There was also feedback from the rational-­ expectations literature to Friedman’s own perspective on economics. Anna Schwartz emphasized to the present author that she and Friedman absorbed the rational-­ expectations literature as they continued their own monetary-­research program during the 1970s and early 1980s.300 The impact that the rational-­

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expectations literature had on Friedman’s thinking was evident also in the words he used. By the 1977–84 period, he was making use of that literature’s terminology in place of the language he had previously tended to employ for the same concepts: “agents” instead of “economic units” or “consumer units,” policy maker “credibility” instead of “resolve,” “metric” instead of “measure.”301 Sargent (1987a, xxii) argued that confirmation of the existence of the rational-­expectations revolution lay in the fact that “the language that macroeconomists speak has changed,” and Friedman clearly was not insulated from that aspect of the revolution. On the matter of macroeconomic substance, as opposed to language, John Taylor, who knew Friedman from 1984 onward, noted: “I can almost never recall him criticizing modern macro. Maybe he’d be skeptical of rational expectations as being too extreme and things like that, but he was always very—maybe the word is ‘tolerant’—very open to what Lucas was doing and things like that, which would be much more detailed types of models than Milton would kind of tend to do, except for his consumption-­ function work” (John Taylor, interview, July 2, 2013). Jo Anna Gray, a graduate student at the University of Chicago in Friedman’s closing years at the institution, emphasized the continuity between Friedman’s outlook and that of the early rational-­expectations school: “it’s just a natural extension of the basic idea that the private sector is quite capable of undoing the public sector. So in that sense, I would have thought it would have struck him as a pleasing development in the field, and not at all unrelated to his own instincts” (Jo Anna Gray, interview, August 8, 2013). Thomas Sargent recalled: “The last year or two that Friedman was at Chicago, Chicago made offers to Chris Sims and me. And I think Friedman had a big hand in both of those offers. He certainly knew a lot about what both of us were doing. And he had a big hand in the offer to Bob Lucas. So I think he was sympathetic to it” (Thomas Sargent, interview, January 24, 2014).302 The preceding remarks, taken together with Friedman’s own statements, amply confirm Robert Lucas’s observation: “Oh, he liked rational expectations” (Robert Lucas, interview, March 12, 2013).303 That is not, however, the end of the matter, as has already been indicated. For it is also true that, as Friedman’s colleague Arnold Harberger observed of Friedman’s attitude to rational expectations, “He liked it, and he didn’t like it.”304 Harberger cited, as an aspect of the 1970s rational-­expectations models that Friedman did not like, their departure from Friedman’s vision of a smooth response of prices and output to an injection of money, in favor of a setting in which the positive responses of both prices and output were concentrated at a date closely adjacent to the time of the monetary injection. Friedman, in contrast to the initial exponents of rational expectations, distinguished between rapid asset price responses and slower responses of

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economic aggregates. Friedman put it this way in a June 1971 memorandum to the Federal Reserve Board: “The impact of monetary change on income, employment, and prices is more gradual, more distributed over time, than it is on financial markets.”305 As Harberger recalled: “You have to have a period when the rate of inflation overshoots the rate of monetary expansion, then works back down and so forth. That’s the Friedman way of thinking.” Harberger argued that this was a subtle aspect of Friedman’s outline of the monetary transmission process and one that amounted to “a very powerful critique of what you get in many rational-­expectations models” (Arnold Harberger, interview, April 12, 2013). In sum, Friedman did not oppose rational expectations, but he did insist that the rational-­expectations models in vogue in the 1970s should be modified to reflect the observed dynamics of the effects of monetary policy. Friedman suggested, in particular, that rational-­expectations models might well be acceptable provided they shed the implication of serially uncorrelated effects of monetary policy on output.306 In articulating this view, one tack that Friedman adopted was to cite cases in which the rational-­ expectations postulate could be consistent with serially correlated errors— notably in what the literature has put under the heading of the “peso problem” case. For example, Friedman noted that the silver movement in the United States in the later years of the nineteenth century was associated with serially correlated prediction errors for commodity prices even though the predictions may well have been rational.307 However, the weakness Friedman perceived in early rational-­expectations models went beyond peso-­problem issues and extended to their generic predictions about the effects of monetary policy actions. As he put it in 1983: “Experience clearly contradicts the more extreme rational expectations models predicting extremely rapid adjustment to changes in monetary growth.”308 To be sure, Friedman shared with the early proponents of rational expectations the notion that the real effects of monetary policy can be viewed as arising from a deviation of monetary growth from its expected rate. That notion, clearly stated by Friedman and Schwartz in 1963, had been a reason Lucas (1972b, 121) had viewed his model economy as exhibiting “Friedmanian” properties.309 And in 1983, Friedman reaffirmed that in monetarist analysis “any changes in the nominal quantity of money that are anticipated in advance will be fully embedded in inflationary and other expectations.”310 But this area of agreement did not negate the exceptions that Friedman took to the early rational-­expectations models. In particular, it did not vitiate his objections to two principal characteristics of those models: their restriction of monetary surprises to one-­period prediction errors; and their use of a flexible-­price assumption when specifying the structure of the

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economy. Friedman favored a respecification that allowed for the presence of contracts for nominal wages and prices. In the presence of contracts, the effects of monetary policy on real variables would likely be spread over time, and the link between the rational-­expectations postulate, and the notion that the only monetary policy actions that produced short-­run output movements were those that were unpredictable a period in advance, would be broken. Friedman’s position was that “expectations may be rational, yet take a long time to adjust”—as they would be if the expectations underlying key private-­sector decisions could be revised only infrequently, because of long-­term contracts.311 The emergence of a subliterature that contained rational-­expectations models with long-­lasting nominal price or wage contracts—including Fischer (1977), Phelps and Taylor (1977), Taylor (1980), and Gray (1976a, 1976b, 1978)—took place in a period when Friedman was stepping further and further away from research.312 But he kept tabs on this development (especially Gray’s work, which stemmed from her 1976 dissertation at the University of Chicago), and he strongly sympathized with it—a perspective that came to the fore when, in 1982, he and Schwartz defended rational-­ expectations models that featured nominal contracts.313 “Milton questioned a lot of the rational expectations stuff that Lucas was doing,” Charles Plosser recalled on the basis of watching the interaction of the two in the money workshop between 1974 and 1976. But Plosser noted that Friedman “wasn’t being hostile to the idea” of rational expectations; rather, his concern was with the need to “make it work, get it right” (Charles Plosser, interview, April 2, 2015).314 In key respects, Friedman’s reaction in the 1970s to the rational-­ expectations revolution paralleled his response during the 1940s and 1950s to the monopolistic-­competition movement. In both instances, he emphasized that some of its basic ideas were present in the preceding literature; he questioned some of the stronger claims made about the implications of the revolution for economic research and policy; and he doubted that the new line of work would—once fully processed by the economics profession—really lead to a jettisoning of a great amount of preexisting economic analysis. The prediction embedded in the last of these positions was certainly validated in the case of the monopolistic-­competition movement; it can also be concluded that the prediction was largely borne out in the case of rational expectations. One piece of evidence for this conclusion is that many of Friedman’s propositions about the delayed effects of monetary policy would prove enduring, while many of those made by the early rational-­expectations literature did not. Another piece of evidence comes from demand/supply analysis. Sargent (1982b) conjectured that the rational-­expectations revolution would see macroeconomic analysis

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moving beyond demand and supply curves; but modern macroeconomic models that incorporate rational expectations (and microfoundations for private-­sector decisions) usually have, in fact, proved amenable to a separation of the equations into demand and supply blocks. In correspondence in May 1983, Friedman summed up many of his views on the literature of the previous twelve years. “As you probably know,” Friedman wrote to Christopher Sims, “I have never myself been much persuaded by the extreme rational expectations version of monetarism which produces instantaneous market clearing and leads to the famous policy ineffectiveness view. I have no quarrel with the general principle of rational expectations. On the contrary, it is obviously correct and welcome, but I do have a very serious quarrel with the particular applications of it.” Although some of that research had, as noted above, provided support for Friedman’s constant-­monetary-­growth rule, Friedman affirmed that the “evidence that has persuaded me of the desirability of a steady rate of monetary growth comes from much longer time units and a much wider range of historical evidence[,] rather than from a specific dynamic or stochastic economic model.”315 An earlier summing up on Friedman’s part of his reservations about the flexible-­price vintage of rational expectations had been made in the public record. A Business Week report on the rational expectations movement noted that Friedman was, in the report’s words, “clearly impressed” with the work, but it also quoted him as observing (Business Week, November 8, 1976, 76): “You may be able to fool people for a very long time. I can’t accept the idea that inflation premiums are incorporated into interest rates and wages instantaneously.”316 This quotation, along with the letter to Sims, underscores the point that Friedman’s complaints about early rational-­expectations models embedded legitimate criticisms of the assumption of flexible prices and of the notion that monetary policy exerts only a one-­period effect on real variables. The 1976 quotation just provided actually went beyond that, as it extended Friedman’s doubts about instantaneous adjustment even to interest rates. Such doubts may seem jarring in light of interpretations of the historical behavior of US long-­term interest rates—such as those of Goodfriend and King (2005) and Levin and Taylor (2013)—that have taken movements in the inflation premium during the 1970s as reflecting complete, instantaneous, and soundly based market assessments of the course of monetary policy. But it has already been discussed (in section II) that the US bond market in 1971 and 1972 failed to foresee the breakout of inflation of the mid-­1970s. And when one considers the often very sanguine behavior of the bond market after 1972 and through 1979—over which time its implied predictions about inflation often proved to be consider-

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ably less accurate than those that Friedman himself was offering publicly— it becomes clear that the doubts that Friedman harbored during the 1970s about bond pricing were not without foundation. Even once revised to incorporate nominal contracts, the rational-­ expectations literature was distant from Friedman’s outlook in another respect. By the standards of the modern literature, Friedman was not a rigorous theorist. He had considerable technical know-­how acquired from those years of work on statistical theory in the 1930s and 1940s, and he could occasionally be stirred into bringing that knowledge out into the open. Robert Gordon remembered of Friedman’s behavior in the money workshop between 1968 and 1973: “He would sometimes turn around and from memory write down formulas for analysis of variance and all sorts of covariances and stuff ” (Robert Gordon, interview, March 21, 2013). But Friedman did not, generally speaking, go out of his way to keep up with technical advances in economic research during the 1970s, although a few specific innovations caught his attention. Nor, as already indicated, had he shown much interest in using what was perceived as best-­practice modeling approaches even in the 1950s and 1960s. Over those decades, Friedman had instead offered his monetary theory piecemeal, through a series of mutually consistent but largely separate analyses, each of which concentrated on a particular block of the economic system. It is therefore simultaneously accurate to say, as Lucas did in Klamer (1983, 56), that Friedman and Phelps “jumped to a general equilibrium level of thinking about these problems,” yet to acknowledge that Friedman did not feel comfortable working explicitly with dynamic neoclassical optimizing models of the type that Lucas and others saw as an appropriate vehicle for studying monetary topics. The dynamics that Friedman used in modeling often lacked rigorous justification, with Chow (1970, 689) observing that a typical Friedman practice was to focus on steady-­state optimality conditions and to postulate dynamics that converged on that steady state.317 In the early 1970s, the level of technicality of Friedman’s papers never got much beyond the sparing use of first derivatives (in maximization problems) in a 1971 paper on government revenue from inflation and a 1972 theoretical study of the demand for money.318 In a sense, Friedman benefited from the shift up in technical standards in economics in the 1970s. Much of the 1960s-­vintage formal modeling from which he had, by and large, abstained was made obsolete; discussions of flow demand versus stock demand, phase diagrams, deterministic continuous-­time systems, and talk of “elasticities of expectations” had all been superseded. Indeed, some proponents of rational expectations were disappointed that those leading macroeconomists who were considered more rigorous than Friedman, such as Tobin and Modigliani, proved very

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resistant during the 1970s to the rational-­expectations approach, instead of viewing it as a natural theoretical advance (Sargent 1996, 545). In contrast, Friedman’s work of the 1960s had used these devices lightly if at all. He consequently had little stake in the survival of these devices. Furthermore, his largely verbal or historical analyses of that decade—notably the Monetary History and the 1967 presidential address—are vastly more readable and less dated than much contemporaneous work because his pieces made little use of what was the technical cutting edge at their time of writing. It remains the case, however, that the technical innovations of the 1970s left Friedman blindsided to some extent. By not keeping up with the technical end of the rational-­expectations literature, Friedman became somewhat isolated from the monetary-­research world during the 1970s, despite being the economist whose views were the most talked about in that world. In January 1977, he noted that in the final years in which he oversaw the money workshop, it had been swamped by papers in the field of rational expectations.319 He found the empirical work in the rational-­expectations literature the most digestible. Robert Lucas recalled: “He liked Tom’s work a lot. . . . And Chris Sims—he was excited about Chris’s work. He was much more comfortable with econometric work than he was with the kind of theory I was doing.” Reinforcing this observation is the fact that Friedman does not seem to have ever cited the heavily theoretically oriented Lucas papers like Lucas (1972b) and Lucas and Prescott (1974), despite their close connection to his own work. In contrast, he did cite the more empirical Lucas papers, Lucas (1972a) and Lucas (1973). Lucas’s view was that Friedman “appreciated the fact that I was an admirer of his and a follower. But I don’t think he enjoyed reading those [more technical] papers” (Robert Lucas, interview, March 12, 2013). In keeping with this assessment was a remark that Friedman made to Michael Darby in 1975: “I am not accustomed to thinking in terms of neoclassical growth models.”320 The rational-­expectations revolution also helped make Friedman’s own revolution yesterday’s news—just when he had become accustomed to referring to “the monetarist revolution.”321 As discussed in the previous chapter, Friedman’s 1970–71 exposition of a theoretical framework, although it included some material of note, paled as a modeling effort alongside that emerging from the new generation of economists. And precisely because a number of his propositions about money were increasingly being accepted and taken for granted, the agenda of the profession moved away from some of the topics covered in the earlier Keynesian-­monetarist exchanges. Friedman himself had observed in 1969 that his own position in these debates, once “highly unorthodox,” could no longer be so described because of the “major shift in professional opinion.”322 The priorities of the rational-­expectations literature reflected this shift.

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In particular, very little of the 1970s rational-­expectations literature concentrated on the relationship between money (M ) and nominal income (P y). It put this relationship in the background, taking its existence as established, and it was concerned instead with developing theories about the (P, y) split within P y. Or—especially in the case of Neil Wallace and others, whose work was represented in such volumes as the Federal Reserve Bank of Minneapolis (1980)—the rational-­expectations literature of the 1970s studied why it was the case that households demanded money, that is, why they took decisions that made M/P positive in equilibrium. Friedman had little interest in this question by the 1970s.323 Wallace’s attitude adapted to this. “You know, there’s sort of a view that people write papers with an audience in mind; and sometimes a very small audience—I mean, particular people. And, so, I would say when I was writing in the ’70s some of these papers, I did have in mind that I was, in some sense, writing for Friedman. But I never would send him stuff particularly, or anything like that; it was just sort of in the background of my mind. And then, I kind of changed, in a way” (Neil Wallace, interview, March 15, 2013). The acceptance of the positions that monetary policy had a decisive influence on the course of nominal income, and that monetary growth provided a good summary of variations in the stance of monetary policy, was a tribute to Friedman’s influence.324 But it also meant that, to the rational-­ expectations theorists, Friedman was fighting the last war in devoting much of his research time in the 1970s to continued work—with Schwartz for the Monetary Trends study—on the (M, P y) relation. On October 25, 1974, Friedman gave a talk at the University of Minnesota’s Department of Economics titled “U.S.-­U.K. Evidence on Price and Output Reactions to Monetary Change,” with the department members who attended the talk including Sims, Sargent, and Wallace.325 “He came and gave a talk about it,” recalled Wallace. “And, well, I don’t know—it seemed like very dated stuff by that time.” Wallace noted not only that the relationships studied did not seem especially topical but also that Friedman’s method of approaching the data seemed to be closer to that of an earlier generation of researchers than to modern practice. In his talk, Friedman expounded the NBER’s procedure (descended from the Burns-­Mitchell work of the 1940s) in which data points were aggregated over time into observations meant to correspond to business cycle dates. Wallace felt that Friedman put himself in an unfavorable light by “talking about these ways of what I guess we would now call filtering the data” when the NBER filtering procedure that he outlined was clearly very far from the best practice established in the recent literature, whose leading contributors included seminar attendees Sargent and Sims.326 “So, I would say, by that time, I no longer viewed him as the audience for

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what I was doing,” Wallace observed. With regard to Friedman’s broader role in the monetary-­economics literature, Wallace’s view was that Friedman “had some brilliant ideas. But in terms of how he expressed them, he’s a bit of a transition figure—between an old-­time way of expressing ideas, and sort of more modern theorists” (Neil Wallace, interview, March 15, 2013).

A rth u r Bu rn s In section II of this chapter, the discussion of the shift in US economic policy to the 1971–72 combination of wage/price controls and aggregate-­ demand stimulus was focused primarily on Friedman’s reaction to President Nixon’s abandonment of the approach of gradualism. The other side of the story—which is discussed in what follows—is Friedman’s reaction to the changes that Arthur Burns made during 1970 and 1971 both to his own position on US economic behavior and to the settings of US monetary policy. These changes supported and complemented Nixon’s economic U-­turn. Although both Nixon and Burns turned away from policies that Friedman supported, the core criticisms that Friedman made of each policy maker differed. Prior to the policy changes of 1971, Friedman had said that achievement of disinflation was a matter of having “the patience and the courage and the wisdom” to maintain restraint in economic policy.327 Friedman was reluctant, and correctly so, to ascribe the policy changes Nixon and Burns subsequently made to a lack of courage.328 Lack of patience and wisdom was, however, an accusation that Friedman had less reticence in voicing against the two policy makers. In the case of Nixon, a politician, Friedman, as noted in section II, primarily attributed the institution of the New Economic Policy to a lack of patience. Nixon, he argued, had succumbed to a “false sense of urgency” (Sarasota Journal, January 5, 1972). The president, Friedman said, had consequently “buckled under political pressure” (Purchasing, May 10, 1977) and thereupon either embraced or appeared to endorse the fashionable view that wage/price controls offered a solution to inflation, while at the same time taking measures to speed up the economy that Friedman thought imprudent. “[When] you’re a politician . . . by definition you’re shortsighted,” Friedman would remark to an audience a few months after Nixon left office.329 When it came to Burns’s change in position, however, Friedman was more inclined to emphasize a lack of wisdom. Friedman believed that, starting in 1970, Burns had adopted an erroneous economic analysis from which flowed flawed policy prescriptions and support for the wage/price controls included in the New Economic Policy.

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This shift in Burns’s thinking may be even more central to the 1971 policy change than Friedman believed. For, as argued above, it is likely that the change in the Nixon administration’s posture toward controls primarily reflected the influence of the cost-­push views for which Burns had become the leading proponent—with the short-­term political calculations that Friedman tended to cast as central to Nixon’s decision being only a subsidiary factor. Agreement on Economics before 1970 This change in Burns’s position, as will be detailed below, came as a surprise to Friedman and, furthermore, formed the basis for a rift between himself and his former teacher. It will be argued that Friedman indeed had good reason to be surprised—that prior to May 1970 Burns had considerable overlap of views with Friedman regarding the determination of aggregate spending—and especially about the inflation process.330 Certainly Burns and Friedman did have some notable long-­standing differences in their positions. These differences included their attitudes to service in government. It has already been indicated (in chapter 3) that Friedman displayed little interest in serving in the federal government after he finished his work at the US Treasury in the 1940s. “I have a lot of good friends in Washington,” Friedman noted when Burns became Federal Reserve chairman, “but insofar as I have any influence there, it’s due to my writings over the past twenty years, not day-­to-­day influence” (Institutional Investor, February 1970, 130). As Anna Schwartz recalled: “Milton never wanted a policy position, whereas Burns was delighted to have it.”331 As was discussed in chapter 10, Burns’s public service prior to the Nixon years included his period as CEA chairman under Eisenhower from 1953 to 1956. Friedman’s assessment of this term of service was highly favorable, both with respect to Burns’s policy advice and the technical tone that Burns set in running the Council of Economic Advisers.332 Friedman did, however, privately express misgivings about the course in which Burns took his career after 1956. Friedman had failed to persuade Burns to become a professor at the University of Chicago’s Department of Economics rather than return to New York City (Hammond and Hammond 1999; 2006, 6). Not only did Burns not accept this offer; he also followed a much less academically oriented career path than he had prior to 1953. Although Burns returned to the position of nominal head of the NBER—and referred to Friedman as one of his “colleagues” (Arthur Burns 1960, 1)—he did not really resume the fundamental business cycle research that had first made his name. Rather, Burns’s many post-­1956 contributions tended to be in the public policy area, with a focus on commentary on current policy develop-

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ments, instead of the carrying out of technical research. Even his American Economic Association presidential address of December 1959 (see Arthur Burns 1960) dealt with policy issues and had no references to the research literature. As he looked back during the 1970s on Burns’s choices, Friedman would come to see Burns’s failure to return to a research sensibility as a sign that during his first spell in Washington, DC, Burns had acquired “Potomac Fever” and become overly attached to the notion of being in the corridors of power (Charles H. Brunie, interview, July 15, 2013). This was a perspective on Burns’s career trajectory with which his son Joseph would not be altogether unsympathetic. In particular, Joseph Burns felt that his father should have reengaged himself in business cycle research after leaving the Eisenhower administration. “He never got involved in that type of study again. And his writings and lectures were more policy oriented. I think that’s one of the drawbacks of the government service. There were many, many advantages and good points with regard to the government service, but one personal factor with regard to the government service was that he did leave the Burns-­Mitchell type of study. And I think, had he not been in Washington [and had he continued business cycle research], he would have, I think, probably received a Nobel Prize in Economics” (Joseph Burns, interview, September 12, 2013). It should, however, be noted that Friedman would not himself prove to be in an ideal position to be critical of Arthur Burns’s tilt toward public policy writing, as Friedman’s own career trajectory moved along that course too, particularly after 1972. On matters of economic substance, Burns and Friedman still seemed to be largely in sync in the years to 1970. Burns had been perceived as an early critic of Keynesian economics in the 1940s and on that score led the way for Friedman, albeit more in helping establish a theme rather than offering detailed theoretical criticisms.333 There were some differences between them that had already emerged. In the area of fiscal policy, Arthur Burns (1968, 8) favored, and Milton Friedman opposed, the 1968 tax increase—a divergence that partly reflected differences between them about the power of fiscal policy to influence aggregate demand as well as what had become a disagreement about what was the appropriate “fiscal-­conservative” attitude toward higher taxes. But once aggregate demand proved resilient in the face of the 1968 tax increase, Burns indicated that he had incorporated some of Friedman’s views on fiscal policy into his own framework, for Burns invoked the permanent income hypothesis in explaining the surtax’s failure.334 Burns himself did underline some differences between Friedman’s views about the business cycle and his own when testifying, in December 1969, at his confirmation hearing for the position of Federal Reserve

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chairman. Asked about Friedman’s prediction of a recession, Burns replied: “I certainly hope he is wrong. I have no way of knowing how he got his probabilities. That I cannot confirm. . . . I think that Professor Friedman’s prediction is a little premature.”335 There were thus undoubtedly differences of opinion before 1970 between Burns and Friedman about the transmission of monetary policy and on the strength of nonmonetary influences on the business cycle in the short run. But none of those differences put Friedman and Burns on opposite sides of the key policy debates in the 1960s, and they did not provide the basis for their schism during the 1970s. Burns’s comments in the 1960s and in 1970 indicated recognition and endorsement of such Friedman themes as the nominal/real interest-­rate distinction, the failure of Federal Reserve policy in the 1930s, and the need for a greater emphasis on monetary aggregates (see E. Nelson 2013d, 2016). Friedman and Burns prior to 1970 also appeared to agree strongly on the matter that became central to their disagreement in the 1970s: the factors that determined inflation and the merits of focusing on aggregate-­demand policy as the means of controlling inflation. Indeed, Burns’s interventions in public policy debates during the 1960s, and in particular his critiques of the Kennedy and Johnson administrations, drew much agreement from Friedman. Among these were Burns’s analysis of the expansionary strategy of the early 1960s (as discussed in chapter 11 above) and Burns’s opposition to wage/price guidelines or guideposts. In August 1966, Burns had said of guidelines: “These require private groups to act counter to their economic interests, create illusions, and lead to a postponement of corrective policies” (Cleveland Press, August 2, 1966). Burns elaborated on these points in what Friedman called “extraordinarily perceptive and effective” writings (Instructional Dynamics Economics Cassette Tape 86, November 20, 1971) and in his public debate with Paul Samuelson in April 1967 (Burns and Samuelson 1967).336 Burns’s Switch on Incomes Policy Burns’s opposition to incomes policy continued with his initial return to government service. In July 1969, as counselor to the president, Burns had said: “There is no support for direct controls of prices or wages within the executive establishment—none whatever” (U.S. News and World Report, July 14, 1969, 61; also quoted in Sobel 1974, 18). In his confirmation hearing on December 18, 1969, Burns stated that the “world has had a great deal of experience with wage and price controls” and that the experience had been unfavorable, being associated with the development of underground markets rather than genuine control of inflation.337

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Burns’s vision of the private-­sector behavior governing wage and price setting also seemed, at the start of the 1970s, to represent another matter on which he was in agreement with Friedman. For one thing, as between cost-­ push and demand-­based perspectives on inflation, Burns seemed clearly to be a subscriber to the latter, as evidenced by his remarks on guideposts and controls and his 1966 critique, quoted above, of wage-­push explanations for inflation. For another thing, as between different demand-­pull theories of inflation, Burns seemed to have settled in favor of the Friedman-­Phelps variant, in which the Phillips curve was nonvertical in the short run but vertical in the long run. Burns had chaired the American Economic Association session in which Friedman gave his presidential address, and his main outline of the natural-­rate hypothesis, in December 1967. Friedman recalled Burns as agreeing with the paper’s no-­long-­run-­trade-­off argument (Taylor 2001, 124). Such a position conformed to Burns’s view (which he had expressed in Business Week, November 3, 1956, 176) that price stability was compatible with, and contributed to, the maintenance of high employment. The positions that Burns took when serving in government during 1969 confirmed an acceptance of the natural-­rate hypothesis. As already indicated, the Nixon administration, for which Burns served over that year in a White House post, absorbed Friedman’s address into its analysis of inflation and its gradualist approach to disinflation. Furthermore, Burns himself gave still further indications of having accepted Friedman’s analysis of the Phillips curve. In the earlier-­noted hearing of December 18, 1969, Burns stated: “I think the Phillips curve is a generalization, a very rough generalization, for short-­run movements, and I think even for the short run the Phillips curve can be changed.”338 In view of the opinions that Burns had expressed about the process by which aggregate demand and inflation were determined, it is little wonder that Friedman came out of the 1960s believing that Burns subscribed to much of monetarist theory.339 Little wonder, too, that Friedman reacted in glowing terms to the nomination and confirmation of Burns for the position of Federal Reserve chairman in late 1969 and Burns’s accession to that post on February 1, 1970. In a Newsweek column published in the week of Burns’s swearing in, Friedman declared: “My close friend and former teacher Arthur Burns is not just another chairman. He is the right man in the right place at the right time” (Newsweek, February 2, 1970). He added that Burns was the first Federal Reserve chairman ever to have “the right qualifications for that post.” Friedman elaborated on this thesis in a talk at Florida Presbyterian College on February 21, 1970. Burns, said Friedman, “is the first Chairman of the Board whose background is not in individual banking and individual

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business. (And I don’t intend to be making any nasty comments about anyone—I am talking about background and qualification.) The Chairmen since the beginning have all been admirable people, able people who were trying to do their best—I am not questioning their motives or their intent— but they have all had a background in an individual business or the individual bank. Arthur Burns has had a background in the economy as a whole. He is one of the world’s authorities on business cycles, was Chairman of the Council of Economic Advisers under Eisenhower, and [is] a very great expert on general economic matters.”340 In Burns’s early months as chairman, Friedman would cite the fact that the 1953–54 recession, which occurred while Burns was at the CEA, provoked the most mild policy reaction—that is, the least drastic swing toward heavily stimulative policies—of those in the postwar period as evidence that Burns would hold firm to the disinflationary strategy articulated by the Nixon administration and the Federal Reserve.341 The change of leading personnel in officialdom, in combination with the lessons learned by policy makers from past experience, made Friedman optimistic that the disinflationary policy that was continuing into 1970 would not be given up as earlier ones in the 1960s had been.342 Fred Levin, a student at the University of Chicago at the time, recalled: “When Arthur Burns became chairman, Friedman was ecstatic, because Arthur Burns was Friedman’s professor. And I remember at University of Chicago, he printed these dollar bills with Arthur Burns’ picture on it. So [eventually] he must have been a gigantic disappointment to Friedman” (Fred Levin, interview, March 10, 2014). Another student of the time, John Paulus, recalled: “I took the [Friedman money] course in the winter trimester of 1970. And I think Arthur Burns had just been appointed chairman of the Fed. And he spent an entire lecture telling us how lucky we were to have Arthur Burns as the new chairman of the Fed. Probably something he would reassess a few years later” (John Paulus, interview, February 28, 2014). In the very short term, Friedman’s confidence that Burns would shift the Federal Reserve in a direction that Friedman favored was proved correct. In his confirmation hearing, although Burns had, as already noted, expressed doubt about Friedman’s recession prediction when it was quoted to him, he added, “I would not say that. But there is, however, a danger of recession.”343 Friedman expressed the hope that Burns would himself take actions that avoided a really serious recession, by delivering monetary growth “high enough to encourage recovery . . . but low enough to avoid renewed inflation” (Newsweek, February 2, 1970). Burns initially did not disappoint Friedman on this score. As discussed earlier in this chapter, the Federal Re-

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serve in early 1970 moved to an easier posture as well as to an apparently greater emphasis on monetary aggregates—shifts in stance that Friedman found congenial. Yet, in the longer term, the connection between Burns’s actions and Friedman’s recommendations would evaporate. After Burns was nominated to the Federal Reserve Board, Friedman readily granted that Burns would not adopt his 3 to 5 percent M2 growth rule. But he contended that Burns “unquestionably” would adhere “closer to a rule than that which the Fed has in fact followed” (Instructional Dynamics Economics Cassette Tape 36, October 22, 1969). The Federal Reserve under Burns eventually permitted very rapid monetary growth, so rapid in fact that double-­digit inflation emerged. Indeed, once lags between monetary policy actions and inflation are taken into account, both the mid-­1970s and 1979–80 bouts of double-­digit inflation can be largely attributed to monetary policy decisions made during Burns’s tenure. The retrospective judgment of Burns’s former employee Anna Schwartz on his period as chairman was as follows: “I think he was a disaster, probably because he didn’t listen to Milton.”344 Friedman himself observed late in Burns’s period as chairman: “I had great expectations. . . . I have been disappointed.”345 Why did Burns end up following a policy so different from what Friedman wanted? A large part of the reason is that Burns changed sharply his economic theory of inflation soon after becoming chairman.346 As has already been indicated, this actually proceeded in two steps (see also E. Nelson 2005b). In the first stage, starting with the May 18, 1970 speech (Arthur Burns 1970) referred to earlier in this chapter, Burns pointed to the value of wage/price guidelines as a way of speeding up the response of inflation to demand restraint. At this point, Burns was continuing to see inflation as amenable to control via aggregate-­demand policies. The appeal to guidelines did, however, constitute a break from the demand policy/market forces combination that Friedman and the Nixon administration had advocated for dealing with inflation. The appeal also contrasted sharply with Friedman’s observation, given on television the previous December: “I think the old guidelines were a complete failure. I think restoring them would be an equal failure. I think that what happens when you do that kind of thing is solely to spread misinformation among the public” (The Great Dollar Robbery: Can We Arrest Inflation?, ABC, December 15, 1969). The disagreement led Friedman in May 1970 to send Burns a lengthy handwritten letter that was critical of Burns’s statements on incomes policy. The Philadelphia Inquirer reported that Burns was shaken by the letter, and it suggested that relations between Burns and Friedman had deteriorated (Philadelphia Inquirer, May 29, 1970). The text of the letter (actually, letters, as Friedman wrote multiple times), now available in both

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Friedman’s and Burns’s archives, confirms Anna Schwartz’s characterization that “Milton wrote Arthur a scathing letter saying he never would have believed that Arthur would do something that was so contrary to what he believed were Arthur’s principles.”347 Friedman also forwarded to Burns a draft of a Newsweek column (subsequently published in the June 15 edition) on Burns’s advocacy of guidelines. In the column, Friedman acknowledged that, in theory, guidelines could be viewed as compatible with a monetary view of inflation, provided that they were seen as a measure that hastened the adjustment of wage/price contracts to monetary measures, rather than as a substitute for monetary restraint.348 But the column also emphatically restated Friedman’s view that guidelines in practice would not succeed in serving this purpose, and it was highly critical of Burns’s stand. Burns’s position on inflation became truly irreconcilable with that of Friedman only with the further development of Burns’s perspective in the months after May 1970. The position that Burns had taken on inflation in May 1970 would seem mild compared with the pure cost-­push standpoint that he would embrace later in the year. In this further evolution of his position, Burns shifted to viewing inflation as a nonmonetary phenomenon, not susceptible to influence from the level of economic slack. This was a position with which Friedman had associated the more extreme versions of Keynesianism popular in the United States in the late 1930s, rather than with modern economic analysis in the United States. He and Schwartz would later write that large parts of the Monetary History “would never have been written, had we, implicitly or explicitly, accepted Keynes’ assumption that prices are an institutional datum.”349 Yet Burns, the early challenger to Keynesianism, was now essentially taking the old-­ style Keynesian position on the determination of prices and inflation. For Burns was largely denying the endogeneity of these variables, at least for conditions in which the output gap was negative. Friedman was, therefore, greatly surprised by Burns’s change in position. Anna Schwartz was far less surprised, and she even doubted that it was really a change. Allan Meltzer observed, “Anna Schwartz at the time told me he’s got it all wrong [about Burns], that Burns . . . doesn’t believe what Milton is telling him” (Allan Meltzer, interview, April 21, 2013). Michael Darby recalled: “she told me once . . . Arthur had a place in Vermont, near Milton’s, and Milton would talk to him about monetary theory and Arthur would smoke his pipe. And Milton would talk more, and Arthur would smoke this pipe, nod, and Milton thought he was agreeing with him. . . . Anna’s view of it was that Friedman was [in 1970] getting a taste of reality” (Michael Darby, interview, October 15, 2013). The notion that Burns subscribed to his post-­1970 views about inflation even prior to joining the Federal Reserve was also advanced by Romer

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and Romer (2004). In the present author’s evaluation, however, such an interpretation is not warranted. The assessment that Friedman had before May 1970—that Burns subscribed to a monetary view of the inflation process similar to Friedman’s own—was one amply justified by the record of Burns’s pre-­1970 statements. Burns’s advocacy from 1970 onward of cost-­ push views of inflation was, therefore, a major switch on his part. A hint of the switch that was about to happen—but also an indication that Burns still, at this point, retained a demand-­based outlook toward the analysis of inflation—came in February 1970 when Burns was asked, “Are you still fully opposed to price and wage controls?” Burns had replied, “I am afraid my answer has to be ‘Yes,’ Senator, I am. But let me add that I am not an ideological economist. I will always reassess my position.”350 To Friedman, the cost-­push analysis that Burns adopted during the course of 1970, along with the corresponding policy recommendation of direct governmental administration of price and wage decisions, was outdated and discredited by empirical evidence. As was discussed in chapters 4 and 7, Friedman himself had embraced cost-­push views in his pre-­ monetarist days, but it had been superseded in the previous twenty years by his monetarist view of inflation, according to which inflation depended on monetary forces via aggregate spending. As he put it in July 1970: “To each businessman separately it looks as if he has to raise prices because costs have gone up. But then, we must ask, ‘Why did his costs go up? Why is it that [for example] from 1960 to 1964 he didn’t find that he had to pay so much more for labor he had to raise prices, but that suddenly from 1964 to 1969 he did?’ The answer is, because, in the second period, total demand all over was increasing” (Chicago Daily News, July 29, 1970). The tension between Burns and Friedman on this issue was made all the more acute because of the intersection between cost-­push views of inflation and the case for public-­sector intervention in market mechanisms. The position that Burns was taking from the second half of 1970 onward was that US labor and goods markets were generating inflationary pressure of a type that was resistant to monetary policy actions yet would be amenable to influence through direct interventions by the government in wage/price setting—leading to Burns’s advocacy of guidelines and his later support for controls. Burns’s shift implied a departure from his posture, affirmed as recently as March 1970, that “I am strongly in favor of free markets.”351 Burns’s evolution in thinking about the process by which inflation was determined therefore created considerable distance between himself and Friedman on two fronts: that of monetary policy, and that of the merits of incomes policy—both issues on which they had formerly had much common ground. In congressional testimony on March 10, 1971, Burns gave a particularly

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clear statement of his new perspective, according to which monetary policy could have only a very limited role in the control of inflation: Senator, I want to make this perfectly clear. I don’t think that our fiscal policy and our monetary policy are sufficient to control inflation. Experience indicates that pretty clearly in our own country and even more dramatically in other countries, particularly in Canada and in Great Britain. Therefore, I urge on the administration and on the Congress an incomes policy. (Committee on Banking, Housing and Urban Affairs 1971, 19)

From the summer of 1970 to the summer of 1971, a period over which Burns pushed for incomes policy and repeatedly espoused his cost-­push view of inflation, Friedman prominently took the opposite line.352 Friedman specifically disputed the notion that strong labor unions had, as claimed by Burns, become important as a source of inflation. Friedman noted: “You can go around the world and find countries that have had very strong trade unions and no inflation. . . . The fact is that there is little relation between trade unions and inflation” (Chicago Daily News, July 29, 1970, 3).353 Nearly a year later, a tone of weariness had entered Friedman’s discussion of the matter: “I don’t believe, as I have emphasized over and over again, that there are two different kinds of inflation,” Friedman observed in June 1971. “I don’t believe we are experiencing cost-­push inflation” (Instructional Dynamics Economics Cassette Tape 76, June 15, 1971). Commentators were, as he saw it, misdiagnosing the delayed reaction of prices and costs to excess demand as cost-­push inflation. Thus in early August 1971 Friedman insisted: “The trade unions have no responsibility for inflation; rather, they react to it.”354 Friedman’s rejection of the importance of labor unions in the analysis of inflation extended beyond his rejection of cost-­push views of inflation. He also doubted the influence of union pressure on the reaction of the monetary authorities. In particular, Friedman was not sympathetic to the proposition that, in practice, policy makers might embrace inflationary policies because of the fear of unemployment brought about as labor unions bid up nominal wages. That proposition was not anathema to him in the way that cost-­push views were, for it preserved the notion that inflation required monetary growth in order to proceed. It amounted to a monetary explanation for inflation combined with a hypothesis about the monetary authorities’ behavior. But Friedman doubted the analytical and empirical soundness of the latter hypothesis. For one thing, he contended that union power was unlikely, by itself, to push up either the overall unemployment rate or the natural rate of unemployment (a position that he would reaffirm in The Times, August 29, 1973).355 For another thing, in the case of the United

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States and most countries that he had considered, observed timing relationships seemed inconsistent with an account in which unions triggered monetary growth. Rather, wage growth in unionized sectors of the economy tended to lag wage growth in nonunion sectors; and both these wage growth series seemed to follow rather than precede monetary growth.356 Although Burns’s statements on incomes policy during 1970 did amount to a break with Friedman’s positions, the behavior of monetary aggregates on the whole during 1970 did not meet great objections from Friedman, as has been indicated earlier in this chapter. In March 1970, he had, as already noted, named the period from middle to late 1970 as that in which momentum for a U-­turn would peak, and he had cited Burns’s presence at the Federal Reserve as a basis for believing that the authorities would rebuff calls for a change in policy. During the following summer, Friedman applauded the authorities’ resistance to pressure to expand aggregate demand more vigorously. This resistance, he maintained, was preventing the country from “repeating the earlier mistakes” of overreaction to a recession (Instructional Dynamics Economics Cassette Tape 56, August 6, 1970). Burns and the New Economic Policy As Friedman saw things late in 1970, policy makers, including those at the Federal Reserve, had ridden out the pressure to change policy. He remained wary: in November, Friedman warned, “As I’ve emphasized time and again, what the Fed says and what it does aren’t always the same” (Instructional Dynamics Economics Cassette Tape 61, November 18, 1970). But in a commentary at the end of 1970, discussed earlier in this chapter, Friedman praised President Nixon for sticking to a disinflation policy since taking office. He also commended Burns for showing maturity and courage as Federal Reserve chairman. Around the same time, Friedman made further remarks on this matter: “I would continue a policy of restraint in government expenditures, encouragement of a moderate rate of monetary expansion by the Fed and complete avoidance of wage/price guidelines or controls, voluntary or involuntary, open or concealed. The policy followed so far has been extraordinarily successful, despite all the talk to the contrary” (Newsday, January 2, 1971). Matters then unraveled during 1971—in the first instance with the very high monetary growth of the first half of the year. It was noted in section II that Friedman seemed barely able to contain himself in his Newsweek commentary on this surge in monetary growth. Another commentary that Friedman made during this period was one that Burns must have found galling. The authorities, Friedman remarked, surely did not actually want high monetary growth, but it was occurring anyway because they were not

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executing monetary policy effectively. He went on: “I honor their intent, but candor compels me to say the money supply is being managed ineptly” (Philadelphia Sunday Bulletin, April 25, 1971). The reference to ineptitude echoed the concluding section of the Friedman-­Schwartz account of the Great Contraction, with the title “Why Was Monetary Policy So Inept?”357 As noted earlier, Friedman put part of the blame for the 1971 monetary explosion on the Federal Reserve operating procedures that Burns had inherited. He found fault with Burns for not treating his arrival at the Federal Reserve as a hostile takeover—and, in particular, for not instituting a reform of operating procedures and not making changes in senior staff that might have improved the conditions for this reform (Instructional Dynamics Economics Cassette Tape 86, November 20, 1971). But this was a matter on which, for the moment, Friedman could regard Burns’s lack of action as being an instance in which Burns did not put a high enough priority on needed changes: an error of omission, rather than commission. In contrast, what Friedman saw as an error of commission was Burns’s continued advocacy throughout 1971, both in policy circles and before the general public, of incomes policy as a means of fighting inflation. Friedman had admired key Nixon administration economic personnel for holding the line against controls. After Nixon finally did impose wage and price controls, one of these personnel (described as a “high Administration official”) was quoted in Newsweek as saying: “You know what Milton Friedman says. ‘If 60 per cent of a society believes in witchcraft, it’s hard for the government not to employ witches.’”358 “He was long bothered that Nixon was relying on just the Federal Reserve to control inflation,” Joseph Burns recalled of his father’s attitude (interview, September 12, 2013). “So he was, I think, pleased that there was an incomes policy.” Following the announcement of the New Economic Policy, Arthur Okun described President Nixon’s imposition of a wage/ price freeze as “a victory for Arthur Burns” (Hutchinson News, August 17, 1971). Against this background, Friedman directed much of his criticism of the wage/price controls aspect of the New Economic Policy at Burns. Friedman was dismayed both at the way Burns had pushed public opinion and the administration in the direction of controls and at the change in Burns’s mindset that had led Burns to see controls as a legitimate weapon against inflation.359 “I think he was disappointed in Arthur,” George Shultz observed (interview, May 22, 2013). From 1970 onward, Shultz noted, “Arthur was a big supporter of guidelines, which were the precursor to the wage and price controls, conceptually.” The favorable perspective with which Burns, by August 1971, viewed compulsory wage/price controls also riled Friedman. After Burns had begun advocating guidelines, Friedman had still presumed him to be an

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opponent of “compulsory government price fixing” (Newsweek, March 1, 1971). Even from the vantage point of April 1978—by which time Friedman’s relations with Burns were much improved on from their state during 1971—Friedman looked harshly on the stand Burns had taken in 1971, remarking publicly: “What I find hard to forgive is not so much what he did in monetary policy, but coming out for wage and price controls. I’ll never understand why he did that” (Wall Street Journal, April 4, 1978). Speaking at the American Economic Association meetings in New Orleans at the end of 1971, Friedman stepped up his attack on both Burns’s diagnosis of cost-­push inflation and Nixon’s attempted cure of controls. Friedman stated that controls had been imposed “not because ‘economic laws are not working the way they used to,’”—here he was alluding to a phrase that Burns had used—“not because the classical medicine cannot, if properly applied, halt inflation, but because the public at large has been led to expect standards of performance that as economists we do not know how to achieve.”360 Friedman had already noted that episodes of high inflation alongside economic slack, like those observed in 1970, were compatible with a monetary view of inflation, especially once account was taken of the lag of inflation behind monetary policy actions.361 Now he elaborated on this point further, while also declaring that Burns’s embrace of cost-­push views reflected “the propensity of economists to appeal to a change in our economic structure whenever they are puzzled,” and that Burns had revived old fallacies about inflation.362 Friedman’s indictment of Burns’s position on controls extended beyond what he perceived as Burns’s flawed economic analysis. For Friedman, of course, saw controls as detrimental to political freedom. Only a month before Burns had announced his support for guidelines, Friedman had observed, “If America ever becomes a collectivist state, it won’t be because of pressure from the Left, but because of pressure for controls” (Philadelphia Sunday Bulletin, April 26, 1970). At the aforementioned American Economic Association meetings at the close of 1971, Friedman described controls as having “driven [us] into a widespread system of arbitrary and tyrannical control over our economic life.”363 A week later, during a talk in Los Angeles—in the course of which he took the business community to task for supporting wage/price controls—Friedman contended that controls brought the country “closer to the day when Big Brother will always be there looking over our shoulder” (Sarasota Journal, January 5, 1972). That Burns—whom Friedman remembered as someone who persuaded President Eisenhower against wage and price controls (see Instructional Dynamics Economics Cassette Tape 51, May 27, 1970, and chapter 10 above)—would be one of the major figures bringing such controls into the United States in the 1970s struck Friedman as a grim irony. When Friedman

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saw Nixon and Shultz in the White House after the controls were imposed, Burns’s position was on Friedman’s mind. “I was going to say—I want to mention one thing,” Friedman told the president. “You should appoint Arthur chairman of the wage/price review board. . . . Arthur is a very close friend of mine, but still, nonetheless, this is poetic justice.” Burns, Friedman declared, was the one most responsible for bringing in the system of wage/price controls, and “he ought to be chairman of the board that [ultimately] gets us out [of it].”364 Not a Case of Electioneering The last remark, together with Arthur Okun’s reaction quoted above, underscores the fact that Burns was a source of pressure on the Nixon administration to undertake a U-­turn with regard to incomes policy. Accounts of economic policy in the years 1971 and 1972 that characterize Burns as capitulating to pressure from the Nixon administration to stimulate the economy ahead of the 1972 election simply do not square with the sequence of events. The record is not, in fact, consistent with a conscious overstimulation on Burns’s part. Burns himself had stated in March 1971 that “we could make no greater mistake now than to throw caution to the winds in the conduct of our monetary and fiscal affairs. . . . Caution in the monetary sphere is required, lest a fresh wave of inflationary forces be released.”365 A more coherent and factually accurate account of Burns’s behavior does not lie in narratives that suggest a willfully excessive monetary expansion. It is to be found instead in the policy mindset that sprang from Burns’s cost-­push interpretation of inflation. That mindset made Burns liable to follow a policy that turned out to constitute excessive ease because it: (1) discouraged him from using monetary policy instruments against inflation (since it suggested that such instruments were ineffective); (2) encouraged him to take measures of economic slack—which gave the impression that current monetary policy settings were justified—at face value (whereas a monetary view of inflation would likely have led estimates of resource slack to be reduced in the face of the evidence in 1970–71 of continued inflation); and (3) gave him false assurance that he had restored positive real interest rates (because, as discussed above, controls reduced measured inflation for given nominal interest rates).366 The notion that the provision of an inflationary amount of monetary ease was an unwitting move on Burns’s part—that is, that it constituted a misjudgment, on the part of himself and other FOMC members, of the monetary policy stance consistent with achieving price stability—is supported by Burns’s February 9, 1972, congressional testimony. In that testimony, Burns stated that “an unduly expansive monetary policy would be

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most unfortunate” and that the Federal Reserve was determined to prevent a “renewed inflationary spiral.”367 As Burns indicated in further remarks in July 1972, he believed that the United States had avoided the course of overexpansionary policy. Rather, he contended it had adhered to the strongest anti-­inflation policy “of any industrialized country in the world,” one that meant the United States was “likely to reach” the announced end-­of-­1972 goal of 2.5 percent inflation (St. Louis Globe-­Democrat, July 5, 1972). Friedman, for his part, rejected outright the notion that Burns would stimulate the economy as a means to promote Nixon’s reelection (Sun [Bal­ timore], February 19, 1971). After Nixon’s reelection, Friedman affirmed this judgment, declaring that the Federal Reserve did not conduct monetary policy in 1971 and 1972 with the aim of getting Nixon reelected (Instructional Dynamics Economics Cassette Tape 147, May 30, 1974, and Tape 152, August 21, 1974; see also Tape 190, May 1976, part 1). Burns, Friedman declared, was someone who would not countenance the remotest alteration in monetary policy to favor Nixon’s electoral chances; even the notion of trying to raise one extra vote for Nixon would, Friedman insisted, be anathema to Burns’s approach to policy making (New York Times, September 1, 1974).368 Although Friedman would, as early as February 1972, judge that the Nixon administration was in a “state of panic” (Instructional Dynamics Economics Cassette Tape 92, February 9, 1972) and on one occasion after the 1972 election he would liken the Watergate break-­in to other efforts, including those in the area of economic policy, that the Nixon administration had taken to overinsure its reelection (Instructional Dynamics Economics Cassette Tape 119, April 25, 1973), Friedman excluded monetary policy from this particular indictment.369 Rather, in his final cassette commentary for 1972, Friedman observed: “Mr. Burns and the rest of [the FOMC], his colleagues, would not depart from what they seriously thought to be the right policy simply in order to be nice to Mr. Nixon.” This, he said, was something on which he had not “the slightest doubt” (Instructional Dynamics Economics Cassette Tape 112, November 29, 1972).370 Indeed, on matters related to the accusation that Burns’s monetary policy reflected pressure from the Nixon administration, there was some reverse field running on the part of Burns and the monetarists. After 1972, Burns would blame the upsurge in inflation in part on federal government borrowing, to which he claimed the Federal Reserve was obliged to respond with more rapid creation of money. In contrast, Friedman and other monetarists would reject the Nixon administration’s deficit spending as a reason for the rapid monetary growth of the early 1970s (see Hetzel 1998; and E. Nelson 2005b, for discussions). As mentioned in “From Gradualism to the New Economic Policy” in section II of this chapter, even by the early

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1970s Friedman was emphatic that monetary growth could, for substantial periods, be determined independently of the course of fiscal policy. In this vein, in January 1972 Friedman titled his first column for the year “Irresponsible Monetary Policy” (Newsweek, January 10, 1972), and a few weeks later he declared that monetary policy in 1971 had been “terrible,” but that President Nixon was not to blame for this occurrence (Newsweek, January 31, 1972a, 74). And, unhappy though he was with monetary policy outcomes in 1971, it is plain that Friedman believed that Burns himself did not want inflation and was endeavoring to follow policies that avoided it. In April 1970, Friedman stated: “The president and Arthur Burns won’t panic,” adding that he was “counting a great deal on the character and personalities” of Burns and Nixon (Philadelphia Sunday Bulletin, April 26, 1970). Similarly, Friedman praised Burns as independent and strong, and he mentioned the fact that Burns had testified that he would not go along with a very expansionary policy (Instructional Dynamics Economics Cassette 68, February 24, 1971). Friedman elaborated on this point in early March: “I am encouraged not only by my innate optimism, but also by the remarks and character of the chairman of the Federal Reserve Board, Mr. Burns. He has remarked in his testimony before Congress that the Federal Reserve Board will not again become an engine of inflation. And I am certain that that is his view and that he and the rest of the Board will stick to it.”371 This assessment of Burns’s intentions did not change after the monetary explosion and the inception of the New Economic Policy, as the late-­1972 comments from Friedman quoted above indicate.372 The indictment of Burns’s monetary policy suggested by Friedman’s analysis—and confirmed also by the record of events—does not involve Burns’s acquiescence to outside pressure to inflate. Nor does it involve conscious pursuit on Burns’s part of an inflationary policy. Rather, as has been stressed repeatedly in this chapter, it lies in his embrace of a nonmonetary view of inflation. For reasons outlined above, that view likely persuaded Burns during 1971 and 1972 that the FOMC’s monetary policy was not inflationary, notwithstanding the contrary opinions of observers like Friedman. Cost-­push factors had, as Burns saw it, been kept in check by controls. Controls had therefore, in his assessment, “contributed materially to the reduction in the rate of inflation we have experienced” (St. Louis Globe-­ Democrat, July 5, 1972). This perspective allowed for the possibility that excess demand could arise as an additional source of inflationary pressure; but Burns believed that he had achieved policy settings consistent with avoiding excess demand. Burns’s conviction that he was pursuing an appropriate policy was likely bolstered by the fact that, although Friedman and a few other observers

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considered monetary policy to be too easy, other prominent commentators were convinced that the danger for the United States was that monetary policy and fiscal policy were too tight, even after the changes associated with the New Economic Policy were put in place. These commentators included some members of the Nixon administration, as well as leading Keynesian economists like Paul Samuelson and Walter Heller.373 Burns’s preferred monetary policy during 1971 and 1972 also tended to be less expansionary than that favored by such governors on the Federal Reserve Board as Dewey Daane and Sherman Maisel.374 The Rift The dispute between Friedman and Burns on incomes policy—starting with Burns’s advocacy of guidelines—was a source of a rift between them that lasted for much of the 1970s. That rift commenced with the acrimonious May 1970 correspondence referred to above. When the existence of that correspondence quickly became publicly known, Friedman affirmed that Burns was “one of my closest personal friends,” but he refused to answer when questioned whether the dispute about incomes policy had damaged their personal relationship (Philadelphia Inquirer, May 29, 1970). Burns had said in February 1970, “The last thing I want to do now is to quarrel with anyone.”375 But from May 1970, he found himself in an ongoing quarrel with Milton Friedman, his former student and hitherto one of Burns’s biggest boosters. Gary Becker, who watched the dispute from the University of Chicago, recalled: “Well, Friedman wrote a public essay for Newsweek on the disagreement, I believe, or elsewhere, and I think it upset Burns a lot, and they really weren’t speaking to each other for a number of years. They finally had a reconciliation, but they were never as close together as they had been before that” (Gary Becker, interview, December 13, 2013). Another member of the University of Chicago’s Department of Economics, Stanley Fischer, was also a witness to the Friedman side of the rift with Burns, including an incident that very likely occurred in 1970 or 1971.376 Fischer knew of the degree of the feud “for the simple reason, I think, that my office was across the road [i.e., the corridor] from his [Friedman’s] and he used to throw out things that he’d written. For when he’d finished with a paper that he didn’t want to keep—which seemed to be most of them—they had a table outside, and he’d throw stuff on it. And one day, there was something on that table which he’d written, which I’m not sure whether he intended to reveal to the public. But it was extremely critical of Arthur Burns. But what it was, I can’t remember. But I realized that he [Friedman] felt in some way betrayed” (Stanley Fischer, interview, August 30, 2013).

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Friedman and Burns did not break off communications with one another. They continued to correspond.377 And, although in the recollection of many (including Friedman in later years) they barely talked to each other, Friedman and Burns did indeed speak to one another after May 1970, both in person and on the telephone. At the professional level, Friedman saw Burns at Federal Reserve Board consultants’ meetings in June 1970, November 1970, June 1971, and one each year from 1973 to 1976.378 Although their joint presence at this forum was one way in which they stayed in contact, it also proved to be a source of tension between them, because Friedman frequently used the occasions of the consultants’ meetings to be uninhibitedly critical about current monetary policy. Friedman and Burns were also summertime neighbors, both having summer homes in Ely, Vermont.379 The proximity of their summer homes had long been one means by which they had kept in regular touch. Friedman initially anticipated that Burns’s role in Washington would mean that they would no longer see each other at their summer homes: “he has been my neighbor in Ely, and I miss his company” (Wall Street Journal, November 4, 1969, 15). But in fact, during his time as Federal Reserve chairman, Burns followed a practice of going to his Ely home for long weekends and most of August each year (New York Times, August 17, 1975, 13). In addition, Burns and Friedman continued to have good relations with each other’s families. It would, therefore, be inaccurate to regard the rift between Arthur Burns and Milton Friedman as moving them into a state of total estrangement from one another. The relationship between the two was, however, definitely chillier than before. “He may have been civil in encountering Burns,” Anna Schwartz observed (email to author, January 25, 2007), “but the relationship of closeness had ended.” Joseph Burns remarked that “it was not as close a family relationship after that point, as previously.” He further observed that the Burns/Friedman dispute reflected “more than just the [issue of the] guidelines. I think the guidelines probably were the principal component; it did damage the relationship.” Also important, however, was the fact that “Friedman was very critical” of monetary policy, especially from 1971 onward (Joseph Burns, interview, September 12, 2013). Lyle Gramley, a member of the Federal Reserve Board senior staff during the early 1970s, recalled Burns’s “unhappiness with Friedman’s criticism of the Fed . . . [which] Burns took very personally.” Burns, in his turn, reciprocated, being highly critical when he talked to Federal Reserve Board senior staff about Friedman’s analysis (Lyle Gramley, interview, April 10, 2013). This attitude, although expressed behind closed doors, became known to outside commentators, with one financial reporter observing that “Arthur Burns . . . makes no secret of his deep distaste and even contempt for the one-­track approach of the Friedmanites” (Sunday Sun, May 21, 1972).

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In terms, however, of his official public remarks, Burns’s unhappiness with Friedman’s posture was typically expressed less explicitly. It was primarily manifested in the paucity of public references to Friedman on Burns’s part in the years that followed the warm remarks Burns gave about Friedman at a February 1970 NBER event (see E. Nelson [2013d, 27; 2016, 317]). Burns rarely mentioned Friedman by name during their periods of deep disagreement, either during the time (in 1970–71) when Friedman challenged Burns on incomes policy, or when (in 1971–72) Friedman took Burns to task on both incomes policy and monetary policy, or during the period, from mid-­1973, in which Friedman engaged in renewed and trenchant criticism of Burns’s record as Federal Reserve chairman. Friedman repaired his relationship with Burns after 1978, and in 1985 he would describe Burns as “still among my closest friends.”380 Friedman was accordingly reluctant after 1978 to criticize Burns’s record, to recount in detail his previous criticisms, or even to acknowledge the previous rift. His memoirs were glowing about Burns, to such an extent that Anna Schwartz was led to observe, “I also think that one should not take at face value what he [Friedman] wrote about people in Two Lucky People” (Anna Schwartz, email to author, January 25, 2007). But the deterioration in the Burns-­Friedman relations during the 1970s is clear from the accounts of Schwartz and others and indeed is evident in Friedman’s sharp public criticisms of Burns in the years from 1973 to 1978 (see E. Nelson 2007, 2013d, 2016). Even before their late-­1970s rapprochement, however, Burns and Friedman went through an interval during 1972 and early 1973 during which their relationship experienced a temporary but considerable improvement. This improvement was reflected in Burns’s attendance of the conference held in Friedman’s honor in October 1972.381 Part of the improvement likely stemmed from the fact that Friedman, in late 1972, had a more positive perspective on the course of monetary policy since 1971 than he had had before or would have later. He was temporarily persuaded that—­contrary to his earlier analysis—the stance of monetary policy under Burns’s tenure to date might have been one that had narrowly avoided inflationary problems.382 This was an assessment that Friedman would revise sharply in 1973 as inflation broke out, and in the process his relationship with Burns, which had been patched up somewhat in 1972, would deteriorate again. One economist who shared Friedman’s 1971–72 fears about US monetary policy, and who did not go through the temporary period of confidence that inflation would be avoided, was Lyle Gramley of the Federal Reserve Board’s senior staff. Gramley recalled: “Burns called me down to his office. It’s the middle of June [1972] or thereabouts. And he said, ‘Lyle, I’ve got a great opportunity to make a speech before the American Economic Asso-

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ciation and American Finance Association annual lunch’—which was, I believe, in Toronto that year. He said, ‘I want to make a hard-­hitting speech on inflation.’ And I said to him—and I was a person that had worked closely with Burns and could speak back to him without fear of retribution of some kind—‘Mr. Chairman, you haven’t asked me for my opinion, but I’m going to give it to you anyway. Don’t do that. Pick another subject.’ And he said to me, ‘Well, why would I do that? You know, all my life I’ve been so strong on holding down inflation.’ I said, ‘Yeah, and you’re running a monetary policy which is blowing the economy out of the water.’ And we talked for, like, fifteen to twenty minutes, and he said to me, ‘Lyle, you know how much I appreciate your view, but you’re just plain wrong on this one.’ And I said, ‘Well, you know, we’ll see. I think inflation is being covered up by the wage and price controls, that monetary policy is much too aggressive now.’” Gramley was persuaded that Burns “was sincere in his view” that inflation was being beaten and that a noninflationary expansion was in process, but Gramley was convinced that Burns would be proven wrong by the time of the American Economic Association meetings in December 1972 (Lyle Gramley, interview, June 24, 2013). In the event, the inflationary breakout that Gramley foresaw and that Friedman had also feared occurred just after the meetings, in early 1973, and with a vengeance.

* * * In contrast to the previous year’s proceedings, Friedman was absent from the December 1972 meetings of the American Economic Association. The reason was that, at the time of the 1972 meetings, he was convalescing after open-­heart surgery. Precisely when Friedman started noticing his heart problems in the period ahead of this surgery is unclear. In recollections published in 1977, Rose Friedman gave an unspecified time during the summer of 1972 as the period when her husband suffered angina attacks that alerted him to the problem and put him on the course to a decision to have cardiac surgery.383 Milton Friedman also opted for this time frame in his own account written much later, with his wife’s 1977 article apparently his source for the date.384 But there is considerable, though not conclusive, evidence that Friedman’s heart problems actually became noticeable in 1971. Christopher Sims presented his paper “Money, Income, and Causality” at a University of Chicago seminar (by his recollection, one held as part of the econometrics workshop series) in the early 1970s. The schedule of visits during Sims’s day at the university included a meeting with Friedman. This meeting took place in an unusual location and under unusual circumstances, for Friedman was staying in an on-­campus medical center after having had heart

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problems. In the course of his discussion with the bedridden Friedman, Sims found himself embroiled in a dispute about the definition and significance of the concept of Granger causality. Sims was alarmed, in view of Friedman’s state of health, that their verbal exchange was becoming somewhat heated. “It was an argument, and he was in the hospital—with a heart problem. It wasn’t a bitter argument: it was just that he had a position, and I was having trouble convincing him that he was wrong. And so, of course, I was thinking, ‘I don’t really want this to get to be an excited argument’” (Christopher Sims, interview, September 20, 2013). Sims’s paper was published in September 1972 (Sims 1972). As Friedman was away from the University of Chicago during calendar 1972 until September, Sims’s workshop presentation was evidently during 1971—the year when he had produced a working paper version of “Money, Income, and Causality” and was presenting it at various forums.385 Other evidence that Friedman’s heart problems became apparent during 1971 lies in the fact that Marc Miles, who began graduate studies at the University of Chicago in fall 1971, had the understanding that Friedman was absent from teaching at the university in the 1971–72 academic year in part because of health problems (Marc Miles, interview, February 20, 2014). Along the same lines, Robert Gordon recalled Friedman’s off-­campus absence for health reasons as lasting a year to a year and a half (Robert Gordon, interview, March 21, 2013). Such an interpretation would involve including Friedman’s absence from campus for a stretch of the 1971–72 academic year, together with his absence for a good part of the 1972–73 academic year, as part of his health-­ related leave. True, Friedman was on sabbatical in Honolulu in the early months of 1972 and was teaching at the University of Hawaii. Therefore, his absence from the University of Chicago in these months was not formally illness related. But Robert Heller, who was a senior member of the Department of Economics at the University of Hawaii at the time of Friedman’s visit, said with respect to Friedman’s health situation, “we knew about it.” Heller, added, however, that “he seemed to be perfectly healthy,” noting: “He was quite vigorous, [and] he’d take long walks on the beach” (Robert Heller, interview, September 9, 2013). Friedman also met considerable teaching and speaking obligations during his spell in Hawaii, and, on return to the US mainland in the second half of 1972, Friedman continued to carry out a sizable volume of speaking engagements.386 By late 1972, he had been scheduled for open-­heart surgery at the Mayo Clinic in Rochester, Minnesota, for December 13. Outwardly, he treated this matter-­of-­factly. Indeed, Friedman’s secretary, Gloria Valentine, was unaware of the forthcoming operation until she overheard Friedman talking about it on the telephone (Gloria Valentine, interview, April 1, 2013).

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“He was a bit of a rationalist,” Stephen Stigler recalled of Friedman’s decision to have surgery (interview, November 6, 2013). “He thought it was a good idea, and he did it.” Although Friedman would later describe himself as “not being very introspective” (Martin 1983, 50), it was the case that, over the second half of 1972, in the months ahead of his end-­of-­year surgery, he was provided with a number of notable opportunities to look back on his career. Prominent among these was the event of his sixtieth birthday on July 31. Another occasion for introspection came in October, when a conference was held in Friedman’s honor by the University of Virginia’s economics department.387 In reporting on this Festschrift, the Wall Street Journal (October 30, 1972) stated that “no economist since John Maynard Keynes has so influenced economic theory and public policy.”388 But to some extent, on the big issues of policy, the claim about Friedman’s influence rang hollow. It was true that exchange rates had become more flexible, but as of October 1972 the exchange-­rate system seemed to be back on a fixed-­parity arrangement for several major countries. It was also true also that US policy makers now paid much more attention to monetary growth. But they had not done so in a manner that led to the disinflationary downward path for the growth of the money stock that Friedman had recommended. Instead, monetary growth had been high during the previous two years. Furthermore, as the Wall Street Journal article noted, the prior decade had “seen an enormous expansion of government.” Speaking in a session of the conference in his honor, Friedman noted that he had been wrong in his prediction, in Capitalism and Freedom a decade earlier, that the United States was poised to shift to smaller government. A conference paper by William Niskanen amplified this judgment, contending that Friedman had been “massively wrong” in 1962 to see the tide turning against the growth of the public sector.389 Friedman himself granted that public opinion had been a strong factor contributing to the expansion of the role of government since 1962.390 “It simply is not true, unfortunately, that the public at large has been opposed to the extension of government and the way in which it has been extended,” Friedman observed during the conference.391 In a Newsweek column titled “Can We Halt Leviathan?” (November 6, 1972) that was written around the time of the conference, Friedman called for a drastic change in “the role that we assign to government.” Unless there developed a wide acceptance in public discourse of the need for such a change, the terms of the US national debate would, Friedman observed, concern not the choice between maintaining and reducing the size of government, but instead the choice between maintaining and increasing it. In this vein, Friedman noted that while Democratic presidential candidate Senator George McGovern proposed to raise the share of federal spending

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in national income by about 5 percentage points, the rival proposal from President Nixon involved holding the share at its existing level rather than substantially reducing it. Most glaringly, in terms of recent departures of US economic policy from Friedman’s prescriptions, the United States in late 1972 was completing its first full calendar year of being subject to comprehensive peacetime price controls, and these controls had since August 1971 figured prominently as a nonmonetary weapon intended to fight inflation. On August 16, 1971, the day after the initial wage/price freeze was imposed, President Nixon had instructed George Shultz to call Friedman and to defend the freeze as a temporary measure, whose advent forestalled pressures from Democratic politicians for permanent wage/price controls (Matusow 1998, 157). Friedman was skeptical about this notion from the start, lamenting: “People have such damn short memories. Don’t they remember World War II? Don’t they remember the Korean War? Once you get controls in, it’s damned hard to get rid of them” (Newsday, August 18, 1971). Sure enough, when the freeze was nearing its scheduled completion, the administration’s announcement for the postfreeze period was summarized in a Newsweek report (October 25, 1971, 87) as one in which “President Nixon outlined his plans for indefinite controls on the U.S. economy.” And when, at the end of 1971, he was preparing to leave the post of chairman of the Council of Economic Advisers, Paul McCracken indicated that wage and price controls might well continue far into the future (New York Times, December 31, 1971). By late 1972, it indeed seemed that controls might have become a permanent feature of the US economic landscape. In December 1972, Paul Samuelson noted in his column that President Nixon had relayed his decision that controls would continue. Samuelson also observed that this decision had been announced publicly by Secretary of the Treasury George Shultz (Newsweek, December 25, 1972). The irony could not have been lost on Samuelson that Shultz had been a colleague first of himself and then of Friedman during his academic career and was perceived as sympathetic to Friedman’s economics—yet Shultz was implementing an incomes policy that Samuelson, but not Friedman, supported. In the same month of December 1972, Arthur Okun predicted that some form of wage/price controls would be in effect “for the rest of our lives,” adding, “I’ll bet a nickel that we never hear another U.S. president say what President Nixon said in 1969 and 1970, that the government has no role over private wage and price decisions” (Kansas City Star, December 7, 1972). On a number of policy issues, therefore, events seemed to be going against Friedman at the time of his entering surgery. It is interesting to speculate about how Friedman would have been remembered if he had not

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survived the operation. The partial revival of interest in the free market that occurred in policy making during the 1980s would likely have proceeded even if he had not lived, and Friedman’s pre-­1972 writings and activities would have likely been credited to some extent as a factor behind this revival. The greater acceptance from the late 1970s onward that inflation was a monetary phenomenon would also likely have led to continued interest in Friedman’s body of monetary work. It can be confidently stated that Friedman would have been recalled as a less controversial figure had he died in 1972 instead of living on to 2006. His views were little different before and after 1972, but many of his highest-­ profile activities advocating those views—including on American television and in widely noted interviews in the United Kingdom—took place in the post-­1972 period. Most especially, his controversial visit to Chile in 1975, which poisoned Friedman’s image with many commentators, would not have occurred. In the period up to 1972, Friedman had visited a number of countries run by dictatorships, including Spain, Yugoslavia, and the USSR, advocating free-­market policies to those he met in each country. He took the fact that his economic advice to dictatorships was the same that he gave to democracies; his own advocacy of democracy to those, including government officials, whom he met in dictatorships; and his conviction that economic liberalization was conducive to political liberalization and to economic improvement, as all bearing witness to the goodwill that underlay his visits abroad and to his strong disapproval of undemocratic regimes. But some of his critics would take a different perspective, and the degree of controversy associated with Friedman from the mid-­1970s onward was consequently far greater than it had been up to 1972. What is clear, as was stressed at the start of this chapter, is that Friedman’s contributions to economic research had predominantly already been committed to writing by the early 1970s. Therefore, had he died in 1972, this would have had little impact either way on his standing as a researcher. Indeed, with the benefit of hindsight, it is clear that there was a major rearrangement of priorities on Friedman’s part around late 1972, away from research and toward public policy activity. Research evidently no longer seemed to him the best means by which he could make an impact. The emergence, as part of the rational-­expectations revolution, of a new generation of monetary economists had put Friedman even further behind current best practice in the area of technical economic modeling, even though many of the results being presented in the new literature confirmed Friedman’s ideas and intuition. He was not well positioned in the 1970s to produce research that would have the agenda-­setting quality of his work of the 1950s and 1960s. In contrast, Friedman in the early 1970s remained in a commanding

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position in the public policy field. Recalling the Department of Economics as it stood in the early 1970s, something that he watched from the vantage point of the business school, Jeremy Siegel observed: “Becker, Friedman, and Stigler were like giants striding the Earth at the University of Chicago” (Jeremy Siegel, interview, September 17, 2013). Of these three, Friedman’s advantage, both comparative and absolute, increasingly lay away from research. Becker continued to have a vibrant research program, while George Stigler had intervened only sporadically in public debate since the Roofs or Ceilings? pamphlet in 1946. “My father wasn’t as into policy pronouncements as Milton was,” Stephen Stigler recalled (interview, November 6, 2013). He added: “My father would make occasional forays into sending a letter to the editor of various types, and he commented on public issues. But it was not as central a part of what he was doing as it was with Milton. At least that’s my view.” Indeed, George Stigler had doubts about whether academic economists were spending their time effectively when they engaged in popular debate. Benjamin Klein, who watched the Stigler-­Friedman relationship during the mid-­1960s, noted: “I remember George was always giving him a hard time, because George had this thing that you’re supposed to just be a pure academic; you’re not supposed to be wasting your time with politics and advising politicians, and all this other stuff ” (Benjamin Klein, interview, March 4, 2013). Stigler would be reinforced in this view in the early 1970s both by the public-­choice literature to which he was a contributor, and by the setbacks that Friedman encountered in having his recommendations implemented by policy makers.392 Deirdre McCloskey remarked: “I like to tell the story of actually seeing, witnessing, a conversation between Milton and George. It had to be in the early ’70s—down in the coffee room of the social-­science building, where we’d go get coffee. The gist of this short exchange that I overheard was George complaining to Milton about Milton trying to persuade people that free trade was a good idea. Stigler said, ‘Look, people support free trade out of their interests.’ George had started in on this intellectual passion of his, which was that everything is driven by interests, it has nothing to do with ideology, or persuasion, or words, or anything like that. And Milton said, ‘Well, look, George, I think I can persuade people to change their minds.’ And Stigler, again, sneered at this and said, ‘Oh, come on, don’t be naïve. People don’t believe things because of their ideas, it’s just their pocketbook that determines it.’ And Milton said, ‘But I am a teacher. I want to teach people’” (Deirdre McCloskey, interview, August 21, 2013).393 Stigler actually made his doubts that academics could influence public policy the theme of his speech for the 1972 conference in Friedman’s

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honor. The negative tone he conveyed about Friedman’s influence startled Bennett McCallum, who was attending the conference. “Stigler made comments that I thought weren’t very appreciative of Friedman. That was, for a naïve young economist, surprising, as they, obviously, were great colleagues” (Bennett McCallum, interview, June 13, 2013). Anna Schwartz had a similar reaction to Stigler’s talk, later stating that “George’s paper understated the influence of economists, including his and Milton’s influence.”394 But she also detected in Stigler’s speech a note of encouragement to Friedman, seeing Stigler as offering a lighthearted admonition to Friedman not to expect policy to change very much, while also giving Friedman an incentive to continue trying to instigate change.395 In fact, for all his needling of Friedman on the matter, Stigler had come to think that Friedman might be able to make an appreciable impact on public opinion. Thus, when it came to Friedman, Stigler made something of an exception to his usual attitude about the scope for academics to influence public policy. One notable piece of evidence of this was the fact that Stigler had encouraged Friedman to take on the Newsweek column in 1966.396 The effect of the latter development on Friedman’s own outlook was evident in his remark at the end of the 1960s that, although his main interest remained research in monetary economics, writing the column was something he rather enjoyed (Wall Street Journal, November 4, 1969, 15). Friedman would later cite as a benefit of the Newsweek column the feedback from readers, and his description of the resulting interaction as “a two-­ way forum” highlighted two key attractions of his public policy work.397 On the one hand, Friedman relished the reaction of the overwhelmingly non-­ economist readership. “The difference between Stigler and Friedman was I think their general open-­mindedness,” observed Marc Nerlove, Friedman’s former student who became a departmental colleague.398 “Friedman was very open-­minded, and Stigler was not. . . . Friedman would listen endlessly to crackpots: he wanted to find out if they had any good ideas. Not that I have ever noticed that he took a crackpot idea very seriously; but he listened. That was his characteristic in class, as well. He listened to some of the imbecilic things that we students would say and ask, and do so patiently, very patiently. I think that’s what made him a good teacher” (Marc Nerlove, interview, September 18, 2013). On the other hand, Friedman wanted to educate the wider public in positive economics and to persuade it of the validity of his views on normative economics. Charles Cox observed, “I think Friedman always believed that the best approach . . . I think that it was his view that the best way to persuade people is to simply engage in debate, and, in a very friendly way, try to stress your views” (Charles Cox, interview, November 5, 2013). Similarly, Stanley Fischer noted: “George Stigler once said, ‘If Milton dis-

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covers errors in the way of thinking of a nine-­year-­old or a ninety-­year-­ old, it makes no difference. He will explain to them in a patient way what is wrong with their thinking.’ He didn’t differentiate among people” (Stanley Fischer, interview, August 30, 2013). The public policy work was appealing to Friedman in this connection both because of the wide audience and because of the challenge it offered him “to express technical economics in language accessible to all.”399 Richard Zecher, who as a junior colleague watched Friedman at close hand from 1968 to 1973, remarked: “Milton, I think, is a uniquely talented person in my experience, who is probably the most genuine teacher I’ve ever known, [as] he really spent an enormous amount of time trying to exposit things in a way that people could understand” (Richard Zecher, interview, September 3, 2013).400 Another dimension of Friedman’s skill in the public square was remarked on by George Stigler himself in these words: “Milton Friedman is the best economic debater in the world” (Institutional Investor, February 1970, 136).401 Paul Wonnacott would also recall, on the basis of seeing Friedman in action during the 1960s, “in a debate, he was the most astonishingly clever person I’ve ever met” (Paul Wonnacott, interview, May 12, 2014). Bearing the brunt of this cleverness on many occasions was Robert Eisner. On account of his status as both a trenchant critic of monetarism and a believer in large-­scale government intervention in the economy, together with his being located in the greater Chicago area (at Northwestern University), Eisner was a natural to be chosen to debate Friedman. The two were therefore pitted against each other at many public-­speaking events. The imprint that these experiences left on Eisner was brought out in congressional testimony in 1975, when in a side comment he recalled having a “debate with Milton Friedman a few years ago that I lost.”402 In light of judgments such as these, it was reasonable to ask whether in the early 1970s Friedman was putting this skill as a debater to its greatest effect. His Newsweek columns, as well as the much less high-­profile Instructional Dynamics Economics Cassettes, were essentially monologues. It was only his occasional television appearances that really brought out Friedman’s skills in delivery and debating to the attention of the general public. Friedman’s division of his time after 1972 seemed to reflect a recognition of this point, starting with his appearances on a fistful of television interview programs between 1974 and 1976 and his spell as a CBS television commentator in 1975–76. It is possible to see Friedman extricating himself from the academic world even in 1972. As has been repeatedly noted in this chapter, Friedman’s major research was done by 1972. Rose Friedman would, correctly,

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insist that Friedman’s various activities in public policy during President Nixon’s first term occurred alongside a continuing stream of research publications.403 But Friedman’s Journal of Political Economy debate with his critics, published in the fourth quarter of 1972 (and later published in Gordon 1974a), would be something of a swan song for him. From now on, with regard to research, it would largely be a case of clearing his desk. He would not follow through on several of the research projects that he had assigned himself before 1972. For example, as noted earlier, Friedman jettisoned the proposed Friedman-­Schwartz cycles volume. Another example of this practice came in a paper that Friedman had been working on in the early 1970s, “Time Perspective in Demand for Money.” After presenting the paper in a session of his money workshop in the fall quarter of 1972, Friedman essentially stopped working on it, publishing it with light revisions in a 1977 issue of the Scandinavian Journal of Economics that helped commemorate his receipt of the Nobel award.404 And although he would continue to provide comments on papers that researchers mailed to him, Friedman from this point onward formally refereed papers only rarely.405 He continued to fulfill the teaching duties he had at the University of Chicago, and these teaching commitments were essentially equal in the early 1970s to those of the previous two decades.406 But even Friedman’s choice of teaching subject reflected his move to public policy activities. The latter often dealt with price-­theoretical topics, and in his teaching from 1973 onward, Friedman was, as one student of his 1973– 74 class put it, “going back to his roots,” because from that year Friedman resumed teaching Price Theory instead of monetary theory (Charles Plosser, interview, April 2, 2015).407 Thus, even before his departure for California at the start of 1977, Friedman was shifting to a state of being half in, and half outside, the academic research environment. One of the most striking manifestations of Friedman’s move away from the research trenches was his decision in 1973 to publish in the Journal of Political Economy correspondence he had engaged in with Sir Dennis Robertson in the mid-­1950s.408 To be sure, Friedman’s admiration for the UK economists who achieved eminence in the seventy-­ five years before World War II is difficult to overstate, and he took pride in having interacted, in the early decades of his career, with a number of the remaining members of that group (even in cases in which, as with Robertson, the interaction included disagreement both in print and in correspondence). It nevertheless was a puzzling decision on Friedman’s part to offer his correspondence with Robertson for publication at this stage. The decision to publish this material was likely made in 1972, and such a decision resembled more the behavior of someone wrapping up his research career than of someone anticipating a continuing high level of activity in the re-

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search area. Even at this point, Friedman probably knew that public policy work would henceforth be his main occupation. It would be, at any rate, if Friedman survived and recovered from his open-­heart surgery. Ahead of the surgery, whether he would do so was very much an open question. The day of the surgery was December 15, 1972. On December 13, in his hotel room in Rochester, Minnesota, shortly before entering hospital, Friedman received a call from President Nixon.409 “I had just learned from George Shultz that you were going up to Mayo for an operation,” Nixon said. “And I wanted you to know we just wish you the best. And when I said, ‘What are they operating on?,’ [they] said, ‘They’re operating on his heart.’ I said, fine, that’s okay—just don’t operate on your brain. Because we need you.” “Well, that’s very thoughtful and kind of you,” Friedman replied. “Well, I tell you,” Nixon went on, “I know these things must be quite an experience to go through, but they tell me they’re the best in the world up there. And, also, you’re a very tough fellow, you know? . . . And I just wish you the very best, and we’ll be expecting to see you back with a good heart and the same brain.” “I only hope they’ll take as good care of me as you’ve been taking of the country,” Friedman replied, wage/price controls notwithstanding. He continued: “In that case, we’ll be in fine shape.”410 Nearly four years would pass before Friedman and Nixon talked again. By then—October 1976—the circumstances for each man had changed enormously. Friedman, facing life-­threatening surgery in December 1972, had long since recovered and in October 1976 had just reached a new career pinnacle with his receipt of the Nobel Prize in Economics. Nixon, instead of completing his second term in the White House, was living a reclusive existence in California, after resigning and accepting a presidential pardon, and was calling to congratulate Friedman on his prize. The country had also been through the wringer in the intervening years, as 1973 to 1976 would be among the years of greatest economic and political turmoil in the postwar period.

Notes

Introduction to Volume 2 1. The chapter numbering continues from volume 1, and in what follows, “this book” refers to volume 1 and volume 2 combined. 2. See chapter 10, sections I and III, as well as Chicago Tribune, April 12, 1964, for Friedman’s judgment on this matter. Friedman was by no means alone in reaching this judgment. It was also voiced by, among others, Paul Samuelson, who in congressional testimony on December 30, 1992, stated that “we mustn’t complain too much” about the 1958 monetary policy tightening because it had, he believed, produced the 1960–61 recession whose onset had led to the election of John F. Kennedy. See Joint Economic Committee (1993, 83). 3. See chapters 13 to 15 below. 4. Feldstein (1981, 1266, 1267). 5. This research and the ensuing debates are analyzed in chapters 11 and 12 below. 6. Feldstein (1981, 1268). 7. See chapter 15.

Conventions Used in This Book 1. Throughout this book, “Romer and Romer” refers to Christina Romer and David Romer, unless otherwise indicated. 2. An exception is made in the small number of cases, which include Friedman (1973c), in which there was no credited interviewer and in which Friedman was listed in the publication as the article’s author, even though the article was published in question-­and-­ answer format.

Chapter Eleven 1. From Hayes’s June 2, 1961, testimony, in Joint Economic Committee (1961a, 78). 2. R. Davis (1969, 119–20). 3. Gramley (1969, 2; p. 489 of 1970 printing). See also the discussion in the previous chapter. 4. Another important article, Friedman and Meiselman (1963), is discussed in the next chapter, on the grounds that the debate on that article was concentrated in the years 1964 and 1965. 5. As noted in previous chapters, even before the 1960s Friedman had produced a

348 N o t es t o P a g es 3 – 7 piece of macroeconomic research that had become widely accepted as valid, namely his consumption-­function work. 6. Instructional Dynamics Economics Cassette Tape 73 (May 10, 1971). 7. Friedman mentioned this joint appearance, which was in late 1969, in Instructional Dynamics Economics Cassette Tape 41 (January 5, 1970). 8. October 5, 1982, FOMC meeting (Federal Open Market Committee 1982, 35). Volcker was referring to Friedman and Schwartz (1963a). 9. The quotation is from Arthur Burns (1961a, 1; p. 493 of 1963 reprint). The conference, which was mentioned in the previous chapter, was the tenth annual Business Economists’ Conference, titled “Old Problems on the New Frontier,” and it was held at the University of Chicago’s Graduate School of Business. The conference and Friedman’s participation in it were reported in Business Week (May 6, 1961). Burns’s address at the conference was delivered on April 21, 1961 (Arthur Burns 1961a). 10. Quoted in Arthur Burns (1961a, 1). The CEA was using the convention that output below potential corresponded to a positive gap. The more usual convention in the later literature, and a convention used in this book unless otherwise noted, is to designate a situation of output below potential as one of a negative output gap. 11. Solow was a CEA staff economist from 1961 to 1962 (American Economic Association 1970, 413), after which he continued to work with CEA on a more occasional basis until 1963 (Solow 2000, 111). 12. These studies offered more detailed accounts of economic policy making in the 1960s than will be provided in this book, especially with respect to the period 1961–65, a period in which, as already noted, Friedman’s commentary on current events was infrequent in comparison with the years after 1965. 13. Paul Samuelson (in Newsweek, November 21, 1977) alluded to Burns’s 1961 cri‑ tique, and Arthur Burns (1961a) was cited and quoted in Wells (1994, 21, 274). However, the 1961 analysis was not cited in the discussions of Orphanides (2003) and Romer and Romer (2004), two articles concerned with the evolution of Burns’s views on the economy. 14. Arthur Burns (1961a, 7; p. 501 of 1963 reprint). See p. 2 of this Burns article for his reference to Hansen. 15. In particular, the figure in Okun (1962, 101) recorded that output exceeded potential in the mid-­1950s. 16. See, for example, Congdon (2011, 150) for the contrary contention. 17. See E. Nelson (2009c) for a discussion. 18. See later chapters for further discussion. 19. Friedman (1958b, 256; p. 187 of 1969 reprint). 20. Friedman (1961d, 465). 21. Kennedy (1961) stated: “I hope that we can reduce it down to 4 percent.” In the same discussion, Kennedy clearly indicated an understanding of the existence of a structural component of the unemployment rate that would remain even in the wake of a robust economic recovery. 22. From Friedman’s remarks in The American Economy, Lesson 48: Can We Have Full Employment without Inflation?, CBS College of the Air, filmed circa June 5, 1962. 23. Friedman and Schwartz (1963b, 37). It should be mentioned that throughout this period Friedman expressed money-­to-­activity lags as lags from monetary growth to an output index. This procedure was one that mixed growth rates and levels, a practice that Friedman defended at the time (Friedman 1961d) but that he later largely dropped. See chapter 15 below for a detailed discussion.

N o t es t o P a g es 7 – 1 3   349 24. From Friedman’s contribution to his debate with Senator Joseph S. Clark, “The Role of Government in Our Society,” US Chamber of Commerce, Washington, DC, May 3, 1961. 25. Arthur Burns also started making predictions about a breakout of inflation. For example, Paul Samuelson (in The Great Economics Debate, WGBH Boston, May 22, 1969) recalled that Burns stated in April 1962 that inflation was developing. 26. These figures were, essentially, accepted by Friedman. As with the price-­level movements of the 1950s, Friedman evidently largely rejected the Stigler-­type position that the recorded price rises in the early 1960s masked a reality of complete price-­level stability. Although he would occasionally give credence to the notion that pre-­1966 measured inflation simply reflected improvement in goods’ quality (see, for example, Friedman 1969a, 47), his analyses of economic developments would more typically take inflation over the period 1961–66 as low but positive (see, for example, Newsweek, October 17, 1966). 27. See chapter 15. 28. See Friedman’s memorandum for the October 7, 1965, meeting of the Federal Reserve Board’s consultants’ meeting, in Friedman (1968a, 148–49). For this calculation, Friedman represented the inflation rate for 1965 by the annualized rate of price rise in the first half of 1965 (148). 29. See, for example, Friedman (1984d, 400). 30. See also Newsweek, October 17, 1966, and the previous chapter. 31. Instructional Dynamics Economics Cassette Tape 197 (mid-­August 1976). Likewise, in Instructional Dynamics Economics Cassette Tape 3 (November 1968) Friedman referred to the “favorable bequest” from the Eisenhower administration to the Kennedy administration in the form of the breaking of inflationary expectations, and in Taylor (2001, 106), Friedman argued that Kennedy “was able to take advantage of the noninflationary economic conditions he inherited.” See also Friedman (1983a, 7; 1984c, 26). 32. Milton Friedman Speaks, episode 6, “Money and Inflation” (taped November 7, 1977), p. 21 of transcript. 33. In the case of Brunner, see his submission in Committee on Banking, Finance and Urban Affairs (1977, 154) as well as Brunner (1979a, 7). 34. See Friedman (1977c, 16) and Friedman’s contribution to Friedman and Modigliani (1977, 20). 35. See his October 7, 1965, memorandum, in Friedman (1968a, 147). 36. Instructional Dynamics Economics Cassette Tape 197 (mid-­August 1976). 37. Friedman (1983a, 8; 1984c, 27). 38. Instructional Dynamics Economics Cassette Tape 87 (December 1, 1971). See also Friedman’s remarks in Friedman and Heller (1969, 56). Other monetarists expressed similar views. See, for example, Karl Brunner’s testimony of February 25, 1971, in Joint Economic Committee (1971a, 548), in which he traced the 1962–63 economic slowdown to the behavior of monetary growth in 1962. See also Keran (1967, 11); Cagan (1972b, 92, 95); and Bowsher (1977, 13). 39. See, for example, Friedman (1970c). See also chapter 2 above. 40. See, for example, Federal Reserve governor Charles Partee’s remarks in American Bankers Association (1979, 145; p. 976 of reprint); Benjamin Friedman’s November 27, 1979, testimony in Committee on Banking, Finance and Urban Affairs (1980a, 57); and McCulloch (1981, 105). 41. Friedman (1962c, 24). 42. See his March 3, 1964, testimony, in Committee on Banking and Currency (1964,

350 N o t es t o P a g es 1 3 – 1 7 1138). Some commentary by Friedman along the same lines was relayed by Paul Samuelson in the Financial Times (October 8, 1962). Samuelson reported that he had spoken to Friedman, who had told him that he was putting weight on the stagnation in M1 even though a rise in time deposits had helped underpin M2 growth. 43. See, for example, Federal Open Market Committee (1962, 58). 44. March 3, 1964, testimony, in Committee on Banking and Currency (1964, 1139). 45. Friedman identified the decisive shift to an overexpansionary policy as taking place in 1962 or 1963 in Friedman (1975c, 21); Instructional Dynamics Economics Cassette Tape 157 (November 6, 1974); and Newsweek, October 3, 1977. 46. Instructional Dynamics Economics Cassette Tape 215 (1977/1978). Setting 1954 rather than in 1951 as the start date for Martin’s tenure allowed Friedman to abstract from the transition from the bond-­price peg and to exclude the Korean War period. Other accounts, drawing on narrative evidence and information from interest-­rate rules rather than Friedman’s criterion of monetary growth, have similarly demarcated the Martin regime into a relatively enlightened and restrained 1950s regime and a too reactive, and inflationary, 1960s regime. See especially Romer and Romer (2002a, 2002b). 47. The fact that the developments that shifted US monetary policy to an expansionary posture were spread out over the early 1960s helps account for why Friedman occasionally dated the shift to 1960 or 1961 rather than 1962 or 1963. See, for example, Friedman (1980c, 82; 1982b, 102), as well as Milton Friedman Speaks, episode 6, “Money and Inflation” (taped November 7, 1977, p. 21 of transcript). 48. Friedman (1992b, vii–viii). 49. See Instructional Dynamics Economics Cassette Tape 64 (December 31, 1970). See also Friedman (1974d, 2). 50. Federal Open Market Committee (1963, 47). 51. See, for example, Michael Evans (1983, 40). 52. Prior to the 1960 election, presidential candidate Kennedy had actually suggested that he might increase taxes, so as to provide financing for his proposed increase in defense spending (Meet the Press, NBC, July 10, 1960, p. 19 of transcript). After the election, however, his program became more clearly influenced by Keynesian ideas, and his proposals for a tax cut and increases in defense spending were largely concurrent. 53. See Friedman’s remarks in Friedman and Roosa (1967, 136) and Dun’s Review (February 1968, 39). 54. Instructional Dynamics Economics Cassette Tapes 23 (April 1969) and 25 (May 25, 1969). 55. See, for example, his remarks in Business Week, May 6, 1961, 113. 56. Instructional Dynamics Economics Cassette Tape 197 (mid-­August 1976). 57. See, for example, Friedman (1975c, 21) and Newsweek, December 6, 1976. 58. See, for instance, Friedman (1958a, 19). 59. See, for example, Friedman and Heller (1969, 56) as well as the 1961 Friedman quotation from Business Week given above. 60. See the items cited in section I of chapter 10. 61. Friedman (1962b, 3) referred to their notes as summaries of the classes. R. D. Friedman (1976d, 22), however, specifically indicated that the notes were derived from their recordings of the classes. Shortly before David Fand’s death on June 4, 2015, his son, Jeremy Fand, kindly asked his father several questions submitted by the present author about David Fand’s years as a student at the University of Chicago. Notwithstanding a long period of illness, David

N o t es t o P a g es 1 7 – 2 1   351 Fand answered the questions with a considerable degree of specificity. Among the pieces of information relayed by this question-­and-­answer session were that the Price Theory lecture notes were not based on tape recordings and that the notes were predominantly derived from Fand’s write-­up, with Warren Gustus’s having only a minor role in drafting the notes. The notes had Friedman’s imprimatur, as Fand’s rendition of the lectures reflected not only his record of the classes but also regular bilateral meetings with Friedman in which they nailed down specific points and put the lecture material into more polished prose. In these meetings, Fand had the sense that Friedman was conscious of the time that the meetings were taking away from what was by then his principal research interest, monetary analysis. 62. Friedman (1962b, 3). 63. See Brumberg’s (1953, 463) citation of Friedman’s “hectographed” notes from what was described as an “advanced price theory course” and dated 1950. See also Nerlove (1958, 234), whose bibliography cited the mimeographed lectures as a 1951 item. 64. This was for Christ’s period as a visiting professor at the University of Tokyo in 1959 (American Economic Association 1970, 75). 65. Friedman (1962b, 3). 66. The font seems to be the same as that of another mimeographed production in which Fand was involved: a 1951 version of lectures Jacob Marschak had given during 1948 and 1949 that Fand and Harry Markowitz had put together (Marschak 1951). However, the production values of Friedman (1962b) were superior to those of the Price Theory lecture notes assembled by Friedman and Fand for Friedman’s classes in the 1950s. Those notes were produced from an ordinary typewriter. 67. See his remarks in Breit and Ransom (1971, 242), in which Friedman (writing in June 1967) indicated that he would like more attention given by the profession to the coverage of capital theory in Price Theory and that he hoped to find the time to produce a short book that built on that section. 68. On these passages, see chapters 1 and 7 above, as well as chapter 13. 69. For documentation of Friedman’s use of the Lagrange multiplier in his Price Theory lectures, see M. Johnson and Samuels (2008, 109) and Friedman (1962b, 40; 1976a, 37). 70. Friedman’s final teaching of Price Theory in the 1960s was in the 1963–64 academic year: Daniel Hamermesh, for example, completed Friedman’s class in spring 1964 (Daniel Hamermesh, personal communication, September 12, 2016). Consequently, what Walters (1987, 424) called a “gap from 1963 to 1973” in Friedman’s teaching of the class is more correctly described as a gap spanning from the 1964–65 to 1972–73 academic years inclusive. (The years for the gap in Friedman and Friedman 1998, 202, are wrong.) 71. That characterization is consistent with the assessment of Bhagwati (1977, 225). However, it is argued below that Bhagwati’s characterization of the University of Chicago’s economics department circa 1960 overstates the extent to which Friedman set the tone for the attitudes prevailing within the department. 72. See Friedman (1962b, 4; 1976a, vii). 73. In Gary Becker’s version of the Price Theory course, as taught to students in the era after Friedman’s departure from the university, general equilibrium theory received some coverage (Glen Weyl, interview, June 17, 2015). 74. For Lucas’s discussion of this point, see Klamer (1983, 30); for Sam Peltzman’s perspective, see Sanderson (2012, 7) as well as the discussion in the present chapter. 75. Lucas was referring to Friedman’s closing years in the department in the 1970s, when Lucas was his colleague. However, his description also rings true with respect to the

352 N o t es t o P a g es 2 1 – 2 3 1960s, as during that decade Friedman had good relations with a number of department members who had different perspectives from his own. For example, Friedman (1969c, 129) praised the guidance to the department’s students provided by Hirofumi Uzawa, who shared neither Friedman’s favorable perspective on market economics nor Friedman’s generally negative perspective on formal general equilibrium theorizing. 76. See Friedman’s discussion in Friedman and Friedman (1998, 164–65). The summer home was also mentioned in a profile of Friedman in Newark Sunday News, February 22, 1959. Both the Orford and Ely homes were near Arthur Burns’s summer home, but, of the two, the Ely location was much closer to the Burns home (Joseph Burns, interview, September 12, 2013, and personal communication, October 29, 2014). 77. The arrangement that Lucas described—one in which the quarters for which Friedman was absent were the spring and summer quarters—prevailed for Friedman’s final three full academic years at the university, that is, 1973–74 through 1975–76. During the 1960s and through the 1970–71 academic year, the typical arrangement was that Friedman would be absent for the second half of the calendar year, that is, the summer and fall quarters (see, for example, New York Times, January 25, 1970, 84). 78. Friedman and Friedman (1980, ix; p. xiii of some later printings). 79. Friedman (1991a). See also Friedman’s remarks in Hammond (1989, 49). 80. The quotation is from Friedman (1972d, x). 81. An index was included in latter-­day commemorative editions, such as Friedman (2002). 82. See, for example, Friedman (1962a, i); Fortune, June 1, 1967, 148; and Hammond (1989, 47). The original Wabash College lectures have since been made electronically available on the Hoover Institution’s website. 83. Friedman (1962a, ii). 84. The inclusion of material from the first of these items might not be considered a reprint as, although Friedman’s talk on central-­bank independence was delivered in April 1960 (Yeager 1962, 1), it appeared in print the same year as Capitalism and Freedom. See Friedman (1962d). 85. Lerner’s review, discussed further in section III below, was one of several reviews of Friedman’s book appearing in economic-­research journals. It is therefore not correct to suggest, as does Burgin (2012, 174), that Capitalism and Freedom “went largely unnoticed” in these journals. 86. See, for example, Friedman (1962a, iii; 1982e, vi). Burgin (2012, 174) stresses the role played the pro-­free-­market Volker Fund, which had sponsored Friedman’s 1956 Wabash University talks and some of his other appearances (see Friedman 1962a, i). Although he acknowledges that Friedman did not tailor his views so as to harmonize them with the foundations sponsoring his work (Burgin 2012, 171, 174), Burgin credits the Volker Fund with enabling the “systematization and popularization” of Friedman’s ideas (174). This characterization neglects several key elements of the making of Capitalism and Freedom: the book drew on material beyond those in the Volker Fund–­sponsored talks; the latter talks partly relayed research Friedman had already done; Friedman had been engaged in popular debate since 1943; and Rose Friedman played a large role in the “systematization” process by working the materials underlying Capitalism and Freedom into book form. 87. CSPAN, November 20, 1994, p. 8 of hard-­copy transcript. 88. See, for example, Friedman and Friedman (1980, ix; 1985, 65). See also Friedman and Friedman (1988, 463). The “Other Books by Milton Friedman” page that preceded the

N o t es t o P a g es 2 3 – 2 8   353 text of Friedman and Friedman (1984) listed Rose Friedman as a full coauthor of Capitalism and Freedom. 89. See, for example, Friedman (1972d, 92). 90. From Friedman’s contribution to his debate with Senator Joseph S. Clark (D-­PA), “The Role of Government in Our Society,” US Chamber of Commerce, Washington, DC, May 3, 1961. Friedman made a very similar remark in 1979: see his contribution in Proprietary Association (1979, 39). 91. See also Taylor (2012, 62). 92. See also the next chapter. 93. Samuelson’s closeness to the administration (and to the preceding Kennedy election campaign) led him to write of himself that he “was economic adviser to President John F. Kennedy” (Samuelson and Nordhaus 1985, v). 94. This was a judgment Samuelson would stick to: in 2006 correspondence with Lawrence Summers, he indicated that Friedman’s economic perspective was “stubbornly old-­ fashioned” (quoted in Wall Street Journal, September 14, 2013). 95. See Friedman (1962a, 2). 96. Friedman (1962a, 14). Here, as in Friedman (1955e, 362), Friedman used the old-­ fashioned term “neighborhood effects” and grouped these with monopolistic power as imperfections economists had to study. Today, both phenomena would be grouped under the heading of externalities. 97. Friedman (1962a, 6). 98. See Friedman (1962a, 67, 134). 99. See, for example, Friedman (1972d x; 1986a 85). 100. Friedman’s remarks to this effect included those in Hammond (1989, 48); Friedman (1991a); and CSPAN, November 20, 1994 (p. 7 of hard-­copy transcript). 101. See Wall Street Journal, May 17 and 18, 1961, for Friedman’s op-­eds on matters covered in Capitalism and Freedom. Friedman also had an op-­ed on foreign aid in Wall Street Journal, April 30, 1962. 102. Friedman mentioned the Economist review (February 16, 1963) in Hammond (1989, 48) and on CSPAN, November 20, 1994 (p. 7 of hard-­copy transcript). See also Laidler (2007). For coverage of the occasion when the Economist became widely circulated in the United States, see the New York Daily News of March 16, 1981. 103. Somewhat contradictorily, Skousen’s section titled “Friedman Writes a Bestseller” (which was claimed to be Capitalism and Freedom) appeared before a section titled “Friedman Finally Makes an Impact” (Skousen 2001, 390, 392). And the latter section was, in any event, written on the (incorrect) basis that such items as Friedman and Meiselman (1963) and Friedman and Schwartz (1963a) did not make a major contemporaneous impact. 104. See Boston Globe, April 1, 1981 (45), as well as Leube (1987, xvi), Friedman and Friedman (1988, 463), and Friedman’s remarks in R. Roberts (2006) for these sales figures. 105. For example, the reimbursement records in Committee on House Administration (1964, 257) for Friedman’s March 3, 1964, congressional testimony, indicated that he drove to Washington for his appearance. 106. Friedman (1961d, 447). 107. Friedman (1958g, 39). In E. Nelson (2004a, 401), Anna Schwartz gave the end of the 1950s as the date at which a full draft was available. However, the reactions she subsequently related in her recollection (which is quoted below) pertained instead to the 1961 version of the Monetary History draft.

354 N o t es t o P a g es 2 9 – 3 2 108. Along similar lines, Robert Lucas, a graduate student in the department from 1960, believed that in the early 1960s Friedman’s “project with Anna Schwartz on monetary history was just getting going” (Lucas 2004a, 19). In fact, the project had been in progress for over a decade. 109. Dewald was in the department from 1962 to 1964 (American Economic Association 1970, 105). Friedman (1962e, viii) had already cited Dewald’s University of Minnesota dissertation work on the money-­supply process. Alvin Marty was also present at the University of Chicago during 1962 (American Economic Association 1970, 282), but only in a visiting-­professor position. Although he was a very good friend of Friedman, Schwartz, and Cagan from the 1960s onward, and articulated important “Chicago School” monetary positions in his writings, Marty would not usually have been regarded as a monetarist. 110. Friedman (1971h, xxii). 111. As noted in chapter 4, Bailey noted Friedman’s (1958b) submission, which had some monetary-­history material, when Bailey testified to Congress in 1958. 112. The likelihood that Friedman’s constant-­monetary-­growth rule would have improved on actual monetary policy in the 1960s was later conceded by another critic of the rule, Alan Blinder. Blinder (1981, 39) stated that the monetarist prescription “probably would have been highly advisable for the 1960s and early 1970s.” 113. In particular, Bailey (1962) featured prominently in Friedman’s course Income, Employment and the Price Level, Economics 332, which Friedman taught in the winter quarter of 1968 (Ann-­Marie Meulendyke, personal communication, May 24, 2013). This class was a later version of the national-­income course that John Gould had taken earlier in the 1960s. Friedman also praised Bailey (1962) in print, in Friedman (1966d, 79). 114. Charles Goodhart, a graduate student at Harvard University at the time, read the manuscript, Duesenberry having shown him his copy of it (Charles Goodhart, interview, July 3, 2013). 115. See Friedman and Friedman (1998, 234). This internal analysis of the Friedman-­ Schwartz manuscript was not an official Federal Reserve Board staff analysis of the monetary-­history draft, as it was written by an academic, David Townsend, who was visiting the institution for a year. 116. From the files now archived in the Anna Schwartz papers, Duke University. 117. Quoted in E. Nelson (2004a, 401–2). 118. August 15, 1962, letter from Schwartz to Clark Warburton, Anna Schwartz papers, Duke University. As noted in Meltzer (1976, 455), Friedman and Schwartz had key items in the papers put in microfilm form, in order to be able to examine them offsite. For a more recent study that makes considerable use of the Harrison papers, see Hsieh and Romer (2006). 119. The quotation is from Anna Schwartz, in E. Nelson (2004a, 402). 120. The completion of the Monetary History also had an ancillary effect of briefly bringing Friedman back into the business of writing papers in the field of statistics, as he penned an article on the interpolation procedures that he had devised for the monetary study (see Friedman 1962f ). This 1962 Friedman study would prompt follow-­up work by Chow and Lin (1971) and would also be cited in a paper on data sampling by Hansen and Sargent (1981, 40). 121. Friedman and Schwartz (1963b). The authors presented the paper at a conference in Pittsburgh in 1962 (see E. Nelson 2004a, 402). 122. May 22, 1962, letter from Friedman to Schwartz, Anna Schwartz files.

N o t es t o P a g es 3 2 – 3 5   355 123. See Friedman and Schwartz (1963a, xxi) and Friedman (1989, 249). 124. Friedman (1961d, 447). 125. Friedman (1958d, 39). See also R. D. Friedman (1976d, 22), in which it was indicated that this chapter was intended as a brief preamble to the statistical study. 126. Friedman used “analytical narrative” to describe the forthcoming book in Friedman (1961d, 447), a term also used in Friedman and Schwartz (1963a, xxi) and in an advertisement for the book in the Wall Street Journal (November 26, 1963). 127. Anna Schwartz, interview, April 21, 2003. 128. The quotation is from a remark Friedman made to the author at the Stanford Institute for Economic Policy Research/Federal Reserve Bank of San Francisco conference, March 1, 2002. 129. In contrast, Hammond (1996, 118) asserted that the two books used “much the same” methods. This does not seem an appropriate conclusion in view of the narrative approach in the Monetary History and its emphasis on crucial episodes. It may be that Hammond, who did not cite Romer and Romer (1989), was writing at a time when it was still only becoming clear that Friedman and Schwartz (1963a) had had a major impact on the modern literature on monetary policy via their narrative-­based approach to identification. Conversely, one of the main approaches of Friedman’s consumption work was, as Robert Lucas stressed in Klamer (1983, 37), the reconciliation of time-­series and cross-­ section evidence—a matter that did not arise in the Monetary History, which focused on aggregate time series. 130. It was used for this purpose in chapters 5 through 9 above. 131. Letter from Anna J. Schwartz to Alan Walters, June 10, 1985, Anna Schwartz files. Meltzer (1965, 416) made a similar observation. 132. A word search on an electronically readable version of Friedman and Schwartz (1963a), available on amazon​.com as of November 2014, registers 98 uses of the word “sharply” in the book. 133. Schwartz made this observation to the present author in 2007 while she and her coauthors were working on successive iterations of draft chapters of Bordo, Humpage, and Schwartz (2015). 134. See the February 1, 1952, letter from Friedman to Burns that Duke University has posted online from its collection (http://​blogs​.library​.duke​.edu​/rubenstein​/2014​/06​/02​ /milton​-f­­ riedman​-­­answers​-­­to​-­­arthur​-­­burns​- o ­­ r​-­­a-​ ­­blog​-­­post​-­­for​- ­­economics​-g ­­ eeks/). The letter was dated 1951, and the accompanying Duke University commentary takes that date at face value, but the content of the letter (discussing Friedman 1952b) makes clear that the 1951 date was a typographical error. 135. Quoted in E. Nelson (2004a, 402). 136. Undated letter, circa 1961, Milton Friedman to Arthur Burns, Burns papers, Duke University. 137. The link between Burns and the Monetary History that the New York Times (May 21, 1969) drew on the basis of Burns’s status as head of the NBER should therefore be viewed with caution. 138. In 1994, when asked what Arthur Burns felt about Friedman’s negative verdict on the Federal Reserve’s record, Friedman replied, “He didn’t like that very much, but, needless to say, I didn’t hesitate to say it to him” (CSPAN, November 20, 1994, p. 12 of hard-­ copy transcript). Friedman was likely referring here to their interactions during the 1970s and not those of the 1960s. 139. Friedman letter to Anna Schwartz, June 24, 1962, Anna Schwartz files.

356 N o t es t o P a g es 3 6 – 3 9 140. Friedman and Schwartz (1963a, 407). 141. The work aspect of the Friedmans’ trip consisted of visits by Friedman to monetary experts in other nations with the aim of collecting monetary data for a set of countries, as part of a projected study of monetary experience abroad. “Unfortunately, I’ve never been able to get enough time to follow through the analysis [by] writing it up,” Friedman reported in 1969 (Instructional Dynamics Economics Cassette Tape 19, March 1969). He eventually abandoned the project (Friedman and Friedman 1998, 332). The trip did, however, establish a new set of contacts for Friedman. These included international contacts as well as Michael Keran, then a US embassy staff economist in Tokyo and later a monetarist economist at the Federal Reserve Banks of St. Louis and San Francisco. 142. This included front-­page coverage in the Wall Street Journal (December 2, 1963). See also Business Week, November 23, 1963. 143. CSPAN, November 20, 1994, p. 8 of hard-­copy transcript. 144. In congressional testimony on March 1, 2011, Federal Reserve chairman Ben Bernanke took the message of the Friedman-­Schwartz account to be that the Federal Reserve was “very, very passive” in the early 1930s (Committee on Banking, Housing, and Urban Affairs 2011, 18). 145. Lucas, as quoted in Klamer (1983, 43). 146. When giving a summary on television in 1962 of the forthcoming Monetary History account of the period, Friedman noted both the passivity of the Federal Reserve with respect to commercial banks’ troubles and its overtly restrictive action in 1931. “The Reserve System, which had been passive to internal drains, reacted vigorously to this [the United Kingdom’s departure from gold] and undertook the most extreme deflationary measures of its history” (The American Economy, Lesson 41: How Important Is Money?, CBS College of the Air, filmed). 147. As Abel and Bernanke (1992, 616) observed, a “principal reason that the Fed was created was to try to reduce severe financial crises”—a point Friedman himself noted on many occasions (for example, in Friedman 1962a, 48). 148. From Volcker’s July 25, 1984, testimony, in Committee on Banking, Housing, and Urban Affairs (1984, 108). 149. Friedman and Schwartz (1986a, 201). 150. Friedman and Schwartz (1986a, 201). 151. See Friedman and Schwartz (1963a, 375, 395) on the lack of pre-­1932 programs, as well as their discussion on pp. 384–89 of the 1932 purchase program. More recent treatments of the purchase program have included Meltzer (2003, 358–67) and Hsieh and Romer (2006). 152. An account by McIvor (1983, 890) went so far as to claim that “the pathbreaking research had already been done” on the Great Contraction by Mints (1950) and to criticize Friedman and Schwartz (or Friedman, for McIvor repeatedly treated the Monetary History as single authored) for not citing it. Quite apart from the fact that the pre-­1950 work by Lauchlin Currie and Clark Warburton (neither of whom McIvor referred to) renders invalid McIvor’s attributions of uniqueness to Mints (1950), McIvor’s suggestion of a one-­way influence from Mints’s ideas to Friedman’s and of a lack of acknowledgment by Friedman were not well founded. Friedman criticized the Federal Reserve’s record during the Great Contraction in print and on the radio before the publication of Mints (1950), and the greater emphasis on monetary policy in Mints (1950) than in Mints (1945) may partly reflect the fact that Friedman offered comments on drafts of Mints (1950), a fact that McIvor acknowledged but which he interpreted as a part of a unidirectional flow

N o t es t o P a g es 3 9 – 4 1   357 of ideas from Mints to Friedman. Furthermore, contrary to the impression that McIvor’s discussion created, Friedman did cite Mints’s work repeatedly. For example, Friedman and Schwartz (1963a, 169, 191, 443) referenced Mints (1945) (which, being a historical account, was the closest antecedent in Mints’s work to the Monetary History), and Friedman (1960a, 108–9) cited Mints (1950) (see also Friedman 1960a, 65). In addition, in 1971 Friedman recommended Mints’s (1945) work in correspondence with Fischer Black (see Mehrling 2005, 155). See also Steindl (1988), who argued that the element in Friedman and Schwartz’s analysis not in Mints’s accounts was their contention that a straightforward open-­market-­ purchase program could have raised the money stock. 153. For example, Mayer (1968, 223) referred to “the great increase in excess reserves,” but he did not indicate that total reserves declined from 1929 to 1933. In addition, Chester Phillips, who had founded the money multiplier approach to money-­supply analysis (C. Phillips 1920), seemed not to appreciate the extent to which developments in the period 1929–33 could be understood in terms of monetary tightness prevailing in those years. Phillips instead viewed the economic downturn as a ricochet effect of the pre-­1929 monetary regime. Specifically, Phillips cited the Federal Reserve Board’s (1924) articulation of its stabilization policy and the excessive credit expansion and the weakening of bank soundness that this stabilization policy, according to Phillips, encouraged (Phil­lips, McManus, and Nelson 1937, 4–6, 161, 167, 176–77). A similar hypothesis was advanced in a 1935 book with a title very similar to one Friedman later used: Monetary Mischief (G. Robinson 1935). For their part, Friedman and Schwartz were highly critical of explanations like these that characterized the Depression as set in train by the prior economic expansion and that encouraged the view that the economic contraction should be allowed to run its course (see Friedman and Schwartz 1963a, 372, 409; in addition, see Friedman 1972a, 936). 154. In Friedman’s case, see his discussions in Ketchum and Kendall (1962, 50); his October 7, 1965, memorandum to the Federal Reserve Board (appearing in Friedman 1968a, 143); and Instructional Dynamics Economics Cassette Tape 12 (January 1969). In the case of Anna Schwartz, see, for example, E. Nelson and Schwartz (2008a). 155. Tavlas (2015) outlines the respects in which Friedman and Schwartz provided a more comprehensive account of the early 1930s than did Currie, while Steindl (1991) argued that Currie’s analysis of developments in the later 1930s was dissimilar to, and weaker than, than that of Friedman and Schwartz. But these arguments do not, of course, absolve Friedman and Schwartz from criticism for their lack of reference to Currie’s work. 156. Relatedly, Friedman noted in this column (as he had previously in Friedman 1970a, 7 [p. 1 of 1991 reprint]) that the propositions about economic relationships embedded in monetarism had little ideological content. This characterization was consistent with Tobin’s (1981b, 34) characterization that “in principle a monetarist could favor big and active government.” 157. See chapter 2. As indicated therein, other financial reforms of the period that Friedman regarded as helpful for recovery included the decoupling of exchange-­rate policy from domestic monetary conditions as well as official actions (via capital injections and more enlightened examination practices) that improved commercial banks’ capital positions. 158. Friedman also acknowledged Currie’s 1930s work on money in an inscription on the copy of Monetary Statistics that he sent to Currie (Leeson 2003d, 289) and in a letter

358 N o t es t o P a g es 4 1 – 4 3 to Federal Reserve Board governor John Sheehan on August 5, 1972 (in the Arthur Burns papers, Gerald R. Ford Presidential Library). 159. That discussion (Friedman and Schwartz 1966) was an early version of their Monetary Statistics discussion of Currie’s money-­stock estimates (Friedman and Schwartz 1970a, 261, 268–70). 160. See Friedman (1984c, 23). 161. The criticism in Meltzer’s (1965) review, on the other hand, focused on the absence from the Monetary History of a formal model of the monetary transmission mechanism— “although I have to add,” Meltzer later said, “that when I came to write my own history [Meltzer 2003], the same was true. . . . I had a model in mind, but I never wrote it down in the book because I thought—as Milton and Anna probably did—that it gets in the way of the history” (Allan Meltzer, interview, April 21, 2013). Meltzer’s 1965 review also complained about a lack of sufficient attention in the Monetary History to the money-­supply process. This matter will be considered further in the next two chapters of this book. 162. See chapter 6 for more on the place of the Fisher effect in Friedman’s analysis. 163. See Friedman and Schwartz (1963a, 323–24, 341, 404). See also Friedman (1960a, 18, 41; 1962c, 28–29) and Schwartz (1981, 31). 164. See also Friedman and Friedman (1980, 258). 165. See Friedman (1968b, 7). 166. Friedman (1972b, 187). In a similar vein, in a conversation with Michael Keran, Bennett McCallum, and the present author at the March 1998 Stanford University/Federal Reserve Bank of San Francisco research conference, Friedman gave 1930 and 1931 as years in which Federal Reserve officials cited low nominal interest rates as evidence of an easy policy. See also Friedman (1997, 18). Former students of Friedman also articulated related points in their own writings and statements. For example, in August 14, 1962, testimony to the Joint Economic Committee, Beryl Sprinkel (by then vice president and economist, Harris Trust and Savings Bank, Chicago) stated (in Joint Economic Committee 1962, 449): “I think the evidence is not 100 percent, but all of the evidence that I have read strongly indicates that the factor we should concentrate our attention on is monetary growth and not interest rates. . . . Beginning in 1929, interest rates declined very sharply until the gold scare of 1931. Yet we know that monetary restrictions during this period were indeed severe. I would not argue that we had lots of money and plenty of money because interest rates were going down in the early 1930s. I think that is entirely the wrong clue.” See also Darby and Lothian (1986, 73). 167. See also Wheelock (1989) for a contrast between the Friedman-­Schwartz and Meltzer accounts. 168. The “Minutes”—actually a transcript-­like record of FOMC meetings—for 1936 to 1960 were transferred to the National Archives in 1964 (Lindsey 2003, 110). This, in effect, made the minutes for FOMC meetings part of the public record, albeit with a lag. The historical minutes also became available for inspection by members of the public at Federal Reserve Banks (Wall Street Journal, December 20, 1993). Furthermore, a microfilmed version was also available and was cited by Meigs (1972, 371, 381). In the 1970s, 1980s, and 1990s, Friedman suggested that the Federal Reserve put the minutes on the public record as a reaction to the Friedman-­Schwartz Monetary History, and in particular to provide material that might aid researchers who were better disposed than Friedman and Schwartz had been toward nonmonetary explanations for the Great Depression and who, relatedly, might put Federal Reserve policy during the 1929–33 period in a more favorable light (see Friedman 1976g; House Republican Research Com-

N o t es t o P a g es 4 4 – 4 8   359 mittee 1984, 38; Wall Street Journal, December 20, 1993). In contrast, Meltzer (2009a, 463) suggests that the 1964 release of historical materials was part of the Federal Reserve’s celebration of fifty years as an institution, while Lindsey (2003, 110) characterized the minutes’ public release as a consequence of pressure from Congressman Wright Patman, chairman of the House Banking Committee. See also Mayer (1982a, 260). 169. Milton Friedman letter to Clark Warburton, March 20, 1962, Clark Warburton papers, George Mason University. 170. In particular, not only must 1962 be rejected as the point at which Friedman tapered off his research, but so must 1966, when he became a Newsweek columnist. Friedman’s research activities remained heavy in his first six years as a Newsweek columnist: Newsweek’s requirement that a column be delivered approximately every three weeks still left Friedman considerable time for other written work. Likewise, Paul Samuelson remained active in research despite being a Newsweek columnist for fifteen years. See chapter 14 for further discussion. 171. The most technical items among his writings over this period would be Friedman (1968b, 1969a, 1971c), as well as Friedman (1977d), which was drafted in the early 1970s. 172. The items discussed in the text are Friedman (1968b) and Friedman and Schwartz (1966, 1970a, 1982a). 173. Gordon (1974b, ix). 174. Friedman (1960a, 2). 175. See the August 14, 1961, testimony of Frazar B. Wilde (commission chairman) in Joint Economic Committee (1961b, 6). 176. Friedman (1962g, 294). 177. Friedman (1962g, 299). An important qualification is that former Federal Reserve chairman Eccles served as a member of the commission. See the membership list in the opening pages of Commission on Money and Credit (1961). 178. Friedman (1962g, 297). 179. Friedman (1962g, 296). 180. See Friedman (1964h). See also chapter 15 below on the sequence of debates concerning Friedman’s work on lags. 181. Friedman (1960a, 57). 182. In testimony to the Joint Economic Committee on April 10, 1961, CEA chairman Walter Heller pointed out that Federal Reserve chairman Martin’s apparent denial of a role for the Federal Reserve in setting interest rates did not, when examined carefully, constitute such a denial (Joint Economic Committee 1961c, 603). See also the previous chapter. Heller’s analysis had a parallel over a decade later, when Friedman (1974a) forensically examined Arthur Burns’s seeming denials of a role played by the Federal Reserve in determining the observed rate of monetary growth. 183. See also E. Nelson (2013a) on Friedman’s position on this matter. 184. See Friedman and Schwartz (1963a, 567) and Friedman’s March 3, 1964, testimony in Committee on Banking and Currency (1964, 1148). 185. In Joint Economic Committee (1959b, 3045), Friedman (1960a, 56, 58), and Friedman and Schwartz (1963a, 634), Friedman indicated that either the US Treasury or the Federal Reserve could perform an Operation Twist–­style debt-­management operation. As Friedman and Schwartz’s discussion of this issue indicated, Friedman did not claim originality for this point, which has in turn has been repeated in the recent literature on the series of Federal Reserve large-­scale asset purchases that spanned the years from 2008 to

360 N o t es t o P a g es 4 9 – 5 1 2014 (see, for example, Hamilton and Wu 2012; and Greenwood, Hanson, Rudolph, and Summers 2015). During the period between the Monetary History and the modern literature, Nordhaus and Wallich (1973, 10) also made the point. 186. This aspect of Friedman’s view of longer-­term interest rates’ determination can be regarded as implying that the ratio relevant for the behavior of the term premium is ([(H/P) + ω*BILLS]/BONDS), where H/P is real high-­powered money, ω is likely positive but is less than one, and BILLS and BONDS are the real private-­sector holdings of bills and longer-­term securities, respectively. That is, the volume of liquid assets consists of a weighted sum in which short-­term securities receive a lower weight than base money, at least when short-­term interest rates are positive. See chapter 6 and E. Nelson (2013a) for a discussion, as well as details concerning the relevant Friedman references. See also Friedman (1976f, 314). 187. The United States registered small current account surpluses for most years in the 1950s and 1960s. See McCallum (1996, 7). 188. See Friedman’s remarks in Instructional Dynamics Economics Cassette Tape 80 (August 11, 1971) and in Chicago Today, May 12, 1971; for further discussion, see chapter 15 below. (In addition, Friedman also discussed the issue in “nth country” terms in Friedman 1972d, 91.) In the 1980s, Friedman revised his views somewhat on these matters, in light of the new environment of largely floating rates and sustained US current account deficits. 189. Friedman applied the same conclusion to foreign exchange controls (Instructional Dynamics Economics Cassette Tape 74, May 20, 1971; Tape 75, June 2, 1971; and Tape 79, July 27, 1971). 190. For the debt Friedman acknowledged to Keynes’s views on this topic, see Friedman (1972d, 92; 1975e, 163; 1980a, 61, p. 60 of 1991 reprint; 1984b, 157); Economist, June 4, 1983; and Wall Street Journal, April 19, 1989. 191. From Friedman’s November 14, 1963, testimony, in Joint Economic Committee (1963a, 456). 192. As well as the discussion of Friedman and Schwartz’s views on this matter in previous chapters, see Friedman (1960a, 79); Schwartz (1981, 42); and Friedman’s October 7, 1965, memorandum to the Federal Reserve Board in Friedman (1968a, 142–43). See also Eichengreen (1992) and Bernanke (2002b) for related discussions. Hsieh and Romer (2006) have provided empirical evidence that when the Federal Reserve did venture to undertake expansionary operations in 1932, it was, indeed, not actually materially impeded by the arrangements associated with the gold standard. 193. Friedman (1960a, 79). 194. Friedman’s March 3, 1964, testimony in Committee on Banking and Currency (1964, 1159). See also Ketchum and Kendall (1962, 50). 195. From Friedman’s November 14, 1963, testimony, in Joint Economic Committee (1963a, 455). 196. Friedman and Schwartz (1963a, 617). Taylor (1999, 338) gave a similar assessment. As discussed in the previous chapter, however, Friedman also cited domestic factors as leading to an excessively restrictive policy over this period, as did Romer and Romer (2002a) and Rotemberg (2013). 197. In Friedman and Roosa (1967, 11), Friedman gave the years in which the balance of payments figured in monetary policy decisions as 1956–61. Note, however, that the Federal Reserve continued to cite the balance of payments as a factor in its decisions into 1962–63. As discussed in section I of this chapter, these years included a restrictive

N o t es t o P a g es 5 1 – 5 5   361 “pause” period—a time of weak monetary growth. Friedman (1962c, 24) partially attributed this softness in monetary growth to the Federal Reserve’s efforts to stem gold outflows. 198. See the discussion in Friedman’s memorandum, dated October 15, 1968, and submitted to president-­elect Nixon in December 1968, published as Friedman (1988b, 438). 199. In addition, Friedman viewed a pegged exchange rate against the dollar enforced unilaterally by a non-­US country as less harmful than a system in which the US government helped to enforce the peg, because the latter system might involve the imposition of trade and exchange controls by the US authorities (see Wall Street Journal, May 8, 1968, and chapters 13 and 15 below). 200. Boughton and Wicker (1975, 451) instead gave the termination date as 1964. 201. See D’Amico, English, López-­Salido, and Nelson (2012) for a detailed discussion of the interrelation of the Operation Twist policy and economic-­research findings during the 1960s. 202. This was indeed the explanation offered by Friedman’s former student James Meigs when he examined this period. See Meigs (1972, 271). 203. From Friedman’s April 26, 1971, letter to Federal Reserve chairman Arthur Burns (available at https://​fraser​.stlouisfed​.org​/scribd​/​?item​_id​=​3 547​&​filepath​=​/docs​ /historical​/burns​/burnspapers​_fordlibrary​/frilet710426​.pdf ). Friedman’s evaluation of the longer-­term effects of the policy, as opposed to a short-­run neutrality result, evidently pointed him toward this assessment. As indicated earlier, he acknowledged that Federal Reserve operations could influence both short-­term interest rates and the term structure in the short run, through liquidity effects and alterations in the outstanding maturity of the public debt. 204. See chapter 13. 205. From Friedman’s remarks in Parker (2002, 44). 206. See Modigliani’s remarks in Snowdon and Vane (1999, 252). 207. And, like Friedman’s critique of Lange from the same period, some of Friedman’s (1947) criticisms of Lerner jarred with Friedman’s later positions. Lester Telser (interview, October 8, 2013) noted that Friedman criticized Lerner for lack of mathematical rigor, yet later indicated that he regarded Telser’s (1955) study as excessively mathematical in its presentation of economic results. This contrast is a testament to Friedman’s drastic shift away from mathematical analysis after the 1940s. 208. See also Lerner (1962b, 37). 209. See Kaldor (1970). An arguable exception to this statement lies in the case of Walter Heller, whom Friedman would debate in 1968 (see Friedman and Heller 1969, as well as chapters 13 and 14 below). 210. Lerner’s emphasis on cost-­push inflation was something of a break with his earlier stress on demand-­pull inflation. Indeed, Lerner’s previous emphasis on demand-­pull was criticized by Weintraub (1961), who felt (as did Friedman and Schwartz 1982a, 61) that a cost-­push view of inflation was an important part of Keynes’s (1936) framework. 211. Friedman (1972a, 936) gave the debate as occurring “in the late 1940s (or perhaps early 1950s).” The date of this event can be further restricted to being in Friedman’s first three academic years at the university, that is, 1946–47 through 1948–49. As discussed presently, Kathy Axilrod, who left the campus in 1950, recalled the debate (Kathy Axilrod, interview, April 25, 2013), as did Arnold Harberger (interview, April 12, 2013). Harberger, whose first year as a student at the university was 1946–47, received his PhD in 1950, but his final academic year as a student on the University of Chicago campus was 1948–49,

362 N o t es t o P a g es 5 5 – 5 9 after which he took up an appointment at Johns Hopkins University (Arnold Harberger, personal communication, June 27, 2014; American Economic Association 1970, 178). 212. See Friedman (1972a, 936–37). This passage was subsequently quoted in Friedman (1986b, 48–49) and Friedman and Friedman (1998, 40–41). 213. Kathy Axilrod, interview, April 25, 2013; and Arnold Harberger, interview, April 12, 2013. 214. See Ketchum and Kendall (1962, 52). 215. See Ketchum and Kendall (1962, 52). 216. See Ketchum and Kendall (1962, 53). See also chapters 7 and 10 above. 217. Friedman (1962a, 1). Friedman had earlier subjected the inaugural speech’s statement to scrutiny in his May 3, 1961, appearance at the US Chamber of Commerce in Washington, DC. 218. It is possible that only a slight change in wording would have placated Friedman on this matter. The reason for believing that this is the case is that, on numerous occasions (including in Instructional Dynamics Economics Cassette Tape 2, November 1968; Speaking Freely, WNBC, May 4, 1969, p. 8 of transcript; Victoria Advocate, August 25, 1978; and Friedman 1982a, 9, 61–62), Friedman endorsed a statement once made by President Grover Cleveland that the business of the people is to support the government rather than the other way around. 219. Meet the Press, NBC, July 10, 1960, p. 18 of transcript. 220. June 5, 1961, statement, quoted in New York Herald Tribune, June 6, 1961, as cited in First National City Bank of New York Monthly Economic Letter (September 1961, 106). 221. Friedman (1962a, 135). 222. See also Friedman (1962a, 134). Friedman expressed the same criticism of Kennedy’s action, in less provocative terms, in a retrospective discussion in Playboy (February 1973, 66, 68) (see Friedman 1975e, 32; 1983b, 50). 223. Friedman expressed the same ideas about assassinations in other forums: Friedman (1968i, 29) and Instructional Dynamics Economics Cassette Tape 2 (November 1968).

Chapter Twelve 1. Friedman (1971h, xxii). Likewise, Ball (1982, 29) dated the peak effort of Keynesianism on economic policy in the United States to 1964. Friedman (1970a, 14; p. 8 of 1991 reprint) dated the high point of Keynesianism in US economic policy to the era of the Kennedy economists. As the early period of the Johnson administration featured a similar lineup of economic officials to that of the Kennedy era, this characterization was consistent with 1964 being the peak year for Keynesian policies. 2. Notwithstanding the fact that the tax cut’s enactment into law did not occur until the first quarter of 1964 (Gordon 1978, 492)—that is, under President Johnson—the tax reduction is typically referred to as the Kennedy-­Johnson tax cut. 3. See Romer and Romer (2009, 2010) on the multiple rationales offered by the Kennedy administration for the tax cut. 4. Friedman confirmed that he supported the 1964 tax cut in Dun’s Review (February 1968, 39). Friedman was fully in “starve-­the-­beast” mode by 1964 and so was enthusiastic about cutting taxes in any circumstances. 5. See chapter 4 on these earlier occasions. 6. Examples beyond those discussed in the text include Keyserling (1972, 136), who

N o t es t o P a g es 5 9 – 6 2   363 viewed the recovery as weak until 1964 and credited the subsequent strengthening of the expansion from 1964 to 1966 to the tax cuts. 7. From Friedman’s remarks in Friedman and Heller (1969, 55–56). 8. Along the same lines, Cagan (1972b, 92) observed that the sizable estimates reported of the effects of fiscal actions taken in the 1960s had typically been derived under the assumption of monetary accommodation of the fiscal measures. 9. That is, in modern parlance, Okun’s experiment was a calibration-­and-­simulation exercise. Such exercises have subsequently become prevalent in the economic-­research literature, and they can be seen as a way of using a specific theory as a prism through which to interpret the data. Friedman had used this approach himself on occasion: for example, Mayer (1972, 68) argued that one of Friedman’s (1957a) exercises amounted to an analysis of the data using the permanent income hypothesis as a framework rather than constituting a bona fide test of the validity of the hypothesis. 10. Those studies focused on real GDP, whereas Friedman in Friedman and Heller (1969, 55) was concerned with nominal GNP. But their predictions concerning higher real GDP should largely carry over to nominal income. Because inflation did not decline after 1964 and because nothing in the results of Barro and Redlick (2011) or Romer and Romer (2010) points to downward pressure on inflation due to tax cuts that is commensurate with the upward pressure on real GDP, these studies can be taken as finding that nominal income was stimulated by the Kennedy-­Johnson tax cut. A focus on nominal income is also important for discriminating Keynesian and monetarist views because, if it was found that a tax cut altered the mix of the level of nominal GDP toward higher real GDP and a lower price level, this finding would be consistent with Friedman’s own views about the supply-­side effects of these changes (as expressed, for example, in Friedman and Heller 1969, 50, and in Newsweek, July 27, 1981) and it would not confirm the existence of major effects on aggregate demand of fiscal policy. 11. One can also cast Friedman’s critique in interest-­rate terms. His position amounted to an argument that the natural rate of interest was rising in the 1960s. In such circumstances, stability of the actual short-­term interest rate did not imply a neutral monetary policy background for the tax cut. 12. See Instructional Dynamics Economics Cassette Tape 157 (November 6, 1974); Friedman (1975c, 21); and Newsweek, December 6, 1976. 13. Modigliani (1975b, 8–9). In a similar vein, Gordon (1976a, 57) characterized the position in 1965 as one of unemployment being at its natural rate alongside a state of price stability. See also the discussion in Bowsher (1977, 13–14). 14. See Friedman’s testimony (of March 3, 1964) in Committee on Banking and Currency (1964, 1139). 15. See his floor comments (in September 1965) in American Enterprise Institute (1966, 107). 16. Friedman (1966c, 89). 17. Similarly, Friedman’s (1970f, 39) retrospective was that “we started out the 1960s with relatively stable prices, and then around 1964, started off on the creeping inflationary spiral that has gotten worse.” In Friedman (1971f, 8), however, he would see the period of excessive monetary expansion in the 1960s as covering 1964 to 1968 but the period of inflation as not starting until 1965; and in the New York Times (December 20, 1970, 54), Friedman referred to the “’65 to ’69” period as the period of inflation. For his part, Arthur Burns would date the move to inflation somewhat earlier. In March 10, 1971, congressional testimony (in Committee on Banking, Housing and Urban Affairs

364 N o t es t o P a g es 6 3 – 6 7 1971, 11), Burns characterized the “first signs of inflation” as being registered in a rise in raw materials prices in fall 1963, and in Burns’s account this was followed by a period beginning in June 1964 when “the entire wholesale price level took off.” 18. See, for example, Newsweek, October 3, 1977; and Friedman (1980c, 82). 19. Friedman (1971h, xxii). 20. Friedman (1964e, 8; p. 262 of 1969 reprint). In addition to figures on the Keynesian side like Modigliani, Tobin, Culbertson, and their coauthors, Friedman probably had in mind fellow monetarists like Brunner, Meltzer, and Dewald. 21. Letter from Princeton University Press to Anna J. Schwartz, April 14, 1966, Anna Schwartz files. 22. That is, Friedman and Schwartz (1966), already mentioned in the preceding chapter. 23. See Friedman and Schwartz (1965). 24. See Anna Schwartz’s remarks in E. Nelson (2004a, 409). However, for a recent study that highlights aspects of Cagan’s analysis that did not have a counterpart in the Monetary History, see Laidler (2013b). 25. Speaking Freely, WNBC, May 4, 1969, p. 41 of transcript. 26. Okun and Eckstein would make some concessions to Friedman’s point of view in the later 1970s, when they were both long out of government. 27. See Friedman (1964a). 28. Friedman (1964b, 6–7; pp. 75–76 of 1969 reprint). 29. These are the authors whom Friedman would mention in his October 7, 1965, memorandum to the Federal Reserve Board as having studied “the links connecting Federal Reserve actions and the quantity of money . . . over short periods” (in Friedman 1968a, 138). The demarcation between Friedman’s research and the others’ was not, of course, complete. In particular, notwithstanding Meltzer’s (1965) criticism that they should have had more discussion of the money-­supply process, in the course of their Monetary History narrative Friedman and Schwartz had devoted considerable attention to the factors determining the monetary base and the multiplier. Indeed, the fact that they did so was one reason Cagan had trouble establishing that there was substantial value added in his own book on the money supply. See also the discussion later in this chapter in the subsection on James Tobin, as well as of Brunner and Meltzer in section III of the next chapter. 30. See Friedman (1962a, 54). 31. From Friedman’s October 7, 1965, memorandum to the Federal Reserve Board, in Friedman (1968a, 138). 32. A symmetric argument pointed to the need to withdraw reserves when these were in excess of what would be warranted to support commercial banks’ current volume of activity. 33. A retyped copy of the memorandum appeared as appendix A of an internal Federal Reserve Board report (Federal Reserve Board 1966). 34. The subcommittee’s rejection of the Friedman proposal was mentioned in Friedman (1982b, 113). 35. See later chapters. 36. See, for example, Fuhrer and Moore (1995b, 226) and Orphanides (2004). These studies estimated a federal funds reaction rate function for the Federal Reserve on samples that start in 1965 or 1966. Bernanke and Mihov (1998, 163) viewed the period 1966–79 as featuring a constant-­parameter reaction function on the part of the Federal Reserve (although the authors did not specify the reaction function explicitly as one for the federal funds rate). The present author would, however, view 1970–78 as a separate regime from

N o t es t o P a g es 6 7 – 7 0   365 that prevailing in the 1960s, on account of the changes in Federal Reserve doctrinal positions on inflation that occurred in 1970 (see Romer and Romer 2002b; E. Nelson 2005b, 2012b; DiCecio and Nelson 2013). The existence of this doctrinal change lends support to Judd and Rudebusch’s (1998, 10–11) use of 1970–78 as a sample period in their estimation of a federal funds rate reaction function. The point that Federal Reserve policy from about 1966 onward was closely concerned with targeting the federal funds rate does, however, remain. Operating procedures exhibited much continuity between 1966 and 1979, even though monetary policy doctrine underwent change over that period. 37. For example, Meltzer was at the March 3, 1966, meeting, from which Friedman was absent. Friedman and Meltzer both attended the June 21, 1967, meeting, although only Meltzer submitted a memorandum for the meeting’s program (Federal Reserve Board records). 38. The setting up of the consultants’ meetings, with George L. Bach the regular organizer, was mentioned in Business Week, May 16, 1964. The first meeting in the series which Friedman attended was on March 5, 1965. At this first 1965 meeting, the consultants also included Bach, Paul Samuelson, Franco Modigliani, James Duesenberry, Arthur Burns, James Tobin, Henry Wallich, and Edward Shaw. All but the last two attended the next meeting, on October 7, 1965. Alongside these figures and Friedman, the consultants present at the second meeting included Charles Kindleberger and Robert Triffin (Federal Reserve Board records). 39. October 7, 1965, memorandum, in Friedman (1968a, 150). 40. In particular, in Brill (1965), cited by Friedman (1966d, 75). 41. Tobin (1972a, 860) specifically characterized Friedman as having “stubbornly” held the line against evidence of a nonzero interest elasticity, while Samuelson (1971, 21) stated that Friedman was “unwilling to detect” an interest sensitivity of the demand for money. See also Gordon (1977). 42. Likewise, Paul Samuelson asserted that with the adoption of an interest-­elastic money-­demand function “one has awakened from the delirium of monetarism” (Washington Post, August 1, 1971). Harry Johnson (1965, 396) had also taken acknowledgment of a positive interest elasticity as tantamount to an acceptance of Keynes’s (1936) rejection of the quantity theory. As discussed below, Friedman (1966d, 82) challenged this line of argument. See also Butler (1985, 161) and Hammond (1996, 77) for other retrospectives on the interest-­elasticity debate. 43. Other discussions arguing on the side of Friedman’s interpretation of the matter include Harrington (1983) and Darby and Melvin (1986, 114–15). In addition, it should be noted that Patinkin (1969, 1971, 1972a), in his critique of Friedman, largely took for granted Friedman’s acceptance of a nonzero interest elasticity. Patinkin instead portrayed this acceptance as implying that Friedman’s monetary analysis was Keynesian in nature. The latter position of Patinkin’s is critiqued below. 44. See Friedman (1956a) and Friedman and Schwartz (1963a, 652; 1963b, 45). Friedman (1964f, 6) indicated that a draft of Friedman (1968c) had been composed in 1964. 45. This aspect of Friedman’s (1959a) argument was stressed in B. Klein (1973, 663). 46. The support that these authors provided for Friedman’s result that real income was the dominant source of variation in the real quantity of money demanded would not, however, justify another Friedman claim of this period, that “the rise in per capita real income is far more important a factor explaining the rise in the money-­income ratio than is any change in interest rates” (Friedman 1961a, 261). This claim flowed from Friedman’s finding that the real income elasticity of M2 demand was well above unity—a finding in his

366 N o t es t o P a g es 7 0 – 7 1 money-­demand work of the 1950s and 1960s that he was later to repudiate. See the discussion of Friedman’s interaction with James Tobin in section III of this chapter. 47. Again, see Friedman and Schwartz (1963a, 652; 1963b, 45). In these particular studies, however, Friedman and Schwartz refrained from using the “M1” and “M2” terminology. 48. See Friedman and Schwartz (1982a, 284). 49. That said, whether the “old” (that is, pre-­1980 definitions) of M1 and M2 had substantially different interest elasticities is a more complex issue than that of whether the modern definitions have different elasticities. The reason for the added complexity is principally that, as noted in the previous chapter, thrift institutions’ liabilities are included in modern M2, and their inclusion makes the aggregate interest elasticity (i.e., the interest elasticity when not controlling for the own rate on money) lower, as shifts from bank deposits to thrift accounts (whose returns were more competitive with market rates) cancel within modern M2. Laidler (1985, 130) discussed the fact that for the old definitions of money, estimates of the US money-­demand function on sample periods that ended prior to 1960 generally showed only a modestly higher interest elasticity of demand (using a short-­term interest rate) for real M1 than for real M2. However, as indicated in the text, the Friedman-­ Schwartz (1982a) estimates of the interest elasticity of the demand for old M2 were lower than those reported in several previous studies and were closer to those that have been reported using new M2. 50. Friedman had instead indirectly evaluated the relevance of interest rates for the demand for money by the procedure of ascertaining whether they helped account for deviations between real money balances and the prediction of real balances on the basis of real (permanent) income. As discussed in Laidler (1966; 1985, 125), Harry Johnson (1971b, 124–25), Gordon (1976a, 53), and Modigliani (1986b, 14), this procedure was flawed. 51. In particular, there was Friedman’s (1959c, 527) statement, “our results suggest that monetary policy may be expected to operate rather more than would otherwise be supposed through the direct effects of changes in cash balances, which is to say, in the stock of money, and rather less through indirect effects on rates of interest, thence on investment, and thence on income.” This passage was adapted from Friedman (1959a, 351), but its retention in the condensed presentation in Friedman (1959c) elevated its prominence. 52. As well as in the references discussed below, the practice of abstracting from interest rates in an analysis of the money/nominal income relationship was criticized by Latané (1970, 330). The counterargument outlined below likely can be applied also to Latané’s critique. 53. Friedman (1968c, 439) attributed this view to Keynesians. He characterized it as their prediction of the implication of a higher quantity of money when the interest elasticity of money demand is nonzero and finite. 54. See Friedman (1961d, 462; 1983a, 3); Friedman and Meiselman (1963, 221); and Friedman and Schwartz (1970a, 125). Interestingly, although—on the interpretation offered in this book—the foremost critics of Friedman in the 1960s, like James Tobin, misstated Friedman’s position on the interest elasticity, a less prominent critic of Friedman’s during the 1960s, Michael DePrano, got Friedman’s position right: “My suspicion is that Friedman does recognize the influence of the rate of interest on money demand, but believes that from one equilibrium point to another, interest rate effects wash out” (DePrano 1968, 38). As noted earlier, Friedman traced this point to Hume. Alongside Hume’s (1752) clas-

N o t es t o P a g es 7 1 – 7 3   367 sic statement of the transitory nature of what would come to be called the liquidity effect (in his tract “Of Interest”) are other early statements of this point, including one in 1819 from David Ricardo, who maintained that a central bank can “not permanently alter the market rate of interest” (quoted in Humphrey 1983, 15). See also E. Nelson (2008b) and chapters 6 and 7 above. 55. See Friedman and Schwartz (1982a, 19, 342–43) and Schwartz (1976, 43–44). In addition, Barro (1982) provided a perspective on inflation that was basically supportive of this outlook. The case of disinflations is more complicated. For, if the monetary authority accommodates a recovery in real balances after the disinflation, monetary growth and velocity growth move in opposite directions, rather than the same direction. Friedman’s discussions in this connection included Friedman (1983a, 5–6, 10); Wall Street Journal, September 1, 1983; Wall Street Journal, December 18, 1985; and Idea Channel, 1987. For related discussions, see Dornbusch and Fischer (1987, 655); E. Nelson (2003, 2007); and Reynard (2007). It should also be noted that, while the case of disinflation adds complications, it is not correct to claim, as Makinen (1977, 374) did, that Friedman’s position that inflation is always and everywhere a monetary phenomenon was inconsistent with his acknowledgment that velocity is interest elastic. 56. Friedman and Schwartz (1982a, 343). 57. See, for example, Friedman (1975a, 178). 58. Friedman’s statements in the 1960s and 1970s that 1/P was the price of money included Friedman (1968f, 12; 1975a, 176; 1976f, 316; 1987a, 10); Friedman and Heller (1969, 75); and Instructional Dynamics Cassette Tape 10 (January 1969) and Tape 19 (March 1969). 59. See Friedman (1972a, 915). 60. Friedman (1966d, 72, 85). 61. Gordon (1976a, 53) observed that Friedman’s 1966 paper “initially attracted little attention,” and Tobin (1972a, 860) actually cited Friedman (1970b, 1971d) as Friedman’s first acknowledgment of a nonzero elasticity. Later, however (in Klamer 1983, 106), Tobin indicated that the 1966 Friedman article had done so and even implied that the 1966 paper was famous. Later still, Tobin (1995, 41) would see Friedman’s (1966d) statement that no “fundamental issues” turned on the issue of elasticity as a move on Friedman’s part to a position that the economy’s supply side is flexible price in character, even in the short run. For a discussion of why this interpretation of Friedman’s characterization is not appropriate, see chapter 7 above. 62. For example, A. Cox (1966, 154) cited Friedman and Schwartz (1963b, 44) and its alleged contrast with Friedman (1959a) as justification for his statement that “even the ‘Friedman school,’ which at one time virtually denied that the rate of interest was an important velocity determinant, has given it recognition more recently.” 63. See Friedman (1966d, 82). Friedman repeated this analysis in a dinner conversation in Chicago in 1971 for which Stanley Fischer, Robert Gordon, and David Meiselman were present. Fischer’s contemporaneous summary (in the form of a letter to Patinkin) of Friedman’s remarks on that occasion was quoted in Leeson (2003a, 512). In noting that Fisher granted a role for the interest rate in the behavior of money demand, Akerlof (1979, 221) contended that Fisher confined this role to the longer run only. However, a passage in Fisher (1922, 63–64) that characterized velocity and interest rates also moving together in their short-­run dynamics was quoted by Patinkin (1972b, 6) and Friedman (1972a, 934); see also Friedman and Schwartz (1982a, 45).

368 N o t es t o P a g es 7 3 – 7 6 Patinkin (1971, 8–9) acknowledged that quantity theorists did perceive a role for interest rates in the determination of money demand, but (giving Irving Fisher and Clark Warburton as examples) he argued that they downplayed it and did not integrate their recognition of a nonzero interest elasticity into their outlines of the quantity theory of money. However, a possible counterexample to Patinkin’s statement comes in the form of Knut Wicksell, who noted that a disinflation will permanently reduce the opportunity cost of holding money and produce a one-­time decline in velocity, “in complete agreement with the Quantity Theory” (Wicksell 1935, 152). 64. Solomon (1965), commenting on Friedman (1964b). 65. High nominal longer-­term interest rates were also cited as a sign of stringency in the early 1930s by Bailey (1962, 172); Culbertson (1973, 36); and Tobin (1965a, 472). Friedman and Schwartz’s argument that the Federal Reserve should have taken vigorous efforts to maintain or expand the money stock in the early 1930s can be regarded as consistent with efforts to provide downward pressure on longer-­term nominal interest rates, but as also taking the position that (because of feedback between interest rates and the economy) lower longer-­term nominal interest rates need not arise from, nor be regarded as a necessary condition for, either the achievement or the success of a more expansionary monetary policy. 66. Friedman (1968a, 15). Friedman also discussed the Time magazine quotation of himself in Friedman (1997, 6) and Friedman and Friedman (1998, 231). 67. For example, in 1969 (Speaking Freely, WNBC, May 4, 1969, pp. 40–41 of transcript), Friedman said that while “everybody today uses Keynesian language,” the Keynesian views as of 1945 or 1950 had now been superseded. And on Firing Line (syndicated, January 8, 1968, p. 1 of transcript) Friedman said that “what now would be held and believed by people who call themselves Keynesian economists” differed from Keynesianism of early-­1950s vintage. 68. Hazlitt was a business columnist for Newsweek from 1946 to 1966, a span exceeding Friedman’s own tenure as a Newsweek columnist. After leaving Newsweek, Hazlitt wrote a syndicated column for US newspapers from 1966 to 1969 (Europa Publications 1986, 666). 69. See Martin (1983, 61). 70. Guillebaud and Friedman (1957, vi). 71. Firing Line, syndicated, January 8, 1968, p. 3 of transcript. 72. Friedman (1970e, 8). Freedman, Harcourt, Kriesler, and Nevile (2013) provide a different account of Friedman’s posture toward Keynes. In the present author’s view, their picture of a uniformly hostile outlook toward Keynes’s work on Friedman’s part, and their contention that this outlook dated back to the 1940s or earlier, are not consistent with the body of Friedman’s contributions on the matter. The authors consider only a few Friedman articles, relying very heavily indeed on Friedman items that have appeared in reprint collections. And several of the Friedman contributions that the authors do include in their analysis were not likely intended to be contributions to the “anti-­Keynes” agenda that the authors perceive. For example, although the authors regard Friedman’s 1940s-­vintage concern with utility maximization under uncertainty as consciously forming part of a University of Chicago counterrevolution against Keynes, this does not seem to be a plausible interpretation. Friedman’s work with Savage was consistently outside macroeconomics; and the Friedman-­Savage research was uncongenial to one of the University of Chicago’s most outspoken critics of Keynes, Frank Knight. In addition, Friedman was highly receptive to some aspects of Keynes’s perspective on probability, as his remarks in the Economist, June 4, 1983, showed.

N o t es t o P a g es 7 7 – 7 9   369 73. Friedman (1966d). The fact that Friedman (for example, in Friedman 1968b, 2–3; 1970b, 206–7) endorsed theoretical developments in which the real balance effect removed Keynes’s result of an underemployment equilibrium does not imply that he believed that Keynes’s original analysis was internally inconsistent. The theoretical developments in question entailed a change in the model specification from (i) one in which current income was the sole variable mattering for consumer spending to one in which wealth played at least some role in consumer decisions, and (ii) one in which the price level was rigid to one in which it was endogenous. These developments amounted to a challenge to, and modification of, the original, 1930s-­vintage Keynesian model, but they did not imply an internal consistency in that original model. 74. However, an advertisement for Newsweek (in New York Times, October 15, 1976), as well as the discussion in Amacher and Sweeney (1980, 455), gave the erroneous impression that every edition of Newsweek had a column by Friedman, Samuelson, or both, while Thygesen (1977, 56) similarly stated that Friedman’s column appeared every week. 75. See Friedman (1972d, ix). See also Rose Friedman’s remarks in Friedman and Friedman (1998, 356). Wallich had already been installed as a Newsweek columnist in 1965 (New York Times, September 4, 1966). (It is therefore not correct to suggest, as David Warsh did in economicprincipals​.com (July 12, 2015), that Wallich was hired simultaneously with Friedman and Samuelson. And it is wholly incorrect to state, as Warsh also does, that before “very long” Wallich’s column was dropped. Wallich’s Newsweek column lasted until 1974, and its termination was at his own initiative—to take a governor position at the Federal Reserve Board.) 76. See National Review, August 24, 1965; and Human Events, July 2, 1966. 77. Friedman and Friedman (1998, xii). 78. The interview format that Jordan described also characterized Milton and Rose Friedman’s joint appearances on many of the Instructional Dynamics Economics Cassette series of tapes from 1968 onward. 79. Gloria Valentine, interview, April 1, 2013. See also Friedman’s remarks in Friedman, Porter, Gruen, and Stammer (1981, 27–28). 80. See Friedman’s two letters dated February 19, 1959, in Arthur Burns papers, Duke University. 81. See Columbia Daily Spectator, October 22, 1964; Friedman (1974f ); and Friedman and Friedman (1998, 370–71). For accounts that are based on these latter two items, see Leeson (2000a, 136–37) and Ebenstein (2007, 153). 82. Leeson (2000a, 136) took Friedman’s criticism as pertaining to the Keynesianism prevalent in academia. But Friedman’s actual discussions of his experiences in New York City in 1964 focused instead on attitudes toward the presidential contest (in which neither side, Democratic or Republican, had in fact adopted Friedman’s monetary policy recommendations) rather than on the Keynesian-­monetarist debate. On Friedman’s participation in the Goldwater campaign, see section III below. 83. See American Economic Association (1970, 62, 390, 394). 84. From E. Nelson (2004a, 399). 85. Friedman briefly referred to the offer, without giving any details about the position, in Friedman and Friedman (1998, 374). 86. R. D. Friedman (1998, 140). One reason for Rose Friedman’s enthusiasm for the move was that her brother, Aaron Director, was himself about to retire from the University of Chicago and move to the Hoover Institution at Stanford University. Director’s relocation to the Bay Area took place in 1965 (Hoover Institution 2004). 87. See, for example, Van Horn (2010).

370 N o t es t o P a g es 7 9 – 8 4 88. See Friedman’s remarks in Business and Society Review (Spring 1972), reprinted in Friedman (1975e, 253). 89. The position on cost-­push inflation that Friedman arrived at by the early 1950s put him on the other side of the argument from free-­market economists like Haberler (1964, 182) and politicians like Barry Goldwater, as well as, from 1970 onward, policy makers like Arthur Burns. In addition, members of the Free Market Study group did not adopt a uniform line on economic issues. For example, Friedman and Frank Knight were both members of the group, but between 1944 and 1950 they parted company not only on the risk/uncertainty nexus, but also on the issue of the Great Depression. As we have seen, by the late 1940s Friedman was already emphasizing the Federal Reserve’s role in the Depression. In contrast, Knight stated (in Fortune, December 1950, 131), somewhat contrary to his initial reaction to General Theory, that—of the extant economic theories—only the Keynesian analysis had a theory of depressions. 90. Not being a Friedman dissertation student, and not at that point working in the field of monetary economics, Lucas did not attend the money workshop while he was a graduate student at the University of Chicago in the early 1960s. He became part of the workshop group when he joined the economics department in a teaching position in the mid-­1970s (Lucas 2004a, 19; Robert Lucas, interview, March 12, 2013). See also chapter 15 below. 91. Michael Bordo had also heard about Robert Clower’s presentation at the workshop (which preceded Bordo’s time as a member of the workshop). In the account that Bordo heard of this workshop appearance, in which Clower presented a technical paper, “Milton started off and said, ‘You know Bob, I was really wondering why a smart guy like you is just wasting his time on something like this’” (Michael Bordo, interview, July 24, 2013). 92. Along the same lines, in mid-­July 1965 Eli Shapiro of Harvard University observed: “we have enjoyed rapid growth rates in the last five years. . . . We have [also] enjoyed price stability of an order which is the envy of the rest of the world” (Shapiro 1966, 327). 93. See, for example, William Gibson’s statement and testimony of December 1, 1969, in Committee on Banking and Currency, US House (1969a, 314, 317); Fand (1970); Brunner (1979b, 4); Walters (1987, 427); Meltzer (2009a); Mayer (1999); and Levin and Taylor (2013). Some of the later accounts mentioned would treat 1965 through the early 1980s as part of a single Great Inflation. However, as already suggested, the quantitative differences between inflation in the 1960s and in the 1970s, and the divergence between the perspectives that policy makers took in the 1970s compared with their 1960s counterparts, argue against treating the whole period as monolithic. 94. In this vein, Otto Eckstein of the CEA reported (Eckstein 1965, 17), “The early reports on the excise tax reduction of last June are equally promising. About 90 percent of that tax cut was passed on in lower prices by mid-­August, according to the recent survey of the BLS.” 95. See Friedman (1966a, 1966e). 96. This omission gave the report lasting notoriety. Meltzer (2009a, 471) would also point to the 1966 CEA-­produced Economic Report of the President in which “monetary policy was not mentioned as a cause of inflation.” 97. The first article—Friedman’s piece on guideposts (Friedman 1966a) was quoted and endorsed in a Wall Street Journal editorial of May 10, 1966. The conference volume was published in September (and advertised in the Wall Street Journal of September 7, 1966). 98. Friedman (1966a, 37; p. 118 of 1968 reprint).

N o t es t o P a g es 8 4 – 8 7   371 99. Friedman (2005a, 4). This speech, “How Not to Stop Inflation,” was given at Wayne State University in Detroit on the evening of February 18, 1966. Advance notice of the speech appeared in the Detroit News, February 16, 1966. Friedman spoke from notes; however, the talk was tape-­recorded and transcribed, and it was ultimately published nearly forty years later by the Federal Reserve Bank of Richmond (Friedman 2005a). 100. This was an increasingly rare instance in which Federal Reserve policy actions were centered on the discount rate. Board governor Mitchell testified after the increase: “Recent public discussion of Federal Reserve actions has largely ignored the fact that open market operations—not discount rate policy—are the principal instrument of Federal Reserve policy” (December 13, 1965, testimony, in Joint Economic Committee 1966, 23). Indeed, over the course of the 1960s, open market operations acquired preeminence as the way in which monetary policy was routinely conducted. The discount rate became more flexible, yet also less relied on as the means by which the Federal Reserve conveyed its policy decisions. J. M. Burns (1973, 50–51) attributed these changes, in part, to Friedman’s influence. The fact, however, that the changes were afoot by 1965 suggests that Friedman’s views did not play a very major role. In addition, even as discounting took a back seat as a policy tool, other changes in Federal Reserve operating procedures during the 1960s went against the Friedman vision—two notable instances, noted earlier, being the FOMC’s increasing focus on management of the federal funds rate and the adoption in 1968 of lagged reserve accounting. 101. See, for example, Financial Times (December 7, 1965) and Dornbusch and Fischer (1978, 251). 102. See section III of the next chapter on the label “monetarists.” 103. For example, Karl Brunner (1969a, 250n2) made this criticism at an April 1966 conference (at the University of California, Los Angeles) on monetary indicators. The proceedings of this conference were published in 1969. 104. The June 1966 memorandum was made public by Friedman when he included it along with the October 1965 memorandum in Friedman (1968a); the quotation is from p. 153 of the latter. Even prior to 1968, however, Friedman’s memoranda were not considered secret documents, and Friedman’s June 1966 memorandum had been cited publicly as an unpublished piece in Gibson and Kaufman (1966, 2) and Fand (1968, 830). Friedman also gave similar analyses in his public commentary. For example, in The Great Society: The Sizzling Economy, NET, June 27, 1966, Friedman stated that money “has been growing since last August at a faster rate than it had earlier”; in Newsweek (October 17, 1966), he contended that the Federal Reserve had “let the quantity of money grow still faster . . . from 1965 to April 1966”; and in Instructional Dynamics Economics Cassette Tape 7 (December 16, 1968), Friedman named the period from late 1965 to early 1966 as one in which rising market interest rates coincided with very rapid monetary growth. 105. Federal Reserve Board records. 106. See Rasche (1987, 1990). Martin’s M3 did, however, differ from both the Federal Reserve’s modern M2 and the official M3 series of the 1970s because Martin’s M3 included the large CD items discussed presently. 107. That is, the series M2 in Friedman and Schwartz (1970a). In Newsweek (October 17, 1966), Friedman gave monetary growth since April as “about 3 percent a year.” 108. See Friedman and Schwartz (1969a, 1970a); Bach et al. (1976); and Whitesell and Collins (1996). See also the discussion in chapter 14. 109. Friedman (1980c, 82). 110. Instructional Dynamics Economics Cassette Tape 16 (February 1969); see also

372 N o t es t o P a g es 8 7 – 8 9 chapter 2 above. Gramley and Chase (1965, 1381) gave the relaxations of the time-­deposit-­ rate ceiling up to that point as taking place in 1957, 1962, 1963, and 1964. The December 1965 increase in ceilings was a further occasion. 111. Mayer (1982a) provided a detailed analysis and critique of the lowering of the Regulation Q ceiling in 1966. Mayer’s argument that the decision was not well thought out and generated inefficiencies, while compelling on its own terms, was somewhat undermined by the fact that, in work contemporaneous to his research on Regulation Q, Mayer (1982b) was advocating the extension of reserve requirements to new financial instruments. Such a proposal, had it been carried out, would likely have created distortions and circumvention highly analogous to those that Mayer (1982a) cited as adverse consequences of the 1966 Regulation Q decision. 112. Friedman (1967b, 101). 113. See, for example, his remarks in Jacobs and Pratt (1968, 49). 114. See, for example, Friedman (1970d, 16) and Tobin (1970c, 4). 115. Friedman (1964f, 16). 116. See Friedman (1968a, 137). 117. See Friedman and Schwartz (1976; 1982a, section 10.8) and Friedman (1987a, 17; 1988a, 226). See also Bordo and Rockoff (2013b); Summers (1983); and Judd (1976, 35). The last of these references cited Cagan (1972c) and Yohe and Karnosky (1969) as “those whose research supports” the notion that the Fisher effect became observable in quarterly or annual US data from the 1960s onward. The case of Cagan (1972c) is especially notable as his earlier study (Cagan 1965) had, as Friedman (1965b, xxvi–­xxvii) noted and as discussed further below, found little evidence of the Fisher effect. This was a valid conclusion on the basis of pre-­1960s US data; yet the Fisher effect in the US data started becoming evident in US data from almost the moment Cagan’s book was published. To Judd’s list can also be added Gibson (1972); Meigs (1972, 127); and B. Klein (1975a, 476). Friedman’s own discussion (in Friedman 1971d, 334–35) of recent years’ research on the Fisher effect listed authors but not specific papers, but he evidently was referring to Cagan (1965); Friedman and Schwartz (1966); and Gibson and Kaufman (1966). 118. Along these lines, Friedman (1968b, 7) cited Brazil and Chile as examples of the association between easy money and high interest rates. See also chapter 6 for the discussions of the Fisher effect that took place in US commentaries between Irving Fisher’s death in 1947 and the end of the 1960s, including those in Friedman’s work. 119. Two of Friedman’s former students, David Meiselman and Phillip Cagan, had explored the Fisher effect. Indeed, Sargent’s (1969) paper on the Fisher effect listed their work as the only recent empirical literature. However, heir results (Meiselman 1963; Cagan 1965) provided, at best, partial and tentative support for a link between nominal and real interest rates. These results reflected the apparent absence, already noted, of a link between the two series in the United States before the advent of sustained inflation in the mid-­1960s. 120. These discussions included the chapter on the subject in Friedman and Schwartz (1966), which became the basis for Friedman (1968f ). However, contrary to what is sometimes suggested (for example, by Bordo and Rockoff 2013b, 174), the Fisher effect was already present in Friedman’s analysis before the 1960s. See chapter 6. 121. Friedman gave a similar formulation, explicitly linked to the Fisher effect, in his December 1967 presidential address to the American Economic Association (Friedman 1968b, 7). 122. Friedman (1970a, 19; p. 12 of 1991 reprint); see also Instructional Dynamics Eco-

N o t es t o P a g es 8 9 – 9 1   373 nomics Cassette Tape 6 (December 1968), in which Friedman indicated that the remark referred to M1. In a similar vein, Friedman’s former student William Gibson, explicitly using the M1 definition, testified in 1969 that monetary growth was zero from April to December 1966 (December 1, 1969, testimony, in Committee on Banking and Currency, US House 1969a, 314). 123. Judgments about whether interest rates corroborate the evidence from monetary growth on the tightness of financial conditions in mid- to late 1966 are somewhat sensitive to which interest-­rate-­based measure of conditions is employed. The behavior of the yield curve over the period does support the notion that conditions were tight. The curve became inverted in 1966—apparently the only occasion in the six decades following the Accord when this has occurred without a subsequent recession (Rudebusch and Williams 2008; Haubrich and Waiwood 2013). On the other hand, the federal funds rate fell below the Taylor (1993) rule prescription around 1964; the 1966 rise in the funds rate failed to close this shortfall, although it ensured that the shortfall did not widen further and may have narrowed it a bit. By the criterion of the Taylor rule’s prescription, therefore, monetary policy may have tightened during 1966, but the policy stance thereby attained was not tight (or neutral) in absolute terms. See Taylor (1999, 337, figure 7.4). 124. See also Friedman (1972e, 15). The decline in industrial production is maintained in the modern revised data on industrial production (available in the Federal Reserve Bank of St. Louis’s FRED portal). The seasonally adjusted index of this series was in July 1967 slightly below its level of a year earlier. 125. See, for example, Friedman (1972e, 14; 1983a, 8; 1984c, 27). 126. See Friedman (1970d, 16–17). 127. Friedman and Schwartz (1982a, 74). 128. Friedman (1972e, 14). See also chapter 15 below. 129. Friedman (1970d, 16). 130. See Friedman’s remarks in Newsweek, November 4, 1974, and October 3, 1977, as well as in the St. Louis Globe-­Democrat, December 7, 1977. In Instructional Dynamics Economics Cassette Tape 45 (February 26, 1970), Friedman characterized 1967 as featuring an overreaction by policy makers to a period of earlier restraint. 131. The 1954 date is consistent with the reference (in general terms) to the project in Friedman (1955f, 30). 132. Friedman included tables from the early work—explicitly labeled “Preliminary”— in one of his 1956 lectures at Wabash College (Friedman 1956d). 133. Friedman and Meiselman (1959), available in Anna Schwartz papers, Duke University. Hetzel (2007, 13) suggested, on the basis of an interview with Meiselman, that the initial draft might have been in 1958, but the documentary evidence from Anna Schwartz’s office papers establishes the initial draft as being in 1959. 134. Friedman (1961d, 447) cited this draft, as did Friedman (1962a, 84) (though both these references put “Investment Multiplier” ahead of “Monetary Velocity” when giving the paper’s title, and the latter also incorrectly gave the first date in the title as 1896). In neither of these citations did Friedman give a date for the draft. Meigs (1972, 19) stated that the preliminary draft was circulated in 1961. Earlier, however, Meigs (1967, 25) gave 1960 as the year in which a draft was available, and contemporaneous evidence confirms that a draft under the final title was already circulating in 1960 (being cited as such by Pesek 1961, 91). Harry Johnson (1962, 380) also cited the Friedman-­Meiselman paper (without supplying a date), while the retrospective account in Thygesen (1977, 74) gave a 1960 date for the Friedman-­Meiselman draft.

374 N o t es t o P a g es 9 1 – 9 4 135. William Poole recalled seeing the presentation of the paper at the workshop in the early 1960s (William Poole, interview, March 25, 2013). So too did Eugene Fama (interview, September 11, 2013). 136. Friedman and Meiselman (1963). 137. See, for example, Wonnacott (1974, 217–27); Lovell (1975, 226–28); and Amacher and Sweeney (1980, 259–60). For coverage of Friedman and Meiselman (1963) in a modern graduate text, see Walsh (2010, 13). 138. Namely, Friedman (1968b, 1969a) and Friedman and Schwartz (1963b). Friedman books that would be regarded as more well known publications than the Friedman-­ Meiselman study include Friedman (1960a, 1962a) and Friedman and Schwartz (1963a). 139. This passage from Friedman (1962a, chapter 5) was also reprinted under the title “Weak Links in the Multiplier Chain” in the Okun (1965, 1972a) collections. 140. See chapters 5 and 6. 141. Among Friedman’s work, the most notable item on this score was Friedman (1952b). As Chow (1970, 688) correctly noted, the 1952 Friedman study, like Friedman and Meiselman (1963), was aimed at putting the Keynesian and quantity theories to empirical test. See also the discussion in Bordo and Schwartz (1979). 142. Friedman and Meiselman (1963, 166). 143. McCallum (1986a, 11) discussed some other retrospectives on the Friedman-­ Meiselman exercise. 144. See chapter 8 above. 145. In addition, as stressed above, bivariate money/income relationships are of interest from the monetarist perspective even though the mechanism through which monetary policy matters for inflation is via asset prices, because money or its growth rate may under those circumstances be a useful summary of overall asset-­price behavior. For elaboration of this point, and related references, see chapter 6. John Wood’s (1981, 214) suggestion that bivariate money/income studies of the Friedman-­Meiselman type “could not possibly have had any implications for the validity of Friedman’s approach,” and the similar claim in Tobin (1981b, 40–41), were accordingly unwarranted. 146. Mishkin (1989, 550), emphasis in original. 147. Friedman would similarly recall in the early 1970s that the debaters “wasted many pages in the American Economic Review in replies, counter replies, counter-­counter replies and so on” (Friedman 1973a, 9). 148. Friedman and Meiselman (1964, 375–76). Following Hester, however, Friedman and Meiselman apparently took arithmetic first differences rather than logarithmic first differences of the money and spending data. Relationships between log differences of series whose original units are in dollars are often of greater interest than relationships obtained with arithmetic first differences (whose form preserves the dollar units) because the use of logarithms allows key regression output, such as the residuals and their standard deviation, to be interpreted as being in the form of percentages. Friedman (1966d, 78) did estimate a money/income relationship in log-­difference form, as did Friedman and Schwartz’s (1982a) work, as well as Plosser and Schwert’s (1978) revisiting of the Friedman-­Meiselman (1963) data set. 149. See Friedman (1943b, 119). 150. Brunner (1986, 35) used the similar label “the war between the radio stations.” Those acronyms should, however, have instead given rise to talk of a war of the radio fre‑ quencies. A little before the debate with Friedman and Meiselman, Modigliani (1964b) had pro-

N o t es t o P a g es 9 4 – 9 8   375 duced a critique of Friedman’s constant-­monetary-­growth rule. This piece was closely related to the critiques of the rule that Modigliani voiced in the 1970s (most notably that in Modigliani 1977). 151. In Meiselman’s recollection, Friedman also gave a presentation of the paper at MIT. “I remember he went to MIT, and he came back, [and] he said, ‘They were so mad at me.’ He said, ‘They thought that Friedman was up pulling one of his old tricks again’” (David Meiselman, interview, July 16, 2014). 152. See especially Friedman and Meiselman (1965, 777). 153. See Ando and Modigliani (1965, 716, 721–22). 154. J. Wood (1981) contended that Friedman and Meiselman’s (1963) results broke sharply with Friedman’s previous (that is, 1950s-­vintage) views on money. However, Wood’s contention arose from confounding two measures of regression fit: the R2 (or its square root) and the standard error of estimate. Friedman and Meiselman found high R2 ’s in spending-­on-­money regressions. This finding implied that the unexplained variation in spending was low in relation to the total variation in spending. But it did not imply that the unexplained variation (which was reflected in the regression’s standard error of estimate) was low in absolute terms. In fact, Plosser and Schwert (1978) found that spending regressions estimated on Friedman and Meiselman’s data set had both high R2 ’s and substantial standard errors of estimate. Wood’s interpretation of Friedman and Meiselman’s (1963) findings was essentially based on the premise that the authors implied that spending could be predicted very precisely using money and that the findings therefore contradicted Friedman’s long-­standing emphasis on the looseness of the relationship. Wood’s interpretation required that the standard errors of estimate of the Friedman-­Meiselman regressions were low; and they were not. No inconsistency exists between Friedman and Meiselman’s (1963) findings and Friedman’s emphasis, both in the 1950s and later, on the looseness of the year-­to-­year money/spending relationship. 155. Friedman (1964f, 26). 156. A similar observation was recorded in Fortune, June 1, 1967, 148. 157. Friedman’s initial contact with Goldwater in the early 1960s had been correspondence in which Friedman expressed dissent from Goldwater’s monetary views, specifically Goldwater’s advocacy of foreign exchange controls: see Burgin (2012, 200). Burgin’s account does not, however, make clear that Friedman and Goldwater’s disagreement on monetary issues continued beyond this period. 158. The New York Times’ preamble to Friedman’s article stated (35) that his “latest book” was Capitalism and Freedom, thereby overlooking A Monetary History. 159. See Friedman’s letter in Frazer (1982). 160. Friedman (1987b, 220). 161. Occasions on which Friedman cited Medicare and Medicaid as reasons why medical costs had risen included his column of Newsweek, February 9, 1976, and an interview in the Register, December 23, 1979. He would, however, subsequently acknowledge that government-­provided medical insurance could be a force of restraint in medical costs if the insurance scheme was applied to the whole population using a single-­payer system (see Friedman 2001, 17). 162. In Fortune (June 1, 1967, 131), for example, Friedman referred to “all the foolish legislation put in place from the New Deal forward.” As has been emphasized in chapter 2, however, Friedman never opposed the New Deal reforms in toto. 163. From Reagan’s entry of January 28, 1982, in Reagan (2009, 65). Reagan’s diary entry implied that he never opposed the pre–­Great Society level of government interven-

376 N o t es t o P a g es 9 8 – 1 0 0 tion, but this seems incorrect in view of his support for the reduction in government programs and regulations entailed by the Goldwater proposals. 164. Examples of these attempts included Friedman’s description, in his October 11, 1964, New York Times piece, of the Goldwater approach as one that sought “to promote the freedom of the individual and to widen his opportunity” (137). 165. The fact that Goldwater did so, as well as his vote against the 1964 tax cut, was highlighted in the nomination-­acceptance speech of the Democratic vice presidential candidate Hubert Humphrey. See New York Times, August 28, 1964. 166. See for example Friedman (1962a, 118). 167. See also Friedman (1970g, 435). 168. See Friedman (1970g, 435; 1970h, 10). 169. See Friedman (1955b, 131). 170. Friedman and Friedman (1980, 165). See also New York Times, September 23, 1973. 171. Instructional Dynamics Economics Cassette Tape 103 (July 12, 1972). In addition, Friedman (1981b) wrote a foreword to Sowell (1981). In that book, a study of the economic situation for minorities, Sowell’s reference to the Civil Rights Act (on p. 115) was favorable. 172. Friedman (1977f, 17). 173. Robert Hall made these remarks in a presentation as a discussant at the NBER Conference on Monetary Policy Rules, Florida Keys, on January 19, 1998. Hall reaffirmed this characterization when reminded of it in an interview for this book (May 31, 2013), although he added that Paul Samuelson should be noted as another figure who was in a similar constant debating posture vis-­à-­vis Friedman. A parallel observation was made by George Stigler (Los Angeles Times, December 14, 1986, 14): “I used to say that the people at MIT and Harvard didn’t know what they were going to work on until Milton made a speech.” However, Stigler’s characterization did not portray the nature of the 1960s debates as well as Hall’s did. This was because Stigler—who very likely was unfamiliar with the details of the monetary and fiscal policy debates of the 1960s—nominated Harvard University rather than Yale University as the main academic center other than MIT known for challenging Friedman. Stigler may also have identified Harvard University as a key location for views on economics opposite to those of the University of Chicago because of his own sparring with Harvard University’s Edward Chamberlin on issues connected to industrial economics. On these issues, it was meaningful to talk of a major debate between the Chicago School—in this context, principally Stigler—and a “Harvard School” of Chamberlin and others (see Schmalensee 1983, 83). But there was no comparably important Friedman/Harvard University debate in the area of monetary economics. 174. The date of the conference was August 29 through September 2, 1964 (Banking, October 1964, 116). The published version of Tobin’s review gave the date of his presentation as September 1, 1964 (Tobin 1965a, 464). 175. See Friedman (1964f ). 176. Friedman indicated (in Friedman and Heller 1969, 87) that this op-­ed was intended as a response to Tobin’s Washington Post articles of that year. 177. See Friedman and Schwartz (1969a). 178. See Tobin (1970a) and Friedman (1970c). 179. One area in which Tobin did not engage Friedman heavily pertained to the writing of books. Shortly after the Monetary History appeared, the Cowles Foundation (1964, 23) reported on a “forthcoming book on monetary theory by Tobin,” in which Tobin would assimilate his work on commercial banking, portfolio selection, the demand for money,

N o t es t o P a g es 1 0 0 – 1 0 2   377 and the monetary mechanism. But the book failed to appear during the 1960s or even the 1970s. (The draft was eventually reworked into Tobin and Golub 1998.) 180. Tobin (1965a, 485). Tobin had used a similar formulation in Tobin (1958b, 447) to describe Friedman’s consumption-­function work: “This is one of those rare contributions of which it can be said that research and thought in its field will not be the same henceforth.” 181. From an audiotape of James Tobin’s floor remarks, October 1, 1986, in the final session of the conference “The Legacy of Keynes” (twenty-­second Nobel Conference, held at Gustavus Adolphus College, St. Peter, Minnesota, September 30 and October 1, 1986). The remarks Tobin made on this occasion were consistent not only with Friedman and Schwartz’s (1963a) analysis of postwar recessions through 1960, but also with Romer and Romer’s (1989) later work on post–­World War II US recessions. As discussed earlier in this chapter, however, this assessment of the sources of US cyclical postwar fluctuations contrasted with the views prevailing among Keynesians as of 1965. 182. See Friedman and Schwartz (1963b, 58–59). See also Friedman (1959a). 183. It is assumed here that the Plosser-­Schwert experiments used Friedman and Meiselman’s M2 series (the series used also by Friedman and Schwartz). 184. Friedman (1964f, 13). 185. Friedman and Schwartz (1966, 2–192). In addition, Friedman in a 1969 television appearance (The Great Economics Debate, WGBH Boston, May 22, 1969) spoke of a 1 percent change in monetary growth being manifested in a 1 percent change in nominal income about six months later. This statement may have registered a shift in Friedman’s views during 1969 in favor of a unit income elasticity, for in November 1968 (as recorded in Friedman and Heller 1969, 76) he was reporting a much different estimate of the cyclical relationship between nominal income growth and monetary growth, one that Friedman and Schwartz (1963b, 57–58) had derived from calculations that built in an income elasticity of money demand of 1.8. 186. See Friedman (1970b, 1971d). In conference remarks given in 1970, Friedman (1971e) signaled his repudiation of the earlier high income elasticity estimates and indicated acceptance of Tobin’s financial-­development argument for understanding late nineteenth-­century velocity behavior. (See also Friedman 1971c, 852.) Friedman and Schwartz (1982a, 150) acknowledged that Tobin (1965a) had moved them in this direction. Friedman’s shift of position on the income elasticity of money demand was noted by Gilbert (1982, 107), Bordo and Jonung (1987, 14), Walters (1990, 270), and Mulligan and Sali-­i-­Martin (1992, 325), with the latter three references noting the role of Tobin’s review in producing the shift. Walters further suggested that Friedman might also have been “reacting to data collected in the late 1960s and 1970s.” Data from this period likely did play a role in the sense that they added to the evidence—available in earlier twentieth-­century data—that the income elasticity of the demand for money was not well above unity in the United States. Nonetheless, as already indicated, even by late 1966 Friedman was shifting toward a belief in an income elasticity of around unity. 187. In contrast, Harry Johnson (1976a, 300), in referring to the “empirically erroneous Friedman view that colored Chicago research in the early 1960s,” recognized that by the mid-­1970s Friedman no longer saw money as a luxury good. 188. Ericsson, Hendry, and Hood (2017) discuss and critique this velocity adjustment. But their discussion, especially their endorsement of the notion that the adjustment “distorted the evidence,” makes the adjustment seem like an arbitrary and poorly motivated one on Friedman and Schwartz’s part, rather than one that (i) was informed by critical

378 N o t es t o P a g es 1 0 2 – 1 0 4 analysis by Tobin of their earlier work and (ii) received backing from the study published as Bordo and Jonung (1987). Furthermore, a comparison of the money-­demand estimates in Friedman and Schwartz (1982a) and Hafer and Jansen (1991) suggests that—contrary to Ericsson, Hendry, and Hood’s (2017) suggestion—the Friedman-­Schwartz adjustment did make estimates of US M2 money-­demand parameters much more constant. 189. See Friedman and Schwartz (1982a, 150, 216–21, 282). 190. See Friedman and Schwartz (1982a, 387, 418); Wall Street Journal, September 1, 1983; and Friedman (1988a, 225). In Friedman (1987a), however, Friedman’s overall judgment of the empirical evidence on money demand was that the income elasticity, while close to unity, was generally above unity. 191. That is, in Friedman (1956a). In a similar vein, Sánchez-­Fung (2015, 7) states that the “monetarist literature” imposes a real income elasticity of unity in specifying the demand function for money. 192. It is likely that Friedman’s (1956a, 13, point 12) statement that money demand “must be homogeneous of the first degree in Y and P” has been misinterpreted as asserting a unit real income elasticity, when, in fact, it was merely a statement of price homogeneity. (P and Y both denoted nominal magnitudes in Friedman 1956a.) 193. See, for example, Friedman (1969a, 47–48). 194. Friedman and Schwartz (1969a, 13; 1970a, 124). 195. See Brunner (1969a, 282) and Brunner (1971a, 1971b). 196. This was the conclusion at which Friedman and Schwartz (1970a, 123–25) arrived after their analysis of Gramley and Chase (1965). Similar conclusions concerning the implications of Gramley and Chase’s analysis appeared in Yeager (1968, 49–51) and Henderschott (1969, 298). 197. See Tobin (1985, 608). 198. On a related note, in 1979 Tobin urged the Federal Reserve Board to publish an official monetary base series (defined, however, to exclude borrowed reserves), stating, “If there is a quantity that is the monetary anchor of the economy, this is it” (Tobin 1979, 320). Tobin’s placement of the words “high-­powered” in quotation marks in his 1965 review (and in Tobin 1969a, 27) may have signified his mixed feelings about that specific terminology. However, as just indicated, Tobin’s own analysis placed significance on the concept of high-­powered money or the monetary base. His preferred terminology for this series was “demand debt of the government” (see, for example, Tobin 1969a, 27; and Rasche 1993b, 27). 199. Federal Reserve Board (1966, 29). Public statements by the Federal Reserve during the 1950s and 1960s generally relayed a similar message. See Meigs (1972, 158–59) for some examples, as well as the account of the reserves/money stock link given in Abbott’s (1960, 1102) discussion in the Federal Reserve Bulletin. In a related vein, a member of the Federal Reserve Board staff noted in 1962 that, irrespective of whether the Federal Reserve consciously targeted the money stock, “the total of bank deposits is subject to the very strong and direct influence of public policy” (Axilrod 1962, 16). Axilrod and Young (1962, 1121) stated specifically that “monetary policy . . . actions affect the volume of bank reserves and, thereby, through the process of bank credit expansion, the volume of currency and deposits.”

N o t es t o P a g es 1 0 6 – 1 0 8   379

Chapter Thirteen 1. That is, Friedman (1968b). 2. In a retrospective, Karl Brunner (February 25, 1971, testimony, in Joint Economic Committee 1971a, 548) characterized the 1967 slowdown as having “exorcised” the inflation that began in 1965 and as having done so at a low real cost. Along the same lines, Brunner later observed (in Forbes, March 1, 1975) that the United States “could have gotten out of inflation at practically no social cost in 1966–67—just a minirecession.” 3. See Friedman’s remarks in Friedman (1972e, 14) and in Chicago Tribune, May 24, 1972. A similar judgment concerning the timing appeared in Meltzer (2009a, 508). 4. See Friedman (1980c, 82; 1983a, 7; 1984c, 26) and Friedman and Friedman (1985, 82–83). Okun (1970, 84–85) and McLure (1972, 55) also expressed the judgment that the year 1967 offered a missed opportunity for the United States to resettle on a noninflationary expansion. But their analysis differed crucially from Friedman’s in identifying the policy error that sacrificed this opportunity not as a return to monetary expansion, but as the failure to increase taxes promptly. Friedman’s emphasis on 1967 rather than a later point as the shift to roller-­coaster policies incorporated a recognition that the policy actions of that year were felt in part in economic behavior in subsequent years. In contrast, Matusow’s (1998, 302) judgment that roller-­coaster policies began in 1969 rested on the presumption that the high inflation of 1969 reflected policy actions in 1969. Friedman’s position—articulated in Instructional Dynamics Economics Cassette Tape 106 (August 24, 1972), for example—was that the higher monetary growth of 1967–68 had set the stage for more inflation (including the rapid inflation rates of 1969 and 1970). This interpretation of events, which allows for lags, has become widely accepted. 5. On the Federal Reserve’s routine sterilization of US balance-­of-­payments disequilibria during the Bretton Woods era, see, for example, Bordo (1993, 56, 77) and McKinnon (1996, 162). 6. Friedman nonetheless suggested that the United States might allow the balance of payments to affect monetary policy in the event of a balance-­of-­payments surplus (Friedman and Roosa 1967, 22). This likely reflected his position in Friedman (1954a) that once an activist stabilization policy was introduced in the United States (as had occurred decisively after the 1960 election), the policy would lead to a secular inflation. The logic of his 1954 talk suggested that the stimulus to aggregate demand provided by balance-­of-­ payments surpluses would be embraced if slack initially existed in the economy. It further suggested that if the strengthening of aggregate demand ultimately led to an emergence of inflation, this would be partly misdiagnosed as cost-­push inflation and so would not trigger an adequate monetary policy tightening. 7. Friedman and Roosa (1967, 15). See also Friedman’s remarks in Newsweek, May 15, 1967. This was a stronger position than that of another advocate of exchange-­rate flexibility, James Tobin, who merely stated (Tobin 1967, 106) that “balance-­of-­payment[s] troubles can be eased by flexibility of exchange rates.” It may be that the difference in judgment reflected a belief on Tobin’s part that individual imbalances in the current account and capital accounts were a policy concern even when floating rates ensured that these two imbalances summed to zero. But, to Friedman, a large current account imbalance under floating rates was not a sign that floating exchange rates were not functioning correctly. See, for example, Friedman and Friedman (1985, 123). 8. See, for example, Friedman (1969g, 17–18) and Friedman’s Newsweek column of

380 N o t es t o P a g es 1 0 9 – 1 1 2 December 20, 1971. A qualification to this characterization is that Friedman envisioned that most countries other than the United States were likely to aim for a modest balance-­ of-­payments surplus in order to accumulate dollar reserves. See the discussions in chapters 11 and 15. 9. Friedman made this point on many occasions, including in Friedman (1962c, 30–31; 1962d, 223, p. 177 of 1968 reprint) and National Review, May 22, 1962, 363. The point was also implicit in Friedman’s discussion (in Wall Street Journal, June 30, 1975), of the “realistic” means by which a country could achieve balance-­of-­payments equilibrium. 10. Friedman and Roosa (1967, 17). See also Newsweek, January 29, 1968. 11. See Friedman (1971b, 18) as well as the related discussions in his Newsweek columns of April 1, 1968; March 24, 1969; and October 19, 1970. Friedman had anticipated in Business Week (October 6, 1962) and Friedman (1962d, 223; p. 177 of 1968 reprint) that the US government would introduce foreign-exchange and other controls in response to the US balance-­of-­payments deficit. See also Friedman and Schwartz (1982a, 29). 12. State of the Union/’68, NET, January 17, 1968, p. 96 of transcript. 13. Friedman’s reaction to the 1967 sterling devaluation is considered in detail in E. Nelson (2009a, 2009b). 14. For the latter, see Committee on Banking and Currency, US House (1968a). 15. The quotation is from Friedman’s February 1, 1968, testimony, in Committee on Banking and Currency, US House (1968a, 153). Friedman used this wording again in Newsweek, February 19, 1968. 16. State of the Union/’68, NET, January 17, 1968, p. 98 of transcript. 17. Great Decisions 1968 #7: The Dollar in Danger, WETA, March 17, 1968, p. 3 of transcript. 18. Great Decisions 1968 #7: The Dollar in Danger, WETA, March 17, 1968, p. 4 of transcript. 19. From Anna Schwartz’s copy of Friedman and Roosa (1967). A large portion of Friedman’s contribution to this “instant book” would in turn have an “instant reprint” as a chapter in Dollars and Deficits (Friedman 1968a). 20. Friedman (1962f, 729). 21. Friedman (1964e, 8; p. 263 of 1969 reprint) claimed that a full draft of the trends-­ and-­cycles volumes had been written “years ago,” before the draft of Monetary History was completed. A similar claim was made in Friedman and Schwartz (1982a, xxviii), in which it was indicated that Friedman and Schwartz (1966) was the second draft of the manuscript. For passages of Monetary History that cited Trends and Cycles as though its publication was imminent, see Friedman and Schwartz (1963a, 3, 97, 592, 703); see also Friedman and Schwartz (1963b, 36). 22. Friedman was at the University of California, Los Angeles, over January–­March 1967—the winter quarter, in University of Chicago terminology (see Friedman and Friedman 1998, 209–10; see also Blaug 1986, 291). The fact of Friedman’s presentation and circulation of the Trends and Cycles manuscript during his stay was established from records at the Federal Reserve Bank of St. Louis library and at the Anna Schwartz papers, Duke University. 23. Jerry Jordan, interview, June 5, 2013; Michael Canes, interview, November 7, 2013. 24. See Friedman and Schwartz (1982a, xxviii). 25. This appeared in both hardback and softbound editions in 1968 (with different subtitles): see Friedman (1968a, 1968e). Although the choice of the book’s main title underlined the focus on international economic problems at the time of publication, a good

N o t es t o P a g es 1 1 2 – 1 1 3   381 deal of the book’s text was concerned with domestic monetary management. The book would be classed in Friedman’s official bibliography as intended for popular audiences. But much of the material in the book—while lacking in equations—had previously appeared in research forums. 26. Friedman and Schwartz (1982a, 477). 27. See chapter 6 and E. Nelson and Schwartz (2008a) for further discussion of the point that it was the monetarist literature that reintroduced the real/nominal interest-­rate distinction into economic research and policy forums. 28. The first occasion was in Business Week (September 30, 1967, 36). As noted in the previous chapter, the magazine had also quoted Friedman on the subject in 1966. 29. See Friedman (1968f ); see also Friedman and Schwartz (1982a, 477). Friedman also presented the argument in summary form in his June 15, 1966, memorandum to the Federal Reserve Board, which he published in 1968 (see Friedman 1968a, 155–57). Friedman (1968f ) was published in the obscure US Savings and Loan League annual proceedings volume. Because of its subject matter, however, it became a moderately well known article in the research literature—see the citations in Mishkin (1983, 76, 162), for example—and received a wider circulation in part by virtue of being reprinted in finance and macroeconomics readings collections (for example, in Brigham 1971, 363–81; and in Havrilesky and Boorman 1976, 362–78). Nonetheless, the later literature on the liquidity effect tended to cite more prominent Friedman articles, like Friedman (1968b), that touched on the subject (see, for example, Cochrane 1989, 75, 82; and Christiano and Eichenbaum 1995, 1115, 1136), rather than Friedman (1968f ). A still more obscure Friedman discussion of interest-­rate determination was his talk to the University of Miami Savings Institution Forum; that talk, given on March 11, 1968, appeared as part of a limited-­circulation transcript of the forum proceedings, with the printed version of his talk (Friedman 1968g) being included in Friedman’s official bibliography. Another advocate of the importance of the Fisher effect around this time was Karl Brunner, whom Gibson and Kaufman (1966, 19) quoted as saying in an unpublished manuscript dated August 31, 1966 (Brunner 1966) that “expansionary monetary policy does lower interest rates in the shorter run [but] . . . the delayed effects working through expanding output and higher prices induce substantial increases in the demand for funds large enough to raise interest rates in the longer run.” 30. In addition, financial newsletters discussed the Fisher effect: see, for example, the article on the subject in First National City Bank Monthly Letter (June 1967). This article, like others in the series, was likely drafted by Friedman’s former student James Meigs, who in 1967 was a vice president of the First National City Bank of New York and who also discussed the Fisher effect in Meigs (1967). Meigs was, in addition, quoted on the subject in the November 1967 Wall Street Journal item noted in the text. 31. Tobin (1966b, 9). 32. See his February 16, 1967, testimony, in Joint Economic Committee (1967b, 581). 33. Among Tobin’s post-­1967 analyses along these lines, see Tobin (1974a, 223–27; 1981c). The second of these items was a contribution to a conference that was held in 1979. 34. Tobin argued that the weakness of the stock market in the mid-­1960s (and afterward) constrained the private sector’s ability to shift out of fixed-­interest securities. On the basis of this argument, in conjunction with his theory of investment behavior (Tobin 1969a), he argued that low real interest rates on Treasury bills and bonds were not a major force making for stimulus to aggregate demand.

382 N o t es t o P a g es 1 1 4 – 1 1 6 Friedman shared Tobin’s view that physical goods were, like securities, among the items that agents viewed as an alternative to holding money (see Friedman 1956a, and chapter 5 above). But he would not share Tobin’s confidence that equities were a good proxy for such physical assets (see Friedman and Schwartz 1982a 507–10; E. Nelson 2013a; and chapters 5–6 above). Instead, Friedman would emphasize substitution by households into consumer durables and other physical goods for which equity claims were not necessarily issued. As examples of these durables, he would list items such as luxury cars and other means of high living (see, for example, Instructional Dynamics Economics Cassette Tape 198, September 1976, part 1; Newsweek, November 8, 1976; Friedman 1977e, 466; Donahue, NBC, September 6, 1979). Even in the early 1960s, Friedman was pointing to postage stamp collection as one of the means by which households hedged against inflation, arguing that stamp purchases were an example of how “people are willing to pay people to make them, force them, to save” (Fortune, August 1960, 119; p. 348 of 1963 reprint). Friedman reaffirmed in Friedman (1982c, 57) that inflation (together with the tax system) was inducing a shift into collectibles as a vehicle for saving. 35. See Brill (1968) 36. See chapter 10. 37. See E. Nelson (2012b, 251) for further discussion. Some basis for treating increases in nominal interest rates as a tightening of monetary conditions lay in the fact that, as high nominal interest rates could mean that Regulation Q ceilings on time deposit interest rates were becoming binding, the commercial banks’ balance sheets would be constricted, with both deposits and bank credit reduced by the flight of funds to nonbank instruments (Meek 1982, 70). This scenario was, however, inapplicable to the conditions of 1967 when, as noted, high nominal interest rates were associated with more, not less, monetary growth: see figure 12.1. In addition, the disintermediation that Regulation Q triggered was not a crucial factor behind the behavior of the M2-­CDs series (which later became the Federal Reserve Board’s official M2 series) that Friedman and Schwartz (1970a) settled on for measuring money. Disintermediation in the 1960s bore heavily on commercial banks’ CD issuance, with M2-­CDs less seriously affected. As figure 12.1 shows, M2-­type aggregates all grew strongly in 1967, including those omitting large CDs. 38. The 1970s are a close second on this score, but the value of money as an indicator during the 1970s can perhaps be put on a lower plane than its corresponding status in the 1960s, because the mid-­1970s witnessed the advent of greater problems with short-­run money-­demand functions for M1 and the monetary base than had been the case in the 1960s (Goldfeld 1976; Judd and Scadding 1982; Laidler 1985). That said, long-­run narrow money-­demand relationships are resilient to the inclusion of the 1970s data (Lucas 1988; D. Hoffman and Rasche 1991; Stock and Watson 1993)—a result that suggests that the empirical short-­run money-­demand functions, based on Goldfeld (1973), that broke down in the 1970s may have been misspecified to begin with. 39. See B. M. Friedman and Kuttner (1992) and the discussion of the St. Louis equation in the next section. 40. For further discussion, see the next two chapters. 41. Friedman (1967a, 13). 42. Exchange of February 14, 1968, in Joint Economic Committee (1968b, 198). 43. See E. Nelson (2012b, 248–49). 44. From Martin’s September 14, 1967, testimony, in Committee on Ways and Means (1967a, 697). This remark was quoted in Meigs (1969, 671; 1972, 45); and William Gibson, the Friedman graduate student whose dissertation work was on the Fisher relationship,

N o t es t o P a g es 1 1 7 – 1 1 9   383 regarded this quotation as a sufficiently clear-­cut official endorsement of the Fisher effect that he used it to open his Journal of Finance article on the Fisher effect (Gibson 1970, 19). But a more important Martin conversion on the issue would come later in the 1960s, as discussed presently. 45. February 14, 1968, testimony, in Joint Economic Committee (1968b, 173). 46. See, for example, Coats (1976, 167) and Evanoff (1990, 136). 47. Control of total reserves remains possible in principle in a lagged-­accounting regime because the excess-­reserves component of total reserves is not predetermined and so is still subject to Federal Reserve manipulation (see Thornton 1982; McCallum 1993a, 1993b). Occasions on which Friedman seemed to recognize this point included his commentary in Instructional Dynamics Economics Cassette Tape 157 (November 6, 1974), and evidence in favor of a same-­period relationship between banks’ deposit liabilities and their reserve positions in samples covering the lagged-­accounting regime would be reported in Hafer (1981) and Tarhan and Spindt (1983, 332). Furthermore, even when total reserves are largely predetermined, contemporaneous influence of monetary policy on commercial bank deposits remains possible in a lagged-­ accounting regime. This will be so if commercial banks adjust their balance sheets in response to same-­period changes in the expected path of short-­term interest rates, which continues to be subject to immediate central-­bank influence in a lagged-­reserves regime (Coats 1972, 51; Goodfriend 1983; Rasche 1993b, 38). 48. See Meltzer (2009a, 535) and Joint Economic Committee (1967a, 166). The Joint Economic Committee also wrote favorably about narrowing the range to 3 to 5 percent (see Meigs 1972, 61). Because much of the discussion of monetary aggregates at this time was framed in terms of M1-­type measures of money, the 3 to 5 percent recommendation was not necessarily identical to Friedman’s prescription, which was for M2, even though the target numbers were the same as in his prescription. 49. Proxmire served as chairman of the Joint Economic Committee in 1967–68 and 1971–72 (information received from the office of the Joint Economic Committee, July 24, 2014). When, early in Proxmire’s first spell as chairman, the Joint Economic Committee started making its recommendation of a target range for monetary growth, Friedman’s fellow Newsweek columnist Henry Wallich observed: “The action of the committee is a tribute to the persuasiveness of Prof. Milton Friedman, well known to readers of these columns, who has long urged a policy of this kind” (Newsweek, April 10, 1967). The other Newsweek economics columnist, Paul Samuelson, testified in June 1967 before the committee. This testimony labeled support for constant monetary growth as an “extremist view,” but it did not refer to Friedman by name (see his June 29, 1967, remarks in Joint Economic Committee 1967a, 134). 50. In Joint Economic Committee (1968a, 9). These remarks were given during hearings of the Joint Economic Committee that included appearances from two panels of three economists: one, appearing on May 8, 1968, consisting of three critics of Friedman (Henry Wallich, Franco Modigliani, and Lester Chandler) and one, appearing on May 9, 1968, consisting of three individuals who were more amenable to Friedman’s views on money (Carl Christ, William Dewald, and Richard Selden). Friedman was absent from the proceedings, having testified to the committee just a few months earlier. Also absent from the proceedings, to a considerable degree, were the JEC members themselves. William Dewald recalled that, at points during the economists’ testimony, Senator Proxmire was the only committee member in attendance (William Dewald, interview, April 25, 2013). 51. For the Johnson administration’s advocacy of the tax increase, see, for example, the

384 N o t es t o P a g es 1 1 9 – 1 2 4 remarks on February 5, 1968, of Gardner Ackley, chairman of the Council of Economic Advisers, in Joint Economic Committee (1968b, 14). 52. From Proxmire’s February 5, 1968, remarks in Joint Economic Committee (1968b, 4). 53. However, Proxmire’s discussion, as indicated presently, seemed to rely more directly on the permanent income hypothesis than did Friedman’s Newsweek analysis, which instead appealed to crowding out. 54. Instructional Dynamics Economics Cassette Tape 129 (September 23, 1973). 55. See, for example, Friedman (1970a, 20 [pp. 12–13 of 1991 reprint]; 1972b, 185); Newsweek, July 5, 1971; and Instructional Dynamics Economics Cassette Tape 155 (October 10, 1974). 56. See Friedman (1970d, 23), Meigs (1972, 56), and Meltzer (2009a, 485, 539, 670). 57. Friedman (1972a, 914–18; 1976f, 312–13) reviewed in detail the analysis of the proposed tax increases that he had given in Newsweek (in his columns of January 23 and August 7, 1967). In his elaboration of those columns’ analysis, Friedman spelled out explicitly the interest-­rate/velocity channel through which he acknowledged an impact on total spending of fiscal tightening (for a given money stock). He had already spelled out this channel in his op-­ed in the Washington Post of November 5, 1967. 58. Instructional Dynamics Economics Cassette Tape 11 (January 1969). Although Friedman regarded consumption as being appreciably interest elastic, he saw investment spending as even more interest elastic. See chapter 5. 59. For further discussion of Eisner’s interactions with Friedman, see chapter 15 below. 60. From Joint Economic Committee (1968a, 138). 61. See, for example, American Economic Association (1970, 218) and Wall Street Journal, January 23, 1979. 62. Studies specifically concerned with the Federal Reserve Bank of St. Louis’s monetary tradition include Elliott (1985) and Hafer and Wheelock (2001). Articles addressed to the subject of the St. Louis equation have included Modigliani and Ando (1976); Darby (1976a); Jordan (1986); McCallum (1986a); and Batten and Thornton (1986). 63. Nonetheless, for an instance of a conference that featured a contribution by Jones, as well as interaction between himself and Friedman, see Ketchum and Strunk (1965). 64. See Friedman (1976b, 436). 65. American Economic Association (1970, 219). 66. One of the Federal Reserve Bank of St. Louis data publications at this stage, and continuing well into the next century, had the same title as that eventually given to the Friedman-­Schwartz book-­in-­progress: Monetary Trends. Friedman referred to the St. Louis bank’s Monetary Trends publication in his cassette commentaries (for example, Instructional Dynamics Economics Cassette Tape 19, March 1969). 67. For Friedman’s recognition of this point, see for example Newsweek, January 8, 1979. See also the discussion in chapter 2 above. 68. Jordan recalled: “I was Karl’s research assistant for three years, so I had to derive all of those adjustments to the source base in order to get the time series that they [Brunner and Meltzer] called ‘extended base’” (Jerry Jordan, interview, June 5, 2013). Brunner left UCLA for Ohio State University in July 1966 (Brunner 1968b, 8). 69. See Friedman and Schwartz (1963a, 83–84). 70. Friedman claimed that the term “high-­powered money” had been coined by Federal Reserve Board officials during the 1920s (see his January 22, 1976, testimony in Com-

N o t es t o P a g es 1 2 5 – 1 2 6   385 mittee on Banking, Currency and Housing 1976a, 2179; and Newsweek, August 20, 1979), but Friedman and Schwartz (1982a, 32) only ventured to suggest that the terminology had been used by the Federal Reserve “as early as the 1930s.” In Instructional Dynamics Economics Cassette Tape 16 (February 1969), Friedman noted that the term “high-­powered money” originated as “Federal Reserve jargon,” but he acknowledged that currency plus reserves instead “now tends to be called” the monetary base. The “high-­powered money” terminology continued to be used in some quarters in the 1980s (for example, in Fischer and Dornbusch 1983, 652–53). Fifty years after the Monetary History, however, the terminology had gone into such disuse that Sims (2013, 563) refers to “what used to be called ‘high-­powered money.’” Use of the “high-­powered money” formulation recognized the role of the monetary base in base/multiplier analysis. And just as the “high-­powered money” terminology predated Friedman and Schwartz (1963a), so did base/multiplier analysis itself. As noted in earlier chapters, this analysis was due, among others, to C. Phillips (1920); and Friedman and Schwartz (1963a, 346) recognized the venerable nature of the analysis in their reference to “the famous multiple expansion process.” Nevertheless, base/multiplier analysis became so associated with the Monetary History that some sources (for example, Rutner 1975, 3) erroneously credited Friedman and Schwartz with originating it. (In contrast, Eichengreen 1986, 155, presented Friedman and Schwartz as having made use of a base/ multiplier approach developed by Cagan, but it would probably be more accurate to characterize both Cagan and Friedman-­Schwartz as having used a largely preexisting base/ multiplier framework.) 71. Other pre-­1968 connections between Friedman and the Federal Reserve Bank of St. Louis included Friedman’s supervision of the dissertation of James Meigs (then at the Federal Reserve Bank of St. Louis) in the late 1950s through 1960, as well as Friedman’s citation of Leonall Andersen’s research on the money supply in his October 1965 memorandum to the Federal Reserve Board (see Friedman 1968a, 144). 72. In Instructional Dynamics Economics Cassette Tape 24 (April 30, 1969), Friedman would refer to the “excellent work of the Federal Reserve Bank of St. Louis,” in reference specifically to Andersen and Jordan (1968a). 73. See Friedman and Heller (1969, 60). Friedman and Heller had sparred publicly earlier in the year when they appeared on a panel in a WNET (public television) news special immediately following President Johnson’s State of the Union address (see Newsday, January 12, 1968), a broadcast quoted earlier in this chapter. The later Friedman/Heller debate was reported in Newsday, November 5, 1968. 74. See Friedman (1971d, 335). 75. See Friedman (1972e, 13–14; 1973a, 19–23), as well as Newsweek, January 10, 1972; and the follow-­up to this Newsweek item in Friedman (1975e, 75–77). Friedman’s equation differed from the St. Louis equation in being monthly (and so using a different series on nominal income), having a single specific lag instead of a distributed lag, dropping the fiscal variable, and using percentage changes instead of arithmetic first differences. (Friedman had indicated his preference for working with logarithmic first differences [or percentage changes] over arithmetic first differences in the study of money and spending as far back as Friedman 1961d, 460n30.) See also section II of the previous chapter. In 1978, in response to heteroskedasticity problems, the St. Louis equation would itself be modified so that variables now appeared in percentage form (see Carlson 1978). This change in specification was endorsed by McCallum (1986a, 12) but was criticized by Vrooman (1979), who contended that the shift to a loglinear specification amounted to a

386 N o t es t o P a g es 1 2 6 – 1 2 8 change in the competing hypotheses on which the St. Louis equation was meant to shed light. But the choice between linear and loglinear specifications can be regarded as a decision about how to approximate an underlying model that is nonlinear; this amounts to a choice between approximations, so the underlying nonlinear model can be regarded as not having been altered by the choice. And, as between linear and loglinear specifications, the latter seems preferable not only on the statistical grounds that Carlson cited but also on the grounds that so much monetary analysis is in a loglinear context. 76. By the time of these remarks, Homer Jones had not been affiliated with the Federal Reserve Bank of St. Louis for several years, having departed in 1971. See American Economic Association (1981, 216). 77. Michael Keran, whose membership of the research department spanned the mid-­ 1960s through the mid-­1970s, observed: “Brunner was a constant presence at the St. Louis Fed. Meltzer was too, to a lesser extent. Milton was not a major presence at the St. Louis Fed” (Michael Keran, interview, March 7, 2013). Jerry Jordan observed of Friedman, “he visited a number of times. It wasn’t a big time-­consuming thing for him to come down from Chicago for something that we were doing, sometimes just to spend a day with us at Homer’s invitation, sit with the [bank] president, and so on. Typical Friedman: at one point having lunch, Homer asked whether Darryl Francis, the president, should install a Dow Jones ticker tape outside his office to keep track of what was going on in the markets. There was a discussion underway on whether that should be done. And Milton said, ‘Yes, you should have one, but the president should never look at it’” (Jerry Jordan, interview, June 5, 2013). 78. See Friedman (1982b, 107). 79. It should be noted that Andersen and Jordan (1968a) did make some allowance for the endogeneity of fiscal policy by using “full-­employment” versions of the fiscal variables; however, the adjustments they used to deliver full-­employment series, while standard at the time, would not be regarded as correct today. 80. See, for example, R. Davis (1969) and Modigliani and Ando (1976). 81. Friedman (1976b, 435). 82. Gramley recalled: “Darryl Francis used to come with a prepared speech that he had on his lap, and you could see his eyeballs looking down reading this speech. . . . So he made no impression on anybody” (Lyle Gramley, interview, April 10, 2013). This recollection may, however, exemplify the difference between the written word and its delivery, because Francis’s interventions at the meetings often appear prescient and impressive when the relevant minutes and memoranda for the FOMC meetings are considered. On this, see, especially, Meltzer (2001a). 83. Friedman (1973a, 10; 1976b, 435–36). 84. See Instructional Dynamics Economics Cassette Tape 12 (January 1969) and Tape 62 (December 3, 1970), as well as Newsweek, March 1, 1971. See also chapter 10 above. A key complaint Friedman had was that the Board economists seemed to devote more attention to the assembly of industrial-­production series than to monetary statistics (see the preceding items as well as Friedman and Schwartz 1963a, 629). 85. See, for example, Samuelson (1970c, 1971) as well as the example in the text. In addition, Robert Shiller, a graduate student at MIT during the late 1960s, recounted to the author Samuelson’s interest in the debate on the Andersen-­Jordan equation (Robert Shiller, personal communication, December 15, 2014). 86. See also Samuelson’s (1970c, 151) criticism of “trial by simple correlation.” One of the more overt occasions on which Samuelson contrasted his and Friedman’s degrees of technical rigor was when they both appeared in a 1962 television program.

N o t es t o P a g es 1 2 9 – 1 3 1   387 In this exchange, Samuelson stated that his and Friedman’s different perspectives partly arose “perhaps because I’m from a technical institution, the MIT, and there are formulas all around.” However, Samuelson tempered this observation by remarking that his heavy exposure to equations had also imbued in him “a certain distrust of them” (The American Economy, Lesson 48: Can We Have Full Employment without Inflation?, CBS College of the Air, filmed circa June 5, 1962). 87. See also Laurent (1999), who concentrates on real monetary growth as an indicator of real GDP growth. 88. In this connection, Ireland (2003) presented results from sticky-­price dynamic stochastic general equilibrium analysis that suggested that the money/income correlation is not primarily a product of monetary policy reactions to the state of the economy. 89. See the discussion in chapter 13. 90. See Brozen and Friedman (1966). Brozen had joined the University of Chicago’s business school in 1957 after ten years at Northwestern University (American Economic Association 1970, 55–56). He would later present a paper on the minimum wage (published as Brozen 1969) at the September 1968 Mont Pelerin Society meeting in Aberdeen, Scotland. Another figure at the business school who had published research critical of the minimum wage laws was George Stigler. See Stigler (1946) and Friedland (2002, 646). 91. A suggestion that Friedman was unaware of the new research findings came in his assertion on April 18, 1996, in an appearance at Claremont McKenna College, “I think everybody will agree to that [i.e., that a higher minimum wage raises unemployment]” (CSPAN, December 26, 1996). Likewise, the Friedmans’ memoirs in 1998 provided an extract from Friedman (1968a, 2) in which Friedman claimed near-unanimity among economists for the minimum wage/unemployment link. No attempt was made in the memoirs to suggest that this virtual unanimity no longer applied (Friedman and Friedman 1998, 218). And in O’Driscoll et al. (1997, 10) Friedman expressed the view that even those economists who were calling for a higher minimum wage must know that such a measure would raise the unemployment rate. 92. Playboy (February 1973, 54), as reprinted in Friedman (1975e, 7; 1983b, 16). 93. In Milton Friedman Speaks, episode 14, “Equality and Freedom in the Free Enterprise System” (taped May 1, 1978), Friedman acknowledged (p. 25 of transcript) that he was not the originator of the negative income tax concept but contended that he had invented the terminology. The Boulding passage, however, provides one example of the term’s usage that preceded Friedman’s employment of it. 94. Friedman (1948a, 248). It was presumably this passage that the Wall Street Journal was referring to when, in a profile of Friedman (November 4, 1969), it stated that Friedman’s advocacy of the negative income tax dated back to the late 1940s. Friedman himself observed in 1966 that a negative income tax was something “I’ve been in favor of for a long time” (The Great Society: The Sizzling Economy, NET, June 27, 1966). 95. Instructional Dynamics Economics Cassette Tape 102 (June 28, 1972). (Friedman had previously acknowledged Rhys-­Williams’s social-­dividend idea was “very much a precursor to the negative income tax” in his 1969 MIT appearance that was broadcast as The Great Economics Debate, WGBH Boston, May 22, 1969.) Rhys-­Williams advocated what she called the “social dividend” in her book Something to Look Forward To (1943). 96. Friedman (1962a, 191–94; 1965a). Thus, a study of federal tax policy by Pechman (1966, 303) credited Friedman with the negative income tax proposal, citing Friedman (1962a) in that connection. 97. Friedman occasionally used the term “social policy” or “social science” to cover

388 N o t es t o P a g es 1 3 1 – 1 3 2 areas of economic analysis—such as the distribution of income and the theory of human capital—that were microeconomic in the sense that they did not pertain to the analysis of stabilization policy, yet which did not fall within the firm- or industry-­based analysis that was most closely associated with price theory. For example, in 2001 Friedman described Gary Becker as “the greatest social scientist who has lived and worked in the last half century” (University of Chicago Magazine, July/August 2014, 26). The preceding interpretation of what Friedman meant by “social science” lines up with Lawrence Summers’s observation that Becker helped broaden economic research beyond coverage of “topics like business cycles, inflation, trade, monopoly and investment” (University of Chicago Magazine, July/August 2014, 26; see also Fourcade, Ollion and Algan 2015, 93–94, for a similar judgment) and with Friedman’s heavy coverage of these broader topics in his public policy writings. A compromise terminology was at one stage offered by the Journal of Political Economy, which suggested the label “social economics” for the research agenda associated with Becker (see University of Chicago Press 1980). As his praise for Becker suggested—and in line with his attitude (discussed in chapter 4) that economic analysis should be applied broadly—Friedman was highly favorably disposed toward Becker’s efforts to bring family behavior and marriage into the coverage of economic analysis. In the early 1980s, Friedman supplied an endorsement of Becker’s A Treatise on the Family that stated: “This truly pathbreaking book marries techniques and problems hitherto regarded as utterly incompatible—rigorous economic reasoning to understanding the family. The marriage is astoundingly productive. It is destined to affect the foundations of every science dealing with human behavior” (see Harvard University Press 1985, and the back cover of Becker 1991b). He had earlier offered words of praise for Becker’s work on the household in Friedman (1976a, 4). Friedman had in fact indicated years before that he was congenial to modeling family decisions in economic terms, when W. Wallis and Friedman (1942, 186) stated that “family composition may even be treated as a good; for the satisfactions of an additional child are likely to be compared with the expenses incurred.” Needless to say, however, Friedman’s own subsequent research focused on other topics. Becker’s (1991b, xi) acknowledgments indicated that Friedman had supplied comments on some of Becker’s work on the family. They also confirmed, though, that George Stigler had been a more major source of comments—a situation consistent both with Becker’s and Stigler’s shared research focus on microeconomics and with the fact that Stigler, and not Friedman, remained a University of Chicago colleague of Becker’s after the 1976–77 academic year. 98. The conference version was subtitled “A View from the Right,” probably over Friedman’s protests. It appeared in print multiple times during the 1960s. A version without the subtitle and with substantially different text appeared as Friedman (1968h). To add to the confusion, National Review (March 7, 1967) printed a letter from Friedman to the editor under the title “The Case for the Negative Income Tax,” and this item, too, would be reprinted in a book of readings (see Haring 1972, 60–62). 99. A Fortune profile of Friedman (June 1, 1967) also discussed the scheme, albeit without any new quotations from Friedman on the subject. A Harper’s article by Friedman (“Myths That Keep People Hungry,” April 1967) concerned living standards in various non-­Western countries and was not concerned with the US welfare system. Friedman was evidently pleased with the Harper’s article (which was an expansion of his preface to the Japanese translation of Capitalism and Freedom), as he included it in his selection of ten published articles in his entry for Who’s Who in Economics 1986 (Blaug 1986, 292). 100. From the April 6, 1967, hearing, in Committee on Labor and Public Welfare (1967, 246).

N o t es t o P a g es 1 3 2 – 1 3 4   389 101. Tobin’s main paper on the subject was Tobin (1965c). The paper made several arguments similar to those Friedman had made, and the connection of its policy proposals to Friedman’s own was underscored when, in 1970, Paul Samuelson included in a readings collection a shortened version of Tobin’s paper under the new title, “The Negative Income Tax.” 102. See especially Friedman (1977b, 55), reprinted in Friedman (1978a, 81). In addition, see Friedman and Friedman (1980, 122). Elizabeth Wickenden, a technical consultant to the firm National Social Welfare Assembly, remarked in testimony to the House of Representatives Committee on Ways and Means on March 23, 1967 (Committee on Ways and Means 1967b, 1601): “The other day I was in a debate with Milton Friedman, Senator Goldwater’s adviser during his campaign. Mr. Friedman says: Let’s toss out the whole social insurance system, the whole minimum wage, all our various measures, and put everybody [sic] on a negative income tax. In that way we can forget all the rest.” (Although the hearing proceedings volume printed Wickenden’s testimony as though she was directly quoting Friedman, she was likely only paraphrasing him.) 103. Friedman (1962a, 192–93). See also Friedman (1965a, 10); New York Times, December 19, 1965a; Wall Street Journal, February 15, 1966; and Friedman and Friedman (1980, 122). 104. Friedman used “starving to death” in describing what he wanted to prevent in his US Chamber of Commerce appearance of May 3, 1961, and his statements that removal of “distress” should be the criterion included those in Vaizey (1975, 72) (see also the Listener, May 30, 1974, 689); Friedman (1975f, 28–29); Milton Friedman Speaks, episode 14, “Equality and Freedom in the Free Enterprise System” (taped May 1, 1978; p. 25 of transcript); and the videotaped debate portion of the US version of the Free to Choose television series, “Created Equal,” episode 5, US broadcast February 15, 1980, p. 7 of transcript. See also the discussion of Friedman and Stigler (1946) in chapter 4 above. 105. Instructional Dynamics Economics Cassette Tape 102 (June 28, 1972). 106. See, for example, Friedman (1962a, 192) and Wall Street Journal, February 15, 1966. 107. Firing Line, syndicated, January 8, 1968, p. 7 of transcript. In the same vein, in an earlier television appearance Friedman said that “this proposal, which in my opinion has a great deal of merit, can be completely destroyed if you talk in terms of filling the whole of that gap” (The Great Society: The Sizzling Economy, NET, June 27, 1966). 108. Floor discussion in US Chamber of Commerce (1967, 42). The 50 percent rate was given there and reaffirmed in Friedman and Friedman (1980, 121–22). 109. The negative income tax had earlier been advocated by Sargent Shriver (New York Times, December 19, 1965a), who would eventually be McGovern’s running mate in the 1972 election campaign. However, McGovern’s advocacy of the negative income tax during his campaign predated the point at which Shriver joined his ticket. 110. Kuh was quoted as saying: “The idea of using the tax system to redistribute income and reduce federal involvement [in the process] goes back to the 1950s with Friedman” (New York Times, June 18, 1972). 111. Instructional Dynamics Economics Cassette Tape 102 (June 28, 1972). In an interview published after the presidential election, Friedman affirmed his criticism of the McGovern variant of the negative income tax (Playboy [February 1973, 66], reprinted in Friedman 1975e, 30; 1983b, 47). He had also criticized the McGovern campaign’s perspective on welfare reform in his Newsweek column of September 25, 1972, with that criticism including an allusion to its income-­support plan. 112. Similarly, a Business Week report (November 29, 1976) on the negative income tax gave the period during which Friedman advocated the proposal as the 1960s only.

390 N o t es t o P a g es 1 3 4 – 1 3 6 113. The negative income tax was discussed in the book version of Free to Choose: see Friedman and Friedman (1980, 119–23). The negative income tax does not, however, receive an index entry in the book. Judging the book’s contents on the basis of the index rather than the book proper would therefore lead to the conclusion that the negative income tax is not covered in the book. 114. See Friedman (1973c, 35) and Playboy (February 1973, 64, 66) (as reprinted in Friedman [1975e, 28–30; 1983b, 45–47]). 115. These Newsweek columns were not in Friedman’s collections of reprinted columns, and therefore they would be items that would be overlooked by those relying on the reprint volumes at the expense of the full record of Friedman’s Newsweek contributions. 116. Friedman (1977i, p. 201 of 1981 reprint). 117. See Friedman (1977b, 54), reprinted as Friedman (1978a, 80). 118. See, in particular, Milton Friedman Speaks, episode 1, “What Is America?” (taped October 3, 1977; pp. 21–22 of transcript; Milton Friedman Speaks, episode 10, “The Economics of Medical Care” (taped May 9, 1978; pp. 20–21 of transcript); and Milton Friedman Speaks, episode 14, “Equality and Freedom in the Free Enterprise System” (taped May 1, 1978; pp. 25–26 of transcript). According to television listings, Friedman also advocated the negative income tax in an appearance on a PBS program titled William F. Buckley in 1971 (see Los Angeles Times, May 10, 1971). However, this program may merely have been a repackaged version of Friedman’s 1968 Firing Line appearance with Buckley. 119. For example, in Friedman (1981a, 17; 1981c, 28; 1982a, 32); Newsweek, April 19, 1982; Saturday Briefing, BBC2, March 12, 1983, pp. 9–10 of transcript; Alternatives in Philanthropy (March 1989); and CSPAN, November 20, 1994, p. 15 of hard-­copy transcript. 120. Milton Friedman Speaks, episode 1, “What Is America?” (taped October 3, 1977). In the same vein, the aforementioned Business Week report on the negative income tax in the November 29, 1976, edition of that magazine took the negative income tax proposal as one that was the subject of public debate but that had not been implemented in the United States. 121. Friedman and Friedman (1980, 102). 122. From the exchange at the US Chamber of Commerce, May 3, 1961. For his part, Friedman disliked the term “Social Security” (see, for example, Friedman 1988c, 380). 123. Friedman (1972d, chapter 8). 124. In addition, Friedman stated that in reality “Social Security is not an insurance arrangement” in St. Petersburg Evening Independent, May 13, 1977. 125. Milton Friedman Speaks, episode 5, “What Is Wrong with the Welfare State?” (taped February 23, 1978), p. 18 of transcript. 126. Newsweek, June 14, 1971. See also Friedman and Friedman (1980, 103–5) and Friedman’s remarks in Cohen and Friedman (1972, 23–24). 127. For example in 1973 (Evening Capital, February 12, 1973), Friedman was quoted as saying that “the individual is in no sense building protection for himself and his family” under Social Security, and that the scope for future payments “derives solely from the willingness of future taxpayers to impose taxes on themselves to finance benefits being promised to present taxpayers by ourselves.” 128. Donahue, NBC, September 30, 1975; and Donahue, NBC, November 24, 1976. Furthermore, in Instructional Dynamics Economics Cassette Tape 174 (August 1975, part 2), Friedman observed that, for the next several decades, the United States was poised to have approximate equality between Social Security receipts and commitments. 129. Friedman (1965a, 8).

N o t es t o P a g es 1 3 6 – 1 3 9   391 130. See for example Newsweek, April 11, 1977, in which Friedman said that the employer part of a payroll tax was passed on to employees. Earlier, Friedman had remarked that the conclusion that the payroll tax was really borne by the employee was accepted by all economists (see Ketchum and Strunk 1965, 18). Consistent with this judgment, Kotlikoff (1978, 123) noted: “There is virtually universal agreement among economists that the distinction between the employee and employer contribution has no long-­run economic significance.” In light of this consensus, it is clear that, when the New York Times Magazine (January 14, 1973, 8) stated that “Friedman’s arguments are based on a set of assumptions, including the debatable one that the worker is really paying the employer’s part of the Social Security tax,” the assumption the article singled out as debatable is not, in fact, one that is much disputed among economists. 131. See, for example, Friedman (1977h). 132. Donahue, NBC, November 24, 1976. 133. Friedman (1965a, 8) and Speaking Freely, WNBC, May 4, 1969, p. 18 of transcript. 134. Friedman (1962a, 189). 135. For similar remarks, see People Weekly, April 5, 1976 (51), and Friedman and Samuelson (1980, 12–13). 136. Friedman and Friedman (1980, 123–24). 137. One prediction of the effect of a Social Security scheme in the presence of infinite-­ horizon households is that agents will carry out private-­saving decisions that offset the effect of Social Security on aggregate saving. This position was taken by Robert Barro in the context of his advocacy of Ricardian equivalence in Barro and Feldstein (1978). It was occasionally advanced by Friedman himself—a situation that led to Friedman being cited on this point by Bernheim, Shleifer, and Summers (1985, 1074). (However, the specific Friedman reference that Bernheim, Shleifer, and Summers gave in this connection— namely Friedman 1980c—seems not to have been the item they meant to cite, as the reference cited did not seem to contain an apposite discussion.) 138. He made this comment when discussing taxes and transfers. 139. See Mirrlees (1973, xi). The overlapping-­generations model also became widely used as an analytical framework in which analysis of reforms to Social Security policy can be carried out (see, for example, Gertler 1999). 140. Because Friedman would still have (via the negative income tax) a government-­ provided minimal retirement income, it is not strictly correct to imply, as Samuelson (1983c, 285) did, that Friedman’s approach to the problem coincided with a wholly laissez-­ faire policy. 141. Videotaped debate portion of Free to Choose, PBS, episode 1, “The Power of the Market,” January 12, 1980, p. 8 of transcript. 142. CBS Morning News, March 1, 1984, p. 23 of transcript; Forbes, December 12, 1988, 165. Friedman had made a similar prediction much earlier (as a long-­range forecast) in People Weekly, April 5, 1976 (52). 143. So too had President Ronald Reagan, in his October 7, 1984, televised debate with Democratic presidential candidate Walter Mondale. 144. In Committee on Financial Services (2011, 15). 145. American Economic Association (1968, ix) gave details about the December 1967 presentation of Friedman (1968b). 146. Halliwell (1977, 356). 147. Tobin’s response to the natural-­rate hypothesis is discussed later in this section. On Samuelson’s initial rejection of the natural-­rate hypothesis, see E. Nelson (2004b, 2005a).

392 N o t es t o P a g es 1 3 9 – 1 4 1 There is, however, some indication that Samuelson was at least prepared to deemphasize the long-­run trade-­off in later years. In particular, there is Samuelson’s reference in Newsweek, September 8, 1980, to the need to take into account the “short-­run clash between fighting inflation and fighting unemployment” (68). Robert Solow’s initial reactions (Solow 1968, 1969, 1970) were an important focus of the early rational-­expectations literature (such as Lucas 1972a, and Sargent 1971) and are discussed in chapters 14 and 15. Solow’s later discussions of the issue included those in Blinder and Solow (1976) and Solow (1976, 1978a, 1978b). See also Solow’s remarks in the interview material discussed later in this section. 148. See Modigliani’s October 31, 1997, remarks in Snowdon and Vane (1999, 251). 149. See also chapters 10 and 11 above and the discussion the follows. As in the rest of this book, and unless otherwise indicated, references to “inflation” in the text pertain to price inflation. 150. Friedman (1968b, 9). 151. Rees himself subscribed to the view that while the unemployment/inflation relationship might be subject to shift, a basic inverse relationship was an enduring part of the economic structure. As has already been mentioned, Rees’s (1970a) advocacy of a downward-­sloping relationship was highlighted by Friedman (1977e), while Rees (1970b) also clashed with Lucas and Rapping (1969, 1972) partly because of their sympathy with the long-­run vertical Phillips curve. Rees’s belief in a long-­run relationship and his willingness to use that relationship for policy purposes were also reflected in a talk he gave in the city of Chicago in the early 1960s. In that talk, Rees urged that the federal government allow inflation to rise as part of a policy of reducing the unemployment rate (Claire Friedland, personal communication with author, May 3, 2015). Some years later, in a paper for a Federal Reserve Board consultants meeting on January 23, 1969, in which Friedman also participated, Rees (1969, 1) stated that he “accept[ed] the general framework of analysis” underlying “the inverse relationship between the rate of unemployment and the rate of change of money wages—the ‘Phillips curve.’” Even at the first Carnegie-­Rochester conference, held at the University of Rochester in April 1973, Rees dissented from the then-­widespread acceptance of the natural-­rate hypothesis: “I don’t buy the Milton Friedman argument that unorganized workers bargain on the real wage. There really is money illusion” (quoted in Business Week, April 28, 1973, 89). 152. See, for example, Gordon (1971, 120); King and Watson (1994a, 165); and the discussion in chapter 10. 153. See Arthur Burns (1974, 554). 154. Friedman (1977e, 455). 155. See Lucas’s remarks in Klamer (1983, 56). 156. In Snowdon and Vane (1997, 198). 157. From Phelps (1972a, 42–43), emphasis in original. 158. See, for example, Friedman (1975a) and The Times, September 13, 1976. Mayer (1980), C. R. Nelson (1981), Humphrey (1982b), and Patinkin (1995, 127) interpreted Hume’s analysis as implying a long-­run positive relationship between output and inflation, but the quotations on which Friedman focused contradict this interpretation. Rather, as Frenkel (1981) and Fischer (1994, 278) stressed, Hume seems to have seen inflation as favorable for the growth rate, not the level, of output—which would mean a violation of long-­run superneutrality, but not of the natural-­rate hypothesis. See also G. Wood (1995).

N o t es t o P a g es 1 4 2 – 1 4 4   393 Mavroeidis, Plagborg-­Møller, and Stock (2014, 125) give the impression that the lineage between David Hume’s writings and the expectational-­Phillips-­curve literature was unknown prior to the study by Mankiw (2001). However, the Hume quotation highlighted by Mankiw had been used more than a quarter century earlier in Friedman’s (1975a) discussion of the expectational Phillips curve. The preceding discussion has not considered the links between Irving Fisher’s views on the Phillips curve and Friedman’s. On these links, see chapter 7 above. 159. Phelps (1968b, 682; 1972a) also mentioned Henry Wallich and Ludwig von Mises in this connection. 160. Friedman (1970b, 222). As Friedman noted in that paper, even Keynes had granted that nominal and real variables might, in a hypothetical, long-­run scenario, be determined by separate forces. 161. The quotation is from Friedman (1970b, 222). Like Lucas and Sargent, William Poole (interview, April 30, 2013) cited Bailey (1962) as stating the natural-­rate hypothesis. This is an accurate assessment insofar as Bailey (1962, chapter 3) discussed the independence on the part of the real sector with regard to inflation in a context in which the rate of inflation is wholly expected. However, Bailey did not apply this notion specifically to the Phillips-­curve context, and he merely stated the invariance result as one that holds if one “assumes that expectations adjust” (57). Friedman and Phelps, in contrast, were specifically concerned with the Phillips curve and provided a theoretical basis for believing that expectations adjust fully to inflation. Bailey (1971, 519) in contrast, perceived the Phillips curve, while susceptible to shifts, as remaining nonvertical over long periods. Indeed, unlike even Samuelson and Solow (1960), Bailey did not grant the scenario of inflation and unemployment falling simultaneously as a theoretical possibility. 162. That is, one would exclude Lerner and Fellner (however, one would include Hume, whom Phelps did not include in the list cited). 163. See chapter 11. 164. Again, see chapter 11. 165. Fellner (1976, 55–56) even professed to see—surely erroneously—in Friedman (1968b) an endorsement of the view that the economy would not tend to the natural rate of unemployment irrespective of the monetary policy chosen. 166. See chapters 7 and 10 through 12 above. 167. See Friedman (1967c). 168. As discussed below, Samuelson and Solow (1960) and other advocates of a permanent trade-­off allowed for an expectations term in the Phillips curve, but they did not endorse the unitary coefficient on expected inflation on which Friedman and Phelps insisted. 169. From Samuelson’s remarks in The American Economy, Lesson 48: Can We Have Full Employment without Inflation?, CBS College of the Air, filmed circa June 5, 1962. See also chapter 10 above. 170. Forder (2010a) contests the notion that the Samuelson-­Solow position was that there was a permanent trade-­off, and he has proceeded to argue that “almost no one” subscribed to the positions regarding the Phillips curve that Friedman (1977e) challenged (Forder 2010b, 329). The present author has considerable sympathy with the notion that permanently nonvertical Phillips curves, and conscious attempts to exploit them, did not figure particularly prominently in the analysis and strategy of policy making during the 1960s, and that policy makers in the United States and other countries explicitly re-

394 N o t es t o P a g es 1 4 4 – 1 4 5 jected permanent-­trade-­off views throughout the 1970s. E. Nelson (2002a, 2005b, 2005c, 2009c, 2012a) provides extensive evidence on these points—indeed, much that contradicts Forder’s acceptance of the notion that UK policy makers were willing to accept the Phillips curve as a framework for reducing inflation (343–44). But Forder’s position that a belief a permanent trade-­off was not prevalent among US academic economists in the 1960s proves not to be justified once an intensive study of statements by Samuelson and other leading economists is brought into consideration. These statements include those given in sources not cited by Forder—for example, Tobin (1967) and Harry Johnson (1969b)—but also in some of the literature cited by Forder. For example, Forder’s suggestion that E. Nelson (2004b) did not provide justification for Samuelson’s belief in a trade-­off beyond citing Samuelson and Solow (1960) is contradicted by the provision in E. Nelson (2004b, 136) of post-­1960 quotations from Samuelson. See also the further documentation of Samuelson’s views in DiCecio and Nelson (2013) (a version of which was issued in the NBER Working Paper series in 2009). As discussed earlier, there was little sign of an acknowledgment before the 1980s on Paul Samuelson’s part of the validity of the natural-­rate hypothesis. Indeed, there is much evidence that he took the opposite position. For example, Samuelson saw the acceptance of inflation in order to avoid above-­normal unemployment as a lesson of the first decade of US economic performance after World War II, expressing this view in Samuelson (1956, 130) even before the Phillips-­curve literature proper appeared. See also the discussion of Samuelson and Solow (1960) below. 171. As already noted, this academic consensus did not imply that policy makers used the Phillips-­curve trade-­off in their decision making. Indeed, the present author has long espoused the position that they did not, either in the United Kingdom or the United States. See also Laidler (1979, 2003) for important articulations of a similar perspective. 172. See his remarks in Burns and Samuelson (1967, 126–27). 173. For example, the Cowles Foundation reported, on the basis of research subsequently published as Bodkin (1966), that the “trade-­off between the conflicting goals of full employment and price level stability” was one under which “the price stability ‘cost’ of full employment (defined as 3 percent unemployment) might be expected to be an inflation of consumer prices approximately equal to 1 1/2 percent annum.” In contrast, it said, zero inflation would require “much unemployment” (Cowles Foundation 1964, 20). 174. In the same vein, Lucas (1976b, 19) cast the natural-­rate hypothesis as an application to inflation of the condition that demand and supply functions be homogeneous of degree zero. In his Nobel lecture, Mortensen (2011, 1077) was even more emphatic on the link between the natural-­rate hypothesis and the rejection of money illusion, stating that “underlying the arguments of both Friedman and Phelps was the proposition that there is no money illusion, at least in the long run.” 175. Harry Johnson (1970a, 112) expressed a similar view. 176. A key part of this process is the dynamic behavior implied by the Friedman-­Phelps restriction, discussed presently, that the inflation-­expectations term enters the Phillips curve with a coefficient equal to one. 177. One of the authors of this reference, Arthur Brown, had a special reason to watch developments in the Phillips-­curve literature: he had published an empirical Phillips-­ curve plot for the United Kingdom three years before A. W. Phillips (1958). See Brown (1955); Financial Times, October 11, 1957; Thirlwall (1972); and Humphrey (1985, 22–23). 178. See Modigliani’s October 31, 1997, remarks in Snowdon and Vane (1999, 251). Even before A. W. Phillips (1958) and Lipsey (1960), L. Klein and Goldberger (1955, 18–19) had

N o t es t o P a g es 1 4 5 – 1 4 7   395 presented a US nominal wage-­growth equation in which the unemployment rate and lagged inflation appeared as right-­hand side variables. See Patinkin (1972a, 899), Lucas (1976b, 19), and Humphrey (1985, 22) for discussions. 179. Friedman (1968b, 9). 180. For this reason, a long-­run nonvertical Phillips curve can be obtained either by supposing that inflation expectations do not ultimately equal actual inflation (for example, if expectations are rigid), or by postulating that expected inflation receives a less-­ than-­unit weight in the Phillips-­curve equation. See DiCecio and Nelson (2013, 428–29). 181. An early instance in which this feature of the pre-­1967 literature was explicitly recognized was a crucial passage in Lemgruber (1974, 44), which read: “It must be noticed that these early studies had already introduced price inflation variables into the Phillips framework, although the authors do not consider the possibility that a unitary coefficient would represent a fundamental analytical change in [the] Phillips Curves, as would be later shown by the accelerationists.” 182. Here wt is the log of the nominal wage index in period t, and Δ is the first-­difference operator. 183. See Friedman (1976a, 219) and Friedman and Schwartz (1982a, 441). 184. See Friedman (1972a, 948); Friedman and Schwartz (1982a, 50); McCallum (1989b, 182); and E. Nelson and Schwartz (2008a) (an item from which part of this paragraph and the previous one are adapted). Rees and Hamilton (1967, 67) actually found a coefficient of π t near unity when it was added to the wage Phillips curve (see also Desai 1984, 263–65) and were led to downplay that finding, no doubt partly because it seemingly rendered the equation not useful for modeling inflation. 185. For this reason, it does not seem appropriate to state, as did Leeson (1997b, 166) that “Friedman outlined it [the natural-­rate hypothesis] in full to Richard Lipsey at the LSE in 1960.” As recalled by Lipsey both in Lipsey (2000, 70) and in an interview for this book (June 17, 2015), the point that Friedman pressed on Lipsey was that the appropriate Phillips-­curve specification should be in terms of a bargain for the real wage. This point is consistent with the long-­run properties of the natural-­rate hypothesis, but it does by itself imply the Friedman-­Phelps modification of the Phillips curve. Therefore, articulating the point does not constitute a full outline of the natural-­rate hypothesis. In addition, in his interview for this book, Lipsey noted that his meeting with Friedman was in the early 1960s and was after the publication of Lipsey (1960), but he did not specifically give the 1960 date that Leeson supplied. The meeting may well have actually been in the 1962–63 year during which Friedman traveled to Europe, and Lipsey (in June 18, 2015, personal communication) confirmed that 1962–63 was his best guess of the date of the meeting. With the same reasoning as that used above, it is possible to grant Nobay and Johnson (1977, 479) and Alogoskoufis and Smith’s (1991, 1256) suggestion that A. W. Phillips’s (1958) discussion recognized that the wage-­growth equation might (or should) be expressed in real terms, without in any way accepting that Phillips’s analysis allowed for the possibility of an expectational Phillips curve of the Friedman-­Phelps type. 186. That this was only the simplest version of the expectational Phillips curve, and not the one that emerged when all Friedman’s positions on wage and price dynamics were incorporated, was stressed in chapter 7 above. Forder (2014) claims categorically that there is a contradiction in Friedman’s presidential address between Friedman’s (1968b, 10) statement that employment increases at “former” nominal wages and Friedman’s subsequent statement that workers believe

396 N o t es t o P a g es 1 4 8 – 1 5 1 their real wages have increased during the initial period in which prices and employment rise. Forder is not making a new point in noting that the 1968 Friedman paper had imprecise terminology concerning wage setting: for a prior discussion that made this point, see E. Nelson and Schwartz (2008a, 840). Furthermore, Forder’s position that there is a contradiction (as opposed to imprecision) in Friedman’s exposition rests essentially on a “former” wage connoting an unchanged wage. The Forder position is, however, not valid if “former” is interpreted—as it surely can be—as “contracted” or “predetermined.” Forder further conjectures that Friedman himself saw the inconsistency that, in Forder’s interpretation, was present in Friedman (1968b) by pointing to the different wording that Friedman (1972a) used in describing the wage-­setting mechanism. (Much earlier, Garrison 1984, 120, similarly claimed that Friedman changed his account of wage behavior from that in Friedman 1968b, to a supposedly different one in Friedman 1972a.) But Friedman’s 1972 phrasing was consistent with that in the 1968 address, so there is no need to construe the later discussion as a correction. In addition, the 1972 formulation is similar in content to a number of other expositions of the Phillips-­curve process that Friedman gave in the second half of the 1960s (that is, in the time frame surrounding his presidential address), such as those in Newsweek (October 17, 1966) and in Instructional Dynamics Economics Cassette Tape 19 (March 1969) and Tape 28 (June 12, 1969). 187. Friedman’s (1968b, 10) terminology for the price level relevant to the wage decision was the “earlier price level,” but a more precise and satisfactory terminology, and one consistent with the use of E t−1 π t in the text, would be “the previous period’s expectation of the current price level.” Such an interpretation is in line with the statement in Friedman (1977e, 457) that the “perceived future average price” enters nominal wage agreements. 188. A white-­noise shock term could also be included in the equation. 189. As in traditional Phillips-­curve analysis (and unlike the pure cost-­push theories that we shall consider again in chapter 15) αu < 0, to ensure that inflation responds to excess demand (and supply). 190. Friedman (1968b, 9). 191. See Friedman (1968b, 10; 1972a, 930; 1976a, 223; 1977e, 457). 192. Friedman (1968b, 13). 193. Indeed, Blinder (1987, 132) contrasted the just-­quoted Friedman passage with the Lucas position and concluded that “most economists think Lucas’s distinguished predecessor at the University of Chicago had it right.” (Strictly speaking, Blinder’s description of Friedman as Lucas’s “predecessor” at the University of Chicago was not fully accurate, because Lucas and Friedman overlapped at the University of Chicago’s economics department from 1974 through the end of 1976: see chapter 15.) 194. See Snowdon and Vane (1997, 198). 195. See, for example, Friedman and Schwartz (1982a, 441–45). 196. See Phelps (2007, 549) and Vane and Mulhearn (2009, 113). 197. Thus, as discussed in chapters 7 and 9, claims (such as in Hahn 1983b) that Friedman’s natural-­rate concept could not be rigorously justified have been refuted by the post­1968 literature. 198. See, for example, Friedman’s remarks in the filmed interview in The Power of Choice, PBS, January 29, 2007. 199. Instead, it can be regarded as utilizing the concept of the natural level of output or the natural level of hours. 200. Samuelson (1971, 20) provided an early statement that the two positions were separate.

N o t es t o P a g es 1 5 1 – 1 5 3   397 201. The only mention of Friedman (1968b) in Friedman (1970a)—whose list of monetarist propositions Friedman referred to in both Friedman (1972a, 913) and Snowdon, Vane, and Wynarczyk (1994, 174)—appeared after the list was given and consisted of a quotation from the “monetarist” second half of the presidential address. 202. The notion that the natural-­rate hypothesis should be regarded as a Friedman proposition separate from those concerning monetarism has also been forcefully advocated in the writings of Peter Jay (see, for example, Listener, May 1, 1980; and The Times, January 5, 1981). See also chapter 7 above. 203. It is also categorized as a defining element of monetarism by Mayer (1978). But some doubts about Mayer’s classification scheme are raised by the fact that Mayer placed within monetarism elements of Friedman’s views (such as belief in free markets) that Friedman did not regard as part of monetarism. 204. In the same vein, Tobin (1974c, 62) stated: “Many nonmonetarists are adherents of the ‘natural rate’ alternative to the Phillips trade-­off.” 205. Friedman (1977c, 13) specifically rejected Modigliani’s (1977) interpretation (which also featured in Modigliani 1986b, 36) of Friedman (1968b) as the critical reference that made the theoretical case for a nonactivist policy rule. (Modigliani had attributed to Friedman the view that the natural-­rate hypothesis implied that, if policy makers mismeasured the natural rate of unemployment even fractionally, a monetary policy approach that responded to unemployment was a strategy prone to generate unbounded inflations or deflations. Although Friedman did see such an eventuality as a theoretically possible outcome of a policy that was geared toward estimates of the natural rate of interest or unemployment—see, for example, his remarks in Forbes, July 9, 1990—he acknowledged that this would not occur in practice, in part because policy makers would correct their target unemployment rates in the direction of the natural rate.) More generally, in Instructional Dynamics Economics Cassette Tape 64 (December 31, 1970) Friedman treated his rejection of a long-­run inflation/unemployment trade-­off as separate from his doubts about the efficacy of precise management of aggregate demand. 206. From Friedman’s submission in Committee on Banking and Currency, US House (1968b, 204). David Laidler concurred with the notion that Friedman (1968b) covered a broad range of monetary policy issues: “There was a lot more to that paper than the expectations-­augmented Phillips curve. Everything else was in there as well” (David Laidler, interview, June 19, 2013). 207. See also Friedman (1951b, 113) and Friedman and Friedman (1998, 208). 208. Friedman (1976a, 213; see also p. vii). 209. See Friedman (1968b) and Friedman and Schwartz (1967, 39–40). Friedman would not, however, write down the expectations-­augmented Phillips curve in equation form until the 1970s. Correspondingly, Mark Blaug would report (in Snowdon and Vane 1999, 327) that his students, upon being assigned Friedman (1968b) as a reading, had expressed surprise that the expectational Phillips curve was not written down in the paper. Friedman would present the expectational Phillips curve as an equation in inflation-­unemployment form in Friedman (1975d) (subsequently incorporated in Friedman 1976a, 228), while a Phillips curve with the output gap as the real activity term had earlier appeared in Friedman (1970b, 224) (and in revised presentations in Gordon 1974a, 49; and Friedman and Schwartz 1982a, 60). Gordon (1976a, 54) noted Friedman (1970b) as the first time that Friedman used the expectational Phillips curve in the context of an explicit model. In the absence of an expectations-­augmented Phillips-­curve equation in Friedman

398 N o t es t o P a g es 1 5 3 – 1 5 7 (1968b), Turnovsky and Wachter (1972, 47) cited Tobin (1968) as a paper that wrote down the expectations-­augmented Phillips curve. The equation had, however, appeared in print prior to Tobin (1968) in Phelps (1967, 261), with the output gap as the real variable in the Phillips curve and straightforward, but nonstandard, notation for the expected-­inflation term. 210. See Friedman (1968b, 8). In the same spirit, Brunner (1975, 186) observed that “some form of Phillips curve analysis” is needed as “an essential block to any monetary theory” seeking to explain the decomposition of nominal income between output and prices. 211. Neglect of this aspect of the debate is a further problem with Forder’s (2010a, 2010b) attempt to establish that there was no substantial “permanent-­trade-­off ” body of opinion arrayed against Friedman and Phelps. Much of Forder’s analysis is concerned with establishing that economists did not put forward a departure from price stability as their policy recommendation. But, with this focus, his discussion in effect elides the crucial difference between economists like Phelps and Friedman who denied a permanent unemployment/inflation trade-­off, and those (like Samuelson and Solow 1960; and Tobin 1967) who saw a permanent trade-­off as a likely situation for the US economy unless the government intervened directly in the setting of wages and prices. 212. See Romer and Romer (2002b, 2013b); Bernanke (2004, 2013); E. Nelson (2005b, 2012b); DiCecio and Nelson (2013); and the next chapter. 213. For more on Friedman’s views on objectives and rules for monetary policy, see chapter 8. See Svensson (1999) for a detailed discussion of the definitional, analytical, and practical aspects of flexible inflation targeting (a concept due to Svensson). 214. Friedman (1977c, 13). This was, in a sense, too modest a description of the coverage of the 1968 paper, as that article discussed how the central bank could not peg a nominal interest rate. However, as noted in chapters 6 to 8 above, Friedman’s lack of confidence in their ability to secure particular values for the nominal interest rate on a sustained basis really pertained to their ability to do so using the liquidity effect: that is, using the transitory response to money-­stock changes of the real-­interest-­rate component of the nominal interest rate. Consequently, his presidential address’s discussion of nominal-­ interest-­rate pegging did amount to a critique of central banks’ ability to affect real interest rates lastingly. 215. Friedman (1968b, 16–17); quotation from p. 16. 216. See the previous chapter. 217. Blinder’s discussion of the natural-­rate concept in his Business Week column contrasted somewhat with the textbook treatment of the natural-­rate hypothesis in Baumol and Blinder (1982). (This was the second edition of the authors’ textbook; the first, 1979, edition endorsed a permanent trade-­off.) The Business Week column credited Friedman with the concept. The section of Baumol and Blinder (1982) that laid out and affirmed the long-run vertical Phillips curve analysis and used the “natural rate of unemployment” terminology did not mention Friedman, although Friedman did feature extensively in Baumol and Blinder’s coverage of policy rules and of market economics. 218. In the same vein, Feldstein (1973, 3) stated that the natural-­rate hypothesis implied “that the situation is worse than Phillips recognized.” Artis, Leslie, and Smith (1982, 146) went further, contending that “the logic of augmented-­Phillips-­curve analysis (at least where the long-­run trade-­off is denied) leaves little scope for macroeconomic policy.” 219. Friedman (1972b, 194). 220. See Friedman (2005b). Similarly, in Instructional Dynamics Economics Cassette

N o t es t o P a g es 1 5 7 – 1 6 0   399 Tape 145 (May 1, 1974), Friedman characterized the original Phillips-­curve specification as pessimistic because of its suggestion that high unemployment would have to be accepted permanently if price stability was going to be secured. 221. Those measures that reduced the natural rate of unemployment were efficiency reducing, however, if they lowered the scope for labor mobility: see Friedman (1977e, 459). 222. This echoed and made specific Friedman’s call for a “twin policy” (42) in his (1967c) talk. 223. Friedman (1978c, R-­183 to R-­184). The rational-­expectations revolution and Friedman’s reaction to it are discussed in detail in the next chapter. 224. As discussed elsewhere in this book (chapter 8), Friedman (1969a) is not counted as one of these contributions, as Friedman in that paper presented a version of results already available in the literature and the research was separate from Friedman’s main line of work on money. 225. Phelps discussed this matter in the interview for this book (May 16, 2013). In addition, it is worth mentioning that while Tobin (1995, 41) quoted from his (1967) paper, which he noted was “presented in October 1966,” as evidence that pre-­1967 Phillips-­ curve analysis recognized the absence of a long-­run trade-­off, he failed to mention that both Friedman and Phelps had articulated the natural-­rate hypothesis publicly by October 1966, and so Tobin (1966a, 1967) actually amounted to a response to this emerging hypothesis. 226. In addition to the discussion provided above, see the remarks on this vintage of models in Patinkin (1972a, 899–900); Friedman (1972a, 948); and Schultze (1996, 34). 227. See also Tobin (1972c, 12), in which Tobin suggested that a vertical Phillips curve might not emerge over the horizons relevant to econometric estimation and to policy making, a point Solow (1968, 9, 11, 14; 1969, 15) stressed too (see Klamer 1983, 135). 228. Washington Post, October 31, 1971, F3. See also Tobin (1972b). 229. Friedman (1968b, 11). 230. See chapter 15. 231. See also Tobin and Ross (1971). 232. Tobin’s acceptance of the natural-­rate hypothesis was highlighted in reviews of the book by Lucas (1981a) and H. Grossman (1982). 233. For example, Phelps presented “Non-­Walrasian Aspects of Employment and Inflation Theory” at the Cowles Foundation on December 13, 1968 (http://​cowles​.econ​.yale​ .edu​/archive​/events​/seminars​-­­cf​.htm). 234. Solow cited the presidential address as well as Friedman (1966e). The latter, of course, Solow was familiar with because it was part of a conference exchange he had with Friedman. Nevertheless, as was the case for so much of the profession, the articulation of the natural-­rate hypothesis in Friedman (1968b) was much more memorable to Solow than that in Friedman’s 1966 comment (Robert Solow, interview, December 2, 2013). One of the reasons for this was likely that Friedman’s (1966e) discussion of the natural-­rate hypothesis was not especially apropos. In his 1966 comments, Friedman was aiming his fire at pure cost-­push views of inflation, and a critical outlook on such views requires a demand-­pull perspective on inflation but does not necessarily require acceptance of the natural-­rate hypothesis. The natural-­rate hypothesis is helpful but not essential when challenging cost-­push views of inflation. 235. Phelps recalled that his emphasis on prior advocates of natural-­rate-­type ideas (such as Fellner and Lerner) was a way of dispelling the notion that signing up to the natural-­rate hypothesis meant endorsing all of Friedman’s ideas. “I might have been

400 N o t es t o P a g es 1 6 0 – 1 6 2 eager to show [the point] that: ‘Look, it’s not just Milton Friedman who had this idea. Others had this idea too’” (Edmund Phelps, interview, May 16, 2013). 236. For his part, Friedman cited Phelps’s work on the Phillips curve in his 1974–75 talk that was reprinted in the 1976 version of Price Theory (see Friedman 1975d, 1976a) and in his Nobel lecture (Friedman 1977e). Friedman and Schwartz (1982a) unaccountably omitted citation of Phelps in the discussion of the Phillips curve in Monetary Trends, but Friedman later cited Phelps again in his memoirs (Friedman and Friedman 1998, 625, 646; see also 231) and Friedman (2010). The latter citation is particularly poignant as it took place in Friedman’s final research paper, which, although published in 2010, was written in the first half of 2006; and the second half of 2006 saw both the award of the Nobel Prize in Economics to Phelps, and Friedman’s death. 237. Ebenstein (2007, 152) makes a directly contrary claim, contending that nobody questioned Friedman’s “technical virtuosity.” This characterization is at odds with the economics profession’s perception of Friedman, as documented repeatedly in the present book. 238. See Friedman (1976a, 228) and Friedman and Schwartz (1982a, 446). Friedman’s critique of Solow’s specification had been anticipated by Laidler (1970, 120). 239. Desai (1984, 265) took Friedman (1968b) to task for not citing A. W. Phillips (1958). (Friedman 1968b, 8, did, however, refer verbally to Phillips’s “analysis” and “his article.” In addition, it might be noted that Desai 1973, 540, referred to “the Friedman . . . world of [a] vertical Phillips curve,” but the article’s bibliography contained no citation of Friedman 1968b.) Furthermore, although Friedman in Taylor (2001, 124) suggested that Samuelson and Solow (1960) may have prompted his critique, it was not cited in Friedman (1968b). Some indication that Friedman’s critique of the Phillips curve was not in fact shaped by a reaction to Samuelson and Solow (1960) is his brief discussion in Friedman’s (1962b) version of Price Theory, in which (as was noted in chapter 7 above) Friedman referred to other work on the US Phillips curve and not to the Samuelson-­Solow study. 240. In 2007, after Friedman’s death, his secretary Gloria Valentine was winding up office affairs ahead of her retirement. After receiving a request from a member of the public for a Friedman paper titled “The Natural Rate Hypothesis,” Valentine emailed Anna Schwartz and the present author, asking if she was mistaken in stating that Friedman had never published such a paper. She was not mistaken; the closest to such a paper was Friedman (1977e, 456) that had “Stage 2: Natural Rate Hypothesis” in a section title. (After the consultation, she sent that 1977 article as the response to the original request.) Friedman also gave a section of his New Palgrave entry (1987a, 14) on the quantity theory of money the title, “The Phillips Curve and the Natural Rate Hypothesis.” Of course, the predilection on the part of editors and publishers to recycle pieces of previously published Friedman articles under new titles (exemplified by Ebenstein 2012)— a practice of which Friedman indicated his disapproval (see Friedman 1976a, 215; and Friedman and Schwartz 1982a, 441; for similar reactions, see Gordon 1976b, 190, 217; and Barro 1984, 444)—means that an article under Friedman’s name may one day appear with “Natural Rate Hypothesis” in the title. A development of this sort occurred in the case of Einstein, a portion of whose writings appeared in a latter-­day posthumous collection under the title The Theory of Relativity and Other Essays (Einstein 1996). 241. Although Paul Samuelson once implied (in Newsweek, March 2, 1970) that Friedman had explicitly used the “natural rate of unemployment” concept in his Newsweek writings, Friedman had not, in fact, done so at that point. Indeed, Friedman never would do so,

N o t es t o P a g es 1 6 2 – 1 6 3   401 and Brittan (2005, 298) noted the dearth of coverage of the natural-­rate hypothesis across Friedman’s popular writings. Friedman did, however, allude to his theory of the Phillips curve in some of his Newsweek columns, such as that of November 12, 1979. 242. Friedman obliquely referred to, but did not cite, his 1968 paper in Friedman (1972a, 930), but only in the context of the 1968 analysis’s implications for the cyclicality of the real wage, not its implications for the inflation/unemployment trade-­off. 243. For these discussions, see Friedman (1970f, 37–39; 1972b; 1973d, 7; 1975e, 103). 244. Friedman also discussed his rejection of a long-­run inflation/unemployment trade-­off in Instructional Dynamics Economics Cassette Tape 64 (December 31, 1970); Tape 145 (May 1, 1974); and Tape 205 (December 1976, part 2). His other 1970s discussions of the natural-­rate hypothesis included Friedman (1974f, 13; 1975c, 20; 1976h, 16–17; 1977c, 14); Monday Conference, ABC Television (Australia), April 14, 1975, p. 3 of transcript; and Meet the Press, NBC, October 24, 1976, p. 5 of transcript. The natural-­rate hypothesis, on which Friedman chose to center his Nobel lecture, underlay research that generated at least three Nobel awards in economics—those of Friedman (in 1976), Phelps (in 2006), and Lucas (in 1995)—and arguably five, if the Nobels received by Dale Mortensen (in 2010) and Thomas Sargent (in 2011) are viewed as partly reflecting their early research on the natural-­rate hypothesis (such as Mortensen 1970a, 1970b; and Sargent 1971). 245. McCallum acknowledged Friedman and Schwartz (1982a) as a somewhat latter-­ day exception, and an earlier version of that study’s Phillips-­curve results had, as noted, appeared in print in 1967 in the NBER Annual Report. Robert Gordon (who was aware of the ongoing Monetary Trends project in the 1970s) noted the Friedman-­Schwartz work on the Phillips curve in Gordon (1976a, 58), although he pointed out that the high degree of time aggregation that Friedman and Schwartz used would limit the relevance of their study to the core Phillips-­curve debate (something that Friedman and Schwartz 1982a, 441, acknowledged). 246. See Friedman (1976a, 228) and the discussion of Robert Gordon in the next chapter. 247. Again, see the next chapter. 248. Phillips, ill since the end of the 1960s (Leeson 2000c, 4, 13; Schwarzer 2016), died on March 4, 1975. In a visit to Australia a month later, Friedman fell into the trap of describing Phillips as an Australian (Friedman 1975i, 16), even though on an earlier occasion (Friedman 1967c, 10) he had correctly described Phillips as a New Zealander. The most common error in discussions, however, is to describe Phillips as British (for example, Business Week, April 28, 1973; Kemp 1979, 103–4; Barro 1984, 440; Hetzel 2007, 17) or English (for example, Senator William Proxmire’s February 7, 1968, remarks in Joint Economic Committee 1968b, 133; Laffer 1986, 4). Friedman generally avoided this error, although he came close to making it in Friedman (1962b, 284). 249. As it happened, Edmund Phelps moved on to other research areas during the time at which Friedman was starting to become active again in the debate about the Phillips curve. “You know, the subject got rather quickly taken over by the econometricians. By 1974–75, I just didn’t feel that that subject was the best use of my time. I was still quite young and still had a lot of ideas. That explains why I was not as visible in this area as one might have predicted” (Edmund Phelps, interview, May 16, 2013). See, however, Phelps and Taylor (1977), which was a paper that played an important role in building bridges between the natural-­rate hypothesis and rigorous models using nominal rigidities. 250. In an interview for this book (June 17, 2015), Richard Lipsey recalled that Friedman

402 N o t es t o P a g es 1 6 3 – 1 6 6 posed this question not only to Lipsey but also, in a separate meeting, to A. W. Phillips, when Friedman saw each of them while passing through the London School of Economics in the early 1960s. It was this Friedman/Phillips encounter that very likely corresponded to the occasion that Friedman later recounted to Sargent. Consequently, for reasons noted earlier, the Friedman/Phillips discussion in question perhaps took place during the 1962–63 academic year. 251. In Klamer (1983, 180). The date for the visit, which was noted in chapter 4 above, was given in Christ (1977). 252. See, however, Sandilands (1990, 157) for documentation of an instance, circa 1966, in which Friedman and Brunner had a telephone conversation; and see Ketchum and Strunk (1965) for the record of a 1965 conference that both Brunner and Friedman attended (specifically, the US Savings and Loan League’s Conference on Savings and Residential Financing, held in the city of Chicago in May 1965). 253. de Oliveira Campos (1964, 127). Among other early discussion was Baer (1962, 85), who opened his article on Brazilian inflation by referring to “the so-­called ‘monetarist vs. structuralist’ debate.” Earlier in the year, the term “monetarist” had also been used by Seers (1962, 193). The term “monetarist” also appeared in the context of the Latin American debate in a 1963 Journal of Political Economy book review (Mikesell 1963, 514, who mentioned the use of the term by Felix 1961). It was also used in an obscure 1963 article by the University of Chicago’s Harry Johnson, albeit in an appendix—apparently written by a rapporteur rather than by Johnson—that summarized the question-­and-­answer portion of his talk (Harry Johnson 1963, 67). 254. The OED entry cited the Economist, April 27, 1963. However, the term earlier appeared in the April 6 issue of the Economist. (The modern online OED entry also adds de Oliveira Campos 1961, 69, as an early usage.) The enterprising OED researchers even found a single example of pre-­1963 usage in a 1914 book by Geddes and Thompson titled Sex. On p. 239 of that book, Geddes and Thompson stated that “this order of things—avowedly mechanical, militarist, and monetarist at best, and thus too readily becoming debased, violent and venal—seems to many of us, perhaps as yet to most, the only possible form of industrial civilization.” (This early invocation of the term “monetarist” is now immortalized by the fact that the Sex book is searchable in the Google Books archive.) 255. Dewald’s article stated that the Federal Reserve Bulletin article by Gramley and Chase (1965) had used the term “monetarists.” In fact, it had not done so. 256. Anna Schwartz, conversation with author on the trip to the NBER’s Vermont Great Inflation conference, September 25, 2008. 257. Friedman (1983a, 2). 258. Friedman (1972e, 12). Friedman evidently liked the phrase “down to date,” having used it earlier in talking about the negative income tax (see US Chamber of Commerce 1967, 43). 259. Friedman, speaking in the Guardian, September 16, 1974. 260. Friedman (1978c, R-­181). 261. See, for example, Friedman (1956a, 12–13, point 11; 1963a, 10) and Friedman and Schwartz (1982a, 38, 40, 62). See also chapter 6 above. 262. Friedman (1982b, 101). Likewise in Friedman (1973a, 3) he had stated, “I don’t myself particularly like that unlovely title, but it has stuck and so I will stick with it.” 263. In his discussion of that debate (Instructional Dynamics Economics Cassette Tape 3, November 1968) Friedman mentioned “the so-­called Chicago school, or ‘mone-

N o t es t o P a g es 1 6 6 – 1 6 7   403 tarists,’ as he [i.e., Walter Heller] was referring to us.” In addition, in Instructional Dynamics Economics Cassette Tape 28 (June 12, 1969), Friedman himself referred to the monetarists as “the Chicago School people.” Friedman’s later use of “monetarism” amounted to an acknowledgment that the term “Chicago School” was not a satisfactory label for views whose proponents included those outside the University of Chicago (like Brunner) and that—as emphasized in earlier chapters—were not held by many of Friedman’s colleagues in the university. 264. See Friedman (1970a) as well as Friedman (1970e, 1970i, 1970j). 265. He did, however, work with Allan Meltzer on understanding the Federal Reserve’s policy in the 1930s (Brunner and Meltzer 1968). Chapter 11 above discussed the relationship between Meltzer’s (2003) historical work and that of Friedman and Schwartz (1963a). 266. The list that follows does not include Brunner and Meltzer’s (1971) celebrated work on the theoretical foundations of money demand. On this research, see King and Plosser (1986) and Laidler (1991b), as well as Brunner’s (1971a) discussion. In addition, Brunner made a number of contributions, not discussed below, to the public-­choice analysis of government (for which see, again, Laidler 1991b, for an analysis). 267. That is, Meltzer was dissatisfied with Friedman and Schwartz’s decomposition of variations in money in terms of high-­powered money, the currency-­deposit ratio, and the reserve-­deposit ratio, and their episode-­by-­episode analysis of the variations in each component. (Similar criticisms would apply to the work of several of Friedman’s students.) Brunner and Meltzer would use this decomposition too, but they would offer an explicit framework describing the factors driving each component. That said, as Schwartz (1981) emphasized and has already been discussed in previous chapters, Friedman and Schwartz did treat the money multiplier as a function of the state of the economy. Furthermore, later events—particularly US commercial banks’ behavior in the wake of the financial disruptions of 2007–8—have vindicated one key component of Friedman and Schwartz’s account of money-­supply determination. This component, which had come under sharp criticism from the Karl Brunner–­supervised work of Frost (1966, 1971), consisted of the notion that a financial panic should steeply raise commercial banks’ precautionary demand for bank reserves (for a given setting of the opportunity cost of holding reserves). 268. See Friedman’s remarks in his October 7, 1965, memorandum to the Federal Reserve Board (Friedman 1968a, 138), discussed in the previous chapter. Masera (1972, 142) credited Brunner and Meltzer with developing a formal theory of money-­supply determination, while Laidler (1995, 325) stressed the fact that Brunner and Meltzer’s money-­supply analysis “had no formal parallel” in Friedman’s writings—­ although he noted work that Friedman wrote or oversaw that was related to the issue (329). In part, the fact that Brunner and Meltzer were more associated with money-­supply work, and Friedman more with money-­demand work, arose by accident. For Meltzer (1995, xiii) recalled that Brunner and Meltzer initially divided their work plan so that Brunner would work on money-­supply issues and Meltzer on money demand. But, in practice, the two collaborated extensively on money-­supply work (culminating in Brunner and Meltzer 1990), and Brunner and Meltzer worked only sporadically on money demand after the early 1960s. 269. Kaldor (1970) also voiced this criticism, earning a rebuke from Brunner (1971b, 44). More generally, Brunner and Meltzer’s work serves as a counterexample to Gale’s (1982, 15) contention that the money-­supply side of economic models was “relatively

404 N o t es t o P a g es 1 6 7 – 1 7 0 neglected” in quantity theorists’ analysis. (Gale did not cite any of the Brunner-­Meltzer money-­supply research.) 270. For Friedman’s stress on this point see, for example, Friedman (1960a, 43; 1972a, 929; 1972b, 192; 1980a); Wall Street Journal, January 30, 1981; and Instructional Dynamics Economics Cassette Tapes 10 (January 1969) and 84 (October 20, 1971). See also E. Nelson (2013a) and chapter 6 for discussion. 271. In addition, as already indicated in the previous section, Brunner and Meltzer conducted pioneering work in adjusting empirical measures of the monetary base for changes in reserve requirements. Rutner (1975, 4) traced this work to Brunner (1961c), a paper in which Brunner developed some of the formulas involved in the adjustments. 272. Brunner (1971b, 1973) provided particularly direct discussions of this case. Friedman and Schwartz had, of course, considered a related case (that of the bond-­price peg) in the Monetary History. 273. See also Brunner (1961a; 1983, 50) and Meltzer (1977, 2001b). 274. Among the authors’ work, Brunner and Meltzer (1973) provided the clearest algebraic exposition of the transmission mechanism (with Brunner and Meltzer 1976a being far less clear). For a discussion of Friedman’s work in this area (for example, in Friedman 1961d, and Friedman and Schwartz 1963b, 1982a) and the relationship between it and the Brunner-­Meltzer work, see chapter 6 above, as well as Bordo and Schwartz (2004); Laidler (1995); and E. Nelson (2002b, 2003, 2013a). 275. A partial exception to this statement lies in the body of work (which did not include Tobin 1969a) in which Tobin emphasized the monetary base. See the previous chapter. 276. See also E. Nelson (2013a) and chapters 5–6 above. 277. Brunner also saw his work as offering more worked-­out versions of Friedman’s work on other topics. In particular, as discussed in Klamer (1983, 198) and Brunner (1979c, 37), Brunner (1969b) was intended to provide a more rigorous defense of the “as-­ if ” methodology than that provided in Friedman (1953c). It is hard to judge this attempt a success, however, because Brunner’s stilted writing style (discussed below) greatly impeded the readability of his 1969 article. 278. The absence of rational expectations from the models was not the critical shortcoming here, for pre-­1970s non-­rational-­expectations models can sometimes be converted into dynamic rational-­expectations models in a straightforward manner (as, for example, Muth 1960, and Hall 1978, did with the time-­series portion of the analysis in Friedman 1957a; and as McCallum 1983b, 154–56, did with the model in Tobin 1965b). Rather, the problem was that Brunner-­Meltzer papers typically did not present models that took the form of concrete difference equations, and so the modeling approach in these papers was less state-­of-­the-­art than that of Phelps (1968b), for example. 279. See especially Friedman and Schwartz (1982a, 33, 51). 280. For the US portion of the debates in question, see the next chapter. Even after renewing his practice of not replying to critics, Friedman would be willing to give replies in nonacademic outlets. For example, he would often reply if criticisms of his work spilled over into the media or were raised in correspondence with him. Examples include his contribution to The Times, March 3, 1980, and, in the 1970s, many of Friedman’s cassette commentaries. 281. On Friedman’s attitude regarding whether to reply to critics, see also E. Nelson (2009a, 466) and the next two chapters. 282. Laidler (1991b, 633) highlighted this aspect of Brunner’s activities. 283. From Friedman’s remarks in Martin (1983, 55).

N o t es t o P a g es 1 7 0 – 1 7 5   405 284. Solow made this remark in the context of a review of the Monetary History, so it was clearly Friedman’s monetary research that Solow had uppermost in mind when referring to the Chicago School. 285. Friedman’s unhappiness with Brunner’s manner of phrasing matters was brought home to the present author in comments that Friedman provided on a draft of E. Nelson (2003). In these comments, Friedman made a point of criticizing (as unclear) a Brunner quotation used in the draft. 286. Schwartz’s attitude remained the same more than two decades later. When for a research project, she was about to reread some items written by Brunner—the nearly 150-­ page Brunner (1971a) study among them—Schwartz remarked, “I am swamped with reading matter that doesn’t read well” (Anna Schwartz, email to author, February 20, 2003). 287. Friedman (1982b, 100). 288. See Friedman and Schwartz (1986b). 289. Friedman’s warm reception in this audio commentary to Nixon’s election success provided many hostages to fortune because of the optimistic predictions that Friedman made about the coming administration, as discussed below. In addition, it provoked criticism from some economist subscribers to the cassette series, who considered Friedman’s assessment too partisan. See Wall Street Journal, July 28, 1969. 290. See Friedman’s 1968 memorandum to Nixon, published as Friedman (1988b, 431). 291. See, for example, Friedman (1976i, 561); and Instructional Dynamics Economics Cassette Tape 163 (February 1975, part 1). 292. Instructional Dynamics Economics Cassette Tape 6 (December 1968) and Tape 11 (January 1969). See also Instructional Dynamics Economics Cassette Tape 92 (February 9, 1972) and Friedman’s (1987c) remarks at Burns’s memorial service, as well as the discussion in chapter 10 above. 293. Friedman made remarks of this kind on a number of occasions, including on Donahue, NBC, November 24, 1976; in Saturday Evening Post (May/June 1977, 20); in Milton Friedman Speaks, episode 14, “Equality and Freedom in the Free Enterprise System” (taped May 1, 1978; p. 19 of transcript); and in Friedman (1981a, 6). See also his remarks in the Listener (May 30, 1974, 688), Vaizey (1975, 70), Milton Friedman Speaks, episode 2, “Myths That Conceal Reality” (taped October 13, 1977; p. 6 of transcript), and Proprietary Association (1979, 38). 294. As printed in Friedman (1988b, 430–31; quotation from p. 431). Although it was not published until 1988, Friedman publicly referred to this memorandum in the closing days of Nixon’s presidency, in Instructional Dynamics Economics Cassette Tape 151 (August 7, 1974).

Chapter Fourteen 1. One instance of the former was his appearance on the debut episode of the program Investor’s Forum on Chicago public television on January 8, 1969 (see Hyde Park Herald, January 1, 1969). One instance of the latter was his appearance, during a visit to Cleveland, on Newswatch, a news discussion program of the ABC affiliate WEWS: see Plain Dealer, March 13, 1971. 2. The title of this conference was “The New, New Economics and the Stock Market of the 1970s” (Arizona Republic, November 24, 1969). Friedman was a lunch speaker for the conference. 3. See Friedman (1969e).

406 N o t es t o P a g es 1 7 5 – 1 7 8 4. Several of these occasions will be covered in this chapter and the next one. 5. Solow did this in a book review to which there will be occasion to refer again below. See Solow (1967, 100). 6. See Evening Star (Washington, DC), November 7 and 24, 1969. 7. On the trips to Japan, see for example Friedman and Friedman (1998, 412); and Japan Times, April 15, 1972. Written products resulting from Friedman’s 1970 UK trip include Friedman (1970a, 1971e). Friedman discussed these trips on various installments of his cassette commentary series, including Instructional Dynamics Economics Cassette Tapes 34 (September 4, 1969); 47 (April 2, 1970); and 98 (April 25, 1972). In addition, Friedman made multiple trips to the Middle East over the 1969–72 period, visiting Israel in 1969 and 1972 and stopping in Iran during his September 1970 travels. On the Middle East trips see, for example Friedman (1973a); Friedman and Friedman (1998, 414–15); and Friedman’s discussions in Newsweek, May 5, 1969; and in Instructional Dynamics Economics Cassette Tape 59 (October 15, 1970). 8. Friedman (1970c, 326–27). 9. Ebenstein (2007, 152) makes the contrary claim, contending that Friedman reduced his teaching load in the late 1960s. But he does not document this contention by listing courses that Friedman stopped teaching. (Ebenstein does state that the portion of the year in which Friedman was on campus declined. But such a development does not in itself imply a reduced teaching load.) The suggestion that Friedman’s teaching load declined is, in any event, contradicted by the record of Friedman’s University of Chicago commitments in the late 1960s, which, as at the start of the decade, consisted of two quarters of graduate teaching and oversight of the money-­and-­banking workshop. Friedman also taught for two quarters of the year in the period closer to his retirement. For example, in the 1974–75 academic year he taught Price Theory (Economics 301 and Economics 302) over two quarters: fall 1974 and winter 1975 (William Dougan, interview, September 19, 2013; Gerald Dwyer, interview, August 20, 2013; Kenneth Clements, personal communication, April 13, 2015). 10. Meulendyke attended Friedman’s graduate classes in the fall of 1966 and in the winter of 1968 (information from Ann-­Marie Meulendyke). The incident recalled by Meulendyke likely took place in 1968 or 1969, after she had completed most of her graduate courses. 11. John Kenneth Galbraith had a clear lead over Friedman and Samuelson in establishing a profile as an economist in public debate. But—notwithstanding his holding the position of president of the American Economic Association in 1972—Galbraith fell into a different category from that of Friedman and Samuelson, as he was, by the 1960s, essentially divorced from the US economic-­research world and was confining his writings to those for a general readership. 12. For example, they made a joint appearance on May 22, 1969, in MIT’s Karl Compton lecture series, broadcast live on Boston-­area public television (station WGBH) under the title The Great Economics Debate, and also as panelists on a CBS news special, Blue Christmas? An Inquiry into the State of the Economy (December 1, 1970). 13. See Friedman (1972d) and Samuelson (1973b). 14. From the “About the Authors” in Samuelson and Nordhaus (1985, v). 15. In E. Nelson (2004a, 405). 16. Schwartz recalled that “early on when I knew Friedman, he was about to go to France. This was around the time he published his case for flexible exchange rates. I asked him whether he would have a chance to go to museums in Paris. He looked at me as if

N o t es t o P a g es 1 7 8 – 1 7 9   407 I was crazy. He said, ‘Why would I spend my time going to museums?’” See E. Nelson (2004a, 405). 17. Friedman also expressed admiration for the great painters of history in Martin (1983, 56). 18. For Friedman’s reference to rock music, see Center for Policy Study (1970, 2). Friedman discussed his musical illiteracy and his indifference to music in Chicago Tribune (July 20, 1980, 22) and Friedman and Friedman (1998, 21), and he also alluded to these in Friedman (1981d, xiv); see also Rose Friedman’s remarks in Los Angeles Times, December 14, 1986, 15. Ironically, during an edition of her television talk show in which she had Friedman as a studio guest, Dinah Shore transitioned from a discussion segment to a musical segment by remarking, “I hope you like music, Dr. Friedman”—a remark that Friedman politely took as not requiring a reply (Dinah!, March 30, 1977). A further irony, in view of Friedman’s indifference to music, is that one occasionally sees articles on music in lists of his publications. Items attributed to Friedman have included a 1971 contribution called “Listening—Assurance for a Vital Musical Future.” This and other publications on music were actually the work of a different Milton Friedman (see Milton M. Friedman 1971). 19. His wider interests notwithstanding, Samuelson shared Friedman’s tendency to reuse material in conversation. Robert Hall recalled: “The MIT department had a big round table in the faculty club, and at first, when I joined the faculty in 1970, I kind of enjoyed going and constantly hearing Samuelson tell stories; he’d kind of dominate the conversation. But then after the third time I’d heard every story, it wasn’t quite so attractive” (Robert Hall, interview, May 31, 2013). 20. For example, on Monday Conference, ABC Television (Australia), April 14, 1975, Friedman implied that Canberra was a state of Australia (when, in fact, it is a city that is not situated within any of Australia’s states). He also confessed to some confusion about geographical matters in an appearance on The Open Mind, PBS, May 31, 1977. 21. See, for example, Friedman’s translation of material from French in Friedman (1955g, 908). Friedman’s remark about his pronunciation appeared in Milton Friedman Speaks, episode 14, “Equality and Freedom in the Free Enterprise System” (taped May 1, 1978), p. 4 of transcript. 22. He in effect acknowledged his lack of command of physics in Friedman (1953c, 18). 23. Friedman publicly alluded to medical evidence against smoking as early as 1950 (see All Participants 1951, 251), but it was not until around the mid-­1950s that he gave up smoking, a decision he later said had been swayed by mounting medical-­research findings (Newsweek, June 16, 1969; Milton Friedman Speaks, episode 12, “Who Protects the Consumer?,” taped September 12, 1977; p. 32 of transcript). For Friedman’s remarks on his post-­1972 interest in cardiac medicine, see for example his column in Newsweek, January 11, 1982. Friedman’s heart surgery is discussed in chapter 15. 24. Friedman (1981d, xiv). 25. Brainard received this response at a dinner he had with Friedman when Brainard was visiting the University of Chicago for a job talk in the first part of 1962. Friedman had made the remark after he had cited the problem of how to include in an equation variables that were in different units, and specifically putting interest rates in their original, percentage form as an opportunity-­cost variable in the money-­demand function. This observation had in turn prompted Brainard to counter that physicists had provided a way of solving the problem. Brainard, who noted that Friedman’s rejoinder about physics was made “in good humor,” reflected: “I have never known what to make of that—it seemed

408 N o t es t o P a g es 1 8 0 – 1 8 1 like a concession, but I wasn’t sure” (William Brainard, personal communication, May 26, 2014). 26. A very latter-­day instance in which this contrast between Friedman and Samuelson came to the fore was in correspondence the two had in December 2001. Samuelson, having read the memoirs of Edward Teller, wrote to Friedman about some of the details of the development of the hydrogen bomb, expressing the hope that Friedman would be able to draw out Teller (who was nominally a colleague of Friedman’s at the Hoover Institution) on the matter in conversation. Friedman replied frankly that, while he had read Teller (2001) and supplied a three-­word endorsement of the book for the publisher, and found Teller an interesting person, his own interactions with Teller, which had never been very extensive, had been especially rare in recent years. Most importantly for the present discussion, Friedman stated that he had never had the interest in and knowledge of the field of nuclear physics that Samuelson clearly had (Samuelson and Friedman letters of December 3 and 21, 2001, respectively, in the Paul Samuelson papers, Duke University). 27. The column in question was Samuelson’s column “Love” (Newsweek, December 29, 1969), which Samuelson later included alongside a September 13, 1971, contribution called “Blood” in a chapter titled “Any Room for Love?” of the Samuelson (1973b) collection of Newsweek columns. Of course, it could be argued that these choices of topic, instead of signifying a failure to focus on economic topics, represented Samuelson’s efforts to apply economics to unconventional areas—in so doing providing his own version of the type of work that came to be associated both with Gary Becker and with Friedman’s son David, who would include a chapter on “The Economics of Love and Marriage” in his book Hidden Order (D. D. Friedman 1996). Although Becker was not mentioned in Samuelson’s column, a negative reaction to Becker’s work may have prompted Samuelson’s choice of topic. Robert Hall recalled that in the period during which the column was written, Samuelson and Solow “were participants in a moral battle that was going on in those days,” involving what the participants implied was a contest between “moral economics and immoral economics. It was especially aimed at Gary Becker—I think more than Milton, interestingly” (Robert Hall, interview, May 31, 2013). Robert Solow (interview, April 3, 2015) confirmed that Becker’s research was indeed a focus of critical comment at MIT during this period. Solow observed that his own objection was to the “imperialism of economics” implied by Becker’s approach, according to which such topics as the decision to have children were framed as the result of a utility-­maximizing exercise. See also the discussion in the previous chapter. 28. In a November 19, 1987, speech, Reagan stated, “Nobel Prize–­winning economist Paul Samuelson has quipped that Wall Street has predicted nine of the last six recessions” (Reagan 1987). The obituary that quoted this Samuelson observation appeared in the New York Times, December 14, 2009. 29. Friedman’s perspective on the stock market would shift still closer to that taken by Samuelson. In 1990, in another joint television appearance with Friedman, Samuelson observed that the 1987 stock market crash had confirmed that the economy and the stock market could be decoupled for extended stretches of time. In response, Friedman remarked: “Unaccustomed as I am to agreeing with Paul, I agree with everything he says” (MacNeil/Lehrer NewsHour, PBS, August 27, 1990, p. 6 of transcript). For further discussion, see E. Nelson (2013a, 70–71), and the analysis in this book of Friedman’s views on aggregate demand (chapters 5–6). 30. See, in particular, his column on energy policy (Newsweek, July 2, 1979), a piece so laced with sarcasm that it is hard to tell what position Samuelson was taking on the matter.

N o t es t o P a g es 1 8 2 – 1 8 6   409 31. The columnist was William Clark, who between 1969 and 1976 served as Friedman’s interlocutor for those episodes of Friedman’s cassette commentary series that were taped in the city of Chicago. See also Business Week, July 26, 1969. 32. Friedman’s Time cover was also mentioned by Campbell (1987, xi) and, as noted in chapter 1 above, Dornbusch and Fischer (1978). 33. In view of this attention, Newsweek’s editors evidently felt that the magazine should play up Friedman’s association with the magazine, and so regular Newsweek contributor Jacquin Sanders wrote an extended profile of Friedman. This profile was syndicated in newspapers (for example, Arizona Republic, February 15, 1970). 34. The bulk of the references to Milton Friedman in 1960 had been to a namesake of Friedman’s who, as discussed further in a later section of this chapter, was a New York–­ area lawyer concerned with labor relations. 35. For another example, see Arizona Republic, November 24, 1969. Prior to Nixon’s inauguration, Friedman’s status as an economist associated with the Nixon campaign had led to his appearance as a panelist on a public television news special (January 10, 1969) titled The Nixon Administration. 36. This and other aspects of Friedman’s testimony led Moffitt (2003, 122) to emphasize Friedman’s adverse reactions to the Family Assistance Plan. However, as noted in the present discussion, Friedman also had positive remarks to offer about the Family Assistance Plan, both in 1969 and in retrospectives. 37. November 7, 1969, testimony, in Committee on Ways and Means (1970, p. 1944). 38. November 7, 1969, testimony, in Committee on Ways and Means (1970, p. 1952). 39. Friedman’s retrospective discussions on the Family Assistance Plan, including praise for Moynihan’s book, included those in Friedman (1977b, 55, reprinted in Friedman 1978a, 81); Milton Friedman Speaks, episode 5, “What Is Wrong with the Welfare State?” (taped February 23, 1978; p. 14 of transcript); and Milton Friedman Speaks, episode 15, “The Future of Our Free Society” (taped February 21, 1978; pp. 9–10 of transcript). The phrase quoted in the text is from p. 10 of the last-­named source. 40. The debate was reported in Philadelphia Evening Bulletin, October 15, 1973; and Newsday, October 22, 1973; and it was excerpted in Fortune, November 1973. For an account of a prior exchange on the same subject—this time between Friedman and businessman Gordon Sherman—see Kansas City Times, February 9, 1971. 41. Other figures critical of the notion that corporations should have an objective other than profit maximization included Theodore Levitt (Levitt 1958; Worthy and Levitt 1959) and Eugene Rostow (see below). 42. For one pre-­1962 publication in which Friedman made the argument, see Friedman (1958a, 22–23). Carson (1993), focusing solely on the 1962 and 1970 Friedman expositions, claimed that Friedman’s position on the responsibility of business changed substantially. Friedman did alter his views on some topics; but it is also the case that, as discussed in E. Nelson (2007, 171), commentators over the years frequently took Friedman as recanting previous positions on occasions when he was not, in fact, doing so. The corporate-­responsibility example studied by Carson may be an instance of the latter phenomenon, especially in view of the fact that, even under Carson’s interpretation, the alleged change in position was an unconscious one on Friedman’s part (see Carson 1993, 4). 43. Baumol and Blinder (1982, 814) observed that “the model of profit maximization [is] so beloved of mainstream economists.” It is true that, after Friedman’s piece on the social responsibility of business appeared, Paul Samuelson penned an op-­ed (New York Times, December 26, 1970) that was ostensibly a dissent from Friedman’s position. But

410 N o t es t o P a g es 1 8 6 – 1 8 8 even Samuelson’s article gave pride of place to profit maximization in laying out firms’ goals, and the article’s discussion quickly moved on from the social-­responsibility issue to areas of sharper divergence from Friedman. 44. The quotation is from Friedman (1962a, 136). 45. Baumol and Blinder (1982, 814) summarized Solow’s argument as follows: “While recognizing that profit maximization cannot be a literal description of corporate behavior . . . , Solow suggests that it is still a workable approximation.” This description of Solow’s argument points up the similarities between Friedman’s and Solow’s perspectives on economic-­research methodology. 46. Even before 1970, Friedman had urged that all corporate income be deemed shareholder income (for example, Friedman 1962a, 132; Instructional Dynamics Economics Cassette Tape 15, February 1969). This recommendation could be viewed as aimed at establishing tighter shareholder control on the firm. But it did not imply a view that firms did not maximize profits under existing tax arrangements, as it could be regarded instead as concerned with shareholder command over the resources that accrue from firms’ profit maximization. In contrast, Eugene Rostow, another advocate of the notion that firms should maximize shareholder wealth, was by the late 1950s so convinced of the empirical existence of a major principal/agent problem that he recommended that firms be required by law to maximize profits (Rostow 1960). 47. Friedman (1976c, 7; p. 9 of 1977 version). 48. Friedman (1977b, 25–29, reprinted in Friedman 1978a, 60–61). This was a printed version of a talk Friedman gave in 1976. 49. As Solow (1967) noted, early literature on the principal/agent problem included Veblen (1923) and Berle and Means (1933). Sir James Mirrlees (interview, January 6, 2015), while noting these early contributions, observed that a major impetus to his taking of a contract-­theory approach to the problem in the Mirrlees (1975) manuscript (later published as Mirrlees 1999) was Arrow’s (1963) analysis of the medical profession—the same Arrow paper that the discussion in chapter 2 had occasion to mention because of that paper’s challenge to the analysis of Friedman and Kuznets (1945). 50. See Friedman and Friedman (1998, 365) and Friedman’s 2002 remarks in Coelho, McClure, and Spry (2003). Friedman was on the right track, however, in recognizing that much of the discussion of his position had occurred outside the ordinary economic-­ research literature. Discussions of Friedman’s views on the social responsibility of business have spread far and wide, and they have included a lively debate in the New Zealand press in the late 1990s (see Evening Post, January 6, 1997, and August 8, 1998) and a 2008 book titled “Star Trek” and Philosophy (Eberl and Decker 2008, 185). 51. An early example of an article in a research journal that cited Friedman’s New York Times Magazine piece prominently was Almarin Phillips (1974), whose opening paragraph referred to Friedman’s discussion. 52. On the other hand, this literature has also provided arguments, of a different kind from those in Manne (1975), for reconciling corporate citizenship with firms’ responsibilities to shareholders. For example, whereas Friedman tended to view corporate donations to charity as a usurpation of shareholders’ rights, and he called for the tax deductibility of such corporate donations to be abolished (Friedman 1962a, 135; Center for Policy Study 1970, 28), Bénabou and Tirole (2010, 10) discuss the possibility that such donations reflect a delegation from shareholders to firms of the responsibility to make donations. Acceptance of this interpretation would preclude viewing such donations as evidence of a principal/agent problem. Taking this interpretation would therefore cast doubt on Friedman’s

N o t es t o P a g es 1 8 8 – 1 9 1   411 circa 1970 view of firms’ behavior but would also go somewhat in the direction of supporting his later downgrading of the principal/agent problem. 53. This article marked something of a turning point in Schwartz’s public profile. Although Schwartz would look back on herself as having stayed out of the limelight throughout her career (conversation with Anna Schwartz, October 8, 2004), from the early 1970s she did have a higher profile than previously. In particular, as noted, she was a founding member of the Shadow Open Market Committee, which started in 1973. She would also be a fixture of the NBER’s regular meetings on the East Coast, which became routine starting late in the 1970s. The text quotation is from Friedman and Schwartz (1969b, 79). 54. See, for example, Rasche (1987) and Simpson (1980). The generalization given in the text is roughly valid for both the old (i.e., pre-­1980) and new (1980 to present) official US definitions of money. 55. Friedman and Schwartz (1970a, 2, 92). 56. Friedman (1972g, 14). 57. Friedman (1960a, 91). On the basis of this discussion, R. Davis (1974, 10) credited Friedman with voicing an early warning of the extent to which Regulation Q might create divergences between M1 and M2. 58. Friedman (1971g, 9). 59. Friedman and Schwartz (1970a, 105, 129) stressed that in practice commercial banks were willing both to transfer time deposit funds to third parties and to redeem time deposits, at the request of depositors, prior to the deposits’ stated maturity date. On the demand-­deposit-­like aspects of traditional time deposits, see, for example, Currie (1934, 14) as well as chapter 6 above. 60. Friedman made observations similar to those in the Cagan passage in various forums, among them: Instructional Dynamics Economics Cassette Tape 29 (June 30, 1969); Newsweek, February 2, 1970; Friedman (1970d, 19; 1972b, 192; 1974b, 352; 1987a, 10); and Free to Choose (US television version), PBS, episode 3, “Anatomy of a Crisis,” January 29, 1980, p. 2 of transcript. Even when applied to the case in which wholesale deposits were not present, this characterization of the individual bank’s situation was not wholly realistic: in practice, as Friedman indicated (Friedman and Schwartz 1970a, 168; Friedman 1970d, 24) and as his dissertation student Benjamin Klein (1970) discussed, commercial banks used devices such as compensating balances to limit the extent to which deposits created by their own loan extension to customers were lost from their deposit total, via the exodus, to other banks, of the new deposit funds. With such devices, a bank could reliably add to its own deposits by issuing a loan (although it could not, of course, know whether this would add to the aggregate money stock, as this would depend on what was happening to other banks’ deposits). See also Tobin (1982, 498–99) for a discussion of these issues. Another point that deserves stress is that neither Cagan’s (1972a) nor Friedman’s (1970d, 19) statement of the standard result is strictly correct. In the preceding quotation, Cagan would have been more correct to say “Bankers used to deny that it was within their power to raise their deposit total permanently” rather than “Bankers used to deny that they created deposits.” Likewise, even in a retail-­deposits world, a modification is needed to Friedman’s (1970d) statement, “No individual bank in a multi-­bank system knowingly creates ‘money.’ It is a financial intermediary that borrows from some and lends to others.” This correctly describes the situation in which a bank receives a deposit and lends out the deposited funds, but it is less applicable to the situation underlying the Cagan quotation: that is to say, the case in which a commercial bank, starting with a given

412 N o t es t o P a g es 1 9 2 – 1 9 3 deposit total, increases its loans and does so by crediting funds to the deposit of the customer who is the recipient of the loan. For the latter case, Friedman’s characterization would be more correct if “knowingly creates ‘money’” were replaced by “consciously makes a permanent addition to the money stock.” 61. See Newsweek, October 30, 1967, and June 3, 1968—columns reprinted in Friedman (1972d, 44–48). 62. See, for example, Friedman (1969f, 366; 1980c, 83; 1984i, 10; 1998); Friedman’s June 21, 1973, testimony in Joint Economic Committee (1973, 120); and his remarks in Instructional Dynamics Economics Cassette Tape 139 (February 4, 1974). Friedman also articulated this point in his June 8, 1971, Oval Office conversation with President Nixon and George Shultz. Citibank official Walter Wriston subscribed to the same view, stating, “We lost the Eurodollar market to the United Kingdom when we passed that dumb interest equalization tax” (Euromoney, July 1978, 89). See also Bell (1973). 63. Likewise, Chairman Martin in June 30, 1969, testimony (in Committee on Banking and Currency, US House 1969b, 301) discussed the prior week’s introduction of a marginal reserve requirement on Eurodollar borrowing. For Friedman’s discussion of a related move, see Friedman (1969d, reprinted in Friedman 1971b, 22). 64. For a discussion, in the US context, by Friedman himself along these lines, see Friedman (1957b, 86–87). These characterizations of the effects of regulation had strong similarities with Tobin’s (1970c, 8) judgment that the Federal Reserve “finds itself in a perpetual and probably losing race to block these detours.” In direct contrast to Friedman (1970d), however, Tobin saw official ceilings on retail deposit interest rates (as distinct from wholesale deposit rates) as likely to contribute to meaningful monetary control. 65. See the footnote in Newsweek, May 26, 1969, as well as Friedman’s remarks in Instructional Dynamics Economics Cassette Tapes 33 (August 21, 1969) and 54 (July 8, 1970) and in Friedman (1970d, 25). It may have been operations of the kind Friedman described that prompted a Federal Reserve Bank of St. Louis (1970, 4) analysis to assert, “Money stock [i.e., M1] plus time deposits [is] a broader concept of money which has largely lost its significance in recent years.” 66. One of the first instances in which Friedman relied on an M2 concept that excluded CDs was that of his Newsweek column of May 26, 1969. In that column, in line with widespread practice in the 1970s literature, but unlike Friedman and Schwartz’s (1970a) convention, the money total that included time deposits but excluded large CDs was actually called “M2,” rather than “M2-­CDs.” Friedman’s decision in 1969 to exclude CDs from his money concept quickly was well known by mid-­1969 and was mentioned in W. Cox (1969, 74), and in two contributions to a June 1969 Federal Reserve Bank of Boston conference on monetary aggregates (which Friedman did not attend): Meltzer (1969b, 97) and Wallich (1969, 32). 67. See Friedman and Schwartz (1982a, 40–41), in which corporations’ demand for money is seen as having been generated by the demand for money by households, the “ultimate wealth holders” (37). This perspective dovetailed with Friedman’s perception, discussed earlier, of businesses as operating in the service of their shareholders. 68. It would seem to the present author that Benjamin Friedman (1986, 455) neglected this aspect of Milton Friedman’s discussions, as well as other analyses of the retail/wholesale deposit distinction, when Benjamin Friedman stated: “As Tobin and others have shown, however, theories of inside asset holding are inseparable from theories of inside liability issuing . . . [so] there is no reason to presume that a satisfactory theory exists for M1 or M2 in isolation from other inside assets and liabilities, or that a comprehensive

N o t es t o P a g e 1 9 4   413 theory of inside asset holding and liability issuing would somehow point to a special role for M1 or M2.” A focus on household money demand does however “point to a special role for M1 or M2” as the definition of money, because such a focus suggests that retail deposits plus currency should be stressed as the economically relevant money balances. This reasoning therefore does provide a basis for considering M1 or M2 “in isolation from other inside assets and liabilities.” The Tobin work to which Benjamin Friedman referred does not invalidate this conclusion, as Tobin’s monetary theory was developed in the era before the wholesale/retail distinction loomed large. Tobin (1982, 496) acknowledged that his theory of banking did not allow for the presence of wholesale deposits. 69. They did not put the choice in these terms, however. Friedman rarely used the terms “retail deposits” or “wholesale deposits” (one instance in which he used the latter term being his discussion of the Eurodollar market in Instructional Dynamics Economics Cassette Tape 33, August 21, 1969). 70. See especially the discussion of large CDs in Friedman and Schwartz (1970a, 80). This position also permeated the report of the Bach Committee on monetary statistics (Bach et al. 1976), on which Friedman served. A similar judgment appeared in Heebner (1969, 28). 71. The relevant passage was Friedman and Schwartz (1970a, 151–52). In their discussion, Friedman and Schwartz did not claim originality for the idea, instead stating that it had been “suggested frequently” (152) and citing Pesek and Saving (1967) on this score. Friedman had previously floated the idea of a weighted monetary series in May 1959 (Joint Economic Committee 1959a, 619) and in Friedman and Meiselman (1965, 753–54). In addition, in Instructional Dynamics Economics Cassette Tape 66 (January 27, 1971), he noted that neither M1 nor M2 could be relied on exclusively as a monetary measure, each being a proxy for the “true money supply.” See also chapter 6. 72. See Barnett (2013) and Belongia and Ireland (2014, 2016) for recent discussions of the Divisia approach. 73. Friedman and Heller (1969, 87). 74. These instruments were included instead in a wider total, M5 (Rasche 1990, 159), which resembled the series that was designated M3 in the redefinitions of money that were made by the Federal Reserve Board in 1979–80. 75. There also existed a supply-­side basis for excluding wholesale deposits from M2. Friedman and Schwartz (1970a, 81) quoted an early Federal Reserve discussion (in Board of Governors of the Federal Reserve System 1943) to the effect that there was a case for including both demand and time deposits in a money-­supply definition because both classes of deposit finance (or, in modern parlance, fund) bank credit in a similar way. On the basis of this criterion, wholesale deposits should be kept out of the monetary definition because their role in funding bank credit is different: a large bank can actively raise wholesale deposits as needed to finance its loans and investments, whereas, in the absence of sizable instantaneous reactions by households to variations in interest rates on deposits, commercial banks tend to be in a more passive position with respect to retail deposits. (In an April 23, 1979, letter—published in Committee on Banking, Finance, and Urban Affairs 1980b, 114—Friedman’s former student William Gibson synthesized both the demand- and supply-­based rationales for excluding negotiable CDs from M2 when he wrote: “Movements in negotiable CD volume reflect substantially different sorts of forces from other deposits, being much more closely connected with investment securities markets and the worldwide funding activities of international banks.”) The Federal Reserve recognized the dissimilarity of large CDs to regular time deposits,

414 N o t es t o P a g es 1 9 4 – 1 9 6 from the point of view of the issuing banks, in its decision in August 1970 to extend reserve requirements to commercial paper issued by bank affiliates. Chairman Burns’s rationale for this move was that it put these commercial-­paper issuances “on the same reserve basis as large-­denomination CDs” (March 10, 1971, testimony, in Committee on Banking, Housing and Urban Affairs 1971, 4). 76. See Friedman (1969d). This paper focused on Eurodollars rather than CDs, but the same bottom line applies. Later, Grabbe (1982) defended using a form of monetary-­base/ money-­multiplier analysis in studying the Eurodollar market. This can be regarded as a vindication of Friedman’s (1969d) analysis. (See also Swoboda 1980, and Willms 1976, for discussions that put Friedman’s article in the context of the larger Eurodollar literature. Earlier, in the late 1960s and early 1970s, Friedman also was a supervisor of dissertation work on the Eurodollar market by Ann-­Marie Meulendyke—research that was issued in condensed form as Meulendyke 1975.) 77. For example, Masera (1972, 173) viewed large CD issuance as linked to monetary base growth. For a contrary finding that suggests the looseness of the relationship between monetary base growth and the overall expansion of the commercial banking system, see Carpenter and Demiralp (2012). A similar contrast of views was evident in discussions of the Eurodollar market. Thus, Benjamin Klein (1976b, 516) suggested that Eurodollar expansion was not linked to monetary base growth, whereas Robert Gordon (in April 1975 remarks in Birnbaum and Laffer 1976, 264) expressed a view like that Friedman had voiced: “The Eurodollar market is a financial pyramid based on U.S. dollar base money, just as is the U.S. savings-­and-­loan industry.” 78. For example, Paul S. Nadler (in Bankers’ Magazine, Spring 1970, 19) asserted: “Once liability management was developed in earnest, then, there was no holding [back] the major banks in their expansion.” Likewise, Formuzis (1973, 806) argued that, in an environment of liability management, the money-­multiplier approach is invalid, his grounds being that such an environment gives autonomy to a banking institution in its decision about the level of its total liabilities. 79. Dewald (1975, 139). See also Llewellyn (1982, 100); and Darby and Lothian (1983, 165). 80. The deposit creation in which commercial banks figure so crucially could then be viewed as constrained by, and often stemming from, central bank actions in the market for bank reserves. 81. In 1974, Lester G. Gable, a vice president of the Federal Reserve Bank of Minneapolis, voiced this position (see American Banker, August 21, 1974; and Gable 1974). Another way of putting the point, as in the analyses of Artis and Lewis (1981, 123) and Brian Griffiths (in The Times, May 6, 1980; and in Griffiths 1980), is by contending that restriction of the stock of commercial bank reserves induces banks to prefer asset management to liability management. 82. Bean, Paustian, Penalver, and T. Taylor (2010) report the (stronger) result that total (that is, bank plus nonbank) credit growth is susceptible to influence by open market operations. 83. See, for example, the 1960 and 1978 Friedman discussions considered in chapter 2’s section on Henry Simons. Harrington (1969, 89) and Laidler (1989, 1154) also expressed views along these lines (see also Guttentag and Lindsay 1968). So too did Anna Schwartz in a January 10, 1992, interview with the present author, when she said, “In the kind of financial system we now have, where clearings go through the central bank, every kind of commercial bank, [and] every kind of non-­commercial-­bank [intermediary], will

N o t es t o P a g es 1 9 6 – 1 9 9   415 find it convenient to hold deposits with the central bank.” Schwartz added (echoing the 1960s discussions mentioned above): “It doesn’t matter if there are financial institutions that are outside of this network, because they in turn have deposits with the commercial banks, so that there’s really no way to escape the kind of control that a reserve bank can exert if it wants to do that.” 84. Friedman (1974a, 22). This view was also expressed—in the context of analyses that took Eurodollars as part of the relevant money measure—by Bell (1970, 27) and Gibson (1971). 85. For example, Hamburger (1966, 622) reported “results [that] . . . cast substantial doubt on the hypothesis that the growth of financial intermediaries may reduce the effectiveness of monetary policy. . . . The alternative hypothesis suggested by the results is that, if the interest rates paid by financial intermediaries vary with market rates, the existence of these institutions should contribute to a broader distribution of the effects of monetary policy.” 86. See Friedman (1984h) and Friedman and Schwartz (1986b). For related arguments, see Congdon (1981); Fischer (1986); Goodhart (1986); and B. Klein (1976b, 1978a, 1978b). 87. Abrams (2006, 184) described a (recorded) White House conversation between Federal Reserve chairman Arthur Burns and President Nixon on February 14, 1972, in which Burns stated that Friedman had recently written that “M2 is more important than M1.” According to Abrams, Burns indicated that this statement was in Friedman’s most recent paper. Abrams did not identify the Friedman paper to which Burns referred. This paper was likely either Friedman’s Newsweek column of March 1, 1971, or his June 1971 Federal Reserve Board memorandum (Friedman 1971g)—neither of which, however, was Friedman’s most recent paper by February 1972. Alternatively, Burns may have meant Friedman (1972e). 88. See the data in the Federal Reserve Bank of St. Louis’s FRED portal at http://​ fred.stlouisfed.org/series/M2own. 89. See Newsweek, August 27, 1973; and Friedman (1974a). 90. Brunner (1980b, 99) stated that monetary policy was easy in 1970 through summer 1971 and then tight (with “a sharp reduction of monetary growth”) in the period from the summer of 1971 to the spring of 1972. This assessment has some validity when old M1 is used as the definition of money but, as table 14.1 shows, the reduction in monetary growth in the summer of 1971 was less pronounced for the revised M1 definition and even more muted in the case of M2, which (on both old and modern definitions) continued to grow rapidly after the summer of 1971. And even by the old M1 measure, rapid monetary growth had resumed by mid-­1972. 91. Friedman and Schwartz (1970a, 3). Notwithstanding this caveat, the book contained a good amount of economic analysis in it (some of which is discussed in the immediately preceding section of this chapter as well as in other chapters of this book). Much of the economic analysis in the book took the form of a critique of other writers’ approaches to defining money, in what amounted to a compendium of ersatz referee reports on previous studies—peppered with sharp remarks of the kind that one is accustomed to from the work of both authors, such as their observation that “unfortunately on this issue their analysis seems to us clearly wrong” (Friedman and Schwartz 1970a, 111). 92. Chow (1970, 687). 93. Clower (1971, 25). 94. Gordon’s biographical data for the 1960s appeared in American Economic Association (1970, 161).

416 N o t es t o P a g es 1 9 9 – 2 0 1 95. Friedman (1971d). Although this follow-­up article was, like Friedman (1970b), published as a solo-­authored piece, the text of the articles identified them as preliminary versions of material that would be included (as they eventually were) in the forthcoming Friedman-­Schwartz Monetary Trends book. Friedman published errata for the first paper (Friedman 1970n), and the corrected version of that paper was what appeared when the Friedman (1970b, 1971d) articles were consolidated into Friedman (1971l) and later into Gordon (1974a). 96. The 1974 book also featured short replies, or amendments to their Journal of Political Economy pieces, by three of Friedman’s critics in response to the small amount of material added during Friedman’s revision of his 1970–71 articles. The critics were not permitted to publish, either in the Journal of Political Economy or in Gordon (1974a), rebuttals to Friedman’s (1972a) response to their comments on the original 1970–71 articles. This reflected Gordon’s enforcement of the convention that the original contributor to a debate in a journal should be permitted to supply the last formal installment in the debate (Gordon 1974b, xii). These authors remained free, of course, to respond to Friedman (1972a) in other forums, and Patinkin (1981b) did so explicitly. 97. However, one of the debate’s participants, Don Patinkin had close ties to MIT, to which he made many visits, in the course of which, Robert Solow recalled, there were “a lot of conversations amongst Samuelson, Patinkin, and me” (Robert Solow, interview, July 7, 2014). 98. Mark Gertler, who was a graduate student at Stanford University in the aftermath of the Journal of Political Economy debate, likewise saw the monetary economics debate as centering on Friedman versus Tobin, or “the Yale camp and the Chicago camp,” rather than viewing that debate in terms of Friedman versus Samuelson or University of Chicago versus MIT. “Samuelson was kind of the father of modern economics—well, I was at Stanford, so [to me] it was Samuelson and Arrow who were the fathers of modern economics, period. [But] in terms of applied macro and for those interested in monetary stuff, it was the Friedman/Tobin debates. . . . Just coming at it as a graduate student, I always thought that the main protagonists were Friedman and Tobin. Tobin and Friedman were both at the center of applied monetary economics” (Mark Gertler, interview, September 26, 2014). Friedman himself acknowledged this state of affairs when, in late 1971, he noted that current debates in academia on monetary economics were perceived as amounting to “Chicago versus Yale” (Friedman 1972e, 11). 99. With respect to MIT and the Keynesian-­monetarist debate, Harry Johnson (1972, 70) made a stronger claim, to the effect that leading MIT economists had been absent from those debates as well as from other discussions of monetary analysis. Johnson attributed this state of affairs to the distraction of the Cambridge-­vs.-­Cambridge debate. However, this contention seemed to neglect the fact that Modigliani, whose heavy participation during the 1960s in research and debate on monetary theory and policy is beyond question, had been at MIT since early in the decade (American Economic Association 1970, 302). Johnson’s contention also seemingly rested on excluding the Phillips-­curve research, in which Samuelson and especially Solow had figured heavily, from monetary analysis. The inclusion of the Phillips-­curve work, alongside such earlier items as Kareken and Solow (1963), presumably underlay Patinkin’s (1993, 352) classification of Tobin and Solow as two of the leading academic advocates of the Keynesian approach. 100. See Friedman and Heller (1969, 49, 85). 101. From Heller’s August 27, 1966, preface, in Heller (1966, vii), to a series of lectures he gave at Harvard University.

N o t es t o P a g es 2 0 1 – 2 0 5   417 102. The years of Meiselman’s association with the University of Minnesota appeared in American Economic Association (1970, 293). 103. See Bordo and Schwartz (2004), Hammond (1996), and Laidler (2012) for previous discussions of this debate. 104. See Friedman (1972a, 909, 911; 1976f ). As detailed in chapter 12 above, the present author has serious reservations concerning J. Wood’s (1981) account of Friedman’s economics. Nevertheless, it should be granted that Wood made a very pertinent point when he stated (231) that Friedman (1970b, 1971d) “cannot seriously claim” to be the model underlying Friedman and Schwartz (1963a). (Wood noted that earlier authors, including Teigen 1972, had made this point too.) 105. In particular, Friedman (1971d, 335) acknowledged that the framework laid out in his 1970–71 papers did not wholly capture the lag in effect of monetary policy that he stressed in his empirical work, as well as the dynamics of velocity behavior implied by that lag. 106. Even here, however, a more complete illustration of the contrast between himself and Keynes on the liquidity trap would have required a short/long-­term interest-­rate distinction, in which case Friedman could have identified himself more explicitly with the position that monetary policy can affect the long-­term interest rate for a given expected path of short-­term rates. 107. For this reason, the 1970–72 debate is covered in this chapter, which is concerned with aggregate supply. Ritter (1975), in reviewing the 1971 monograph version of Friedman’s 1970–71 articles, accurately assessed that they placed too much emphasis on different views about aggregate supply; the way Ritter put it was that despite his twenty years of work concerned with disputes about the MV side of MV = P y, Friedman now was centering the differences on the P y side. Ritter’s criticism was, however, less valid when applied to the 1971 monograph version that he reviewed than to the 1970–71 JPE articles of which the Friedman (1971l) monograph was a combination and revision. The monograph at least had a verbal discussion of the monetarist multiple-­yield-­based view of transmission of monetary policy to aggregate demand, even though this view remained unrepresented in the mathematical model that Friedman laid out. 108. In Friedman (1966d). In addition, the Friedman (1968f ) exposition of the liquidity effect traced through the reaction (to a monetary injection) of a single interest rate, while also holding that reported interest rates constituted only a few elements of a large set of rates of interest that were likely relevant for spending decisions (Friedman 1968f, 17). 109. Phelps (1967) had put an explicit expectational Phillips curve into an IS-­LM system, but he had frozen interest rates in the model and focused his analysis on fiscal policy rather than monetary policy. 110. On Lucas’s work, along with that of Thomas Sargent and others, see the next chapter. 111. In the same vein, Carleton (1976, 1264) argued that in being specific, Friedman “compromised his earlier position,” which had emphasized model uncertainty. To this it could be countered that in 1970–71 Friedman was using a model that was simple enough to focus on liquidity-­trap and aggregate-­supply issues, areas in which he did have firm views concerning the appropriate model specification. 112. For the “simple common model” terminology, see Friedman (1970b, 217). 113. Friedman (1976f, 312). 114. Similarly, in the New York Times (July 4, 1999), Friedman stated that he had erred

418 N o t es t o P a g es 2 0 5 – 2 0 7 in 1970–71 in supposing “that by putting my ideas in Keynesian language I would make any dent on the Keynesians.” 115. Friedman (1976f, 315). 116. In particular, in Friedman (1961d); Friedman and Schwartz (1963b); and Friedman and Meiselman (1963). In the wake of such studies, Harry Johnson (1970a, 95) had stated that Friedman opposed “the dominant school of orthodox macroeconomic theory based on the IS-­LM model.” 117. The quotations are from Friedman (1970b, 204) and Friedman (1971d, 329). 118. In addition, Friedman’s 1972 reply scotched the notion that the 1970–71 JPE papers provided his full theoretical framework, by referring readers to Friedman (1970a) for a list of the characteristic propositions of monetarism (see Friedman 1972a, 913). As noted in chapter 1, it was this lecture, rather than the JPE articles, on which Bernanke (2004) primarily relied for Friedman’s outline of his monetary framework. 119. Friedman (1972a, 909–11). 120. See Friedman (1972a) and the discussion in chapter 4 above. Although his own work (such as Patinkin 1956) on the real balance effect was in essence a response to the theoretical challenge of the liquidity trap, Patinkin (1972a, 1974) in effect underplayed the prominence of the liquidity trap in the Keynesian revolution by contending that Keynes was not an advocate of the trap’s empirical relevance. Because portions of the General Theory certainly did seem to endorse the liquidity trap, Patinkin (1974, 10–11; 1976, 112) had to resort to the conclusion that some passages in the General Theory were inconsistent with one another. 121. However, in Friedman (1977k, 4), he expressed regret at the fact “that apparently nobody reads anything that was written more than ten or fifteen years ago.” By this time, many of his own contributions were of this vintage. 122. When Meiselman first met Friedman, the latter was, of course, poised to write about Alfred Marshall’s views regarding demand functions. But, even here, the limits of Friedman’s command of the body of Marshall’s work were brought to the fore, as subsequent authors were able to catch him out on the details of his textual interpretation of Marshall (see the discussion in chapter 4). Meiselman recalled that, in the late 1940s, Friedman did instill an interest in past economists’ writings because he encouraged his students to read Marshall for themselves. “Friedman had the Marshall analysis as a central part of his own course on price theory. And he asked us to get hold of the Marshall books. . . . And Frank Knight used to sell copies of Marshall’s stuff [to graduate students] on the side” (David Meiselman, interview, July 16, 2014). 123. From Friedman’s remarks in The Great Economics Debate, WGBH Boston, May 22, 1969. 124. It might appear that an area of possible dispute could be whether University of Chicago economists had a sophisticated view of money demand, for Samuelson (1971, 12) endorsed Patinkin’s (1969) side of the dispute with Friedman on this matter. However, Samuelson’s endorsement of Patinkin’s account on this occasion seemed inconsistent with other Samuelson recollections, such as his observation in Samuelson (1991, 538) that Jacob Viner’s version of the quantity theory of money was one in which interest rates entered the money-­demand function. Likewise, Patinkin’s (1969) contention that Friedman was being revisionist in viewing the quantity theory of money as a theory of money demand was basically at odds with Samuelson’s (1968) perspective on classical and neoclassical monetary theory.

N o t es t o P a g es 2 0 8 – 2 1 0   419 125. Robert Solow observed that “it’s certainly true, the [Samuelson] textbook was a textbook of what I just called American Keynesianism, and it focuses on the notion of effective demand—the idea that there are times when output is determined by effective demand, and how one might organize the idea of effective demand. And I don’t know whether it’s a criticism or not, but that’s the line that the textbook took.” Solow noted that Samuelson distilled from the General Theory a “straightforward model” that admittedly lacked “some of the long-­term uncertainty and that sort of thing that are in the General Theory itself ” (Robert Solow, interview, July 7, 2014). In the initial Journal of Political Economy paper in 1970, Friedman gave considerable credit to the then-­new, and widely noticed, book of Leijonhufvud (1968) for motivating his own interpretation of Keynes (1936) (see Friedman 1970b, 207). However, Friedman’s interpretation of the General Theory corresponded more closely to the “U.S. Keynesian” standard interpretation than to Leijonhufvud’s. In particular, Friedman did not follow Leijonhufvud’s rejection of the notion that the General Theory endorsed the liquidity trap. And while Friedman credited Leijonhufvud with attributing price rigidity to Keynes, that interpretation of Keynes was already prevalent in US Keynesian work and in Friedman’s prior discussions of Keynes. Furthermore, after Leijonhufvud, in post-­1968 work (specifically Leijonhufvud 1974), had concluded that prices were, in fact, somewhat flexible in Keynes’s framework, Friedman affirmed that it was appropriate to see Keynes as using the assumption of price rigidity (see Friedman and Schwartz 1982a, 47). 126. Thus, notwithstanding his emphasis on the liquidity trap in his exposition of Keynes­ian economics in Samuelson (1948), the discussion in Samuelson (1971, 11) implied that Keynes had not endorsed the liquidity trap (or other routes to monetary policy ineffectiveness) except in a few isolated passages. Likewise, although Tobin (1947, 128) referred to “the Keynesian doctrine that at low positive rates the demand for cash balances approaches perfect elasticity,” in his later writings on Keynes (for example, Tobin 1987a, 110), Tobin rejected the notion that the General Theory endorsed the liquidity trap. Friedman, it should be observed, was willing to accept that Keynes may have come to reject the liquidity trap at some point after the publication of the General Theory, but he did not regard it as appropriate to regard Keynes as rejecting the trap in the General Theory— whose analysis gave the trap a central role (Wall Street Journal, August 31, 1984). 127. In challenging Friedman’s interpretation of General Theory, with that interpretation’s emphasis on nominal rigidity, Davidson was, as already indicated, taking a line that also amounted to a challenge to the interpretation associated with Paul Samuelson. “And I never convinced Paul Samuelson, by the way. I had a number of discussions with him about it. He always stuck to the idea that Keynes was only about equation systems with fixity of wages and prices. I said, ‘Did you ever read the chapter in Keynes [1936], “Changes in Money-­Wages”?’ And he dismissed it, just like Friedman. ‘Oh, that’s a chapter that, you know, occurs after Keynes’ summary chapter; it can’t be very important’” (Paul Davidson, interview, May 3, 2013). 128. Tobin reserved much of his disputation with Friedman on aggregate-­supply issues to another paper published that year, Tobin (1972b), which consisted of Tobin’s AEA presidential address, delivered in late 1971. 129. See Friedman (1972a, 917). There, Friedman noted that Tobin himself had referred to the argument in his own paper in the exchange. Indeed, both Friedman and Tobin had referred to the idea in earlier discussions. See the previous chapter for more on Friedman’s interest in Ricardian equivalence. 130. See Friedman (1972a, 913), paraphrasing Tobin (1972a, 853, 855).

420 N o t es t o P a g es 2 1 0 – 2 1 3 131. Friedman and Schwartz (1963b, 53). The same sentiment appeared in an unpublished reply Friedman gave to Tobin’s Monetary History review. See Friedman (1964f, 17), also quoted in Hammond (1996, 112–13). 132. See the previous chapter’s discussion. The empirical research on inflation in which Friedman did engage during the early 1970s was reduced form in nature, connecting inflation directly to monetary variables (see chapter 15). 133. Not all participants at these conferences were members of the formal panel. Okun and Perry (1971, 10–11) listed conference participants in three categories: panel members, senior advisers, and guests. 134. In Klamer (1983, 56). 135. As will become clear in the account provided in the next chapter of developments in stabilization policy during the period 1969–72, and as also discussed in DiCecio and Nelson (2013) and E. Nelson (2005b), the present author finds the Sargent account, according to which econometricians gradually learned the true Phillips-­curve slope, to be far more applicable to the academic debate in 1970 to 1972 than to the same years’ policy debate, for which the key question was, instead, the validity of hard-­line cost-­push views of inflation. 136. See also the reports in the Evening Star (Washington, DC), June 11, 1970; and St. Louis Globe-­Democrat, June 13, 1970. 137. The article also quoted the Brookings Papers editors, Arthur Okun and George Perry, lending credence to Gordon’s findings. Similar skepticism about the natural-­rate hypothesis—or at least its applicability to any time horizon relevant for stabilization policy—was voiced around this time by Walter Heller (in D. G. Johnson, Heller, Wallich, and Schnittker 1970, 295): “I’m not thinking in terms of the long run within which Milton Friedman tells us high employment and a high degree of price stability are compatible, for in that long run, we really are all dead.” 138. In the published version, Gordon (1971, 105) acknowledged comments from Friedman and other workshop participants on an earlier version of the paper. Friedman also referenced the paper in print: see Friedman and Schwartz (1982a, 641). The date of Gordon’s workshop presentation of the paper was likely sometime between mid-­March and mid-­April 1971. We know from Friedman’s cassette commentaries that he was based in Chicago for the period January–­April 1971 (with other records showing some short out-­of-­town visits, such as those to Cleveland and Detroit in the first half of March 1971). We know also that the money workshop was in operation at the University of Chicago under Friedman’s charge during April 1971 (Friedman and Schwartz 1982a, 643). Gordon presumably gave his paper to the workshop before presenting a revised version to the Brookings panel, which heard his paper during its proceedings of April 22–23, 1971 (Okun and Perry 1971, 1). 139. See Gordon (1970a, 17–18), as well as McCallum (1989b, 183). 140. See Solow (1970). Consequently, both Gordon (1970a) and Solow (1970) would be cited in Lucas’s (1972a) indictment of econometric testing of the natural-­rate hypothesis. 141. Friedman made similar remarks in Instructional Dynamics Economics Cassette Tapes 76 (June 15, 1971) and 89 (December 26, 1971), as well as in The Open Mind, PBS, May 31, 1977, p. 9 of transcript. 142. See especially Friedman’s reference to a Brookings study’s findings on Social Security in Friedman (1976j, 8; p. 74 of 1983 reprint). 143. Poole noted this in conversation with the author (April 21, 2013) and elaborated on it in one of the interviews he gave for this book (that of April 30, 2013).

N o t es t o P a g es 2 1 4 – 2 1 7   421 144. See also Lemgruber’s (1974, 43) observation that an “interesting evolution of estimates can be found in the work of R. J. Gordon.” 145. Hall (1972, 66). Hall’s experiences at the Brookings conferences and as a member of the MIT economics department were reflected in his reference, in the same discussion, to “the hostility of conventional macroeconomists to the view that inflation cannot reduce unemployment in the long run.” 146. It turned out that, because of the imposition of price controls, early 1971 was the final period, for some years, in which US inflation figures were reasonably reliable. 147. See the next chapter. 148. Other responses over this period to the breakdown of the Phillips curve stood in an intermediate position between Arthur Burns’s adoption of a cost-­push view of inflation and Gordon’s acceptance of the natural-­rate hypothesis. Several researchers advanced what Friedman (1977e, 452, 469) described as attempts to patch up the Phillips curve, by adding explanatory variables or making other specification changes (see also E. Nelson and Schwartz 2008a). For example, Solow (1969) and Eckstein and Brinner (1972, 2, 15) added dummy variables for the 1960s wage-­price guideposts, while the latter pair of authors also argued (1972, 1) that a lastingly nonvertical Phillips curve continued to prevail when the economy was in the region short of full employment. And, although in 1982 Solow (in Klamer 1983, 136) would indicate skepticism about attempts to rescue the downward-­sloping Phillips curve by adding new variables, in Solow (1969) he had added cost-­related terms to his estimated UK and US Phillips curves. As Laidler (1970, 120), Friedman (1976a, 228), and Friedman and Schwartz (1982a, 446) pointed out, and as mentioned in chapter 13, extra terms of this kind changed the interpretation of the estimated price equation in a manner that rendered invalid Solow’s tests of the accelerationist restriction (as what Solow estimated was, in essence, a relationship between the markup and real activity, not between inflation and real activity). This criticism of Solow’s specification applied as an addition to, and irrespective of the applicability of, the Sargent (1971) argument regarding the problems with Solow’s tests. 149. The work on measurement that Gordon carried out in the two decades after completing his dissertation culminated in Gordon (1990). 150. In Friedman (1970m, 5; 1972g, 10), Friedman discussed the Stigler-­Kindahl (1970) study, based on microeconomic data, that ascertained the discrepancy between transacted and reported prices. Although Friedman found studies such as these intriguing, it seems fair to say that he did not integrate their findings into his research on inflation—just as he did not do so with the findings of the Stigler Committee (see chapter 10). The Stigler-­ Kindahl work may, however, have helped firm Friedman’s conviction that the Nixon price controls in force from 1971 would largely be evaded and make price indexes less reliable. Another aspect of the Stigler-­Kindahl study that Friedman stressed (Instructional Dynamics Economics Cassette Tape 55, July 22, 1970) was its conclusion that price movements were a function of the state of the economy. This finding confirmed the endogeneity of the price level, in contrast to pure cost-­push views of price setting. However, the result did not imply complete short-­run price flexibility. Indeed, the Stigler-­Kindahl evidence and data set were later used to motivate New Keynesians’ position that prices respond sluggishly to economic developments (see Rotemberg 1987, 75). 151. On Friedman’s illness in 1972–73, see the next chapter. 152. Gordon has been a member of the economics department of Northwestern University since September 1973. 153. See E. Nelson (2018). While at the time of this indexation debate—which took place

422 N o t es t o P a g es 2 1 7 – 2 2 0 largely over March through September 1974—Friedman could have been left in no doubt that Gordon had become an exponent of the natural-­rate hypothesis, Friedman likely remained unaware of the extent of the shift of both professional opinion and conventional empirical tests in favor of that hypothesis. For example, in a talk given in London in September 1974, Friedman (1975d, 24–25 [p. 75 of 1991 reprint]; 1976a, 228) stated that empirical studies of the Phillips curve for the United States continued to report estimated coefficients on expected inflation, citing in this connection Turnovsky’s (1974) discussion of the literature (see the previous chapter). The contrary (or more up-­to-­date) judgment on the state of the literature delivered by Gordon (1976a) was one to which Friedman would have been exposed a couple of months later, when Gordon gave his discussion at the Brown University conference on monetarism. This conference, which Friedman attended, was held in November 1974 (McCallum 1978c, 321). It is probably from that point on that Friedman was fully aware that he and Phelps had prevailed in the debate on the natural-­rate hypothesis. 154. See especially pp. 459 and 460 of Friedman (1977e). 155. Gordon’s Phillips-­curve paper of that year was Gordon (1973). 156. Friedman (1983d, 161). 157. Friedman (1962a, 148). 158. See, for example, Friedman and Friedman (1980, 192); Free to Choose (US television version), PBS, episode 7, “Who Protects the Consumer?,” February 29, 1980, p. 6 of transcript; and the Listener, April 17, 1980. 159. Friedman (1972d, 142; 1975e, 209). See also Friedman (1972c, 22). 160. From Milton Friedman Speaks, episode 3, “Is Capitalism Humane?” (taped September 27, 1977). This quotation appears on p. 33 of the transcript, as part of an extended discussion of the topic (pp. 28–34). 161. Free to Choose (US television version), PBS, episode 7, “Who Protects the Consumer?,” February 29, 1980, p. 1 of transcript; also in the Listener, April 17, 1980, 489. 162. The Friedman interview to which Krugman referred appeared in a February 10, 1999, episode titled “Libertarianism” of the Hoover Institution website series, Uncommon Knowledge. 163. The phrase “nutritive services” appeared in Friedman (1976a, 284). 164. The quotation is from Friedman (1983d, 165), and the second remark appeared in Milton Friedman Speaks, episode 12, “Who Protects the Consumer?,” taped September 12, 1977, pp. 23–24 of transcript. Friedman (1962a, 159) had applied a similar argument to the services of the medical profession. 165. From p. 20 of Friedman (1971i), an introduction to Peterson (1971) that Friedman dated April 2, 1971. 166. See Playboy (February 1973, 56), as reprinted in Friedman (1975e, 10–11; 1983b, 21–22); Instructional Dynamics Economics Cassette Tape 122, June 6, 1973; Milton Friedman Speaks, episode 12, “Who Protects the Consumer?” (taped September 12, 1977, p. 35 of transcript); and Proprietary Association (1979, 32). Earlier, Low (1970, 434) had criticized Friedman’s discussion of the medical profession, arguing that the case against licensure in Capitalism and Freedom put unduly heavy reliance on malpractice suits as a mechanism for preserving the quality of medical care. 167. In Committee on Banking, Currency and Housing (1976a, 2187). 168. See Friedman’s remarks in M. Anderson (1982, 85), given in 1979, as well as in Levy (1992, 12). 169. Friedman (1984f, 27).

N o t es t o P a g es 2 2 0 – 2 2 4   423 170. Friedman (1987d, 1). 171. On Friedman’s opposition to licensure, see chapter 2 above, and for discussions that underlined the point that this opposition included legal licenses, see for example Friedman and Friedman (1980, 305). Friedman’s discussion of licensure in Capitalism and Freedom had focused heavily on the medical-­profession example with which he was most familiar; the legal profession was mentioned as an “aside,” and Friedman noted that a colleague of his had pressed the case against licensure for lawyers (Friedman 1962a, 151, 153). 172. See Friedman’s remarks in Playboy (February 1973, 56), as reprinted in Friedman (1975e, 10–11; 1983b, 21–22). 173. Instructional Dynamics Economics Cassette Tape 122, June 6, 1973; Milton Friedman Speaks, episode 12, “Who Protects the Consumer?” (taped September 12, 1977), p. 34 of transcript. 174. Friedman (1971j, p. 165 of 1972 printing). 175. In addition, in a 1969 television interview (Speaking Freely, WNBC, May 4, 1969, p. 6 of transcript), Friedman had elaborated on his criticism of President Kennedy’s inauguration speech by stating that its appeal for citizens to contribute to their country was something that Hitler or Mussolini could have said. Another unfortunate parallel with the Nazi era in Friedman’s statements came about unintentionally. Friedman and Schwartz (1963a, 362, 449, 480) referred to the 1930s Great Depression as a “holocaust.” They were writing at a time when that word was often used synonymously with “catastrophe.” 176. The published version (in which the original speech—which appeared as Milton Friedman Speaks, episode 3, “Is Capitalism Humane?,” and was taped on September 27, 1977—was erroneously listed as delivered in 1978) was Friedman (1983c). 177. In Center for Policy Study (1970, 3). See also the long interview Friedman gave on the subject in Chicago Tribune, April 12, 1970. 178. Meet the Press, NBC, June 28, 1970, p. 6 of transcript. Another rationale that Friedman supported for a gasoline tax was as a fee for motorists’ use of government-­provided highway infrastructure (Friedman 1981a, 16; San Jose Mercury, November 5, 2006). 179. See for example, Friedman’s remarks in Center for Policy Study (1970, 20, 25); Instructional Dynamics Economics Cassette Tape 48 (April 15, 1979); Business and Society Review, Spring 1972, as excerpted in Friedman (1975e, 246); and Playboy (February 1973, 58–59), as reprinted in Friedman (1975e, 16–17; 1983b, 29–30). An instance from further into the 1970s of Friedman’s advocacy of pollution taxes was his contribution to Friedman and Kristol (1976, 36–37), while a much earlier discussion was that of Friedman (1957b, 92). These items and the others discussed presently provide support for Jeffrey Sachs’s position (blogs​.ft​.com, July 12, 2012) that Friedman recognized the need for governmental environmental-­protection measures. 180. The tax’s place in economic orthodoxy was acknowledged in Friedman and Friedman (1980, 217). It is notable that this was a departure from the Coasean position on externalities. Friedman admired the Coase (1960) paper that is principally associated with the Coase theorem regarding externalities, and he defended the internal logic of the Coase theorem on more than one occasion (Kitch 1983, 227; Stigler 1988, 76, 212). But Friedman, unlike Stigler, did not devote a great deal of discussion in print to the Coase theorem. In particular, Friedman was not inclined to use the theorem as a jumping-­off point when considering the merits of public-­sector measures against externalities. On the contrary, Friedman’s repeated advocacy in the 1970s and 1980s of Pigovian remedies to

424 N o t es t o P a g es 2 2 4 – 2 2 8 pollution implied that his view on this issue differed sharply from that associated with the Coase theorem and was closer to that of mainstream economic thinking. 181. In Proprietary Association (1979, 38). In addition, Friedman (1977j, 34) stated that implementing such measures constituted an “appropriate function” of government. 182. Friedman and Friedman (1980, 217–18). See also Donahue, NBC, September 6, 1979. For a reaffirmation, see Barrons, August 24, 1998. 183. Milton Friedman Speaks, episode 12, “Who Protects the Consumer?” (taped September 12, 1977), p. 35 of transcript. 184. Milton Friedman Speaks, episode 2, “Myths That Conceal Reality” (taped October 13, 1977), p. 27 of transcript. 185. Friedman and Friedman (1980, 216–17). 186. Friedman’s diagnosis of the post-­1973 productivity slowdown is discussed in E. Nelson (2007, 169).

Chapter Fifteen 1. Anna Schwartz to author at the New York City office of the NBER, City University of New York, May 27, 2008. 2. See Friedman (1969a). 3. Again, see chapter 8. 4. See Samuelson (1970b, 35). (This Samuelson discussion provides an instance of Samuelson citing Friedman 1969a. In contrast, Mehrling 2014, 190–91, is unable to locate any Samuelson citations of Friedman 1969a.) Although Mehrling (2014, 190) presents the argument outlined in Friedman (1969a) in favor of a deflation rule (i.e., deflating at a rate governed by the value of the real rate of interest) as though it formed part of Friedman’s disagreements with Samuelson, there is little reason for accepting this interpretation. Samuelson had, after all, presented his own version of the same argument—for example, in Samuelson (1968, 9–10)—and, during the period covered in this chapter, Friedman’s former student Morris Perlman (1971, 247, attributed the deflation-­rule result to both Samuelson and Friedman. (So, later, did others, including Niehans 1978, 6; and Townsend 1980, 266.) Indeed, as discussed in chapter 8, a complaint voiced by Edmund Phelps concerning the bulk of the post-­1969 literature was with regard to the sole attribution of the deflation-­rule result to Friedman and not to other contributors to the 1960s literature, such as himself and Samuelson. The areas of agreement between Friedman and Samuelson regarding the deflation-­ rule proposal were many. Both Friedman and Samuelson agreed that government had a role in monetary management. They concurred that, in principle, the presence of non-­ interest-­bearing money incurred on the private sector a utility loss that could be relieved by a monetary policy that encouraged zero steady-­state nominal interest rates. And, crucially, both also agreed that other considerations pointed to the undesirability of adoption of the deflation rule in actual US monetary policy. 5. So, too, is an account of the rational-­expectations revolution. For this, see the discussion titled “Robert Lucas and Thomas Sargent” in section III below. 6. March 26, 1971, letter from Princeton University Press to Anna Schwartz, Anna Schwartz papers. 7. March 26, 1971, letter from Princeton University Press to Anna Schwartz, Anna Schwartz papers. (In contrast, a paperback edition of The Optimum Quantity of Money and Other Essays did not appear until 2005.)

N o t es t o P a g es 2 2 8 – 2 3 0   425 8. Friedman and Schwartz (1969b, 80). See also Friedman and Schwartz (1970a, xix–­ xx) for another instance in which the authors stated their plans for two more books. 9. Friedman and Schwartz (1991, 39) indicated that Friedman and Schwartz (1982a) went to press in 1981. The text of Friedman and Schwartz (1982a) referred (on p. 43) to 1980 as the present date (see also pp. 573–74), although some changes and additions to the text were evidently inserted in 1981. (See, for example, the bibliographical references given on pp. 64 and 647 of the book.) 10. Friedman and Schwartz (1970b, 79, 81). 11. Friedman (1971e, 151). 12. Published as Friedman (1972g, 1973a). 13. Friedman and Schwartz (1972, 32). 14. See Friedman and Schwartz (1982a, xxix). 15. Its results were described in Brill (1968, 158), for example. See also Tobin (1969b, 21–22). 16. See Friedman and Schwartz (1963a, 686–95; 1963b) and Friedman (1954a, p. 82 of 1968 reprint; 1964e, 10–20 [pp. 265–77 of 1969 reprint]). In “Money and Business Cycles,” see in particular Friedman and Schwartz’s (1963b, 54) reference to the notion that money is a “passive accompaniment of change,” and their discussion (Friedman and Schwartz 1963b, 48–49) of the reasons why a positive money/output correlation would be likely to be more revealing about the causes of cyclical fluctuations than would be a positive correlation between pin production and total output. (The contrast between money and pins in this connection was recapitulated in Friedman 1970j, 52. See also Friedman 1956a, 16.) In addition, Friedman and Schwartz (1963b, 50–52) provided a condensed version of the argument in Friedman and Schwartz (1963a) that the historical analysis of key episodes was helpful in isolating cases in which the behavior of money could not be regarded as preordained by the behavior of nominal income. 17. From Friedman’s remarks in The American Economy, Lesson 41: How Important Is Money?, CBS College of the Air, filmed June 4, 1962. 18. Friedman and Heller (1969, 87). 19. Friedman (1970j, 52). 20. In the same vein, Friedman’s student Richard Selden (1975a, 226) noted that there were “many examples that could be cited” of papers criticizing monetarism in this way, and the study he singled out was one from the 1960s (de Leeuw and Kalchbrenner 1969). The prevalence of the reverse-­causation argument as a response to monetarism was also recognized in the US business press of the 1960s. For example, it was stated in the Boston Herald Traveler (March 28, 1969) that the position of “those who have doubts about the Friedman theory” was that “nobody really knows whether changes in the money supply are in reality causes or results of major economic shifts.” It should be stressed that the reverse-­causation question at issue was not whether central banks in practice followed policies in which the money stock responded to the state of the economy. This point was accepted by both sides in the Keynesian-­monetarist debate of the 1960s and 1970s (although it is arguable whether the implications of this point for the values of money/income correlations were really studied in detail by either side of these debates). Rather, the question at issue was whether central-­bank policies had effects on real and nominal income and whether the money/income correlation in the data primarily reflected the effectiveness of monetary policy. See also the discussion in chapter 8 above.

426 N o t es t o P a g es 2 3 1 – 2 3 3 21. Council of Economic Advisers (1969, 92). The discussion did, however, acknowledge that money/income relationships were “difficult to pass off lightly” (91). 22. See, for example, Anna Schwartz’s remarks in E. Nelson (2004a, 402), and Friedman and Schwartz’s (1982a, 603) discussion of Kuznets (1958). (Some NBER figures, such as Geoffrey Moore, were, however, surprised by Friedman and Schwartz’s finding of a correlation between money and real variables. But, Anna Schwartz recalled, they still “weren’t sympathetic” to an emphasis on money’s role—again, see E. Nelson 2004a, 402. In the case of these critics, the attribution of the correlation to the dependence of the money stock on income may have been a fallback position—one that they relied on once the existence of a correlation between money and income had been firmly established.) Perhaps in indirect acknowledgment of the skepticism that their work received from NBER senior staff, Friedman and Schwartz (1963a, xxix) used as an epigraph for their book a warning by Alfred Marshall against “post hoc ergo propter hoc” reasoning. In making this choice, Friedman and Schwartz anticipated the general line of argument made by Tobin (1970a), who, of course, chose “post hoc ergo propter hoc” for the subtitle of his article. 23. For example, Friedman (1968c, 433) had remarked that exponents of nonmonetary explanations of price-­level behavior had seen money-­stock increases as a “consequence” of the nonmonetary forces giving rise to price-­level movements (and not being among the necessary or sufficient conditions for the latter movements to occur). In addition, Friedman (1960a, 1) stated that the view predominant from 1933 onward that the economy was basically unresponsive to monetary factors had been accompanied, to some extent, by the position that the stock of money responded passively to economic change. In the same vein, Friedman (1975a, 176) observed that, a quarter of a century earlier, “the bulk of professional economists regarded ‘money’ as simply . . . an utterly passive magnitude that responded to other economic forces but had negligible independent influence.” See also Friedman and Schwartz (1963a, 300). Humphrey (1991, 1998) considered the older monetary-­economics literature—from the eighteenth century through the pre–­World War II period—in which the issue of causation was debated. 24. The 1936 publication was Friedman (1936). 25. See, in addition to what follows, the discussion in chapter 12 above of the merits of correlation-­based analysis. 26. Whether “correlations” is the right term to use in this context is debatable. Sims (2012, 1191) uses it in describing Tobin’s model, but he also acknowledges that Tobin’s model is deterministic. 27. See also Friedman (1970c, 323) and Cagan (1989, 121–22). 28. That is, the levels series used was linearly detrended but not first differenced. See Friedman (1961d, 459). 29. This criticism was also raised by J. M. Clark in 1960 correspondence with Friedman (Hammond 1996, 92). 30. See Friedman (1964h). 31. Culbertson (1960, 620) concentrated on relations between growth rates, spurred by a chart Friedman used in Joint Economic Committee (1959a, 39). See also Friedman (1961d, 460; 1966d, 78). Cases in Friedman’s popular writings in which growth-­rate-­to-­ growth-­rate comparisons were the focus included his Newsweek column of June 3, 1968, which compared the percentage change of both industrial production and consumer prices with monetary growth of six months earlier. 32. In particular, this argument was advanced to justify first differencing the (log) money stock and not performing the same operation on income series. See Friedman

N o t es t o P a g es 2 3 3 – 2 3 5   427 and Schwartz’s 1957 remarks in Hammond (1996, 86–87) and those of Friedman (1961d, 453–55). 33. In E. Nelson (2004a, 402). 34. Early instances in which Friedman reported the six- to nine-­month lag included his discussions in Ketchum and Kendall (1962, 54) and in Washington Post, November 5, 1967, H3. The latter discussion mentioned that the six-­to-­nine-­month average encompassed lags from three months to twelve or eighteen months. (Similarly, in Newsweek, January 9, 1967, Friedman referred to a lag of six, twelve, or eighteen months.) This way of putting the matter elided the differences between the lag lengths associated with growth-­rate/ growth-­rate comparisons and growth/level comparisons. It was predominantly the latter comparisons that had suggested lags of over a year. 35. Examples of the latter included Friedman (1971d, 335; 1983a, 2). 36. The work of George Kaufman (1969b) also likely played a role. Friedman and Schwartz (1970a, 187) cited Kaufman’s finding that the first difference of M2 led the first difference of nominal GNP by two or three quarters over the period 1953–66 and in subperiods. 37. Friedman (1961d, 460–61). 38. See also Friedman’s reference to a six- or nine-­to-­ten-­month lag in his November 1968 remarks in Friedman and Heller (1969, 56), and, some months later, his reference to a six-­to-­nine-­month lag in Instructional Dynamics Economics Cassette Tape 28 (June 12, 1969). 39. Friedman may have given a similar indication in interactions with Federal Reserve Board officials, such as at the January 1969 consultants’ meeting. The reason for this conjecture lies in the fact that, speaking in February 1969, the Board’s adviser Lyle Gramley observed (Gramley 1969, 13; p. 378 of 1970 printing): “I understand Professor Friedman’s current view is that the average lag is something like six months between changes in the growth rate of money and changes in the growth rate of GNP.” 40. Economists more familiar with Friedman’s earlier work did not always notice the shift. For example, at a conference in May 1983, Robert Mundell—Friedman’s colleague during the 1960s—gave Friedman’s estimate of the lag as nine to eighteen months. When it was suggested that this estimate was not what a reading of Friedman’s (recent) work would support, Mundell replied: “I didn’t read it; I listened to it in Chicago for seven or eight years” (from Mundell’s remarks in Hinshaw 1985, 56). Other economists endeavored to reconcile the earlier and later Friedman lag estimates by essentially combining them. For example, Congdon (1978, 14) referred to “the usual nine-­to-­eighteen month lag” from monetary growth to real income growth; likewise, Congdon (1992, 145) stated that the “usual pattern” was for real income growth to register a reaction nine to eighteen months after monetary growth. In a similar vein, Kormendi and Meguire (1984, 879)—although they cited no specific Friedman reference—referred to “Friedman’s claim that monetary shocks have their effects on real output over ‘long and variable lags’ of 6 to 18 months.” 41. During the first half of 1971, there was a debate between monetarists and (principally) Arthur Laffer on the existence of the lag from monetary change to nominal income change, in light of research by Laffer and Ranson (1971) that claimed that the relationship between the two series was contemporaneous. The Laffer-­Ranson work also featured prominently in the debate over the Nixon administration’s initial forecasts of nominal GNP for 1971. But although Paul Samuelson was active in this debate (see, for example, Samuelson 1971, 13–16), Friedman’s personal participation in this debate was

428 N o t es t o P a g es 2 3 5 – 2 3 8 limited, and the debate was in effect short-­circuited by the administration’s switch (discussed in the next section) to the New Economic Policy. In light of these facts, the Laffer-­ Ranson work is not considered in this chapter’s account of stabilization policy during the period 1969–72. 42. And sometimes explicitly, as in Friedman (1970a, 23 [p. 15 of 1991 reprint]; 1983a, 2; 1985c, 52), for example. See also chapter 4 above. 43. This had occurred to such an extent that Dornbusch and Fischer (1978, 526) expressed surprise at Friedman’s stated expectation in his commentaries in 1969, detailed below, of a same-­year sizable response of inflation to monetary growth. Their discussion likely reflected the fact that, by the time they wrote their textbook, Dornbusch and Fischer had greater familiarity with Friedman’s post-­1969 statements regarding the lag than with his pre-­1969 position on that topic. (Such exposure came not only from reading Friedman’s work but also through direct interaction with Friedman at the University of Chicago: Fischer as a postdoctoral fellow and then departmental colleague between 1969 and 1973, and Dornbusch as a PhD student at the university through 1971, then a teacher at the business school in 1974–75. See American Economic Association 1981, 124, 145.) 44. These lag estimates were, as Friedman occasionally stressed (for example, in The Times, May 2, 1977; Friedman and Modigliani 1977, 20; and Friedman 1980a, para. 21, p. 59; p. 57 of 1991 reprint), consistent with the notion that reactions of the economy to monetary policy were spread over many periods. The specific lag estimates he gave were intended to capture the lag between monetary change and the most sizable subsequent reaction of other economic aggregates. They were not meant to suggest that there existed a specific point in time at which the reaction of output growth or inflation to monetary policy actions was wholly concentrated. 45. That is, Friedman (1987a). 46. Friedman and Schwartz (1963a, 638) did say that monetary actions in 1954 did not have their “full”—by which they surely really meant “most noticeable”—effect on prices until 1955 or 1956. But at this time, Friedman and Schwartz were emphasizing lags of a similar length from monetary actions to output. 47. See Friedman (1968a, 148–49, 156). See also the discussion, in chapter 11 above, of Friedman’s analysis of the behavior of US inflation in the first half of the 1960s. 48. See also chapter 7 above. 49. From Meet the Press, NBC, June 28, 1970, pp. 1, 3 of transcript. The first quotation also appeared in a press report on the interview in Chicago Tribune, June 29, 1970. 50. Friedman (1970a, 23; p. 15 of 1991 reprint). 51. It is in this light that Bernanke (2004) discussed Friedman’s (1970a) outline of the lags between monetary growth and other variables. 52. Friedman (1972e, 14–15). Although the paper was solo authored, the computations reported in it were done by Anna Schwartz using the NBER’s facilities. See Friedman (1972e, 11). 53. Friedman (1975a, 178). A lag of this magnitude was also largely present in tables of the estimated reaction of prices to monetary actions in the United States given in Friedman and Schwartz (1982a, 438), whose analysis was based on data up to 1975. 54. Friedman (1972e, 15). In this vein, a report on inflation published in the early 1960s had noted that “because the effect of demand on prices usually acts with a lag, some prices often continue to rise for several months after a period of high demand has ended” (Fellner et al. 1961, 34). 55. In testimony to the Joint Economic Committee on February 18, 1970, Burns had

N o t es t o P a g es 2 3 8 – 2 4 1   429 observed, “Now, as for lags, you have got to draw a vital distinction between the effects of monetary actions on the overall level of prices and the effects of monetary actions on economic activities. There is a difference here in the length of the lag, a very considerable difference. The second is considerably shorter than the first” (in Joint Economic Committee 1970c, 147–48). 56. See Batini and Nelson (2001). Partly through Friedman’s repetition of the point, the two-­year lag seems to have become ingrained in US discussions by 1976. In June 24, 1976, congressional testimony, Allan Meltzer stated that a roughly two-­year lag from monetary growth to inflation “is well researched and I believe has been supported in a general way by the work of many different people” (in Committee on Banking, Currency and Housing, US House of Representatives 1976b, 181). Meltzer may have had in mind a finding in 1976 by congressional staff research—to which Friedman would refer both in Newsweek, September 20, 1976, and in The Times, May 2, 1977—of an average twenty-­ three-­month lag from monetary growth to inflation (a finding that dovetailed nicely with the estimate in Friedman 1972e, 15, which had been based largely on pre-­1970s data). In addition, research by Citibank economists that was reported in First National City Bank Monthly Newsletter (June 1975) documented the relationship, in cross-­country weighted aggregates, between 1972’s monetary growth and 1974’s inflation. The two-­year lag had also become prominent in UK discussions, in light of the mid-­1970s peak of inflation following an early-­1970s peak in monetary growth (as Friedman himself noted in discussing the UK debate in Newsweek, September 20, 1976). 57. See, for example, Friedman (1983a, 2–3). 58. Friedman (1975a, 177) dated his discovery of this passage to the summer of 1974. But his earlier discussion in Instructional Dynamics Economics Cassette Tape 147 (May 30, 1974) established that he actually came across the quotation in the late spring of 1974. 59. Other instances in which Friedman mentioned this Jevons quotation included Friedman (1974g, 17n1) and his Newsweek columns of September 20, 1976, and April 24, 1978. 60. Of the members of the Nixon administration nominated for non-­economic posts, one who had a close connection to Friedman was Warren Nutter, Friedman’s earliest PhD dissertation student. Nutter served as an assistant secretary of defense in Nixon’s first term. 61. Europa Publications (1986, 1476). 62. Robert Solow, personal communication, March 27, 2015. Shultz’s long-­standing friendship with Solow, which dated back at least to the early 1950s when both were assistant professors at MIT, was reflected in Solow’s acceptance of prominent roles on the programs of two events held by the University of Chicago’s business school in the mid-­ 1960s: the 1966 guidelines conference (Solow 1966a) and the 1967 Conference of Business Economists (Kingsport News, May 18, 1967). 63. American Economic Association (1970, 420) and Ben Stein, interview, March 18, 2015. In H. Stein (1998, 17), Herbert Stein mentioned taking classes from Henry Simons in 1936. 64. The New York Times of September 9, 1999, stated that Stein was nominated to the CEA on Friedman’s advice. In addition, according to Moritz (1973, 390), Stein’s original appointment as a Nixon economic aide (in the summer of 1968) had been on Friedman’s recommendation (see also Matusow 1998, 36). 65. See also the Edwardsville Intelligencer, August 25, 1969, and Matusow (1998, 15). 66. Committee on Banking and Currency, US House (1969b, 15).

430 N o t es t o P a g es 2 4 1 – 2 4 5 67. Committee on Banking and Currency, US House (1969b, 17). 68. See McCracken’s testimony in Committee on Banking and Currency, US House (1969b, 15–16). 69. Statements given individually by members of Nixon’s Council of Economic Advisers were also supportive of the natural-­rate hypothesis. For example, when in 1969 Paul McCracken was asked whether a particular unemployment rate was associated with the administration’s inflation objective, he replied: “I don’t think one can set this kind of target figure” (Chicago Tribune, February 24, 1969). His colleague Herbert Stein would later state: “Let us suppose it is correct, as I think it is, that we could have the same rate of unemployment with zero [percent inflation] as with five, if the five was steady and the zero was steady” (University of Chicago Round Table: The Nation’s Economy Out of Control, PBS, May 1, 1974). 70. See also the discussion of Herbert Stein’s and George Shultz’s views later in this section. 71. Paul Samuelson also, by 1969, favored the discontinuation of the investment tax credit—see his column in Newsweek, March 31, 1969—albeit on economic-­stabilization grounds of the kind that Friedman regarded as largely irrelevant for a decision about the investment tax credit. In a similar vein, confidence in fiscal policy as a stabilization tool underlay Walter Heller’s support for the continuation of the tax surcharge. Heller applauded this continuation as a case in which Nixon “rose above campaign rhetoric” (Washington Post, October 21, 1969). 72. From Burns’s December 18, 1969, testimony, in Committee on Banking and Currency, US Senate (1970a, 8). 73. A minor qualification lies in the fact that Secretary of Labor Shultz described his department’s “microeconomic policy,” which was aimed to boost labor-­market flexibility and aggregate supply, as contributing to the anti-­inflation strategy (Daily Labor Review, January 7, 1970, E-­9). 74. Recall that in 1969, Friedman’s views on the lags from monetary growth to inflation were still evolving, and in particular, as noted in the previous section, he saw same-­ year reductions in inflation as likely to come from a 1969 reduction in monetary growth. 75. However—consistent with the assessment in chapter 10 that policy makers in the whole postwar period regarded 2 percent inflation as a satisfactory degree of price stability—Federal Reserve Board governor George Mitchell indicated that “we will be doing pretty well” to restore inflation of 2 percent (U.S. News and World Report, January 20, 1969, 25). And as will be discussed presently, Friedman, too, believed that the authorities would be doing well if they brought inflation down to 2 percent. 76. A major concern was also that the policy should be pursued more consistently, for Friedman was concerned that, on the monetary side, the promised gradualist policy had not been delivered and that the pattern of monetary growth that had emerged from 1969 to mid-­1971 was far too erratic. In addition to the discussion provided below, see Friedman’s remarks in Wall Street Journal, December 8, 1969; Instructional Dynamics Economics Cassette Tape 89 (December 26, 1971); and Friedman (1972d, 1). 77. Instructional Dynamics Economics Cassette Tape 6 (December 1968). The new peaks of inflation in the mid-­1970s would, of course, put these rates into sharp relief. 78. Friedman attended the January 23, 1969, consultants’ meeting as discussant of a paper by James Duesenberry. 79. William McChesney Martin’s letter to Friedman of April 7, 1969, quoted in Friedman (1982a, 106). Friedman earlier publicly discussed this 1969 correspondence with

N o t es t o P a g es 2 4 5 – 2 4 8   431 Martin, which is available in Federal Reserve Board records, in Instructional Dynamics Economics Cassette Tape 135 (December 4, 1973) and Instructional Dynamics Economics Cassette Tape 179 (October 1975, part 3); as well as in his Newsweek column of July 14, 1980. He had also referred to it in his memorandum to the Federal Reserve Board for the Board’s academic consultants’ meeting of June 19 (Friedman 1970m, 16b) and in a presentation on December 6, 1973, to clients of Oppenheimer and Company in New York City (information from Rudolf Hauser). The correspondence is also mentioned in Meltzer (2009a, 17) on the basis of the reference to it in Friedman (1982b). 80. See, for example, Poole (1969, 65) for Poole’s affiliation during this period. 81. Free to Choose, PBS, debate portion, episode 9, “How to Cure Inflation,” broadcast date March 14, 1980, p. 7 of transcript. 82. Free to Choose, PBS, debate portion, episode 9, “How to Cure Inflation,” broadcast date March 14, 1980, p. 8 of transcript. 83. See, for example, Meltzer (2009a, 84–87; 2009b, 1223). (The 1955 remarks attributed to Martin in Meltzer 2009a, 85, although presented as a verbatim quotation, were, in fact, paraphrased somewhat from the original quotation, but they accurately convey the substance of the latter.) 84. See the coverage of Arthur Burns in section III of this chapter, as well as the discussion in chapters 8 and 11. 85. Letter from Governor Marriner Eccles, in draft and undated form (but, as noted in chapter 10, probably written in mid-­February 1951), available at https://​fraser​.stlouisfed​ .org​/docs​/historical​/eccles​/062​_01​_0002​.pdf. 86. Instructional Dynamics Economics Cassette Tape 8 (December 1968). In Newsweek, January 20, 1969, Friedman similarly challenged claims that the increase in the discount rate constituted a major step against inflation. 87. In congressional testimony delivered on March 25, 1969, Federal Reserve chairman Martin also gave the tightening phase as having begun in late 1968 (Committee on Banking and Currency, US Senate 1969, 9). 88. However, in Instructional Dynamics Economics Cassette Tape 28 (June 12, 1969), Friedman essentially attributed these changes in monetary growth to conscious policy actions, when he explicitly linked the decline in monetary growth to the FOMC’s decision at its December 1968 meeting to tighten policy. 89. Friedman gave much the same sketch—in which he cast the program as consisting of two major steps, first a reduction in M2 growth from 12 to 8 percent, then a further reduction to around 5 percent—at his January 1969 appearance at the Federal Reserve Board (from p. 15 of “Review of the Advice of the Academic Consultants,” memorandum from Reed J. Irvine to Board governor Robertson, Federal Reserve Board, January 24, 1969, summarizing the January 23, 1969, consultants’ meeting, Federal Reserve Board records.) 90. Joint Economic Committee (1970a, 816). 91. Other monetarists were also warning of the danger of a major recession in 1970. For example, Allan Meltzer stated that Federal Reserve policies were “far too restrictive. We’re going to have more of a recession than we need” (Los Angeles Times, November 25, 1969). And Friedman would point out that Beryl Sprinkel, his former student and the only monetarist in Time magazine’s panel of economic forecasters, had been the single member of that panel who predicted the 1970 recession (Instructional Dynamics Economics Cassette Tape 46, March 11, 1970; Friedman 1970i, 1). 92. The date appears in the presidential daily diary available on the website of the

432 N o t es t o P a g es 2 4 8 – 2 5 0 Nixon Presidential Library: http://​www​.nixonlibrary​.gov​/president/presidential-daily -diary. 93. In this conversation, Friedman reportedly remarked that outgoing chairman Martin was “a fine guy but usually wrong” (Matusow 1998, 33). This assessment paralleled to some extent the assessment of Keynes that Friedman once gave to Allan Meltzer. “He said Keynes was a brilliant man who was very often wrong” (Allan Meltzer, interview, April 21, 2013). 94. This debate was mentioned by Friedman in Instructional Dynamics Economics Cassette Tape 40 (December 17, 1969). 95. The Washington Post report on the record of the meeting described the record as the “minutes.” This was a term Friedman also used for this release, which was the closest counterpart to what are today called the FOMC Minutes (and are released three weeks after the FOMC meeting whose deliberations they describe). In the late 1960s, however, the official name for this public record of the meeting was the “Record of Policy Actions,” the “Minutes” term being reserved for a separate document that enumerated the formal decisions taken at the meeting. See http://​www​.federalreserve​.gov​/monetarypolicy​ /fomchistorical1969​.htm. Around the same time of the appearance of these FOMC minutes, at a Business Week conference that Friedman and Mitchell both attended, Friedman praised Mitchell for being one of the figures at the Federal Reserve who had steered policy makers toward paying greater attention to monetary aggregates (Friedman 1970f, 43). This conference was held on December 9, 1969 (Washington Post, December 10, 1969). 96. Daily Labor Review, January 7, 1970, E-­6. Shultz’s remarks generated widespread press coverage and commentary. See, for example, Dallas Morning News, January 7, 1970; Financial Times, January 8, 1970; and Evening Star (Washington, DC), January 11, 1970. It should be remarked that public commentary by cabinet members and other senior officials about Federal Reserve monetary policy was a common practice prior to the Clinton administration. During the George H. W. Bush administration, for example, John Sununu, the White House chief of staff, observed: “The president jawbones the Fed at times” (Business Week, December 2, 1991). The degree to which the Nixon administration sought to influence Federal Reserve policy was, however, considered unusual even by early 1970 (E. Nelson 2005b). It would not be correct to suggest, however, that Arthur Burns’s policies between 1970 and 1972 were a reflection of that pressure. On the contrary, Burns himself favored the policy course he took (See Meltzer 2009b, 798; Orphanides 2003; Romer and Romer 2002b; DiCecio and Nelson 2013; and the discussion later in this chapter). 97. Friedman acknowledged in Reader’s Digest (June 1970, 204) that the easing had begun in Martin’s final meeting as chairman. 98. See https://​www​.nber​.org​/cycles​.html. 99. See Jordan and Stevens (1971, 19); Cagan (1972b, 105); and the footnote in Friedman (1972d, 52). The softness in late 1969 in monetary growth remained pronounced in the revised figures, particularly for Friedman’s preferred series of (old) M2 excluding CDs. However, the data revisions implied that monetary growth was generally at low single-­digit rates during late 1969, instead of the near-­zero rate that Friedman (in Newsweek, December 22, 1969, for example) and Shultz had cited in the late-­1969/early-­1970 period on the basis of the initial figures. 100. In Friedman (1970m), a memorandum for the Academic Consultants meeting of June 19, 1970, and mailed to the Board on June 10, 1970. Friedman also outlined this interpretation in a talk to the financial firm Oppenheimer and Company on August 28, 1970,

N o t es t o P a g es 2 5 0 – 2 5 4   433 at the University Club in New York City (information from Rudolf Hauser), and in Instructional Dynamics Economics Cassette Tape 63 (December 16, 1970). 101. The tension created by the economic-­slowdown/tight-­money/high-­inflation combination in early 1970 was illustrated by the title of the Economist’s article of February 7, 1970: “America’s Inflationary Stagnation.” (In addition, Paul Samuelson had written a Newsweek column titled “Inflationary Slowdown” in the June 23, 1969, edition, at a time prior to the major part of the slowdown.) 102. Reader’s Digest (June 1970); also reported in Newsday, May 25, 1970. 103. Friedman made this observation in his August 28, 1970, briefing to Oppenheimer and Company at the University Club in New York City (information from Rudolf Hauser). Earlier, in a letter to President Nixon dated March 13, 1970, Friedman had described the economic situation in 1972 if current policies were continued as featuring the economy “expanding rapidly in real terms, with prices nearly stable” (quoted in Matusow 1998, 61). 104. Meet the Press, NBC, June 28, 1970, p. 1 of transcript. 105. See http://​www​.nber​.org​/cycles​.html. 106. The meeting, of roughly one hour, took place on April 27, 1970. As well as President Nixon, presidential assistants John Ehrlichman and William Safire, and CEA members McCracken, Stein, and Hendrik Houthakker, the attendees were outside economists Friedman, George Katona, James O’Leary, Pierre Rinfret, and Lloyd Ulman (http://​www​ .nixonlibrary​.gov​). Earlier in the year, on February 21, 1970, Friedman had been part of a large meeting with Nixon in connection with the report of the Commission on an All-­ Volunteer Armed Force (from the President’s Daily Diary for February 1970, available at http:​/​/www​.nixonlibrary​.gov). Abrams and Butkiewicz (2012, 396) suggest that Friedman had another conversation with President Nixon other than those discussed in this chapter, as they quote Friedman on September 24, 1971, saying to the president that their last conversation was the previous night. This inference seems to arise from a mistranscription of Friedman’s words. At the start of the September 24, 1971, meeting between Friedman and Nixon, Nixon’s reference to Friedman’s congressional testimony of the previous day clearly indicated that the president had not spoken to Friedman the previous night. 107. The meeting lasted for over an hour; see http://​www​.nixonlibrary​.gov​/president​ /presidential​-daily​- diary. 108. See http://​www​.nixonlibrary​.gov​/virtuallibrary​/documents​/PDD​/1970​/040​ %20November​%2016–30%201970.pdf. Haldeman (1994, 253) recorded Nixon’s positive reaction to the meeting (which Haldeman did not attend). The November 1970 meeting was also described in Matusow (1998, 88). As with the 1969 Nixon/Friedman conversation, the 1970 meetings occurred prior to the secret installation of recording equipment for presidential conversations. 109. See, for example, Jordan and Stevens (1971). 110. Bernanke and Mishkin (1992, 191) likewise implied that the 1970 alteration in arrangements did not change matters in practice. 111. Maisel (1969, 2). Other policy makers’ statements from this period were more opaque about the Federal Reserve’s use of a federal funds rate instrument. For example, Federal Reserve Board governor Mitchell stated in a September 1969 speech, “the Federal Reserve does not directly determine the money supply; the instruments it manipulates are reserve requirements, discount rates, open-­market operations, and ceiling rates on time deposits” (Mitchell 1971, 390). 112. On the latter point, see Instructional Dynamics Tape 40 (December 17, 1969) and

434 N o t es t o P a g es 2 5 4 – 2 6 1 Friedman (1971g, 5, 24–25). In the first half of the 1970s, Friedman discussed the Federal Reserve’s use of a federal funds rate in a number of his cassette commentaries, and starting in the year (1975) in which Congress first mandated monetary targeting, Friedman discussed and critiqued the federal funds rate’s status as the FOMC’s instrument in many forums (including Wall Street Week, Maryland Public Television, February 7, 1975, p. 18 of transcript; and Newsweek, March 10 and December 8, 1975). 113. Friedman (1980a, para. 14, p. 58; p. 55 of 1991 reprint). 114. Friedman (1984c, 27). 115. Friedman (1980a, para. 14, p. 58; p. 54 of 1991 reprint). See also Newsweek, March 10, 1975, for an earlier Friedman remark on this phenomenon, which other commentators (for example, Pierce 1980, 82; and Meltzer 2009a, 591; 2009b, 885–86, 897) also had occasion to note when discussing US monetary targeting during the 1970s. 116. Friedman (1970d, 19). 117. Friedman (1970m, 16a). 118. Friedman (1970i, 3). 119. Friedman (1970m, 16d). 120. It was already common ground before the 1960s between Friedman and the Federal Reserve that monetary restraint had a role to play in removing excess demand, and this remained the case in the 1970s. An important benchmark for judging Friedman’s influence in the early 1970s is therefore whether there arose an acceptance in official circles of the point that monetary policy was a sufficient tool for controlling aggregate demand and inflation. It is clear that this benchmark was not met. 121. For example, Elliott (1985, 134) gave a piece by the Federal Reserve Bank of New York’s Gerald Corrigan (Corrigan 1970) as one example of the continuing Federal Reserve fight back against monetarism. 122. Mitchell (1972, 20). 123. Axilrod (1971, p. 166 of 1976 reprint). This and the preceding quotations in the text, together with the authoritative contemporaneous account of Brimmer (1972), indicate that Kozicki and Tinsley’s (2009) claim that Federal Reserve policy from 1970 was based closely on monetarist ideas is not appropriate and is not supported by the totality of the documentary evidence. 124. State of the Union/’70, WNET, January 22, 1970, p. 20 of transcript. 125. Friedman also made this point in Friedman (1974e, 86). 126. Friedman (1970m, 2). Around the same time, in Newsday, June 18, 1970, Friedman stated that monetary growth in the prior three months had been at a “horrendous rate” of about 9 percent. Some months later, in his appearance at the November 20, 1970, meeting of the Federal Reserve Board’s academic consultants, Friedman reiterated that 1970’s higher monetary growth could be defended as appropriate in light of the slow monetary growth during 1969 (reported in the Federal Reserve Board staff memorandum by Reed J. Irvine of November 23, 1970, Federal Reserve Board records). 127. Friedman (1970m, 3). Although he did not spell it out in his memorandum, Friedman regarded this advice as applicable to both M1 and M2-­CDs. He was temporarily under the (erroneous) impression that the two series would tend to grow similarly. 128. June 24, 1970, letter to Secretary Kennedy, cc’d to Arthur Burns and included in the Burns-­Friedman correspondence in the Arthur Burns papers, Gerald Ford Presidential Library. 129. See Boston Globe, April 3, 1983, 25; and Friedman and Friedman (1998, 386). 130. These data are based on Lothian, Cassese, and Nowak (1983). These series are de-

N o t es t o P a g es 2 6 1 – 2 6 6   435 rived from a late-­1970s vintage of the monetary data, and as such they incorporate the—­ sometimes substantial—revisions to US monetary data, for the early 1970s. 131. Friedman (1971f, 13). 132. See, for example, Friedman’s remarks in Newsweek, November 4, 1974, and October 3, 1977, and in Tampa Times, March 11, 1975. Likewise, in Newsweek, February 7, 1972, Friedman classified 1970 as a year in which Federal Reserve policy did not deviate far from monetarists’ prescription, while Friedman’s column in Newsweek, March 10, 1975, aimed its criticism at the 1971–74 period. Friedman’s verdict in Friedman (1974a, 20–21) was more ambiguous, with the analysis therein pointing to both monetary growth from 1970 to 1973 and monetary growth from 1971 when referring to the period of excessive ease. 133. For the monetary-­growth data for this period, see table 14.1 in the preceding chapter and figures 15.2a and 15.2b. 134. Friedman (1971g, 3). 135. Instructional Dynamics Economics Cassette Tape 63 (December 16, 1970). In the same cassette commentary, the gulf between Friedman and researchers in the area of finance was brought out by his statement that “spread” was a Wall Street term. 136. Friedman (1971f, 9). See also figure 15.2 f. 137. From June 8, 1971, Oval Office conversation; copy of recording provided by the Nixon Presidential Library. 138. Friedman (1971g, 4). 139. Friedman (1971g, 6). 140. Similarly, in the Wall Street Journal of June 10, 1971, Friedman stated: “The horse [of price stability] hasn’t been stolen from the barn yet. But it soon will be unless the policymakers pursue a much more conservative monetary policy” (1). 141. Friedman (1971g, 8). 142. Two years later he would see it as an early, though minor, case of backtracking on Nixon’s part from his initial approach to economic policy. Friedman nevertheless still dated the material change in US government policy to August 1971. See Friedman (1972d, 1). 143. See also Meiselman (1973, 528). 144. That Nixon made this statement in January 1971 casts grave doubt on Matusow’s (1998, 98) position that “the high tide of monetarism in the Nixon Administration” took place in the months after November 1970. The year from January 1969 would match such a description far better. 145. A New York Times article of May 21, 1969, also made this case. 146. Friedman (1972d, 7). Key members of the Nixon administration’s economic team had, like Friedman, made overoptimistic predictions about the speed with which inflation would respond to demand restriction. During the first half of 1969, erroneous predictions that inflation would start to fall before the end of 1969 had been articulated by Herbert Stein (Milwaukee Journal, May 15, 1969) and Arthur Burns (as recalled in Washington Post, October 21, 1969). 147. March 10, 1971, testimony, in Committee on Banking, Housing and Urban Affairs (1971, 13). 148. The material quoted here is from the program transcript. The Advocates debate was also summarized in William Buckley’s syndicated newspaper column. See Delta Democrat-­Times, January 8, 1971. 149. As indicated in chapter 13, both in the 1960s and 1970s, Reuss was an advocate

436 N o t es t o P a g es 2 6 6 – 2 6 9 of a nonmonetary analysis of inflation even though he saw merit in monetary targets as a means of regulating aggregate demand. 150. In Joint Economic Committee (1971c, 239). 151. The title was borrowed from that of a speech George Shultz had given on the topic earlier in the year. In Instructional Dynamics Economics Cassette Tape 78 (July 14, 1971), Friedman judged this “a very important speech” and, as he would in his Newsweek column, criticized the limited press coverage given the speech. In an interview for this book, Shultz, too, attached considerable weight to the speech and stressed its role as an unheeded analysis. “I gave a speech entitled ‘Steady as You Go,’ and I argued [there] that . . . if we’ll just be patient, we’ll get inflation under control. . . . I argued that . . . we should continue ‘steady as you go,’ but I lost the argument. And Milton was [also] upset about that” (George Shultz, interview, May 22, 2013). 152. The New Economic Policy was later redubbed the “Economic Stabilization Program,” apparently in the face of criticism that the term “New Economic Policy” had been the name (at least after translation into English) of Lenin’s revamped economic program of the early 1920s in the USSR (Manchester Union-­Leader, November 17, 1971). The “Economic Stabilization Program,” or ESP, term is indeed used in some studies of US economic policy from 1971 to 1974 (such as Darby 1976b). But former president Nixon himself did not fully abandon the “New Economic Policy” terminology, using it, for example, in the 1975 deposition testimony reported in New York Times, August 21, 1975; and the “New Economic Policy” phrase is employed here to encompass the Nixon economic policy measures undertaken during the whole period of the 1971–74 wage/price controls. 153. It would, however, be hyperbole to claim, as Matusow (1998, 304) did, that “nearly everybody in the country except Milton Friedman and George Shultz were urging price and wage restraints along with more expansive policy.” Various monetarist outposts, including those at the First National City Bank of New York (Citibank) and the Federal Reserve Bank of St. Louis, were among those providing voices of opposition to the freeze and to the concurrent shifts in monetary and fiscal policy. So, too, was Alan Greenspan (Daily News, August 17, 1971; New York Times, August 23, 1971). 154. Samuelson gave a similar tribute to the older members of the Chicago School in a Newsweek column, of July 31, 1972, that marked Frank Knight’s recent death. 155. The quotations are respectively from Friedman’s Newsweek columns of January 11, 1971, and August 30, 1971 (22). 156. From the September 24, 1971, Oval Office conversation; copy of recording provided by the Nixon Presidential Library. In their analysis of this conversation, Abrams and Butkiewicz (2012) provide a different rendering of some of Friedman’s words from that given here. In particular, the version provided here, unlike theirs, does not attribute to Friedman the position (which would be grossly contrary to his many writings on the subject) that wage/price controls can hold down inflationary pressure, as opposed to measured inflation. In addition, a good amount of what Abrams and Butkiewicz (2012) assess to be unintelligible words from Friedman can, in fact, be deciphered and have been provided in the quotations given here. It should also be noted that, because they do not place the taped White House conversations in the context of the economic commentary given publicly at the time by Friedman, Abrams and Butkiewicz create the incorrect impression that Friedman was giving advice privately that was not available in his public analysis. Furthermore, because they do not consider the monetary literature of the time and earlier, these authors (2012, 396) take Friedman’s observation that not too much weight should be given to monthly swings

N o t es t o P a g es 2 6 9 – 2 7 2   437 in the monetary aggregates—a very commonplace observation by the early 1970s—as though it was a prescient insight on Friedman’s part. 157. In the conversation with Nixon, Friedman said, “the Congress you will not be able, I think, to prevent from spending. You’re going to have a whopping big deficit.” Friedman expressed a similar sentiment in Newsweek, October 18, 1971. 158. Meet the Press, NBC, June 28, 1970, p. 8 of transcript. See also the report of the interview in Philadelphia Inquirer, June 29, 1970. 159. Friedman (1975e, 13). 160. Friedman (1975e, 41). The Nixon administration also added to longer-­term US public spending commitments with what Boskin (1987, 84) described as an “enormous across-­the-­board boost in Social Security benefits” in the 1972 changes to Social Security. Romer and Romer (2013c, 60) quantify this as a 20 percent permanent increase in Social Security benefits starting in October 1972. Similarly, according to Meguire (2003, 127), the 1972 changes raised the real present value of Social Security obligations by 22 percent. 161. For an earlier occasion on which Friedman observed that budget deficits were historically a main source of high monetary growth, see Friedman (1962a, 39). 162. A case in point consisted of Friedman’s remarks in Chicago Daily News, July 29, 1970. In that newspaper interview, Friedman stated that a budget deficit made high monetary growth more likely and interpreted recent monetary developments in that light. But he added (4): “A budget deficit is inflationary if, and only if, it is financed in considerable part by printing money.” Along the same lines, after the freeze was imposed, Friedman stated that the Federal Reserve “deserves most of the blame for producing the inflation” of recent years (Newsweek, August 30, 1971, 22), and in his September 1971 conversation with the president he emphasized the importance of the Federal Reserve not monetizing what budget deficits emerged in the period ahead. 163. James Tobin similarly felt that the freeze, in itself, tended to have a dampening effect on spending through the uncertainty channel (Washington Post, October 31, 1971; Business Week, November 13, 1971). 164. Letter of December 13, 1971, quoted in Wells (1994, 84). (The copy of the letter available at https://​fraser​.stlouisfed​.org​/archival​/​?id​=​1193 shows that Friedman opened the letter with this question.) Abrams and Butkiewicz (2012, 398) rely on the description of the letter in White House conversations in late December to glean that it “apparently took aim on the Fed’s already expansionary monetary policy.” In fact, because of the description of the letter already in available in Wells’s (1994) discussion, as well as the holdings of the letter in the Burns and Friedman archives, the qualifier “apparently” is unnecessary. Its presence serves to underline the extent to which the authors’ reliance on the White House recordings as a source seemingly occurred at the expense of consultation of the body of literature on the Great Inflation. Note, also, that it is important not to pigeonhole the position that Friedman took in very late 1971. He was not, at that stage, a figure urging tighter monetary policy pitted against an administration that desired an easier Federal Reserve posture. Friedman’s letter, while expressing regret about the expansionary monetary policy of 1971 as a whole, was immediately concerned with what he perceived as an overdrastic recent shift down in monetary growth. 165. See table 14.1 in the previous chapter. 166. Friedman also made this prediction in Newsweek, May 22, 1972. 167. See Friedman (1974a, 22) for the numbers for the old definition of M2. The in-

438 N o t es t o P a g es 2 7 2 – 2 7 3 creases reported for modern M2 are the twelve-­month growth rates for December 1971 and December 1972, using the monthly data in the Federal Reserve Bank of St. Louis’s FRED portal. Because modern M2 is similar to old M3, the growth rates reported in the text above for modern M2 are similar to the M3 growth rates of 12.8 percent reported for 1971 and 12.5 percent for 1972 that Friedman (1974a, 22) gave. 168. Friedman (1972d, 1). This collection (Friedman 1972d), for which the publisher issued both hardback and softbound editions, included all but one of the first hundred columns that Friedman had written for Newsweek, as well as some more recent columns and Friedman’s 1970 and 1971 items for the New York Times, together with Friedman’s commencement speech at the University of Rochester on June 6, 1971 (that is, Friedman 1971j, a speech discussed in the previous chapter). Updates and context were presented in chapter introductions and in footnotes added to the reprinted Newsweek columns. In addition, typographical errors were corrected from the columns: for example, “1867” in the September 27, 1971, column was corrected to “1967,” and an error in an axis date label—noted by Anna Schwartz in a letter in Newsweek (January 31, 1972b)—in the January 10, 1972, column was corrected. (The column omitted in the collection was that for November 9, 1970, which had been a tribute to Paul Samuelson after his receipt of the economics Nobel.) 169. A similar claim appeared in Akron Beacon Journal, December 1, 1974. 170. In Reason (June 1995, 33), Friedman noted that he saw Nixon once after the New Economic Policy was imposed, but he incorrectly implied that this was their only post-­ August 1971 communication and that, from then on, any adivce he had for the president was conveyed through his writings or through third parties. The two, in fact, had a phone conversation in December 1972 (see the end of this chapter). Shortly thereafter, Friedman also wrote the president a letter about the economic situation (a letter of December 21, 1972, held in the Arthur Burns papers in the Ford Presidential Library). 171. Friedman made a similar comment in Firing Line, PBS, January 5, 1972, p. 16 of transcript. 172. In his account of the Nixon administration’s economic policy, Matusow (1998, 103–4) conveyed the contemporaneous assessment of officials and observers that the economy was weak. Matusow’s reliance on contemporary accounts had the unfortunate effect that his narrative did not recognize the subsequent upward revisions to data on real economic activity, and this omission led him to endorse the notion that the weak economic growth that was initially recorded for 1971 repudiated the “crucial premise of monetarism” (Matusow 1998, 103). 173. Similarly, in April 1971, Friedman observed: “We’ve paid the price of a recession to get inflation under control. Let’s not throw it away” (Philadelphia Sunday Bulletin, April 25, 1971). He made remarks along the same lines in his September 1971 meeting with the president, in a portion quoted above. 174. Friedman gave a similar warning in Instructional Dynamics Economics Cassette Tape 75 (June 2, 1971). 175. September 24, 1971, Oval Office conversation; copy of recording provided by the Nixon Presidential Library. The Democrats already had control of both houses of Congress in 1971, but the numbers and composition of the Democratic membership of Congress meant that Nixon could count on a working majority for a good deal of his legislative program. 176. See the next part of this section, titled “The End of Bretton Woods.” 177. Friedman and Friedman (1998, 387).

N o t es t o P a g es 2 7 4 – 2 7 6   439 178. Friedman wrote in an email to the present author (May 18, 2002): “I took the occasion of being in Washington for the first time in nine years to go out to the [National] Archives to listen to the Nixon tapes. Unfortunately, the tapes are of extremely poor quality. You can hear some stretches clearly, but not most. And as it happens the particular sentences that I was most interested in checking could not be heard at all.” It is also possible that some of what Friedman recalled as having occurred in his 1971 meetings, particularly the one in June, with Nixon and Shultz may have actually occurred at the previous, unrecorded meeting that the three had in November 1970. But, as indicated in the text, the June 8, 1971, and September 24, 1971, conversations did have portions that roughly corresponded to the Friedman recollections given in Friedman and Friedman (1998). 179. This portion occurred as the meeting concluded, as in Friedman’s recollection in Friedman and Friedman (1998, 387). 180. Domitrovic (2009, 97) incorrectly states that Friedman made visits to the White House during 1972 and erroneously implies that Friedman publicly backed the Nixon administration’s post-­1971 policy concerning inflation. 181. Writing on a similar topic, Alan Greenspan used “politicization” (quoted in Detroit Free Press, July 29, 1974). For once, Greenspan’s exposition was clearer than Friedman’s. Friedman’s use of “politicalization” in 1972 was not a slip on his part: for example, in January 22, 1976, testimony, in Committee on Banking, Currency and Housing (1976a, 2180), Friedman used “politicalize.” (For the record, “politicalization” is an admissible word in the English language, but the Oxford English Dictionary of 2015 indicates that it simply means “politicization.”) Friedman did, however, opt for “politicizing” in his column in Newsweek, November 14, 1977 (91). 182. As this quotation indicates, Friedman was not averse to describing himself as an ideologue or a believer in an ideology, provided that it was acknowledged that the philosophical framework he had developed was separable from his scientific endeavors. In Friedman (1983e, 15), for example, he discussed the empirical propositions associated with monetarism before moving on to “the level of ideology,” at which point he outlined his small-­government philosophy. 183. For example, Stein observed in 1974 that US inflation had “a historical genesis in the big expansion of the economy, the big expansion of demand—including the big expansion of the money supply, but also the very inflationary behavior of the budget—in the period from ’65 to ’68” (University of Chicago Round Table: The Nation’s Economy Out of Control, PBS, May 1, 1974). In the same television appearance, Stein cited fiscal policy as one factor behind the strength in aggregate demand and inflation in more recent years. (See also the Stein remarks discussed in E. Nelson 2005b.) 184. For example, one profile (in the Baltimore Sunday Sun of May 21, 1972) asserted: “Mr. Shultz is a monetarist, an ideological advocate of the theories of the University of Chicago economist, Milton Friedman.” Earlier, syndicated columnists Rowland Evans and Robert Novak had labeled Shultz a “Friedmanite economist” (Omaha World-­Herald, February 24, 1971). 185. The opposition on the part of Stein and Shultz to the adoption of the freeze was public knowledge at the time. See, for example, the Baltimore Sun of September 4, 1971. 186. One manifestation of this attitude came in a conversation Friedman had around 1972 with Thomas Campbell, an advanced undergraduate student at the University of Chicago to whom Friedman had been assigned as faculty adviser. Friedman mapped out a path in which Campbell would immediately follow the receipt of his degree from the Uni-

440 N o t es t o P a g es 2 7 7 – 2 8 3 versity of Chicago’s undergraduate college with entry into the university’s graduate program in economics. Campbell expressed the concern that this might not be possible, as Campbell’s deferment of military service would expire once he received his undergraduate degree. Friedman replied that the issue would not arise because President Nixon had stated that the United States’ military engagement in Vietnam would be ended by the following year, and the president could be relied on to keep this commitment (Thomas Campbell, interview, August 19, 2015). 187. In this midmorning conversation, Nixon said, “we ought to get the hell out of the wage/price control business. . . . I’ve always believed that.” From segment 10 of http://​ www​.nixonlibrary​.gov​/forresearchers​/find​/tapes​/tape905​/tape905​.php. 188. Firing Line, PBS, January 5, 1972, p. 13 of transcript. 189. Friedman (1971h, xxiii). 190. The title of Samuelson’s article anticipated the title chosen by another critic of Friedman’s, Nicholas Kaldor, for his 1982 book The Scourge of Monetarism. 191. See chapter 13 for a detailed discussion of the (Federal Reserve Bank of ) St. Louis equation. 192. The equation, Friedman’s variant of the St. Louis equation, was mentioned in chapter 13. The equation was estimated by Anna Schwartz at Friedman’s request (Friedman 1972e, 11), and it delivered reasonable predictions over the early years of the 1970s, especially if allowance was made for periods affected by the General Motors strike of 1970 (Newsweek, January 10, 1972; Friedman 1972e, 13; 1973a, 36). 193. See, for example, Meigs (1975, 183–84) and Hamburger (1977a; 1983, 108), and for Friedman’s own observation to this effect, see Friedman (1976d, 131). 194. Friedman (1972e, 15). 195. Martin made an observation along these lines in the Memorandum of Discussion for the FOMC meeting of July 15, 1969 (Federal Open Market Committee 1969, 81). (See also Matusow 1998, 27, who, however, sourced these remarks to the “minutes” of the meeting. Matusow’s terminology was not very appropriate because, as noted above, by 1969 the “minutes” title applied instead to another FOMC document.) In regard to Hayes’s (1970) interpretation, which was like that Martin had given in the FOMC deliberations, Friedman voiced his objections in Instructional Dynamics Economics Cassette Tape 78 (July 14, 1971). 196. See, for example, Friedman (1970a, 26–27; pp. 18–19 of 1991 reprint) and Newsweek, February 7, 1972. 197. Friedman (1974e, 87). 198. Newsweek, October 18, 1971. Friedman quoted this passage—whose warning closely resembled that he had given President Nixon in person—in a later column, after inflation had broken out on a large scale in 1973 (Newsweek, May 14, 1973). In addition, Rose Friedman also quoted the 1971 passage in 1976 in the Oriental Economist (R. D. Friedman 1976e, 32), before remarking: “Can one ask for a more prophetic forecast?” 199. Emphasis in original. 200. Robert Gordon also expressed this concern regarding the freeze (Business Week, November 13, 1971). 201. Friedman (1975c, 6). See also Friedman (1974e, 88; 1977c, 17). Similar judgments were expressed by Karnosky (1974a, 9); Balbach and Karnosky (1975, 15); Fama (1975, 275); and Hetzel (1976, 16); as well as McNees (1978, 59), who observed: “There can be little doubt that the controls held down prices in 1972 and that the relaxation of controls contributed to the acceleration of inflation in 1973 and perhaps 1974.” That is a mes-

N o t es t o P a g es 2 8 4 – 2 8 7   441 sage not absorbed in Blinder and Rudd (2013, 159) who state: “the pre-­1973 inflation was dwarfed by what came after. Had inflation remained below 5 percent, as it did prior to 1973, we would never have had a conference on The Great Inflation.” It would surely have been more accurate to have said that inflation would not have remained below 5 percent prior to 1973 had there been no controls, and that—absent controls—the upsurge in inflation during 1973 would have been more evenly spread across 1972 and 1973. 202. See Friedman and Schwartz (1982a, 104–8), in which an output deflator series was used to measure prices. Tatom (1981b, table 1) reported a similar estimate of the underreporting of inflation during 1972, using a different procedure. Employing still another method, Darby (1976b, 149) affirmed that “the apparent sharp decline in the rate of inflation during Phases I and II was a statistical illusion.” According to Darby’s estimate, the total rise in the controls-­adjusted US price level over the 1971:Q3–1972:Q4 period cumulated to around 3 percentage points more than the official increase in prices. 203. See Friedman (1966a, 19–20; p. 100 of 1968 reprint). Consistent with the preceding sketch of the effects of controls, Friedman described controls as permitting a situation in which policy makers could secure an improved split between the real and price components of nominal spending (Friedman 1975i, 62–63). Controls also reduced the level of potential output, with the latter effect becoming more serious with the length and severity of controls (Friedman 1958a, 1977e). 204. Milton Friedman Speaks, episode 6, “Money and Inflation” (taped November 7, 1977), p. 20 of transcript. 205. From his remarks in Friedman and Samuelson (1980, 29). 206. The RPD regime formally continued until 1976 (H. M. Treasury 1980, 2–3), although Meulendyke (1988, 12; 1998, 46) indicated that RPD’s loss of status in policy making preceded the formal 1976 abandonment. Developments in monetary policy in the lead-­up to 1976 confirm her account. On September 11, 1973, Friedman’s former student William Gibson observed in Congressional testimony that it seemed that, RPD notwithstanding, “interest rate targets continue to play a central role” in Federal Reserve policy (in Committee on Banking and Currency, US House 1973, 284). Along these lines, in August 1974, it was reported that the Federal Reserve was intervening in the federal funds market to enforce a target funds rate (Financial Times, August 28, 1974), while by early 1975, Chairman Burns was frankly acknowledging in testimony the Federal Reserve’s continued focus on the federal funds rate (see, for example, E. Nelson 2005b). 207. See Friedman (1982b, 110–11; 1984c, 28). At Burns’s request, Stephen Axilrod of the Federal Reserve Board staff (and an all-­but-­dissertation PhD student at the University of Chicago in the early 1950s) wrote an analysis of a critique of lagged reserve accounting Friedman had given in a letter to Burns. Burns forwarded the analysis to Friedman, who was displeased with the tone of Axilrod’s countercritique (Friedman 1982b, 110). The dialogue with the Board continued, however, and in the 1970–71 academic year Axilrod discussed monetary control at Friedman’s money workshop (as noted in Friedman 1971g, 1; 1982b, 107). 208. See, in this connection, Chairman Burns’s remarks in November 1971 as quoted in DiCecio and Nelson (2013, 407). Administration members expressed similar views. For example, Undersecretary of the Treasury Charls Walker observed: “The decrease in interest rates across the board confirmed our conviction that an inflationary trend had been built into interest rates, and that when inflationary expectations subsided[,] rates would come down” (Bankers Monthly, December 15, 1971, 10). Consistent with the argument presented in this chapter, Darby (1976b, 158) suggested that a reason for what, in retrospect,

442 N o t es t o P a g es 2 8 7 – 2 9 1 was clearly a relaxation of monetary policy stance during 1971–72 was that policy makers, at the time, took literally the benign behavior of measured inflation in that period. 209. This distortion implies that retrospective analyses of 1972 monetary policy stance that compare the actual federal funds rate with the Taylor (1993) rule prescription tend to understate the degree of monetary policy ease during 1972. Insofar as the price controls had the effect of depressing measured inflation for the period in which they were in effect, they would lower the Taylor rule’s prescription, whose calculation involves measured inflation as an input. 210. For example, in The Times (October 12, 1998), Friedman referred to the “official death of the Bretton Woods system in 1973,” but he declared that it really ended on August 15, 1971. A qualification, discussed below, is that the arrangements instituted by the United States and other countries in December 1971 attempted, ultimately unsuccessfully, to restore some of the pre-­August 1971 international monetary arrangements. 211. See Friedman (1972d, 1), in which the indicated effect was said to be a position taken by policy makers, but one with which Friedman indicated his agreement. 212. From Friedman’s remarks at November 20, 1970, Board Academic Consultants meeting, as quoted on p. 2 of a Federal Reserve Board staff memorandum by Reed J. Irvine of November 23, 1970 (Federal Reserve Board records). Meltzer (2009a, 618) implies that Friedman was at a Board Academic Consultants meeting held on December 2, 1970. This date is, however, incorrect, as the just-­mentioned Federal Reserve Board record of the occasion shows that the consultants’ meeting around this time (which Friedman attended) was actually held on November 20, 1970. 213. The New York Times was quoting a speech that Friedman delivered in Geneva (see Friedman 1969h, 10). For other instances during 1969 in which Friedman described Bretton Woods as amounting to a dollar standard regime, see Jerusalem Post, March 25, 1969; Newsweek, September 8, 1969; and Instructional Dynamics Economics Cassette Tapes 21 (April 11, 1969) and 25 (May 25, 1969). Another term that Friedman used for the Bretton Woods system was “the dollar exchange system” (Newsweek, May 30, 1983). 214. As a related matter, in 1970 Friedman questioned whether the US dollar was actually overvalued, as many were contending (Newsweek, October 19, 1970). In the case of the United States, in contrast to other countries, he did not regard a balance-­of-­payments deficit as prima facie evidence of an overvalued exchange rate. 215. See Friedman (1972d, 1) and chapter 13 above. 216. Robert Mundell—although an opponent of Friedman’s on many matters concerning international monetary arrangements—expressed a judgment on this particular matter that resembled Friedman’s. Mundell stated: “The United States has had no need to close the window, because other countries have not come to it” (Mundell 1971, 6). 217. In a similar vein, in congressional testimony in June 1973, Friedman would grant that the United States’ obligations to provide gold in the 1968–71 arrangements were “less direct but still extremely important” (Joint Economic Committee 1973, 115). However, because of the scope available to the monetary authorities to sterilize the impact on the monetary base of international payments flows, these concessions did not amount to a claim that the gold-­price peg was having a bearing on US monetary conditions. 218. Friedman was also critical of the president for maintaining a variety of exchange controls imposed in the 1960s, something Nixon did through the first part of 1974. Friedman voiced this criticism in Instructional Dynamics Economics Cassette Tape 33 (August 21, 1969) and to Nixon himself in their June 8, 1971, Oval Office meeting. 219. Of course, as indicated in chapter 2, a point stressed by Friedman and Schwartz

N o t es t o P a g es 2 9 1 – 2 9 4   443 (1963a) was that separation of monetary conditions from gold flows had been a feature of US monetary policy even before 1933. The era of a “fairly rigorous gold standard” for the United States, Friedman (1984c, 34) judged, had ended with World War I. In the same vein, in the Wall Street Journal of March 4, 1988, Friedman dated the United States’ adherence to a rigid gold standard to the period ending in 1914. 220. Friedman and Schwartz (1982a, 572). 221. However, as detailed in the discussion of Arthur Burns in section III, Friedman laid much blame on Chairman Burns rather than President Nixon for fostering this change in attitude. 222. An earlier occasion on which Friedman insisted that a US-­instigated dollar devaluation was impossible was in Instructional Dynamics Economics Cassette Tape 54 (July 8, 1970). 223. Friedman also made the point that imposition of an import surcharge amounted to a back-­door devaluation in an interview with the American Banker, August 23, 1971. He expressed remarks to the same effect in his September 1971 meeting with President Nixon. He had, in addition, offered a related observation about import taxes in his celebrated 1963 testimony on international arrangements in Joint Economic Committee (1963a). See also Friedman’s article in the Economist, June 4, 1983. 224. St. Petersburg Times, November 17, 1971; Newsweek, December 20, 1971. 225. To the chagrin of opponents of cost-­push views of inflation, the US dollar devaluation and import surcharge were cited as reinforcing the case for imposing US wage and price controls. The rationale offered was that such controls could prevent upward pressure on import prices from spilling over into more general price inflation. Shultz recalled that in internal discussions he countered “the argument [that] if we devalue the dollar, we’ll cause inflation to rise” by noting that imports were only a small fraction of total consumer goods in the United States (George Shultz, interview, May 22, 2013). The Friedman argument against the notion of automatic implications for inflation of exchange-­rate declines (and of import-­price rises) went further, however. It contended that (any aggregate-­supply reactions aside) a rise in import prices would ultimately be offset by downward pressure on prices of domestically produced goods, provided that the US monetary authorities were nonaccommodative (see Friedman 1953a, 180–82; 1961f, 1054). However, with cost-­push theories prevalent in 1971 in the US Treasury and elsewhere, this argument was not accepted. Instead, a wage/price spiral scenario in the wake of devaluation was a concern, and to forestall this, domestic wage and price controls were seen as a quid pro quo for US dollar devaluation. As David Ranson, a member of Shultz’s economic team at the time, recalled of the 1971 shift in the United States’ international economic arrangements, there was “a general fear that it would be inflationary, and so Nixon’s solution to that was to institute wage/price controls, which was the worst possible thing from Shultz’s point of view” (David Ranson, interview, April 30, 2014). 226. Friedman’s contribution to this roundtable was Friedman (1969f ). 227. In the same vein, Samuelson (1970c, 147) praised Friedman for “getting economists generally to realize the desirability of flexible exchange rates.” 228. See Friedman (1969e), commenting on Kindleberger (1969). 229. The gold window was not reopened by the Smithsonian Agreement. That is, the US government did not reestablish its pre-­August 1971 obligation to provide gold to other governments at the official gold price (which until the agreement had formally remained $35 per ounce). But the agreement left open the possibility that such an arrangement

444 N o t es t o P a g es 2 9 4 – 2 9 6 would be resumed, with the communiqué for the Smithsonian meeting referring to the need to determine the “proper role of gold” in a future fixed-­rate system (see the Sun [Baltimore], December 19, 1971). In addition, the communiqué formally expressed the dollar’s devaluation, which had been ratified by the agreement, as a “change in the value of the dollar in terms of gold.” These features, together with the authorities’ continuation of an official gold price, meant that the liberalization of US citizens’ rights to own gold would not be forthcoming. In contrast, in his September meeting with President Nixon, Friedman had expressed the hope that the closing of the gold window would be followed by the ending of the restrictions on private citizens’ access to gold. 230. See below. 231. Burns also indicated that the United States should “not restrict the movements of investment funds” (St. Louis Globe-­Democrat, July 5, 1972). This position, for Friedman, was tantamount to support for flexible exchange rates. Friedman believed that countries would not accept the loss of prerogative over domestic economic management implied by a system of fixed rates plus free capital movements (see Wall Street Journal, May 8, 1968; Friedman 1980c, 83; and chapter 13 above.) 232. In his 1975 deposition, Nixon recalled that “the New Economic Policy . . . was developed in the first instance in a long conversation that I had with Connally in the Oval Office. It was discussed [at] great length in memoranda from people within the administration who had diametrically opposed views and who wrote those memoranda to me, all of which I read, and who then, when they were together when we met at Camp David, expressed those views. I made the decision.” See also Nixon (1978, 518–20). 233. From Friedman’s remarks to President Nixon and OMB director Shultz at their September 24, 1971, Oval Office meeting; copy of recording provided by the Nixon Presidential Library. 234. Hamburger (1977b, 36) characterized the change in the international system as follows: “the dollar was allowed to float in August 1971.” Along similar lines, in his 1975 deposition testimony, former president Nixon described the August 15, 1971 measures as including “the floating of the dollar” (quoted in New York Times, August 21, 1975; see also Nixon 1978, 520). Although Friedman would come to use shorthand of this kind himself (for example, in Friedman 1980c, 83), it was not really how he saw things at the time. The August 1971 change and subsequent developments between 1971 and 1973 relieved the US authorities of commitment to fixed exchange rates. In that sense, the dollar was free, and Friedman described it as such in Newsweek, December 20, 1971. But a US dollar float required the United States’ major trading partners to permit a float, and Friedman’s conception of the dollar standard was one in which such a situation would not materialize. In the event, however, actual arrangements gave rise to the situation of a truly floating US dollar for most of the post-­1973 period. 235. See Friedman (1985a; 1986d, 643; 1987a, 7, 18; 1988a, 238; 1992b, viii; 1992c, xii, 42; and chapter 13); Friedman and Schwartz (1986b, 38); and Financial Times, February 23, 1987. 236. Even prior to the August 1971 changes, Friedman had predicted that a floating pound was “highly likely” in the next few years (Instructional Dynamics Economics Cassette Tape 58, October 4, 1970). 237. From a conversation in the White House in the morning of June 23, 1972, for which President Nixon released a transcript on August 5, 1974 (New York Times, August 6, 1974). Other material in the conversation—that pertaining to the president’s role in the Watergate cover-­up—prompted Nixon’s resignation on August 9, 1974. 238. Friedman (1988a, 239).

N o t es t o P a g es 2 9 6 – 3 0 0   445 239. For Friedman’s and Melamed’s written accounts of these developments, see, respectively, Friedman and Friedman (1998, 350–52) and Melamed and Tamarkin (2006, 176–77). Friedman’s account provided the specific date for the meeting; Melamed’s account gave the price Friedman charged for his commissioned study. 240. See Friedman (1972f ). 241. Billboard, November 20, 1971. 242. The only reference to Friedman in Sargent’s bibliography was as the editor of Cagan (1956). 243. In addition to the discussion that follows, see the previous two chapters for a discussion of this debate. The opening line of Sargent’s paper referred to “the Phelps-­ Friedman ‘accelerationist’ view of the Phillips curve,” taking for granted readers’ familiarity with these already well-­known 1960s contributions (Sargent 1971, 721). 244. Prior to Lucas and Prescott (1971), Lucas had studied investment behavior in Lucas (1967). 245. See chapter 5. The principal exceptions to the generalization that Friedman did not study investment spending consist of Friedman’s discussions, in Friedman (1962a) and elsewhere, of the implications of taxes and budget deficits for private investment spending, and Friedman and Meiselman (1963), which considered investment in the context of constructing a measure of autonomous spending. As a graduate student at the University of Chicago, Lucas served as a research assistant on the Friedman-­Meiselman study—­ perhaps in the 1961–62 academic year—but his work mainly involved proofreading, and he did not feel that the assignment shaped his own thinking about economic research (Lucas 2004a, 18–19). Thus, Lucas’s characterization of his graduate student years was that “I did not work with Friedman” (in McCallum 1999b, 282). 246. See chapter 1 above, as well as the discussion of aggregate supply in chapter 7. 247. See Lucas’s remarks in McCallum (1999b, 282) and Lucas (2004a, 19). 248. In the academic year 1962–63, Friedman was absent from the University of Chicago, and from 1963 to 1974, Lucas was on the academic staff of the Carnegie Institute of Technology, renamed Carnegie Mellon University in 1967. Lucas had little contact with Friedman during those years (Robert Lucas, interview, March 12, 2013). 249. The homework problem on the Phillips curve that Friedman assigned Lucas probably corresponded to that which appeared in his 1962 Price Theory text, as discussed in chapter 11 above. 250. Lucas and Rapping were not the only authors to put qualifications into their articles, pending the outcome of the debate on the natural-­rate hypothesis. In a paper written for a March 1970 conference, Grubel (1973, 104) included a country’s ability to pick its own inflation/unemployment combination in a list of the advantages of floating exchange rates. But the author added that this item on the list would “have to be deleted if Friedman’s challenge to Keynesian economics is valid.” 251. As noted in chapter 13, Friedman never published a paper with “Natural Rate Hypothesis” in the title. In contrast, Lucas (1972a) used those words in the paper’s title. In addition, Lucas’s 1973 article “Some International Evidence on Output-­Inflation Tradeoffs” originally had the phrase in the title. When he presented this work at Yale University on February 26, 1971, in the Cowles Foundation seminar series, Lucas gave it under the title, “Cross Section Tests of the Natural Rate Hypothesis” (see https://​cowles​.yale​ .edu​/cf​-­­seminars). 252. More generally, of course, Lucas’s work could be traced to both Friedman and Phelps because each of them had advanced the natural-­rate hypothesis in their late-­1960s papers. This was acknowledged in Lucas’s (1980b, 705) description of his research of the

446 N o t es t o P a g es 3 0 0 – 3 0 2 early 1970s as “attempts to formalize the Friedman-­Phelps natural rate hypothesis.” See also Lucas (1976b, 19). Another formalization of the natural-­rate hypothesis from this period, in an analysis centered on the labor market, was the Mortensen (1970a, 1970b) work mentioned below. 253. See also Bean (2003b, 62). 254. The joint Sargent-­Wallace work is also sometimes discussed in this connection, in which case Neil Wallace is added to the list of developers of the natural-­rate hypothesis. For example, Mark Gertler, who was a graduate student at the time of the rational-­ expectations revolution, referred to the “misperceptions model due to Phelps/Friedman and fleshed out by Lucas, and Sargent and Wallace” (Mark Gertler, interview, September 26, 2014). 255. Friedman (1970b, 221). Friedman (1976a, vii) noted losing touch with growth theory. 256. That Friedman’s embrace of what he called a Marshallian approach, and which he distinguished from a Walrasian approach, did not connote wholehearted endorsement of partial-­equilibrium analysis was made clear in his admonition against partial-­equilibrium approaches in Friedman (1955a, 404). In the same vein, Paul Evans, a member of Friedman’s workshop over the first half of the 1970s, observed, “I wouldn’t say ‘Marshallian’ is particularly partial equilibrium” (Paul Evans, interview, February 26, 2013). Arnold Harberger characterized Friedman’s approach as identifying an area of interest, whereupon, in “focusing on that particular area you concentrate your efforts on getting the problem at hand and all the connections and so on there, and bringing in the rest of the economy as it really seriously impinges on what happens there, and in a pretty rough way.” Harberger likened this approach to that of an “orthopedic surgeon [working] on the knee who knows a great deal about knees but doesn’t neglect the fact that one of his patients might have a heart problem” (Arnold Harberger, interview, April 12, 2013). Weyl (2015) defines and outlines the “price theory” tradition, as practiced at the University of Chicago, in a manner that emphasizes its links to Marshall’s approach. 257. Friedman, for example, used the term in the same 1971 correspondence with Fischer Black that was quoted in Mehrling (2005, 155). 258. Parkin (1990, 825) noted with regard to Muth (1961): “As a matter of fact, he had not yet completed his Ph.D. when his article was published.” This was technically true, as Muth received his doctorate in 1962. But he had been an assistant professor at the Carnegie Institute of Technology since the mid-­1950s (American Economic Association 1981, 301), and—as in the case of Friedman—Muth’s dissertation was largely written well before his formal receipt of a PhD degree. Indeed, the dissertation accepted in 1962 consisted of material dated 1956 (see McCallum 2016, 343). Muth received his PhD after the Carnegie Institute of Technology’s dean had warned him that the institution could not retain him on the academic staff unless he received a doctorate. This warning prompted Muth to complete the remaining course requirement (a language course) for his PhD. The language course in question was for French, Muth having abandoned some years earlier a course in German that had been intended to be the culmination of his PhD coursework. As it happened, Muth’s brother, Richard Muth, had himself learned French in the past, and at Friedman’s request, in 1963–64 Richard Muth translated, and presented and critiqued in the University of Chicago’s money workshop, a research paper on monetary issues that Friedman had come across that was written in French (Richard Muth, interview, May 20, 2015). Another item among John Muth’s activities, which attested to the fact that he was regarded as a de facto PhD recipient even prior to 1962, was recalled by Robert Lucas (interview, March 12, 2013): “Jack actually spent a year here too, when he was visiting as a post-

N o t es t o P a g es 3 0 2 – 3 0 4   447 doc or something at Chicago, . . . and was definitely influenced by Friedman.” This period, during which Muth served a visiting lecturer at the University of Chicago, was given by Muth as being in 1957–58 (Blaug 1986, 625). It is likely that any face-­to-­face interactions between Friedman and Muth occurred on other occasions and not during Muth’s visit, as, during the 1957–58 academic year, Friedman was located in California. In this connection, it is worth mentioning that Muth may well have spent time in the Chicago area in periods adjacent to the 1957–58 academic year. Muth’s place of birth was Chicago, and his aforementioned brother Richard was affiliated with the University of Chicago, first as a PhD student on campus through 1956, and later as a teacher at the business school from 1959 to 1964 (see Blaug 1986, 625–26). Richard Muth’s recollection was that John Muth did not drop into the University of Chicago campus in the pre-­1957 period but did make occasional visits to the campus during the period of Richard Muth’s business school affiliation (Richard Muth, interview, May 20, 2015). 259. Friedman (1987a, 14). Friedman earlier used these words in an unpublished paper, Friedman (1978c), presented at a Mont Pelerin Society meeting. That paper contained one of his most extended discussions of rational expectations. But, being unpublished and low in circulation, it was little noted. An exception was the fleeting mention given it by Hoover (1984, 61), who presumably received the paper in the course of the correspondence with Friedman on rational expectations that Hoover acknowledged. 260. From his remarks in Snowdon and Vane (1997, 200). Friedman (1987a, 14) made a similar point, on that occasion jointly crediting Lucas and Sargent with applying the Muth concept. 261. From an analytical perspective, Kareken and Solow were critical of Friedman on the same grounds as Culbertson (1960) and others had been, that is, on the basis that estimates of lags based on a comparison of monetary growth and output levels were liable to give rise to spurious estimates. From an empirical perspective, Kareken and Solow (1963) contended that their estimates of the lag from monetary policy to economic activity differed greatly from those of Friedman—a contention that Friedman (1964h) vigorously contested. See Hammond (1996, 125–30) and E. Nelson and Schwartz (2008a, 846) for earlier accounts of the Kareken-­Solow critique of Friedman’s work on lags. 262. See, for example, McCallum (1982, 8; 1987b, 127; 1990c, 993–94) for similar criticisms. 263. Friedman (1977e, 459). This statement is not inconsistent with Friedman’s embrace of the “accelerationist theory” terminology in association with the natural-­rate hypothesis (as, for example, in his Who’s Who in Economics 1986 entry: see Blaug 1986, 293). The natural-­rate hypothesis can be regarded as insisting that the inflation term in the Phillips curve is (π − π e ), where π is inflation and π e is expected inflation. Within that context, the Sargent (1971) and Lucas (1972a) criticisms of empirical Phillips-­curve work pertained to the practice of testing the hypothesis by approximating π e by a fixed and policy-­invariant function of lagged inflation (and, relatedly, the practice of inferring, from a below-­unity estimated coefficient on lagged inflation in the Phillips curve, that the natural-­rate hypothesis was rejected). But these analyses did support the notion that the inflation variable that should be related to real series in the Phillips curve is an “acceleration,” provided that such a term is interpreted as (π − π e ). On this matter, see especially Sargent (1971, 721). 264. Lucas (whose paper was prepared for the first Carnegie-­Rochester conference, held in April 1973—see Business Week, April 28, 1973; and Brunner and Meltzer 1976b, 2) specifically cited Friedman’s work on the consumption function (1957a) in this connection. The interaction between the policy regime in force and observed patterns in aggre-

448 N o t es t o P a g es 3 0 4 – 3 0 5 gate time series had, indeed, been a recurring theme of the consumption-­function literature. Recall from chapters 3 and 4 that Alvin Hansen had tried to reconcile long-­run stability in the empirical consumption/income ratio with a nonunitary marginal propensity to consume by appealing to the impact of effective stabilization policy on the observed consumption/income relationship. Another prominent contributor to the consumption-­function literature, James Duesenberry, also used arguments about the policy regime during a floor discussion at a Brookings panel meeting in 1970. The discussion summary recorded (Brookings Institution 1970, 301): “James Duesenberry pointed out that all the models [in the paper discussed] have been fitted to data covering only the past twenty to twenty-­five years, a period of relatively slow growth in money and rising interest rates, while historically there have been periods of sharply different rates of growth in money. The models cannot analyze what happens if the recent slow growth process is reversed.” An earlier occasion on which Duesenberry arguably alluded to the same line of reasoning was in his congressional testimony of February 6, 1963. Here Duesenberry reacted to correlation-­based evidence (presented by Allan Meltzer in the same session) in favor of the monetarist view by saying: “If I had a nickel for every persuasive correlation I have seen which didn’t work, I would be rich” (in Joint Economic Committee 1963b, 607). However, this earlier remark really amounted to the standard position of econometric model builders of the 1960s that structural models should be used instead of reduced-­form evidence. The Lucas critique, and Duesenberry’s 1970 foreshadowing of it, instead pointed to the danger that models claimed to be structural might actually be reduced form in character, owing to the fact that their estimates of private-­sector behavioral parameters were actually a function of the economic policies followed during the sample period. Still another anticipation of the Lucas critique came from Jacob Marschak, at one time a colleague of Friedman’s, albeit one with whom Friedman had had sharp disagreements on econometric matters (see chapter 10). Marschak (1966, viii–­ix) observed, “the economist’s main observations have been historical data. Yet he cannot assign future validity to the patterns of the past. For policy change may consist in changing the very mechanism by which the environment influences economic variables.” Lucas (1976b, 20) himself credited Marschak with anticipating the point that Lucas advanced, although Lucas cited a different Marschak discussion from the one just quoted. 265. Friedman and Schwartz (1963a, 583). 266. The memorandum’s discussion of Yohe and Karnosky (1969) appeared in Friedman (1970m, 13–16). 267. This was in line with Friedman and Schwartz’s (1982a, 569) later assessment that it was “most unreasonable” to use adaptive expectations when this involves extrapolating from a different regime. See also E. Nelson (2008a, 104–5) for a related discussion of Friedman’s views regarding the behavior of expectations of inflation. 268. Friedman (1970b, 228). 269. Friedman (1971f, 13). 270. From Friedman’s June 21, 1973, testimony, in Joint Economic Committee (1973, 139). Later critiques that Friedman voiced of the practice of extrapolating recent experience or recent data into the future included those in Instructional Dynamics Economics Cassette Tapes 143 (April 3, 1974), 144 (April 17, 1974), and 197 (August 1976, part 1). 271. Numerous commentators have, like Lucas, affirmed the affinity between the natural-­rate hypothesis and rational expectations. In contrast to the Kareken interpretation, and in keeping with the discussion provided in this section, many of these commentators have viewed Friedman’s (1968b) analysis as tantamount to postulating rational

N o t es t o P a g es 3 0 5 – 3 0 7   449 expectations. For example, Krugman (1995, 209) characterized the Friedman (1968b) account as one in which agents were “behaving rationally,” while Barro (2007, 129) argued that Friedman (1968b) “foreshadowed the 1970s Bob Lucas–­led revolution on rational expectations macroeconomics.” 272. So too was Friedman’s teaching. Indeed, Michael Darby (interview, October 15, 2013) argued that the Friedman classes that he took starting in fall 1967 captured the essence of rational expectations because of the insistence that “expectations have to adjust in due course to reality, and therefore, you have to have the expected inflation approximate, or equal to, actual inflation in the long run.” Consistent with this characterization, a Friedman paper of approximately this vintage contained a warning against treating households as though they ignored evolving patterns in the data when they formed expectations (see Friedman 1969a, 28). 273. In this vein, during his years as president of the Federal Reserve Bank of New York, Paul Volcker credited monetarism with fostering greater recognition of “the importance of expectations in explaining behavior in financial markets and in economic life generally” (Volcker 1977, 24). 274. Friedman (1970b, 222). 275. See, respectively, Friedman (1957a, 25) and Friedman and Becker (1958a, 549). 276. Nor was this a new skepticism on Friedman’s part. In Friedman (1968c, 443), he had indicated that lagged inflation’s value as a proxy for expected inflation depended on the policy regime. 277. See also Friedman and Schwartz’s (1982a, 570) observation that US inflation may have become a random walk and that such a result reflected the policy regime in force. For a related discussion, see Fuhrer and Moore (1995a, 135). 278. Blanchard (1997, 343, 356) stated: “There is no longer any relation between the unemployment rate and the inflation rate. . . . In the United States today, the aggregate supply relation takes the form of a relation between unemployment and the change in inflation.” Blanchard’s contributions to the rational-­expectations literature included Blanchard and Kahn (1980), a seminal paper that outlined solution procedures for linear rational-­expectations models. 279. Sargent quoted from a passage in Friedman (1958b, 252; p. 183 of 1969 reprint) in which Friedman had indicated that the incorporation into private-­sector expectations of a more inflationary monetary policy would remove that policy’s stimulative effects on real output. In 1978, looking back over his past work to find instances in which points of this kind figured prominently, Friedman missed this 1958 item, instead citing his (1958d) Mont Pelerin article from the same year in which the role of expectations was “implicit” (Friedman 1978c, R-­184). 280. The founder of rational expectations, John Muth, recognized this point when he noted (in Blaug 1986, 625) that in the 1950s it was already standard to employ “rational, optimizing hypotheses for static equilibrium analysis.” 281. The latter reference (Cogley, Sargent, and Tsyrennikov 2014, 1) specifically identifies Friedman (1953c, 22) as containing the relevant material. (In addition, Friedman 1976a, 150, had a related discussion.) See also the discussion of the methodology essay in chapter 9 above. 282. Hommes then quoted what he called the “well-­known” passage from Friedman (1953a, 175) on exchange-­rate speculation. 283. June 22, 1984, letter from Friedman to David Laidler, David Laidler papers, University of Toronto. Laidler’s colleague Michael Parkin, who would spend time with Friedman at the

450 N o t es t o P a g es 3 0 8 – 3 0 9 Hoover Institution in 1979–80, assessed, on the basis of Friedman’s middecade writings, that Friedman supported the rational-­expectations hypothesis. Parkin contrasted Friedman’s stand on this matter with that of James Tobin. See Parkin (1979, 435). 284. Earlier, rational expectations featured in the overview of the monetary economics literature that Friedman provided in his 1987 New Palgrave entry on the quantity theory of money (Friedman 1987a, 14–15). The coverage of rational expectations in this article was a considerably shortened version of the discussion in the original draft entry (Friedman 1985b). 285. See Wallechinsky, Wallace, and Wallace (1981, 417–18). 286. See Friedman (1978c, R-­184) and the discussion of this reference given above. 287. Sargent (1993, 210) gave the mid-­1970s as the time by which macroeconomists had abandoned adaptive expectations. In research coming from academia, especially in the United States, the message of Sargent (1971) had become entrenched, as was evident in Summers’s (1986, 83) later reference to the “now-­traditional critique of identification in distributed lag models.” Well into the 1980s, however, it was common for policy agencies to use macroeconometric models that were offered as structural but lacked forward-­ looking terms (K. Wallis and Whitley 1991, 120). It would nonetheless be incorrect to conclude that the builders of these backward-­looking models brushed off the points made by Lucas (1972a) and Sargent (1971) altogether. The reason why such a suggestion would be incorrect was that, by the 1980s, it was typical to impose a unitary coefficient on the expected-­inflation term in the Phillips curve on a priori grounds rather than estimate it freely. Consequently, for theoretical reasons, a version of the long-­run vertical Phillips curve was insisted on by model builders as a property of macroeconometric systems. 288. See Friedman (1975a). Another occasion during 1974 when Friedman discussed the rational-­expectations work was in his September 1974 lecture in London on the Phillips curve (Friedman 1975d), a lecture discussed in chapter 13 above. 289. Friedman (1975a, 177). Along similar lines, Friedman and Schwartz (1982a, 564) cited Sargent (1973b) as having formalized Wicksell’s monetary work. 290. Biographical sources over the years have given different dates for Lucas’s start at the University of Chicago. In American Economic Association (1981, 262), Lucas gave his move from Carnegie Mellon University to the University of Chicago as having occurred in 1975, and this date also appeared in press reports when Lucas won the Nobel award in 1995 (for example, Wisconsin State Journal, October 11, 1995). Lucas (1995), however, dated his move as occurring in 1974, and that date is correct. The reason for the lack of clarity about dates lies in the fact that, in his first year, 1974–75, at the University of Chicago, Lucas was formally a visiting professor (Lucas 2004b, 297). However, he was immediately brought into the teaching of the graduate program—giving a macroeconomics course (Bennett McCallum, interview, June 13, 2013; Charles Plosser, interview, April 2, 2015)—and the visiting-­professor appointment was made with the expectation that it could well evolve into a permanent appointment. Stanley Fischer recalled: “I was at the faculty meeting [in the 1972–73 academic year] at which Bob Lucas was brought to Chicago as a visitor, with a clear intent of looking at him as one of the most important people of the next generation” (Stanley Fischer, interview, August 30, 2013). Lucas therefore overlapped with Friedman as a departmental colleague for two and a half academic years, through the end of 1976. (Lucas, as a graduate student, had been a lecturer at the university for a time—see Lucas [2004b, 297]—but this had occurred in the 1962–63 year, during which Friedman had been on leave.) 291. And Friedman would himself observe in 1978 that an emphasis on expectations

N o t es t o P a g es 3 0 9 – 3 1 0   451 “clearly underlies many of my conclusions” (Friedman 1978c, R-­184). See also the specific examples given above. 292. Of these, the study of Barro (1974), on Ricardian equivalence, had formalized a topic that Friedman had himself touched on in the 1960s and early 1970s and to which he would return in the 1980s. See chapters 13 and 14. 293. In the same vein, McCallum (1978a, 122) observed that the Lucas-­Sargent-­Wallace proposition (i.e., that only unanticipated monetary shocks matter for output variations) “provides powerful intellectual support for Milton Friedman’s contention that monetary authorities should abandon attempts to pursue an activist countercyclical monetary policy, acting instead so as to generate a steady growth rate of the nominal money stock.” (See also Sargent and Wallace 1975, 242; McCallum 1978b, 419.) McCallum (1978c, 324), however, made a more qualified statement, observing that the Lucas-­Sargent-­Wallace proposition “might not literally entail support for a k percent [monetary-­growth] rule, but it would certainly work strongly in favor of such a position.” Neil Wallace (1977) also came out explicitly for a k percent (specifically, zero percent) rule for monetary base growth. However, he did so on the basis of arguments related to his work on the underlying reasons for the community’s holding of money balances, rather than on the basis of arguments like those in Lucas (1972b) or Sargent and Wallace (1975). (In contrast, Sargent and Wallace 1981 argued that the nature of monetary policy/fiscal policy interaction provided a case for the Friedman’s 1948 monetization rule over the k percent rule, and Wallace, in the interview of March 15, 2013, for this book, indicated he saw the monetization rule as more feasible than the constant-­monetary-­growth rule.) 294. Quoted in Shepherd (1995, 49). 295. The same comment applies to related papers in the early rational-­expectations literature that supported nonactivist rules, most notably Sargent and Wallace (1975). Material in the latter paper was presented by Sargent at a University of Chicago workshop, as part of a talk drawing mainly on an early draft of Sargent (1973a). (Sargent and Wallace 1975, 241, thanked Friedman for comments on the paper. The recollection of Thomas Sargent, in his January 24, 2014, interview for this book, was that these comments were received at a session of Arnold Zellner’s econometrics workshop that Friedman attended. Friedman’s exposure to Sargent 1973a was confirmed by its inclusion in the references in Friedman and Schwartz 1982a, 650.) The Sargent-­Wallace paper contrasted a constant-­ monetary-­growth rule with an interest-­rate rule, with the latter alleged to fail to produce a model solution (or, in later presentations of their result, to produce multiple model solutions). From today’s perspective, however, it is clear that Sargent and Wallace did not offer a fair contest between monetary-­growth and interest-­rate rules because they did not contemplate a response in the interest-­rate rule to prices, money, or their rates of change (Parkin 1978; McCallum 1981, 1986b; McCallum 2001a, 151–53; McCallum and Nelson 1999, 306–10; Woodford 2003, 44–45, 108). 296. He would therefore likely not have concurred with Sargent (1976b, 207) that it was a monetarist proposition that constant monetary growth could not be improved on, and that the closer that a macroeconomic model came to generating this result, the “more monetarist” it was. 297. Consistent with the preceding discussion, Sims (2009, 249) observed that, although the constant-­monetary-­growth rule seemed to fit well with the analysis of the early rational-­expectations literature, Friedman’s case for the rule arose in large part from a set of arguments different from those emphasized in that literature. 298. Another 1970s paper that was presented as a rigorous version of Friedman’s analy-

452 N o t es t o P a g es 3 1 0 – 3 1 2 sis was that of Brock (1974), who offered his model as a mathematical formalization of Friedman (1969a). But Brock’s analysis was somewhat different from that of the rational-­ expectations literature of the 1970s that had formalized some of Friedman’s monetary ideas—partly because of Brock’s perfect-­foresight assumption, and partly because the Friedman paper that Brock formalized was unrepresentative of Friedman’s main body of monetary work. 299. Friedman (1977e, 459). 300. See E. Nelson (2004a, 406). 301. Friedman (1984d, 397) used the term “agents,” while Friedman (1977e, 464) and Friedman and Friedman (1985, 107) referred to “economic agents.” Friedman (1981e, 10) used “metric.” With respect to “credibility,” McCallum (1984b, 105) credited the adoption of that word in the sense it is used in the modern monetary literature to Fellner (1976). However, as discussed elsewhere in this chapter, Friedman’s use of the word “credible” in its modern sense predated, at least slightly, the rational-­expectations revolution. Nonetheless, he used “credible” or “credibility” in their modern senses more frequently once the rational-­expectations revolution was in train, such as in Manhattan Mercury, April 27, 1978, A6; Wall Street Journal, July 2, 1987; and Friedman and Friedman (1980, 277), as well in a 1982 television appearance, during which he stated that low-­inflation countries had “demonstrated the credibility of their long-­run patterns” (Meet the Press, NBC, March 21, 1982, p. 8 of transcript). Nelson (2018) provides further discussion. 302. Sargent’s interactions with Friedman during the 1970s included, in addition to those noted above, presenting Sargent (1977b) in Friedman’s workshop (Sargent 1977b, 59; Thomas Sargent, interview, January 24, 2014), as well as Sargent’s year (1976–77) as a visiting professor at the University of Chicago, which involved overlapping with Friedman in the department during the September–­December 1976 period (see https://​www​ .tomsargent​.com​/personal​/resume​.pdf ). 303. Lucas did note in 1982 (see Klamer 1983, 40) that Friedman had reservations about representing the whole community’s expectations with a common probability distribution. In this connection, Michael Parkin recalled that from Friedman’s perspective “the implementation of that idea [rational expectations] using, essentially, a macro version of Muth, was, in some sense, too easy. . . . I remember Milton quoting me [in Friedman 1978c] as having said that a major challenge for macroeconomics in the future is working out the implications of the idea that expectations are formed rationally. And I know that, by that, Milton meant figuring out how to deal with this idea in a way that’s different from the way that Bob Lucas and others were handling it” (Michael Parkin, interview, May 29, 2013). On these reservations on Friedman’s part, see also Friedman and Schwartz (1982a, 557). As discussed in chapter 4, reservations of this kind were a holdover of Friedman’s work in microeconomics during the 1940s. They applied to many applications of stochastic macroeconomic models, and not specifically to rational-­expectations models. Such reservations may have been a factor restraining Friedman’s willingness to use formal macroeconomic models. But they did not provide a sound basis for rejecting the use of the rational-­expectations assumption in macroeconomic modeling. 304. Arnold Harberger, interview, April 12, 2013. Along similar lines, Stanley Fischer recalled that “Milton had very mixed feelings about rational expectations” (Stanley Fischer, interview, August 30, 2013). Gary Becker characterized Friedman’s perspective on the rational-­expectations literature as follows: “Very much opposed initially, but then, gradually, making an accommodation with it” (Gary Becker, interview, December 13, 2013). 305. This observation, from Friedman (1971g, 8), stands in contrast with that of Stokey,

N o t es t o P a g es 3 1 2 – 3 1 3   453 Lucas, and Prescott (1989, 485): “For actively traded securities like common stocks, prices vary a lot from day to day, whereas consumption by typical households is relatively smooth.” To Friedman, what was missing in such a statement was a recognition that not only real quantities but also nominal goods prices adjust smoothly. 306. See Friedman (1977c, 14). 307. See Friedman and Schwartz (1982a, 516–17, 556–57, 630). In addition, Friedman, in Instructional Dynamics Economics Cassette Tape 192 (June 1976, part 1) and in Friedman (1977c, 14), specifically invoked the case of the peso. He had earlier done so during the closing years of his money workshop at the University of Chicago (Robert Hodrick, interview, January 23, 2016). See also Friedman and Schwartz (1963a, 247) for an earlier articulation of a related line of reasoning. 308. Friedman (1983a, 5). Sentiments to this effect had also been expressed by Friedman (1978c, R-­185). 309. See Friedman and Schwartz (1963a, 678; 1963b, 55, 60). Friedman (1960a, 92) likewise stated that unexpected price changes made for fluctuations in output. See also his remarks in Friedman (1977c, 15). As was discussed in chapter 13, Friedman traced the expectational-­Phillips-­curve idea back to Hume. He also cited Hume as an originator of the more general notion that what creates real effects of monetary actions is a deviation of money from its expected path (Friedman 1975a, 176–77; The Times, September 13, 1976). Although Friedman’s elaboration in the 1960s of his view of the supply side of the economy increased the focus on expectations, the role of expectations was already prominent in his view of how monetary policy affected the economy, as indicated above. It would therefore not be appropriate to claim, as Chick (1973, 4) did, that “only in later developments of monetarism” did a distinction between expectations and realized values assume importance. 310. Friedman (1983a, 2). 311. Friedman (1980c, 83). 312. The Gray and Fischer papers were available as manuscripts in 1975, with those versions of their work cited in Gordon (1976b, 217). On the empirical side, criticisms of the position that only monetary policy surprises mattered for output fluctuations were also emerging over the late 1970s, most particularly as part of the scrutiny given to the favorable results for the position claimed by Barro (1977). Robert Gordon (interview, March 21, 2013) argued that US economics profession’s belief in the viability of the only-­surprises-­ matter position peaked in 1978 and rapidly declined thereafter. Negative results later appeared in print in the form of Mishkin (1982, 1983); Darby (1983); and Gordon (1982). Friedman took a shine to the last of these papers and highlighted its results in Friedman (1984c, 33). 313. Friedman and Schwartz (1982a, 415). As discussed in chapter 7 above, there is no contradiction between the postulate that nominal prices (and/or nominal wages) exhibit short-­run stickiness and the postulate that the amount of product supplied (both in the short and long run) by a firm or laborer is a function of the relative price of the supplier’s product. Friedman (and many others) adhered to both postulates, and the author does not see merit in regarding adherence to the second postulate as having, as an inevitable corollary, the assumption of complete short-­run price flexibility. For the same reason, the author would, like many others, regard it as appropriate to describe the Phillips-­curve relationship as an “aggregate-­supply equation,” irrespective of whether that relationship is derived in sticky-­price conditions or in flexible-­price conditions (see chapter 7). 314. Bennett McCallum, who attended the workshop during his visit to the University of

454 N o t es t o P a g es 3 1 4 – 3 1 9 Chicago’s economics department in the winter quarter of 1975, had a similar recollection. “Friedman’s money workshop, which was my introduction to major-­league monetary economics, was regularly attended by Lucas, Barro, Dornbusch, Frenkel, Zellner, Charles Nelson, and Paul Evans—and occasionally by Fama and others. . . . There wasn’t any open warfare between Friedman and the others over rational expectations, but I sensed a bit of tension” (Bennett McCallum, personal communication, February 10, 2010). 315. Friedman letter to Christopher Sims, May 14, 1983, Federal Reserve Board records. 316. This Business Week quotation provides a counterexample, albeit one outside the research literature, to Hoover’s (1984, 61) contention that only in publications starting in 1977 did Friedman’s views on the rational-­expectations work come into the public record. Another counterexample is provided by Friedman’s Dauphine conference remarks— given in 1974 and published in 1976—that were quoted earlier. 317. Chow gave Friedman (1969a, 30) as an example of this practice. A later example was provided by the dynamics (other than those describing the Phillips curve) used in Friedman (1970b). In that paper, Friedman viewed the “Walrasian equations of general equilibrium” as determining the steady state of the model, but, in contrast to Lucas (1972b), he did not further employ them to determine the dynamic adjustment of nominal income to monetary actions (Friedman 1970b, 219). 318. Friedman (1971c, 849; 1977d, 406). The latter discussion, which also presented second-­order conditions for optimality, was a published version of a paper that Friedman had drafted in 1972. This paper is discussed at the end of this chapter. 319. The only competition, he suggested, was coming from papers using Box-­Jenkins (that is, autoregressive integrated moving-­average time series) methods. See Friedman (1977c, 13). This feature of the workshops was evident by fall 1972, when Friedman opened a presentation of Gould and Nelson (1974) with the same complaint (Charles Nelson, interview, September 9, 2013). 320. Friedman letter to Michael Darby, March 12, 1975, Milton Friedman papers, Hoover Institution. 321. Friedman used this term in Instructional Dynamics Economics Cassette Tape 58 (October 4, 1970). See also Friedman (1970a). 322. Friedman (1969b, vi). 323. See, in this connection, the discussion in Friedman and Schwartz (1982a, 37). 324. Of course, as noted above, whether money and nominal income had a significant relationship was still a live issue in the public policy debate in 1971 and 1972, even if it was regarded as settled in some of the academic discussions. 325. The title and date of the presentation were provided to the author by Gloria Valentine (personal communication, July 11, 2013). 326. Sargent (1987a, xxi) listed the introduction of “the tools of optimal prediction and filtering” into macroeconomics as part of the rational-­expectations revolution. 327. Friedman (1971k, 10). 328. For example, long after the New Economic Policy was instituted, Friedman still referred to “the president’s courage and good sense” (Newsweek, April 2, 1973). 329. Friedman (1975g, 15; p. 707 of 1979 reprint). 330. In the discussion that follows of Burns’s views before May 1970, statements by Burns in the period prior to his ascension to the position of Federal Reserve chairman will be considered. In addition, those statements Burns made in the opening weeks of his tenure will be analyzed, with these taken as views that Burns likely also held before he took office.

N o t es t o P a g es 3 1 9 – 3 2 6   455 331. In E. Nelson (2004a, 404). 332. See chapters 11 and 14 above. 333. Friedman made this point in Taylor (2001, 107). Rotemberg (2013, 72–73) also emphasized the similarities between Burns’s views and Friedman’s views as of 1970, while Romer and Romer (2004, 154) noted Burns’s opposition during the 1960s to incomes policy, discussed presently. 334. See Burns’s February 18, 1970, testimony, in Joint Economic Committee (1970c, 177–78) as well as Chicago Tribune, February 20, 1970. 335. From Burns’s December 18, 1969, testimony, in Committee on Banking and Currency, US Senate (1970a, 8). 336. Friedman also noted Burns’s long record of opposition to guideposts in Instructional Dynamics Economics Cassette Tape 51 (May 27, 1970) and in Newsweek, June 15, 1970. 337. December 18, 1969, testimony, in Committee on Banking and Currency, US Senate (1970a, 11). 338. From Burns’s December 18, 1969, testimony, in Committee on Banking and Currency, US Senate (1970a, 24). See also DiCecio and Nelson (2013, 412–13) for documentation of Burns’s continuing rejection of a long-­run inflation/unemployment trade-­off throughout his years as Federal Reserve chairman. 339. Friedman relayed this impression in Instructional Dynamics Economics Cassette Tape 36 (October 22, 1969) and Friedman (1970e, 24). 340. Friedman (1970e, 23–24). 341. Friedman (1970k, 12; 1970l, 9). 342. Friedman (1970l, 9). 343. From Burns’s December 18, 1969, testimony, quoted in U.S. News and World Report, January 12, 1970. 344. In E. Nelson (2004a, 404). 345. Instructional Dynamics Economics Cassette Tape 215 (recorded December 1977, released March 1978). 346. In addition to the discussion that follows, see Poole (1979); Hetzel (1998); Romer and Romer (2002b); and E. Nelson (2005b). In addition, Romer and Romer (2004), DiCecio and Nelson (2013), and E. Nelson (2013d, 2016) have provided detailed accounts of Burns’s views on inflation beyond the 1970–72 period considered in this chapter, and the latter three references provide an interpretation in which Burns’s views on the determination of inflation, once they underwent the 1970 shift described here, did not undergo substantial further change during his time as Federal Reserve chairman. 347. Anna Schwartz in E. Nelson (2004a, 404). To the best of this author’s knowledge, other than the press accounts at the time, the earliest public references to these exchanges were in Wells (1994, 57, 280). The exchanges were also discussed in E. Nelson (2005b, 2007), which drew on the press accounts. The 1970 letters from Friedman to Burns have been quoted in Wells (1994, 57) and Leeson (2009, 182–83). 348. In addition to his Newsweek column, Friedman acknowledged in Instructional Dynamics Economics Cassette Tapes 51 (May 27, 1970) and 86 (November 20, 1971) the theoretical validity of the case for incomes policy as a means of speeding up the wage-­ price reaction. See also the discussion in section II above. 349. Friedman and Schwartz (1982a, 51). 350. From Burns’s February 18, 1970, testimony, in Joint Economic Committee (1970c, 164).

456 N o t es t o P a g es 3 2 6 – 3 3 1 351. From Burns’s March 18, 1970, testimony, in Committee on Banking and Currency, US Senate (1970b, 14). 352. In addition to the examples of Friedman’s remarks given here, see also those discussed in “From Gradualism to the New Economic Policy” in section II. 353. Likewise, in a September 1970 conference in Sheffield, United Kingdom, Friedman remarked that the degree of pressure exerted by labor unions was not a useful variable in understanding the behavior of inflation (Clayton, Gilbert, and Sedgwick 1971, 70–71). 354. Quoted in E. Hoffman (1971, 12). 355. As a corollary, Friedman doubted unions’ capacity to raise the aggregate wage level (both nominal and real) in the economy. 356. On Friedman’s discussion of union versus nonunion wages, see chapter 10 above. For his rejection of accommodation of wage-­push as an empirically realistic explanation of high monetary growth, see Friedman’s remarks in Monday Conference, ABC Television (Australia), April 14, 1975 (p. 15 of transcript) and in Friedman, Porter, Gruen, and Stammer (1981, 27). (As discussed in E. Nelson 2009a, 2009b, Friedman as of 1963 was willing to countenance the idea that nominal wage behavior provoked a monetary-­growth reaction in countries like the United Kingdom, but he later judged that such a reaction was empirically important.) 357. Friedman and Schwartz (1963a, chapter 7, section 7, pp. 407–19). 358. Newsweek, October 25, 1971, 88. 359. In addition to the remarks quoted in the text, see Friedman’s remarks on Burns in Instructional Dynamics Economics Cassette Tape 151 (August 7, 1974). 360. Friedman (1972e, 17). 361. Friedman (1971f, 22). 362. Friedman (1972e, 11). The crucial connection between Burns’s cost-­push views and his favorable perspective on wage/price guidelines and wage/price controls is the lacuna in the analysis of the Nixon White House tapes in Abrams and Butkiewicz (2012). These authors nowhere refer to cost-­push views of inflation. They consequently overlook Burns’s view that controls removed cost-­push pressures, and they are driven to the invalid conclusion that Burns must have known that rapid monetary growth in 1971 and 1972 was incompatible with removal of inflationary pressure. In particular, these authors take it for granted that the interest-­rate reductions of late 1971 represented capitulation on the part of Burns to political pressure. In so doing, the authors neglect the reasoning behind those reductions that Burns formed on the basis of his nonmonetary view of inflation (see DiCecio and Nelson 2013, 407; and the discussion in section II above). 363. Friedman (1972e, 17). 364. From Friedman’s remarks in the September 24, 1971, Oval Office conversation; copy of recording provided by the Nixon Presidential Library. 365. From Burns’s March 10, 1971, testimony, in Committee on Banking, Housing and Urban Affairs (1971, 7). 366. The fact that real interest rates rose over this period (and rose in nominal terms in 1972) casts doubt on accounts that suggest that Burns knew during 1972 that interest rates were too low. One prominent line of argument (see P. Wonnacott and R. J. Wonnacott 1979, 317; and Wells 1994) is that Burns’s position as head of the interest and dividends committee (a board created to monitor, but not control, nonwage incomes during the Nixon controls period) constrained Burns’s scope to raise market interest rates during 1972. A related argument is that Burns may have held interest rates down because he

N o t es t o P a g es 3 3 2 – 3 3 3   457 feared not doing so would lead to a broadening of Nixon’s mandatory controls to include interest rates (see Dornbusch and Fischer 1981, 568). Neither of these positions seems convincing to the present author, when set against the factors, just mentioned in the text, that likely led Burns to be satisfied that excessive monetary ease had been avoided. The position that the interest-­monitoring committee clashed with Burns’s monetary policy role was also voiced in 1973 (for example, Manchester Union-­Leader, April 9, 1973). But, as with his behavior during 1972, Burns’s conduct in 1973 was inconsistent with the suggestion that he resolved any conflict between his roles by making monetary policy easy. Rather, the Burns FOMC actually tightened monetary policy very significantly during 1973. To reconcile this policy tightening with his interest-­monitoring role, Burns agreed to such devices as a “dual prime rate” (see DeLong 1997, 266). Devices of this kind certainly complicated and distorted financial intermediation, but they would not ordinarily be regarded as measures that negated the macroeconomic effects of the tightening of monetary policy in 1973. 367. From Burns’s testimony in Joint Economic Committee (1972b, 121), also quoted in Sobel (1975, 19). 368. Meltzer (2009b, 796–97), although he emphasized the role of politics in his account of pre-­1979 Federal Reserve behavior (and likely did so to a far greater extent than the record justifies—see Romer 2005, and E. Nelson 2012b), also rejected the notion that Burns’s monetary policy decisions during 1971 and 1972 reflected consideration of the 1972 election. Abrams (2006), in an account of the Burns/Nixon White House conversations, was ostensibly concerned with Nixon’s pressure on Burns but ultimately came out largely in favor of the notion that Burns’s policies lined up with Burns’s own conception of the behavior of inflation. That paper’s account was therefore reconcilable with the prior literature on the Great Inflation, which did not point to political pressure on the Federal Reserve. (Abrams and Butkiewicz 2012 make a contrary conclusion. But, for reasons discussed earlier in this chapter, although these authors deserve much credit for their research into recorded White House conversations between economic policy makers, flaws in their monetary analysis and in their coverage of the existing literature vitiate their main conclusions about the factors driving monetary policy decisions during the 1970s.) 369. In any event, Friedman’s had criticized what he perceived as instances of panicky behavior on the part of the administration almost since its inception. In mid-­1969, for example, he stated that the administration was “running scared” at signs that Congress might not renew the income tax surcharge and perceived a “frenetic campaign” by officials to secure an extension of the surcharge (Instructional Dynamics Economics Cassette Tape 28, June 12, 1969). 370. Friedman remarked in Newsweek, August 6, 1973, that “the urgent desire of President Nixon to be reelected” played a role in producing inflation. Note, however, that this remark need not imply deliberate overstimulation of the economy. It could instead be seen as an explanation for why, in setting policy, the authorities did not eschew reliance on real variables, such as unemployment and estimates of the output gap, in their policy making as much as Friedman would have liked. For example, in Instructional Dynamics Economics Cassette Tape 152 (August 21, 1974), Friedman rejected the notion that the Federal Reserve “acted politically in 1972,” but he cited as a factor behind excessive monetary ease the authorities’ “continuous misassessment of the situation.” 371. Friedman (1971f, 17). 372. Indeed, Friedman’s statement turned out to be accurate, in the sense that Burns

458 N o t es t o P a g es 3 3 4 – 3 3 7 did not quite end public service with his Federal Reserve tenure, which was so associated with high inflation. In the 1980s, he would serve in the Reagan administration, first as an outside economic adviser, then as US Ambassador to the Federal Republic of Germany. 373. Samuelson and Heller testified against a tightening of aggregate demand policies at a congressional hearing on July 27, 1972 (Evening Star, July 27, 1972; see also Joint Economic Committee 1972a). 374. The fact that Burns had to face a range of opinions from fellow FOMC members, and was obliged to seek a consensus among members, was one reason for Burns’s irritation with Friedman’s commentaries on monetary policy. Joseph Burns observed, “I think one thing my father didn’t like is that he [Friedman] would associate whatever open market policy came out as being ‘Burns’ policy.’ . . . But there were some very bright, independent people on the committee, and they were able to form their own opinion. And they, I don’t think, would have been overly influenced by what my father wanted” (Joseph Burns, interview, September 12, 2013). 375. From his February 7, 1970, testimony, in Committee on Banking and Currency, US House (1970, 252). 376. Fischer was in the university’s Department of Economics through mid-­1973. But the incident described in the text likely occurred in 1970 or 1971. 377. See, for example, the 1970–71 correspondence quoted in Friedman (1982b, 106–10). 378. Friedman also visited the Federal Reserve Board while passing through Washington during the second half of 1972. Another occasion on which Burns and Friedman met in Washington was when both were participants in an American Enterprise Institute conference on international monetary problems, held on September 22, 1971 (American Enterprise Institute 1972, 135). Both also attended the May 1972 Montreal conference noted below. 379. Until the 1960s, the Friedmans had a summer home outside Vermont that was fairly close to Burns’s Vermont home. After the Friedmans, during the 1960s, changed their summer home to one located in Ely, Vermont, the Friedmans were much physically closer to the Burns home, making the two families virtually next-­door neighbors (Joseph Burns, interview, September 12, 2013; and Joseph Burns, personal communication, October 29, 2014). Friedman said of his Vermont home, “We’re at the end of the road, thank goodness, overlooking a lake and a valley,” and he noted that the house was about a mile from any other house, including the Burns home (New York Times, August 17, 1975, 13). See also chapter 12 above. The fact that Friedman and Burns were summertime neighbors was mentioned many times in the press (including in New York Times, January 25, 1970; Philadelphia Sunday Bulletin, April 26, 1970; and New York Post, October 16, 1976, 27) and was noted also in Matusow (1998, 60) and Meltzer (2009a, 644). 380. Friedman (1986a, 83). 381. Burns and George Shultz were two highly senior policy makers in attendance at the conference. See Selden (1975b, 323, 325). 382. See “From Gradualism to the New Economic Policy” in section II above. One factor, in addition to those noted in the text, that must have played some role in helping to understand both Friedman’s and Burns’s perspectives in 1972 on monetary policy is that data on monetary growth for 1972 were subsequently revised upward substantially. Joseph Burns, in conversation with the author, has indicated that he wished he had included this point in the defense of his father’s record in 1971–72 that he wrote in the Wall Street Journal of April 26, 2004. 383. R. D. Friedman (1977a, 28).

N o t es t o P a g es 3 3 7 – 3 4 2   459 384. Friedman and Friedman (1998, 420). 385. Sargent (1972, 96) indicated that a manuscript version of Sims (1972) was dated February 1971. Sims presented the paper at the Cowles Foundation (located at Yale University) on April 16, 1971 (see http://​cowles​.yale​.edu​/cf​-seminars). Taking these pieces of information together with the record of Friedman’s whereabouts during 1971, likely intervals during which Sims gave his presentation at the University of Chicago would seem to be March–­May 1971 and August–­December 1971. It can be further pinpointed to November 1971 if the month of November given in Rose Friedman’s (1977a, 28) account of Friedman’s stay at the University of Chicago’s hospital is used. (If—contrary to the alternative time line that is suggested here—one also accepts the year she gave for the hospital visit as 1972, then the Sims visit to the university occurred in November 1972. Such a date, however, seems inconsistent with Sims’s recollection of presenting “Money, Income, and Causality” on his visit, as the article was already in print by November 1972.) 386. Among Friedman’s activities during the spring/summer 1972 period were his participations in the American Bankers Association’s International Monetary Conference, held in Montreal in the first half of May (Toronto Star, May 11, 1972) and in a debate on economic policy with Pierre Rinfret in New York City at the Financial Analysts Federation Conference on May 23 (Chicago Tribune, May 24, 1972; Newsday, May 28, 1972). In addition, in early September 1972, Friedman attended the Mont Pelerin Society conference in Montreux, Switzerland (Evening Independent, September 15, 1972; Friedman and Friedman 1998, 335). He also appeared at a dinner at the University of Rochester (in New York State) held by the university president, sometime in the 1972–73 academic year. At the dinner, Friedman talked at length with Brian Griffiths, who was visiting the university for the year from the London School of Economics (Lord [Brian] Griffiths, interview, September 23, 2013). 387. Published as Selden (1975b). Friedman’s recent sixtieth birthday formed part of the impetus for the conference. 388. The article was by Lindley Clark, a staff writer for the Wall Street Journal who was also a former student of Friedman’s. Friedman discussed the article in Instructional Dynamics Economics Cassette Tape 110 (November 1, 1972). 389. See respectively, the floor discussions in Selden (1975b, 51) and Niskanen (1975, 21). 390. For government spending, Friedman increasingly stressed during the mid-­1970s a qualification: inflation had permitted unlegislated increases in taxes and so (via Friedman’s “starve-­the-­beast” logic) tended to create momentum for higher government spending. But Friedman saw even the growth in public spending that could be traced to this source as occurring partly because of agreement or acquiescence on the part of the general public. 391. See Selden (1975b, 50). This judgment reflected in part the evidence accumulated from Nixon’s first term. Three years earlier, Friedman had been more optimistic, judging that the general public was recognizing that government programs often failed to achieve their intended aims (testimony of October 6, 1969, in Joint Economic Committee 1970a, 818). 392. With respect to the latter development, Charles Cox, a graduate student at the University of Chicago in the late 1960s and early 1970s, recalled that “in addition to being a very good economist, he [Stigler] had a particular sense of humor that appealed to me. For example, I can remember him saying: ‘What’s wrong with Milton Friedman? Why is he so ineffective on changing policy?’” Cox recounted the fact that Stigler said that this raised the question, “Should we fire Milton? Or should we look at the way policy is for-

460 N o t es t o P a g es 3 4 2 – 3 4 6 mulated as having, you know, different goals than Milton seems to think?” (Charles Cox, interview, November 5, 2013). 393. See also the recollection of the conversation in McCloskey (1992, 689), in which the approximate date for the conversation is given as somewhat earlier (around 1968). Stigler himself pithily summarized the different perspectives of himself and Friedman as follows: “Milton’s out to save the world and I’m out to understand it” (Daily Mail, October 22, 1982). Stigler’s characterization, although accurately bringing out Friedman’s interest in advocating policy changes, was flawed by its failure to acknowledge Friedman’s large body of research output in positive economics. The quotation underscores a point that has been stressed repeatedly in this book: it would seem that Stigler from the early 1950s had little familiarity with Friedman’s research work, as distinct from his public policy activities. 394. Schwartz (1993, 209). For the relevant material in the Stigler talk under discussion, see especially Stigler (1975, 312, 319–21), and for an early discussion of the contrast between the Friedman and Stigler perspectives on advocating policy change, see Bordo and Landau (1986). And see R. D. Friedman (1977b, 26) on Friedman’s assessment. 395. Schwartz (1993, 207). 396. See Friedman’s remarks in Friedman and Friedman (1998, 357) as well as R. D. Friedman (1998). 397. From Friedman’s introduction, dated November 20, 1982, in Friedman (1983b, x). 398. Nerlove was a member of the University of Chicago’s Department of Economics from 1969 to 1974 (American Economic Association 1981, 305). 399. Friedman (1972d, ix). 400. Zecher was assistant professor in the University of Chicago’s Department of Economics from 1968 to 1973 (see https://​prabook​.com​/web​/joseph​_richard​.zecher​ /586927). 401. For his part, Paul Samuelson would offer a more qualified endorsement, stating that Friedman was the finest economic debater among those on his (that is, Friedman’s) side of the argument (New York Post, October 16, 1976, 27). 402. From Eisner’s July 31, 1975, testimony, in Joint Economic Committee (1975, 293). 403. R. D. Friedman (1976e, 32). 404. See Friedman (1977d). 405. Prior to 1972, Friedman had served as a referee frequently; cases include Chow (1966) (Gregory Chow, interview, July 1, 2013); Laidler (1966) (see chapter 12 above); and Dunn (1970) (see Dunn 1973, 259). Friedman also refereed an NBER paper version of Christopher Sims’s article “Money, Income, and Causality,” which did not proceed because the published version of the article (Sims 1972) was going to press (information from Christopher Sims). Gloria Valentine, Friedman’s secretary from January 1972 until his death in 2006, recalled little in the way of refereeing by Friedman over that whole period (Gloria Valentine, personal communication, May 15, 2013). Exceptions between 1972 and 1979 included Tavlas (1977b: see Tavlas 1998, 19). 406. See the previous chapter. 407. Friedman’s choice of class for his early-­1972 visit to the University of Hawaii had also reflected this orientation. The class he taught was an (undergraduate) elementary-­ economics course (R. D. Friedman 1977a, 24). 408. See Friedman and Robertson (1973). For the exchange in print that the two had in the 1950s (regarding decision theory), see Robertson (1954) and Friedman (1955c). 409. The quotations that follow come from the Nixon Presidential Library’s down-

N o t e t o P a g e 3 4 6   461 loadable recording of the December 13, 1972, Nixon/Friedman telephone conversation (https://​www​.nixonlibrary​.gov​/white​-­­house​-­­tapes​/34​/conversation​-0 ­­ 34​-­­065). 410. As well as saying this out of politeness, Friedman may have been expressing approval of the president’s Vietnam policy. Broadly speaking, as of late 1972, it looked as though a settlement was looming in which both North Vietnam and South Vietnam would be able to continue as separate states, à la the divisions of Korea and Germany. The ceasefire agreement announced in January 1973 seemed to confirm that such an arrangement would emerge.

Bibliography

This bibliography consists of two parts: a chronological listing of the media items (pieces in sound, television, newspaper, and magazine sources) that have been cited in this study, and a reference list, in alphabetical order, consisting of the research papers and books that have been cited.

I. Newspaper Articles, Periodical Articles, and Electronic Media Items Cited John McDonald. “The Economists.” Fortune, December 1950, 108–13, 126, 128, 131–32, 134–36, and 138. “The Boom-­Bust Cycle: How Well Have We Got It Tamed?” Business Week, November 3, 1956, 176–88. “Unemployment and Wages.” Financial Times (London), October 11, 1957, 3. Edith Kermit Roosevelt. “A Specialist on Theory of Earnings and Savings.” Newark Sunday News (New Jersey), February 22, 1959, magazine section, 12–14. John F. Kennedy appearance on Meet the Press, NBC July 10, 1960; NBC transcript, held by John F. Kennedy Presidential Library. Richard Hammer. “Will Trading Stamps Stick?” Fortune, August 1960, 116–19. (Reprinted in R. Clifton Andersen and Philip R. Cateora, eds., Marketing Insights: Selected Readings. New York: Appleton-­Century-­Crofts, 1963. 343–55.) “The Pragmatic Professor.” Time, March 3, 1961a, 18–22. “How Goes the Recession?” Time, March 3, 1961b, 20. Debate between Milton Friedman and Senator Joseph S. Clark (D-­PA). “The Role of Government in Our Society,” US Chamber of Commerce, Washington, DC, May 3, 1961. (Audiotape of debate held in Hoover Institution archives; information on date, title, and location of debate available in worldcat​.org and in coverage of the debate in afternoon editions of newspapers: UPI, “CoC Reviews Code of Ethics,” Philadelphia Inquirer, May 3, 1961; AP, “U.S. CoC Boos Clark: ‘Grow Up,’ He Retorts,” Philadelphia Evening Bulletin, May 3, 1961; and AP, “CoC Delegates Boo Democratic Senator’s Speech,” Racine Journal-­Times [WI], May 3, 1961, 1. A next-­day report also appeared as AP, “U.S. Chamber Group Raps Kennedy Plan, Boos Senator,” Abilene Reporter-­ News [TX], May 4, 1961, 12-­B.) “What Chronic Slack?” Business Week, May 6, 1961, 112–13 and 116. Milton Friedman. “Capitalism and Freedom: Why and How the Two Ideas Are Mutually Dependent.” Wall Street Journal, May 17, 1961, 16.

464 B i b l i o g r a p h y Milton Friedman. “The New Liberal’s Creed: Individual Freedom, Preserving Dissent Are Ultimate Goals.” Wall Street Journal, May 18, 1961, 14. Joseph R. Slevin. “Administration Fights Wage-Price Inflation: Management, Labor Are Urged to Hold Line by Self-­Discipline.” New York Herald Tribune, June 6, 1961, 33. First National City Bank of New York Monthly Economic Letter, September 1961. “Debate over Controls Begins.” Business Week, September 30, 1961, 84–86 and 90–94. “Economist Says Tariff Plan Bad: Dr. Friedman, in Emphasis Series, Says Cuts Would Reduce Free Trade.” Chattanooga Times (Tennessee), March 9, 1962, 21. “The Nation.” Time, April 27, 1962, 17. Milton Friedman. “An Alternative to Aid: An Economist Urges U.S. to Free Trade, End Grants of Money.” Wall Street Journal, April 30, 1962, 12. Milton Friedman. “Tariffs and the Common Market.” National Review, May 22, 1962, 363–64. Milton Friedman appearance on The American Economy, Lesson 41: How Important Is Money?, presented by Learning Resource Institute, cosponsored by American Economic Association and Joint Council on Economic Education; filmed for CBS College of the Air on June 4, 1962; broadcast on November 19, 1962. Milton Friedman and Paul A. Samuelson appearance on The American Economy, Lesson 48: Can We Have Full Employment without Inflation?, presented by Learning Resource Institute, cosponsored by American Economic Association and Joint Council on Economic Education; filmed for CBS College of the Air, circa June 5, 1962; broadcast on November 30, 1962. “Free Enterpriser—without Any Strings.” Business Week, October 6, 1962, 76–79. Paul A. Samuelson. “The Pause That Doesn’t Refresh.” Financial Times (London), October 8, 1962, 8 and 30. “A Tract for the Times: Capitalism and Freedom by Milton Friedman.” Economist (London), February 16, 1963, 611. “Monetarists and Structuralists.” Economist (London), April 6, 1963, 79. W. B. Meyer. “Cure for Inflation.” Economist (London), April 27, 1963, 299. “Universities: Return of a Giant.” Time, May 31, 1963, 38. “Theorizing for Goldwater?” Business Week, November 23, 1963, 106 and 108. Advertisement for A Monetary History of the United States, Wall Street Journal, November 26, 1963, 24. George Shea. “The Outlook: Appraisal of Current Trends in Business and Finance.” Wall Street Journal, December 2, 1963, 1. Chesly Many. “U.C. Economic Experts Advise Goldwater: Many to Aid Campaign of Conservative.” Chicago Tribune, April 12, 1964, 8. First National City Bank of New York Monthly Economic Newsletter, May 1964. “Friedman Cautions against Rights Bill.” Harvard Crimson (Cambridge, MA), May 5, 1964, 1. “The Fed Remodels Itself.” Business Week, May 16, 1964, 64–76. Milton Friedman. “Monetary Management.” Wall Street Journal, July 21, 1964, 14. Albert L. Kraus. “Economist Is Foe of U.S. Controls: Views of Chicago Educator Admired by Goldwater.” New York Times, July 26, 1964, F1 and F13. Our U.S. Correspondent. “The Economics of Barry Goldwater.” Financial Times (London), August 18, 1964, 6. “Transcript of Acceptance Speeches by Johnson and Humphrey at Atlantic City.” New York Times, August 28, 1964, 12.

B i b l i o g r a p h y   465 AP. “Nutter Seen as Choice of Goldwater.” Christian Science Monitor, September 4, 1964, 10. Frank C. Porter. “Blunt Views from a Barry Aide: Everybody May Talk about Free Enterprise, but Hardly Anyone Wants It, He Says.” Washington Post, September 11, 1964, A10. David R. Francis. “The Economic Scene: Goldwater’s Bark Called Further Right Than His Bite.” Christian Science Monitor, September 28, 1964, 10. “Academic Economists Attend Conference at Princeton.” Banking: Journal of the American Bankers Association 57, no. 4 (October 1964): 116 and 118. Milton Friedman. “The Goldwater View of Economics.” New York Times (New York Times Magazine section), October 11, 1964, 35 and 133–37. Michael T. Gengler. “Calling the Kettle Black: Friedman Says Faculty Attitude towards Goldwater Is ‘Illiberal.’” Columbia Daily Spectator (New York), October 22, 1964, 1 and 3. Andrew Sinclair. “None Dare Call It Reason.” Guardian (London and Manchester, UK), October 27, 1964, 10. Robert M. Solow. “Friedman on America’s Money.” Banker (London) 114, no. 465 (November 1964): 710–13 and 715–17. Lawrence Bollen. “Interview with Milton Friedman: Goldwater Economic Advisor Attacks ‘Extra-­Legal’ Pressures and Social Security.” Columbia Owl (New York), November 25, 1964, 1 and 4. Henry Brandon. “Pupil into Teacher: The Economic Education of President Kennedy.” Sunday Times (London), June 20, 1965, 27. Sylvia Porter. “Your Money’s Worth: Buying Power of U.S. Dollar Holding Up Well, Thank You!” Morning Herald (Hagerstown, MD), June 21, 1965, 26. Milton Friedman. “Social Responsibility: A Subversive Doctrine.” National Review, August 24, 1965, 721–23. Our Own Correspondent. “Wall St. Active on U.S. Bank Rate Rise: Johnson Sends for Federal Reserve Chairman.” Financial Times (London), December 7, 1965, 1. David M. Grebler. “Rate Hike Hailed by Top Economist; Dr. Milton Friedman Criticizes Johnson Methods to Curb Inflation.” St. Louis Globe-­Democrat, December 9, 1965, 7A. Austin C. Wehrwein. “Economist Says Negative Tax Should Replace All Poverty Aid.” New York Times, December 19, 1965a, 41. “Under a Negative Tax, Poor Would Get Cash.” New York Times, December 19, 1965b, 41. “‘We Are All Keynesians Now.’” Time, December 31, 1965, 64–67B. Paul Bareau. “The Economic Scene.” Journal of the Institute of Bankers (London), February 1966, 7–12. Milton Friedman. “Friedman and Keynes.” Time, February 4, 1966, 13. Milton Friedman. “Mr. Friedman’s Negative Tax.” Wall Street Journal, February 15, 1966, 16. “Chicago U Alumni to Hear Professor.” Detroit News, February 16, 1966, 15A. Hobart Rowen. “Poll of Economists Favors Prompt Tax Boost.” Washington Post, March 10, 1966, G1. “‘The Coming Period of Inflation Won’t Get Out of Hand’: Interview with Milton Friedman.” U.S. News and World Report, April 4, 1966, 63–64. “Economists Report Guideposts Are Ineffective against Inflation.” New York Times, April 29, 1966, 1 and 59. “Quotable.” Chicago Tribune, May 8, 1966, G5.

466 B i b l i o g r a p h y Editorial, “What Would You Do?” Wall Street Journal, May 10, 1966, 18. Milton Friedman and Leon Keyserling appearance on The Great Society: The Sizzling Economy, NET (National Educational Television), June 27, 1966. Milton Friedman. “Why Does the Free Market Have Such a Bad Press?” Human Events, July 2, 1966, 8 and 14. Press-­Chicago News Wire. “Ike’s Economist Opposes Tax Hike, Investment Credit.” Cleveland Press, August 2, 1966, B5. “Is Money Tight—or Isn’t It?” Business Week, August 6, 1966, 96. “Samuelson and Friedman to Write for Newsweek.” New York Times, September 4, 1966, 111. Advertisement for Guidelines in Wall Street Journal, September 7, 1966, 7. Paul A. Samuelson. “Science and Stocks.” Newsweek, September 19, 1966, 92. Milton Friedman. “Minimum-­Wage Rates.” Newsweek, September 26, 1966, 96. Milton Friedman. “Inflationary Recession.” Newsweek, October 17, 1966, 92. Richard L. Strout. “Jiggle That Jolted Economists.” Christian Science Monitor, December 19, 1966, 1 and 7. Milton Friedman. “Friedman on U.S. Monetary and Fiscal Policy.” Banker (London) 117, no. 491 (January 1967): 68–70. Milton Friedman. “Current Monetary Policy.” Newsweek, January 9, 1967, 59. Milton Friedman. “Higher Taxes? No.” Newsweek, January 23, 1967, 86. UPI. “Economist Predicts Recession.” Lodi News-­Sentinel (CA), February 10, 1967, 3. Paul A. Samuelson. “Social Security.” Newsweek, February 13, 1967, 88. Milton Friedman. “The Case for the Negative Income Tax.” National Review, March 7, 1967, 239–40. (Reprinted in Haring 1972, 60–62.) Milton Friedman. “Myths That Keep People Hungry.” Harper’s Magazine, April 1967, 16–24. Milton Friedman. “Social Security.” Newsweek, April 3, 1967, 81. Henry C. Wallich. “Magic Numbers.” Newsweek, April 10, 1967, 82. “Economics: What Happens When Fed Changes Its Tune?” Business Week, April 15, 1967, 188, 190, and 192. James Tobin. “Tobin Attacks Friedman’s Theories of Money Supply.” Washington Post, April 16, 1967, G1–­G2. Milton Friedman. “A Dollar Is a Dollar.” Newsweek, May 15, 1967, 86. Richard T. Cooper. “U.S. Economy: Can It Be Managed?” Kingsport News (TN), May 18, 1967, 6-­C. Harvey H. Segal. “Free versus Fixed: Economists Debate Exchange Rate Role.” Washington Post, May 19, 1967, D9. “Central Banking and Interest Rates.” First National City Bank Monthly Letter, June 1967, 63–65. John Davenport. “The Radical Economics of Milton Friedman.” Fortune, June 1, 1967, 131–32, 147–48, 150, and 154. Milton Friedman. “Auto-­Safety Standards.” Newsweek, June 5, 1967, 80. Milton Friedman. “Fiscal Responsibility.” Newsweek, August 7, 1967, 68. “Is a Money Crunch on Its Way?” Business Week, September 30, 1967, 35–36. James Tobin. “Tobin: Case for Tax Increase Simple, Powerful.” Washington Post, October 8, 1967, F1. “Why Does More Money Mean Higher Interest?” Business Week, October 14, 1967, 134–36.

B i b l i o g r a p h y   467 Milton Friedman. “Current Monetary Policy.” Newsweek, October 30, 1967, 80. Milton Friedman. “Taxes, Money and Stabilization.” Washington Post, November 5, 1967, H1 and H3. Alfred L. Malabre Jr. “The New Confusion: More Analysts Question Some Basic Concepts of the ‘New Economics.’” Wall Street Journal, November 17, 1967, 1 and 15. “Maverick in the Fed System.” Business Week, November 18, 1967, 128–29, 132, and 134. Milton Friedman. “The Price of Gold.” Newsweek, January 1, 1968, 51. Milton Friedman appearance on Firing Line, syndicated, episode “The Economic Crisis,” January 8, 1968; transcript available on Hoover Institution website. “Webs, NET to Carry State of Union Talk.” Newsday (Long Island, NY), January 12, 1968, 2A. Milton Friedman appearance on State of the Union/’68, National Education Television (NET), January 17, 1968; NET transcript. Milton Friedman. “The Price of the Dollar.” Newsweek, January 29, 1968, 72. Gerald R. Rosen. “Has the New Economics Failed? An Interview with Milton Friedman.” Dun’s Review, February 1968, 38–39, 92–94, and 96. Milton Friedman. “The Gold Requirement.” Newsweek, February 19, 1968, 78. “3 Profs. Cite Good, Bad in Riot Report.” Chicago Tribune, March 3, 1968, 1–2. Milton Friedman appearance on National Educational Television’s Great Decisions 1968 #7: The Dollar in Danger, broadcast Washington, DC, March 17, 1968, WETA/channel 26; NET transcript. Rob Warden. “Friedman: Knight of Economic Chessboard.” Chicago Daily News, March 26, 1968, 37 and 39. Milton Friedman. “Gold Clichés.” Newsweek, April 1, 1968, 83. Milton Friedman. “Floating Dollars.” Wall Street Journal, May 8, 1968, 16. Milton Friedman. “Monetary Policy.” Newsweek, June 3, 1968, 85. Milton Friedman. “Politics and Violence.” Newsweek, June 24, 1968, 90. Louis Dombrowski. “Ask Money Supply Equal to Growth Rate.” Chicago Tribune, July 5, 1968, C8. Milton Friedman. “Customers Go Home.” Newsweek, August 26, 1968, 75. Milton Friedman. “Negative Income Tax—1.” Newsweek, September 16, 1968, 86. Scripps-­Howard Newspapers. “Tax Boost Fails to Slow Inflation.” Cleveland Press, September 21, 1968, A1. Instructional Dynamics Economics Cassettes (audiotaped series of commentaries by Friedman), various dates October 1968–­December 1978. Most tapes available in digitized form on Hoover Institution website. Instructional Dynamics Economics Cassettes (Paul Samuelson series) (audiotaped series of commentaries by Paul A. Samuelson), various dates October 1968–­October 1977. Milton Friedman. “Negative Income Tax—II.” Newsweek, October 7, 1968, 92. “Friedman’s Hard Line: U.S. Controls over Business Challenged by Nixon Adviser.” St. Louis Post-­Dispatch, November 11, 1968, 5B. “Hard or Soft Money?” Newsday (Long Island, NY), November 15, 1968, 96. Milton Friedman. “After the New Economics.” Newsweek, December 9, 1968, 83. “Neighbors in the News.” Hyde Park Herald (IL), January 1, 1969, 9. “The New Attack on Keynesian Economics.” Time, January 10, 1969, 64–65. Milton Friedman appearance on The Nixon Administration, WNET, January 10, 1969. Milton Friedman. “The Inflationary Fed.” Newsweek, January 20, 1969, 78.

468 B i b l i o g r a p h y “Inflation Crackdown Begins: ‘Trying to Slow the Economy’; Exclusive Interview with George W. Mitchell, Member, Federal Reserve Board.” U.S. News and World Report, January 20, 1969, 25–28. Milton Friedman and Walter W. Heller appearance on State of the Union, WNET, January 20, 1969. “Charge Plot by Radicals to Hurt U.C.: 2 Profs Discuss Sit-­In Goal.” Chicago Tribune, February 6, 1969, 3. J. A. Livingston. “Business Outlook: Federal Reserve Isn’t Out to Crunch US Economy.” Milwaukee Journal, February 16, 1969, sec. 4, p. 12. Glen Elsasser. “Prefers Slow Inflation Fight.” Chicago Tribune, February 24, 1969, 16. AP. “FRB Rapped for Inflationary Policy.” Milwaukee Journal, February 25, 1969, part 2, p. 18. John E. Bryan. “Chicago Expert Puts Money Back in Style.” Plain Dealer (Cleveland), February 28, 1969, 1 and 7. William Clark. “Sunday Comment.” Chicago Tribune, March 2, 1969, C9. “Ask Them Yourself.” Family Weekly, March 16, 1969, 2; published as a supplement in Sarasota Herald-­Tribune (FL), March 16, 1969. Milton Friedman. “Exchange Controls.” Newsweek, March 24, 1969, 75. Moshe Ater. “Noted Economist Milton Friedman’s Advice to Israel: Stop Bothering about Exchange Rates.” Jerusalem Post, March 25, 1969, 10. Edson B. Smith. “The Investor.” Boston Herald Traveler, March 28, 1969, 32. Paul A. Samuelson. “Investment Tax Credit.” Newsweek, March 31, 1969, 76. Milton Friedman appearance on Speaking Freely, NBC television (WNBC, New York), taped April 4, 1969, broadcast May 4, 1969; WNBC transcript. Milton Friedman. “Invisible Occupation.” Newsweek, May 5, 1969, 94. AP. “U.S. Economists Hopeful about Attack on Inflation.” Milwaukee Journal, May 15, 1969, part 2, p. 22. Albert L. Kraus. “A Dollar Standard? If U.S. Severs Its Gold Ties, Europe Must Accept the Fact or Go It Alone.” New York Times, May 21, 1969, 59 and 70. Milton Friedman and Paul A. Samuelson appearance on The Great Economics Debate, PBS (Boston station WGBH), May 22, 1969 (listed in “TV Highlights Today,” Boston Globe, May 22, 1969, 61). (This was a live transmission of the Friedman/Samuelson seminar dialogue “Old, New, and Correct Economics,” in the Karl Compton Lecture Series, Kresge Auditorium, Massachusetts Institute of Technology.) Milton Friedman. “Money and Inflation.” Newsweek, May 26, 1969, 105. Milton Friedman. “Book Burning, FCC Style.” Newsweek, June 16, 1969, 86. John M. Lee. “Banker Warns of Money Crisis.” New York Times, June 17, 1969, 59. Clyde H. Farnsworth. “Fiscal Prospect Worries Bankers: Denmark Meeting Points Up Possibility of Slowdown.” New York Times, June 22, 1969, 13. Paul A. Samuelson. “Inflationary Slowdown.” Newsweek, June 23, 1969, 86. “The Nation’s Biggest Danger—as Seen by Arthur Burns, Adviser to Nixon on Domestic Problems.” U.S. News and World Report, July 14, 1969, 60–65. “Nixon Rules Out Wage-­Price Controls.” Washington Post, July 17, 1969, A2. “The Great Iconoclast Has a Shocking Answer.” Business Week, July 19, 1969, 82. “Marketing: Taped Newsletters Sound Off.” Business Week, July 26, 1969, 58. Richard D. James. “Two Noted Economists Stage Running Debate via Tape Recordings: Views of Friedman, Samuelson Sell for $175 for 20 Tapes; Other Experts to Be Offered.” Wall Street Journal, July 28, 1969, 1 and 15.

B i b l i o g r a p h y   469 Milton Friedman. “Monetary Overkill.” Newsweek, August 18, 1969, 75. Milton Friedman. “Spending Slowdown.” New York Times, August 21, 1969, 40. Albert L. Kraus. “‘Mini-­recession’ Seen.” Dominion Post (Morganstown, WV), August 24, 1969, 3D. H. Erich Heinemann. “Monetarists Hold Sway: Keynesians Are Out.” Edwardsville Intelligencer (IL), August 25, 1969, 4. Milton Friedman. “The Obsolete SDR’s.” Newsweek, September 8, 1969, 76. UPI. “Inflation Curbs Working, but Tight Money Stays.” Los Angeles Herald-­Examiner, October 11, 1969, B9. Hobart Rowen. “Heller Raps ‘Jawboning Nixonomics.’” Washington Post, October 21, 1969, A4. Alfred L. Malabre Jr. “Influential Economist: Milton Friedman’s Ideas Gain Wider Acceptance among Policy-­Makers.” Wall Street Journal, November 4, 1969, 1 and 15. “Economist Sees Cut in Interest Rates Soon.” Daily News (New York), November 7, 1969, 54. William Mathewson (AP). “Friedman Forecasts Interest Rate Decline.” St. Petersburg Times (FL), November 7, 1969, 6C. AP. “Stock Prices Extend Gains; Trading Quiet.” Evening Star (Washington, DC), November 7, 1969, E-­3. Don Campbell. “Recession Feared by Nixon Adviser.” Arizona Republic, November 24, 1969, A1. “‘Through the Windshield’: Nixon Adviser Warns of Severe Recession.” Phoenix Gazette (AZ), November 24, 1969, 26. AP. “Stock Prices Widen Losses; Trading Quiet.” Evening Star (Washington, DC), November 24, 1969, A-­17. Ernest A. Schonberger. “Inside the Market: Economists Paint Dark Picture for Next Year.” Los Angeles Times, November 25, 1969, C14. Milton Friedman. “How to Free TV.” Newsweek, December 1, 1969, 82. Frank W. Corrigan. “Business Isn’t Buying Nixon’s Inflation Plan.” Newsday (Long Island, NY), December 3, 1969, 68. Roy F. Harrod. “Keynes: The Arrested Revolution.” New Statesman (London) 78, no. 2021 (December 5, 1969): 808–10. Milton Friedman. “Gradualism.” Wall Street Journal, December 8, 1969, 22. Hobart Rowen. “Money Managers Split on Monetary Policy: Minority Feel It’s Too Tight.” Washington Post, December 9, 1969, D7. (Also appeared as Hobart Rowen, “Basic Split Emerges in FOMC over Federal Reserve Policy,” Greeley Tribune [CO], December 11, 1969, 26.) Washington Post Staff Writer. “Economists Differ over Recession.” Washington Post, December 10, 1969, 78. “Fed Official Hints Even Tighter Curbs to Control Inflation.” Los Angeles Times, December 11, 1969, 15 and 17. The Great Dollar Robbery: Can We Arrest Inflation?, ABC television news special, December 15, 1969. “The Intellectual Provocateur.” Time, December 19, 1969a, 71. “The Rising Risk of Recession.” Time, December 19, 1969b, 66–70 and 72. Milton Friedman. “Economic Perspective.” Newsweek, December 22, 1969, 75. Paul A. Samuelson. “Love.” Newsweek, December 29, 1969, 52.

470 B i b l i o g r a p h y Prudence Brown. “Their New Year’s Resolutions.” Newsday (Long Island, NY), January 3, 1970, 32. Dennis Duggan. “The Economists: Philosopher-­Kings or Faddists?” Newsday (Long Island, NY), January 5, 1970, 68. “Transcript of Remarks of Secretary of Labor Shultz at Labor Department Press Conference [January 6, 1970].” Daily Labor Review (Bureau of National Affairs, Washington, DC), January 7, 1970, E-­1 to E-­9. Associated Press. “Shultz Feels Tight Money Gone Too Far.” Dallas Morning News, January 7, 1970, 1A. John Graham. “Shultz Calls on Fed to Relax Monetary Policy.” Financial Times (London), January 8, 1970, 5. “Ask the Economist?” Economist (London), January 10, 1970, 43. Lee M. Cohn. “Credit Easing Tied to Budget.” Evening Star (Washington, DC), January 11, 1970, A1 and A6. “Arthur Burns on Easier Credit . . . Business in ’70.” U.S. News and World Report, January 12, 1970, 56. “Cost of Living Spurts: Food and Housing Prices Rise Sharply in December to Make Year Most Inflationary 12 Months since 1951, the Bureau of Labor Statistics Reports.” Kansas City Times, January 20, 1970, 1. Milton Friedman appearance on State of the Union/’70, broadcast on WNET, January 22, 1970; WNET transcript. Milton Viorst. “Friedmanism, n[oun]. Doctrine of Most Audacious U.S. Economist, Esp. Theory ‘Only Money Matters.’” New York Times (New York Times Magazine section), January 25, 1970, 22–23, 80, and 82–84. Harvey D. Shapiro. “The Chicago School: Apostles of the Money Supply.” Institutional Investor 4, no. 2 (February 1970): 36, 39, 40, 130, 134, and 136. “A Look at a Problem Which Concerns All of Us—Our Decaying Environment.” Chicago Tribune, February 1, 1970, A1. Milton Friedman. “A New Chairman at the Fed.” Newsweek, February 2, 1970, 68. Barry Goldwater. “Capitol Notes: Get-­Tough Policy for Domestic Ills.” Arizona Republic (Phoenix), February 3, 1970, A6. “America’s Inflationary Stagnation.” Economist (London), February 7, 1970, 56–57. Jacquin Sanders. “This Is Year of Boom or Bust . . . for Economist Milton Friedman If Not for Nation.” Arizona Republic, February 15, 1970, 22D. (Also appeared as Jacquin Sanders, “A Gloomy Outlook for ’70,” Today [Cocoa, FL], February 17, 1970, 4A; and Jacquin Sanders, “The Man of the Moment: Jersey-­Born Economist Rejects Many Fashionable Policies,” Courier-­Post [Camden, NJ], February 18, 1970, 18.) Louis Dombrowski. “Washington Finance: Burns Offers Views in Two Appearances.” Chicago Tribune, February 20, 1970, C10. Paul A. Samuelson. “Bleak Outlook.” Newsweek, March 2, 1970, 64. AP. “Friedman Warns of Overreaction.” Newsday, March 6, 1970, 84. (Also appeared as AP, “Warns Money Easing Could Fan Inflation,” Chicago Tribune, March 6, 1970, C9.) Paul S. Nadler. “Regulation Q and Credit Control.” Bankers’ Magazine (Boston) 153, no. 2 (Spring 1970): 17–25. Peter Malken. “Hysterics Won’t Clean Up Pollution: Economist Milton Friedman Appraises an Old Problem and the Cost of Solving It.” Chicago Tribune, magazine section, April 12, 1970, 66–67, 69, 71–72, 77, 80, and 82.

B i b l i o g r a p h y   471 A. Joseph Newman. “Economist Friedman Says: Unemployment at 6% a Possibility in 1970.” Philadelphia Sunday Bulletin, April 26, 1970, sec. 1, p. 36. Milton Friedman appearance on NBC Nightly News, April 28, 1970; also syndicated by Reuters Television, April 29, 1970. Milton Friedman. “Welfare: Back to the Drawing Board.” Newsweek, May 18, 1970, 89. “End of Inflation?” Newsday (Long Island, NY), May 25, 1970, 72. Vera Glaser. “Economist Hits Burns on Inflation Plan.” Philadelphia Inquirer, May 29, 1970. (Also appeared as Vera Glaser [Times-­Miami Herald Service], “Income Policy Splits Friedman and Burns,” St. Petersburg Times [FL], May 29, 1970, 6C.) Milton Friedman. “We Must Stand Firm against Inflation.” Reader’s Digest, June 1970, 202–4 and 206. Hobart Rowen. “Too Much Big Talk about the Economy?” Washington Post, June 2, 1970, A18. Reuters. “Friedman Expecting New Money Rein by the Reserve.” New York Times, June 11, 1970, 65. “Chronic Inflation Is Predicted If Unemployment Is Reduced.” Evening Star (Washington, DC), June 11, 1970, A-­4. “Low Unemployment or Stable Prices? Can’t Have Both, Economist Says.” Kansas City Star, June 12, 1970, 20. Kenneth McKenna. “Fed Must Curtail Money Supply, Economist Warns.” Daily News (New York), June 12, 1970, 50. Peter S. Nagan. “Professor Finds Economy Trapped: Inflation-­Unemployment Dilemma Raised.” St. Louis Globe-­Democrat, June 13, 1970. Milton Friedman. “Burns and Guidelines.” Newsweek, June 15, 1970, 86. “Nixon’s Plan: Jeers and Cheers.” Newsday (Long Island, NY), June 18, 1970, 96. Milton Friedman appearance on Meet the Press, NBC, June 28, 1970; NBC transcript. Wire Services. “U.S. Spending Is Too High, Adviser Says.” Philadelphia Inquirer, June 29, 1970, 1. John Maclean. “Friedman Views Inflation Curbs: Fewer Jobs, Product Dip Called Vital.” Chicago Tribune, June 29, 1970, E7. H. Erich Heinemann. “Milton and Anna: Book Two—Friedman Publishes Volume 2.” New York Times, July 12, 1970, sec. 3, pp. 1 and 13. Lee M. Cohn. “Treasury Secretary Asks Easier Money.” Evening Star (Washington, DC), July 16, 1970, A-­4 . Rob Warden. “What Really Causes Inflation? Milton Friedman, Top White House Adviser, Puts the Blame on Washington and Nowhere Else.” Chicago Daily News, July 29, 1970, 3–4. Derryn Hinch. “Smokestacks That ‘Smell Like Jobs’: Pollution Backlash Divides Americans.” Sun-­Herald (Sydney), August 16, 1970, 94 and 104. Karl Brunner. “Controlling the Money Supply.” The Times (London), September 7, 1970, 19. Milton Friedman. “Welfare Reform Again.” Newsweek, September 7, 1970, 70. Milton Friedman. “A Friedman Doctrine—the Social Responsibility of Business Is to Increase Its Profits.” New York Times (New York Times Magazine section), September 13, 1970, 32–33, 122, and 124. (Reprinted under the title “Social Responsibility of Business” in Friedman 1972d, 177–84.) “Miscellany: Freedom Fighter.” Guardian (London and Manchester, UK), September 17, 1970, 19.

472 B i b l i o g r a p h y Milton Friedman. “Inflation and Wages.” Newsweek, September 28, 1970, 77. Milton Friedman. “Set the Dollar Free.” Newsweek, October 19, 1970, 98. Milton Friedman. “Paul Samuelson.” Newsweek, November 9, 1970, 80. Milton Friedman and Paul A. Samuelson joint appearance on Blue Christmas? An Inquiry into the State of the Economy, CBS television news special, December 1, 1970. Studs Turkel. “Hard Times, 1970: An Oral History of the Recession.” New York Times (New York Times Magazine section), December 20, 1970, 10, 46–51, and 54. Paul A. Samuelson. “Love That Corporation.” New York Times, December 26, 1970, 17. (Reprinted in Samuelson 1973b, 246–48.) Penny Brown and Clarence Newman. “‘If I Were President Nixon, I’d. . . .’” Newsday (Long Island, NY), January 2, 1971, 3W. Milton Friedman appearance on The Advocates, PBS television, WGBH Boston, January 5, 1971. Reuters. “Nixon Reportedly Says He Is Now a Keynesian.” New York Times, January 7, 1971, 19. AP. “Nixon Quote: ‘I’m Now a Keynesian.’” Chicago Tribune, January 8, 1971, 1. William F. Buckley Jr. “The Fight for Price Controls.” Delta Democrat-­Times (Greenville, MS), January 8, 1971, 4. Nick Poulos. “Milton Friedman Sees Nixon Quote on Keynes as Rib.” Chicago Tribune, January 9, 1971, E7. Milton Friedman. “Imitating Failure.” Newsweek, January 11, 1971, 72. Paul A. Samuelson. “Milton Friedman Is Wrong—So Wrong.” Sunday Telegraph (London), January 24, 1971, 19–20. “Milton Friedman: An Oracle Besieged.” Time, February 1, 1971, 72. “Friedman Hits Big Budget, Money Expansion Policy.” Daily News (New York), February 3, 1971, 50. Paul A. Samuelson. “The Two Nixons.” Newsweek, February 8, 1971, 84. Service of the Chicago Daily News. “Economist, Businessman Clash on Responsibility.” Kansas City Star, February 9, 1971, 11. Milton Friedman. “Needed—More of the Same.” Newsweek, February 15, 1971, 58. Jesse Glasgow. “Friedman Expects Rapid Growth Soon.” Evening Sun (Baltimore), February 19, 1971, C7. Rowland Evans and Robert Novak. “On to Controls: Shultz Is Wage-­Price Loser.” Omaha World-­Herald, February 24, 1971, 10. Milton Friedman. “Money—Tight or Easy?” Newsweek, March 1, 1971, 80. “Conversations at Chicago: ‘Milton Friedman Discusses the Social Responsibility of the Corporate Structure.’” Wisconsin WHA radio program broadcast March 8, 1971; listed in “Monday’s Features,” Capital Times (WI), March 6, 1971, 3. Ray De Crane. “Friedman Urges a ‘Go-­Easy’ in Growth of Money Supply.” Cleveland Press, March 8, 1971, B8. Brian Bragg. “Friedman Warns against Rapid Expansion.” Detroit Free Press, March 9, 1971, 3B. John E. Bryan. “Zero Inflation Called Possible for Future.” Plain Dealer (Cleveland), March 9, 1971, 5-­A. “Saturday Selections.” Plain Dealer (Cleveland), March 13, 1971, 5-­A. Joseph Newman Jr. “Economist Friedman Offers Advice on Bonds, Elections, and the Making of Money.” Philadelphia Sunday Bulletin, April 25, 1971, sec. 2, p. 10. Special to the American Banker. “Friedman Labels Fed Monetary Policy ‘Inept.’” American Banker, April 27, 1971, 3.

B i b l i o g r a p h y   473 Milton Friedman. “Money Explodes.” Newsweek, May 3, 1971, 81. Warren Moulds. “U.S. Goal Is Growth without Inflation.” Chicago Today, May 10, 1971, 23 and 26. Television listings, Los Angeles Times, May 10, 1971, E17. Milton Friedman. “Friedman’s Credo: Optimism.” Chicago Today, May 12, 1971, 23. Dow Jones Service. “Milton Friedman Sees Rekindling of High Inflation.” Philadelphia Evening Bulletin, June 4, 1971, 23. Alfred Malabre Jr. and Richard Martin. “Inflation Paradox: Concern about Prices Spreads Despite Easing in Amount of Increases.” Wall Street Journal, June 10, 1971, 1 and 33. Milton Friedman. “Truth in Advertising.” Newsweek, June 14, 1971, 88. “Seeking Muscle for a Flabby Recovery.” Time, June 14, 1971, 104. Milton Friedman. “Which Crystal Ball?” Newsweek, July 5, 1971, 62. Milton Friedman. “Steady as You Go.” Newsweek, July 26, 1971, 62. Paul A. Samuelson. “Plague and Problem of Monetarism.” Washington Post, August 1, 1971, “Business” section, E1. Paul A. Samuelson. “Nixon Economics.” Newsweek, August 2, 1971, 70. Reuters. “Friedman Differs with Reuss Panel: Says Unilateral Devaluing of Dollar Won’t Work—Roosa Calls Move Impractical.” New York Times, August 11, 1971, 49 and 54. Nick Poulos. “Friedman Declares Freeze Won’t Work.” Chicago Tribune, August 16, 1971, 1 and 5. Arthur Greenspan. “Leading Economists View Nixon Freeze.” New York Post, August 16, 1971, 5 and 39. AP. “Most Economists Favor Nixon Economic Steps; Some Are Critical.” Louisville Courier-­Journal (KY), August 16, 1971, 2. AP and UPI. “Economists Like Nixon Plans, Some Grumble at Details.” Detroit Free Press, August 16, 1971, 9A. Robert D. Hershey Jr. (“New York Times News Service”). “Domestic Initiatives ‘Leap Forward into Realism.’” Hutchinson News (Kansas), August 17, 1971, 4. Charles J. Elia. “Economic Plan Is Praised Here, Not Abroad.” Daily News, August 17, 1971, 38. Milton Friedman and Paul A. Samuelson appearances on ABC Evening News, August 17, 1971. Frank W. Corrigan. “The Future: Experts See Some Form of Wage Controls Continuing Longer Than Nixon’s 90 Days.” Newsday (Long Island, NY), August 18, 1971, 5. “Dollar Crisis: What the Experts Think.” Sunday Telegraph (London), August 22, 1971, 19 and 21. AP. “Opinions Voiced: U.S. Economic Experts Differ.” Dallas Times-­Herald, August 22, 1971, B10. “Friedman Fears Credit Ease, More Inflation.” American Banker, August 23, 1971, 1 and 8. H. Erich Heinemann. “Analysts Hail Nixon Move: Economists Appear Mostly Bullish on Policy’s Impact.” New York Times, August 23, 1971, 43–44. Milton Friedman. “Why the Freeze Is a Mistake.” Newsweek, August 30, 1971, 22–23. TRB. “Nixon’s Aides Left Awash by Strong Shifting Winds.” Sun (Baltimore), September 4, 1971, A15. Paul A. Samuelson. “Blood.” Newsweek, September 13, 1971, 94. UPI. “Bretton Woods System Is Dead, Friedman Says.” Japan Times, September 24, 1971, 13.

474 B i b l i o g r a p h y Milton Friedman. “Last Readings on the Old Game Plan.” Newsweek, September 27, 1971, 95. Milton Friedman. “Will the Kettle Explode?” Newsweek, October 18, 1971, 30. Alfred L. Malabre Jr. “Heard on the Street.” Wall Street Journal, October 22, 1971, 29. “Business and Finance: Who’s at the Controls?” Newsweek, October 25, 1971, 87–88. Milton Friedman. “Morality and Controls: I.” New York Times, October 28, 1971, 41. Milton Friedman. “Morality and Controls: II.” New York Times, October 29, 1971, 41. James Tobin. “Administration’s Gamble with Nation’s Economy.” Washington Post, October 31, 1971, F1 and F3. William Brown. “Loss of Confidence Stalls Expansion Plans: Friedman.” Daily News (New York), November 11, 1971, 80. “The Economists Have Second Thoughts.” Business Week, November 13, 1971, 110. Lou Schneider. “Trade Winds: Inflation Resurgence Probable in Late ’72.” Manchester Union-­Leader (NH), November 17, 1971, 13. “Friedman Likes Nixon’s Economics—If It’s Abroad.” St. Petersburg Times (FL), November 17, 1971, 17B. “Billboard Album Reviews.” Billboard, November 20, 1971, 70. Herbert Bratter. “Washington Finance: View from Treasury Now—Exclusive Interview with [Undersecretary of the Treasury] Charls E. Walker.” Banker’s Monthly, December 15, 1971, 10–11. AP. “Text of Group of Ten Communique.” Sun (Baltimore), December 19, 1971, A3. Milton Friedman. “Keep the Dollar Free.” Newsweek, December 20, 1971, 83. Edwin L. Dale Jr. “McCracken Sees More Controls: Predicts Continuing Government Role after Phase 2.” New York Times, December 31, 1971, 5. UPI. “Leaders Help Dig Business Grave.” Sarasota Journal, January 5, 1972, 2A. Milton Friedman appearance on Firing Line, PBS, episode “American Conservatives Confront 1972,” PBS, taped January 5, 1972, broadcast January 7, 1972; PBS transcript, available on Hoover Institution website. Milton Friedman. “Irresponsible Monetary Policy.” Newsweek, January 10, 1972, 57. Kit Smith. “As Visiting Economist Sees It . . . Controls Are Curtailing Economic Recovery.” Honolulu Advertiser, January 11, 1972, A4. Thomas Oliphant. “Whatever Happened to Monetarism?” Boston Sunday Globe, January 16, 1972, A84. Brian Bragg. “‘Super Bear’ Shows His Claws.” Detroit Free Press, January 23, 1972, 3F. Milton Friedman, Paul A. Samuelson, and Henry C. Wallich. “Three Views of Nixon­ omics and Where It Leads [panel Q&A].” Newsweek, January 31, 1972a, 74–75. Anna J. Schwartz. “Time Out, Time In.” Newsweek, January 31, 1972b, 5. Milton Friedman. “The Case for a Monetary Rule.” Newsweek, February 7, 1972, 67. Paul Lewis. “U.S. Bank Forecasts More Gloom on Unemployment.” Financial Times (London), February 22, 1972, 5. Milton Friedman. “Homogenized Schools.” Newsweek, February 28, 1972, 77. Gerry Keir. “Money Not Going to Poor: Top Economist Scores Policymakers.” Honolulu Register, March 9, 1972, A6. Kit Smith. “Economist Predicts ’73 ‘Crisis’: Walkout Seen as Boon for Nixon.” Honolulu Advertiser, March 24, 1972, A11. John McClaughry. “Milton Friedman Responds: A Business and Society Review Interview.” Business and Society Review 1, no. 1 (Spring 1972): 5–16. (Excerpted in Friedman 1975e, 240–56.)

B i b l i o g r a p h y   475 “Friedman Predicts U.S. Economic Boom.” Japan Times, April 15, 1972, 5. David Crane. “Some Monetary Reforms Won’t Work, Bankers Told.” Toronto Star, May 11, 1972, 44. Joseph A. Slevin. “Inside the Economy: Shultz Not a Treasury Man.” Sunday Sun (Baltimore), May 21, 1972, K7. Milton Friedman. “Controls: An Exercise in Futility.” Newsweek, May 22, 1972, 86. Joseph Egelhof. “‘Great Debate’ Needles Flash.” Chicago Tribune, May 24, 1972, G7 and G10. “Nominee Testifies: Federal Budget ‘Discipline’ Urged by Shultz before Tax-­Boost Plans.” Wall Street Journal, May 26, 1972, 3. George Wheeler. “Wheeler’s Wall Street: The First Round Went to Friedman on Points, Though Rinfret Had Some, Too.” Newsday (Long Island, NY), May 28, 1972, 46. Frank Corrigan. “Laurel in Hardy’s Shoes.” Guardian (London and Manchester, UK), June 13, 1972, 12. Robert Reinhold. “Scholars Starting to Advise McGovern.” New York Times, June 18, 1972, 28. Bruce Handler (AP). “Burns Predicts 2 1/2 Pct. Inflation by End of Year.” St. Louis Globe-­ Democrat, July 5, 1972, 6C. “Liberal Economists Warn Congress.” Evening Star (Washington, DC), July 27, 1972, A4. Paul A. Samuelson. “Frank Knight, 1885–1972.” Newsweek, July 31, 1972, 55. John F. Burby. “Economic Advisers.” National Journal, August 12, 1972, 1279–81. John Chamberlain. “Mont Pelerin Society Meets.” Evening Independent (St. Petersburg, FL), September 15, 1972, 20-­A. Milton Friedman. “Unrepentant Sinners.” Newsweek, September 25, 1972, 90. Reuters. “Friedman Asks Fed to Cut Money Growth.” American Banker, October 9, 1972, 3. Milton Friedman. “The Fed on the Spot.” Newsweek, October 16, 1972, 98. David O. Tyson. “Friedman and Mrs. Schwartz Find Velocity of Money Almost Identical in Both U.S., Britain.” American Banker, October 17, 1972, 3. Lindley H. Clark Jr. “The Outlook: Appraisal of Current Trends in Business and Finance.” Wall Street Journal, October 30, 1972, 1. Milton Friedman. “Can We Halt Leviathan?” Newsweek, November 6, 1972, 98. AP. “Economist Says Controls to Stay.” Kansas City Star, December 7, 1972, 2A. Milton Friedman. “Unemployment and Monetary Growth.” The Times (London), December 12, 1972, 17. Paul A. Samuelson. “The Right to Hoard Gold.” Newsweek, December 25, 1972, 67. “Friedman: Budget Deficit May Upset Money Policy.” National Journal, January 13, 1973, 57. Edwin L. Dale Jr. “The Security of Social Security: The Young Pay for the Old.” New York Times (New York Times Magazine section), January 14, 1973, 8–9, 40–41, 43, and 45. Michael Laurence and Geoffrey Norman. “Playboy Interview: Milton Friedman—a Candid Conversation in Which the Maverick Economist Advocates the Abolition of Welfare, Social Security and the Graduated Income Tax.” Playboy 28, no. 2 (February 1973): 51–54, 56, 58–60, 62, 64, 66, 68, and 74. (Reprinted in Friedman 1975e, 1–38, and Friedman 1983b, 9–59.) AP. “Social Security Bite Causes Few Complaints.” Evening Capital (Annapolis, MD), February 12, 1973, 5. Milton Friedman. “The Nixon Budget.” Newsweek, April 2, 1973, 82.

476 B i b l i o g r a p h y Lou Schneider. “Trade Winds: Loan Rate Climb Gaining Momentum.” Manchester Union-­Leader (NH), April 9, 1973, 14. “Is the Phillips Curve Losing Its Allure?” Business Week, April 28, 1973, 88–89. Milton Friedman. “‘Steady as You Go’ Revisited.” Newsweek, May 14, 1973, 100. “Book Briefs: The Samuelson Sampler.” Business Week, July 14, 1973, 12. Milton Friedman. “A Frightening Parallel.” Newsweek, August 6, 1973, 70. Milton Friedman. “The Inflationary Fed.” Newsweek, August 27, 1973, 74. Milton Friedman. “Public Spending and Inflation.” The Times (London), August 29, 1973, 15. Milton Friedman. “The Voucher Idea.” New York Times (New York Times Magazine section), September 23, 1973, 22–23, 65, 67, and 69–72. (Reprinted in Friedman 1975e, 270–84.) Peter H. Binzen. “Stick to Profits, Business Told.” Philadelphia Evening Bulletin, October 15, 1973, 19–20. “The Corporate Balance Sheet: Should It Include a Social Conscience?” Newsday (Long Island, NY), October 22, 1973, 32A. “The Responsible Corporation: Benefactor or Monopolist?” Fortune, November 1973, 56. Appearance by Robert Eisner, Milton Friedman, and Herbert Stein on University of Chicago Round Table: The Nation’s Economy Out of Control, PBS, May 1, 1974. John Vaizey. “Whatever Happened to Equality?—5. Equality and Income [Interview with Milton Friedman].” Listener (London), May 30, 1974, 688–90. Hobart Rowen. “Patience Is Urged on Inflation Fight.” Washington Post, May 31, 1974, D11. Milton Friedman. “What Majority Rules?” Newsweek, June 3, 1974, 68. Dan Miller. “A Laissez-­Faire Look for Nixon’s Economics.” Detroit Free Press, July 29, 1974, 9-­C. Special to the New York Times. “White House Transcripts of 3 Nixon-­Haldeman Conversations on June 23, 1972.” New York Times, August 6, 1974, 14. Michael C. Jensen. “Severe Economic Problems Are Being Left by Nixon.” New York Times, August 9, 1974, 45 and 50. “Liability Management Philosophy Weakening Credit Quality, Minneapolis Fed Official Says.” American Banker, August 21, 1974, 1 and 10. Guy De Jonquieres. “U.S. Treasury Bill Rates May Go Even Higher.” Financial Times (London), August 28, 1974, 1. Milton Friedman. “Controversy over Burns and Fed’s Role.” New York Times, September 1, 1974, 122. Frances Cairncross. “Inflation ‘Immoral Tax No M.P. Would Approve.’” Guardian (London and Manchester, UK), September 16, 1974, 12. Milton Friedman. “Inflation Prospects.” Newsweek, November 4, 1974, 84. Tibor Machan, Joe Cobb, and Ralph Raico. “An Interview with Milton Friedman.” Reason, December 1974, 4 and 7–14. Carolyn Jay Wright. “Friedman: The U.S. Won’t Let Recession Run Long Enough.” Akron Beacon Journal (OH), December 1, 1974, D9. Milton Friedman. “Wonderland Scheme.” Newsweek, January 27, 1975, 25. Milton Friedman appearance on Wall Street Week, Maryland Public Television, February 7, 1975; Maryland Public Television transcript. “A Talk with Economist Karl Brunner.” Forbes, March 1, 1975, 34.

B i b l i o g r a p h y   477 Dennis V. Waite. “A Monetarist Talks Tough on Recession.” Philadelphia Sunday Bulletin, March 2, 1975, 25. Milton Friedman. “What Is the Federal Reserve Doing?” Newsweek, March 10, 1975, 63. Grant Donaldson. “Economist Predicts Teetering Economy.” Tampa Times (FL), March 11, 1975, 8. Milton Friedman appearance on Monday Conference, ABC Television (Australia), April 14, 1975; ABC Television (Australia) transcript. “Flexible Rates—the Monetary Shock Absorber.” First National City Bank Monthly Newsletter, June 1975, 12–15. Milton Friedman. “Subsidizing OPEC Oil.” Newsweek, June 23, 1975, 75. Milton Friedman. “Six Fallacies.” Wall Street Journal, June 30, 1975, 11. Michael Goodwin. “Executives, Seasonally Adjusted: Vacation Is a Time for Diversification.” New York Times, August 17, 1975, sec. 3, pp. 1 and 13. “Excerpts from Deposition Taken from Nixon by Lawyers.” New York Times, August 21, 1975, 26. Milton Friedman. “Five Examples of Fed Double-­Talk.” Wall Street Journal, August 21, 1975, 6. Milton Friedman appearance on Donahue, NBC, September 30, 1975. Theodore Kurrus. “Laissez Faire: Friedman against Government Control.” Dallas Morning News, October 17, 1975, 13B. Repps B. Hudson. “Friedman Thinks Inflation Will Resurge.” Kansas City Times, December 5, 1975, 16C. Milton Friedman. “How to Hit the Money Target.” Newsweek, December 8, 1975, 85. Milton Friedman. “Ford’s Budget.” Newsweek, February 9, 1976, 64. UPI. “Adviser Calls Reagan Plan ‘Underestimated.’” Detroit News, February 15, 1976, 13A. “In His Own Words: Economist Milton Friedman Calls the Income Tax ‘an Unholy Mess’ and Wants to Reform It.” People Weekly, April 5, 1976, 49–52. Milton Friedman appearance on The Jay Interview (hosted by Peter Jay), ITN, videotaped May 11, 1976; UK broadcast date July 17, 1976. “Interview with Economist Milton Friedman: Called Conservative[,] but Is He Really?” Christian Science Monitor, August 26, 1976, 15. David Sinclair. “Inflation: ‘The Tax That Never Has to Be Passed by Parliament.’” The Times (London), September 13, 1976, 7. Milton Friedman. “Money and Inflation.” Newsweek, September 20, 1976, 77. Advertisement for Newsweek. New York Times, October 15, 1976, D11. David Rostenthal. “Man of the Week, Milton Friedman: A Nobel for Economics.” New York Post, October 16, 1976, 27. James Tobin. “The Nobel Milton.” Economist (London), October 23, 1976a, 94–95. Harry G. Johnson. “The Nobel Milton.” Economist (London), October 23, 1976b, 95. Milton Friedman appearance on Meet the Press, NBC, October 24, 1976; NBC transcript. Larry Martz. “A Nobel for Friedman.” Newsweek, October 25, 1976, 86 and 89 (40–41 of UK edition). “Medal for a Monetarist.” Time, October 25, 1976, 58. “How Expectations Defeat Economic Policy.” Business Week, November 8, 1976, 74 and 76. Milton Friedman appearance on Donahue, NBC, November 24, 1976 (Chicago broadcast date; syndication broadcast dates included December 1, 1976).

478 B i b l i o g r a p h y “Positive Values of the Negative Income Tax.” Business Week, November 29, 1976, 62–64. Milton Friedman. “To Jimmy from James.” Newsweek, December 6, 1976, 87. Milton Friedman appearance on Dinah! (Dinah Shore talk show), broadcast March 30, 1977. Clip of appearance available on Free to Choose website; recording of full appearance purchased from Hoover Institution. Milton Friedman. “Tax Gimmickry at Its Finest.” Newsweek, April 11, 1977, 90. Fred Kutchins. “Leaning against Next Year’s Wind” (interview with Milton Friedman). Saturday Evening Post (New York) May/June 1977, 16 and 18–20. “Nixon: It Should Never ‘Get Out That We Taped This Office’: ‘. . . Where the Hell Are All These Leaks . . . Coming From?’” Washington Post, May 1, 1977, A14–­A15. Milton Friedman. “Monetary Policy and the Inflation Rate.” The Times (London), May 2, 1977, 13. “Energy Proposals Are Inflationary.” Purchasing (Boston), May 10, 1977, 7. AP. “Carter’s Plan Faces Opposition.” St. Petersburg Evening Independent (FL), May 13, 1977, 16A. Milton Friedman appearance on The Open Mind, episode titled “A Nobel Laureate on the American Economy,” PBS, May 31, 1977; transcript. Milton Friedman. “Energy Rhetoric.” Newsweek, June 13, 1977, 82. Milton Friedman Speaks, episode 12, “Who Protects the Consumer?,” taped September 12, 1977. Milton Friedman Speaks, episode 3, “Is Capitalism Humane?,” taped September 27, 1977. “The IMF Multiple Interview: Will the Refusal of the Strong to Reflate Bring a Wave of Protectionism?” Euromoney, October 1977, 20–32. Milton Friedman. “Why Inflation Persists.” Newsweek, October 3, 1977, 54. Milton Friedman Speaks, episode 1, “What Is America?,” taped October 3, 1977. Milton Friedman Speaks, episode 2, “Myths That Conceal Reality,” taped October 13, 1977. Milton Friedman Speaks, episode 6, “Money and Inflation,” taped November 7, 1977. Milton Friedman. “Entebbe Again.” Newsweek, November 14, 1977, 90–91. Paul A. Samuelson. “Reappoint Burns?” Newsweek, November 21, 1977, 81. Donald C. Bauder. “Economist Assails Growth in Monetary Aggregates.” St. Louis Globe-­ Democrat, December 7, 1977, 4G. Milton Friedman Speaks, episode 15, “The Future of Our Free Society,” taped February 21, 1978. Milton Friedman Speaks, episode 5, “What Is Wrong with the Welfare State?,” taped February 23, 1978. Lindley H. Clark Jr. “Speaking of Business: Assessing Arthur.” Wall Street Journal, April 4, 1978, 22. Milton Friedman. “Inflationary Recession.” Newsweek, April 24, 1978, 81. Rusty Harris. “No Tariffs, Urges Friedman: Lecturer Wants Total Free Trade.” Manhattan Mercury (KS), April 27, 1978, A1 and A6. Milton Friedman Speaks, episode 14, “Equality and Freedom in the Free Enterprise System,” taped May 1, 1978. Milton Friedman Speaks, episode 10, “The Economics of Medical Care,” taped May 9, 1978. Milton Friedman. “Three Mini-­columns.” Newsweek, June 12, 1978, 88. William Clarke. “Why Citibank’s Walt Wriston Is Looking Forward to the 1980s.” Euromoney, July 1978, 84, 86, 89, and 92–93.

B i b l i o g r a p h y   479 Virginia Payette. “Average Voter Flexing His Muscles: Congress Feels Taxpayer Pressure.” Victoria Advocate (TX), August 25, 1978, 4A. (Also appeared as Virginia Payette, “Direct Democracy,” Syracuse Post-­Standard [NY], August 31, 1978, 5.) Milton Friedman. “Borrowing Marks.” Newsweek, January 8, 1979, 56. Lindley H. Clark Jr. “Speaking of Business: The Fed’s Research.” Wall Street Journal, January 23, 1979, 24. Harry Farrell. “Who Gains from Inflation? The Politicians, Says Milton Friedman.” San Jose Mercury News, February 12, 1979, 7B. Milton Friedman. “Implementing Humphrey-­Hawkins.” Newsweek, March 5, 1979, 87. Merrill Sheils, Lea Donosky, Pamela Abramson, and Stryker McGuire. “Capitalism 101.” Newsweek, April 30, 1979a, 62 and 65. Paul A. Samuelson. “The Last Days of the Boom.” Newsweek, April 30, 1979b, 58. Paul A. Samuelson. “Tragicomedy of the Energy Crisis.” Newsweek, July 2, 1979, 62. Alvin Nagelberg. “Friedman Says Villain Is Poor Productivity.” Chicago Tribune, July 15, 1979, E5. Milton Friedman. “Volcker’s Inheritance.” Newsweek, August 20, 1979, 65. Milton Friedman appearance on Donahue, NBC, September 6, 1979 (Chicago broadcast date; the syndication broadcast date was October 10, 1979). A videotape including this episode was released commercially in 1994–96 as Interviewing the Great Minds of America. Also available on YouTube. Milton Friedman. “Has the Fed Changed Course?” Newsweek, October 22, 1979, 39. Milton Friedman. “Inflation and Jobs.” Newsweek, November 12, 1979, 97. Dana Rohrabacher. “An Economist against the Government: An Interview with Milton Friedman.” Register (Orange County, CA), December 23, 1979, E10–­E11. Hamish McRae. “Keynes Wanes.” Guardian (London and Manchester, UK), December 28, 1979, 11. Milton Friedman. “Iran and Energy Policy.” Newsweek, December 31, 1979, 61. Free to Choose (US television version), PBS, episode 1, “The Power of the Market,” broadcast dates in US areas included January 12, 1980; transcript available online on Free to Choose website. Free to Choose (US television version), PBS, episode 3, “Anatomy of a Crisis,” broadcast dates in US areas included January 29, 1980; transcript available online on Free to Choose website. Free to Choose (US television version), PBS, episode 5, “Created Equal,” broadcast dates in US areas included February 15, 1980; transcript available online on Free to Choose website. Anthony Holden. “The Free Market Man.” Observer (London), February 17, 1980, 33–34. Free to Choose (US television version), PBS, episode 7, “Who Protects the Consumer?,” broadcast dates in US areas included February 29, 1980; transcript available online on Free to Choose website. Milton Friedman. “Monetarism: A Reply to the Critics.” The Times (London), March 3, 1980, 19. Milton Friedman. “Things That Ain’t So.” Newsweek, March 10, 1980, 79. Free to Choose (US television version), PBS, episode 9, “How to Cure Inflation,” broadcast dates in US areas included March 14, 1980; transcript available online on Free to Choose website. Milton Friedman. “The Government as Nanny.” Listener (London), April 17, 1980, 489–90.

480 B i b l i o g r a p h y Peter Jay. “The Friedman Doctrine: Who Really Are the British Monetarists?” Listener (London), May 1, 1980, 561–62 and 564. Brian Griffiths. “Has the Green Paper Got It Wrong?” The Times (London), May 6, 1980, 17. Milton Friedman. “Monetary Overkill.” Newsweek, July 14, 1980, 62. Peter T. Maiken. “Milton Friedman—the Free-­Market Monetarist Thrives in a New Locale.” Chicago Tribune, July 20, 1980, magazine section, 20–24. Milton Friedman and Paul A. Samuelson. “Productivity: Two Experts Cross Swords [panel Q&A].” Newsweek, September 8, 1980, 68–69. M. Roberts. “Money and Prices.” Financial Times (London), October 15, 1980, 19. “And Friedman Chose a Rose. . . .” Straits Times (Singapore), October 18, 1980, sec. 2, p. 1. Peter Jay. “Those Puzzling Monetarist Misconceptions.” The Times (London), January 5, 1981, 12. Milton Friedman. “A Memorandum to the Fed.” Wall Street Journal, January 30, 1981, 20. Jane Perlez. “The Economist Invades America.” Daily News (New York), March 16, 1981, M6. Robert Lenzner. “Friedman Would Take Fed Job—but Paul Volcker’s Got It and Shows No Intention of Resigning.” Boston Globe, April 1, 1981, 39 and 45. Milton Friedman. “An Open Letter on Grants.” Newsweek, May 18, 1981, 99. Milton Friedman. “Closet Keynesianism.” Newsweek, July 27, 1981, 60. Lindley H. Clark. “The Monetarist: Karl Brunner Sways Government Policies, Rides Herd on the Fed.” Wall Street Journal, October 7, 1981, 1 and 12. Milton Friedman. “Investigative Reporting?” Newsweek, January 11, 1982, 56. Milton Friedman appearance on Meet the Press, NBC, March 21, 1982; NBC transcript. Milton Friedman. “Newsweek on Poverty.” April 19, 1982, 80. Milton Friedman. “Defining ‘Monetarism.”’ Newsweek, July 12, 1982, 64. Dermot Purgavie. “City Slickers.” Daily Mail (London), October 22, 1982, 4. Milton Friedman appearance on Saturday Briefing, BBC2, March 12, 1983; BBC transcript. Lindley H. Clark Jr. “Speaking of Business: The Perils of Paul and Coming Attractions.” Wall Street Journal, March 22, 1983, 33. Sidney Blumenthal. “Economic Navigator for the Right.” Boston Globe (magazine section), April 3, 1983, 10, 11, 20–21, 24–25, 40, and 42–43. Milton Friedman. “Is the Summit Worth the Climb?” Newsweek, May 30, 1983, 33. Milton Friedman. “The Keynes Centenary: A Monetarist Reflects.” Economist (London), June 4, 1983, 17–19 of US edition; 35–37 of London edition. Paul A. Samuelson. “Sympathy from the Other Cambridge.” Economist (London), June 25, 1983, 19–21 of US edition; 21–25 of London edition. Milton Friedman. “Why a Surge of Inflation Is Likely Next Year.” Wall Street Journal, September 1, 1983, 24. Milton Friedman appearance on CBS Morning News, March 1, 1984; CBS transcript. Rose D. Friedman. “First Person: Sharing.” San Francisco Chronicle (California Living magazine supplement), March 18, 1984, 8–9. Tyranny of the Status Quo television program, episode 3, “Politicians,” US broadcast dates including March 28, 1984, on channel 16 in Pennsylvania (as given in “Today’s Television Listings,” Beaver County Times [PA], March 28, 1984, B8). Milton Friedman. “The Taxes Called Deficits.” Wall Street Journal, April 26, 1984, 28.

B i b l i o g r a p h y   481 P.H.S. “The Times Diary.” The Times (London), August 17, 1984, 8. Milton Friedman. “Monetarist Can Be a Supply-­Sider, Too.” Wall Street Journal, August 31, 1984, 13. Anna J. Schwartz. “Where the Bank Went Wrong.” Banker (London) 135, no. 708 (February 1985): 100–101. “Milton Friedman. “The Fed’s Monetarism Was Never Anything but Rhetoric.” Wall Street Journal, December 18, 1985, 29. Audiotape of the proceedings of conference, “The Legacy of Keynes,” twenty-­second Nobel Conference, held at Gustavus Adolphus College, St. Peter, Minnesota, September 30 and October 1, 1986. Karl Brunner and Allan H. Meltzer. “The Straight Dope on the Money Supply.” Wall Street Journal, October 20, 1986, 27. Jonathan Peterson. “The Captain of Capitalism: Even as Milton Friedman’s Theories Have Gone Out of Vogue in Washington, His Ideas Have Come to Shape the Way Nations Manage Their Money.” Los Angeles Times (Los Angeles Times Magazine section), December 14, 1986, 12–18 and 54. (Also appeared as Jonathan Peterson, “Defining Friedman Takes a Lifetime,” San Francisco Chronicle, December 26, 1986, 39; and Jonathan Peterson, “Now, the Friedman Revival,” Sydney Morning Herald, December 27, 1986, 27.) Idea Channel. Milton Friedman. Videotaped interview, 1987. Anatole Kaletsky. “Freedom Rules, O.K.: Anatole Kaletsky Talks to Milton Friedman, Father of Monetarism.” Financial Times (London), February 23, 1987, 12. Milton Friedman. “Ice-­Cream Cone Challenge Scooped Up.” Wall Street Journal, July 2, 1987, 19. Alan S. Blinder. “Balancing the Equation between Inflation and Joblessness.” Business Week, February 15, 1988, 18. Milton Friedman. “Floating Rates vs. Monetary Standard.” Wall Street Journal, March 4, 1988, 29. Peter Brimelow. “Why Liberalism Is Now Obsolete [interview with Milton Friedman].” Forbes, December 12, 1988, 161–65, 168, 170, 174, and 176. Willa Johnson. “Freedom and Philanthropy: An Interview With Milton Friedman.” Alternatives in Philanthropy, March 1989, 1–6. Milton Friedman. “Britain Should Defer to the Earlier Keynes.” Wall Street Journal, April 19, 1989, A19. Warren T. Brookes. “The Gospel According to Knut Wicksell.” Forbes, July 9, 1990, 66–69. Milton Friedman and Paul A. Samuelson appearance on MacNeil/Lehrer NewsHour, PBS, August 27, 1990; PBS transcript. “Sununu Speaks: Business Is Partly to Blame.” Business Week, December 2, 1991, 31 of US edition; 14 of international edition. Milton Friedman appearance, May 6, 1993, at House Republican Conference Task Force on the Economy, Washington, DC, Broadcast on CSPAN, May 7, 1993, and released as a videotape by CSPAN educational video. Also viewable on CSPAN website. Paul Sheehan. “Friedman’s Fundamentals.” Australian Business Monthly, October 1993, 52–55. Milton Friedman and Anna J. Schwartz. “A Tale of Fed Transcripts.” Wall Street Journal, December 20, 1993, A12.

482 B i b l i o g r a p h y Chuck Freadhoff. “Nobelist Milton Friedman: Looking Back on Career Spent Out of the Mainstream.” Investor’s Business Daily, January 14, 1994, 1–2. Interview with Milton Friedman conducted by Brian Lamb for Booknotes, CSPAN, November 20, 1994. Transcript and recording available on CSPAN website; transcript was also issued in hard-­copy form by CSPAN in 1994. Brian Doherty. “Best of Both Worlds: Interview with Milton Friedman.” Reason, June 1995, 32–38. Milton Friedman. “Getting Back to Real Growth.” Wall Street Journal, August 1, 1995, A14. Ralph Nader. “Increase of Regulations Has Slowed, as a Rule.” Wall Street Journal, August 29, 1995, A15. Beth Bolton. “Chicago Professor Wins Nobel.” USA Today, October 11, 1995, 2B. Brian Bergstein (AP). “U of Chicago Prof. Wins Nobel Economics Prize.” Wisconsin State Journal, October 11, 1995, 8B. Milton Friedman appearance, April 18, 1996, at Claremont McKenna College, broadcast on CSPAN on December 26, 1996; viewable on CSPAN website. “Minimum Wage versus Supply and Demand.” Wall Street Journal, April 24, 1996, A14. Bill Saporito. “Good for the Bottom Line.” Time, May 20, 1996, 40–43. Milton Friedman. “The Fed and the Natural Rate.” Wall Street Journal, September 24, 1996, A22. Roger Kerr. “The Business of Business Is Business.” Evening Post (Wellington, New Zealand), January 6, 1997, 4. Dean Bedford. “The Caring Capitalist.” Evening Post (Wellington, New Zealand), August 8, 1998, 13–14. Gene Epstein. “Mr. Market: A Nobelist Views Today’s Fed, Currencies, Social Security, Regulation.” Barron’s, August 24, 1998, 30. Milton Friedman. “Clear Lessons to Be Learnt from the East Asian Episode.” The Times (London), October 12, 1998, 49. Anna J. Schwartz. “Dawn of the Euro: What Europe Can Learn from the Fed.” Wall Street Journal, December 31, 1998, A10. Milton Friedman. “Social Security Chimeras.” New York Times, January 11, 1999, A17. Milton Friedman appearance on Uncommon Knowledge (Hoover Institution website series), episode “Libertarianism,” February 10, 1999. Michael M. Weinstein. “Milton Friedman: My Biggest Mistake.” New York Times, July 4, 1999, sec. 3, p. 2. Michael M. Weinstein. “Herbert Stein, Nixon Adviser and Economist, Is Dead at 83.” New York Times, September 9, 1999, C22. Joseph M. Burns. “Monetary Policy Wasn’t Manipulated for Nixon.” Wall Street Journal, April 26, 2004, A15. Milton Friedman appearance on television special Election 2004: The Economy, WQED San Francisco, broadcast live on October 15, 2004. John T. Ward. “The View from Up There: Economist Milton Friedman, RC ’32, Reflects on a Long Life as a Contrarian.” Rutgers magazine, Fall 2006, 22–27 and 48. Scott Duke Harris. “Nobel Prize Winner Expounds on Education, Health Care, Iraq.” San Jose Mercury, November 5, 2006. The Power of Choice, PBS documentary, broadcast January 29, 2007. Paul Krugman. “Fear of Eating.” New York Times, May 21, 2007, A19. Paul Krugman. “Bad Cow Disease: How America Returned to The Jungle.” New York Times, June 13, 2008, A29.

B i b l i o g r a p h y   483 Michael M. Weinstein. “Paul A. Samuelson, Economist, Dies at 94.” New York Times, December 14, 2009, A1. Jeffrey Sachs. “Move America’s Economic Debate Out of Its Time Warp.” Financial Times website (blogs​.ft​.com), July 12, 2012. Also available at https://​www​.earth​ .columbia​.edu​/sitefiles​/file​/Sachs​%20Writing​/2012​/moveamericaseconomyout ofitstimewarp​.pdf. Jon Hilsenrath. “Reporter’s Journal: A Close Bond and a Shared Love for ‘Dismal Science’—Correspondence between Famously Brash Summers and His Uncle, a Nobel Economist, Reveals Flashes of Humility and Tenderness.” Wall Street Journal, September 14, 2013, A4. Jason Kelly. “Human Capitalist.” University of Chicago Magazine 106, no. 6, July/August 2014, 26–27. https://​mag​.uchicago​.edu​/university​-­­news​/human​-­­capitalist#. Paul Krugman. “Pollution and Politics.” New York Times, November 28, 2014, A31. David Warsh. “The Rivals: Paul Samuelson and Milton Friedman Arrive at the University of Chicago—in 1932,” on Warsh’s blog website economicprincipals​.com, entry dated July 12, 2015.

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Index

In what follows, “MF” refers to Milton Friedman. Abbott, William J., 123, 378n199 Abel, Andrew B., 39, 356n147 Abrams, Burton A., 415n87, 433n106, 436n156, 437n164, 456n362, 457n368 accelerationist, 297, 395n181, 421n148, 445n243, 447n263. See also Phillips curve accord. See Federal Reserve/US Treasury Accord (1951) Ackley, Gardner, 267, 384n51 Adler, Howard, Jr., 222 aggregate demand, 4, 16, 24, 37, 47, 53, 58–61, 74, 76, 92–95, 107, 108, 110, 119–21, 131, 151, 153, 154, 168, 172, 201–3, 209, 242, 244, 247, 251, 253, 255, 256, 258, 259, 268, 273, 276, 278, 284, 285, 318, 320–22, 324, 328, 363n10, 379n6, 381n34, 397n205, 408n29, 417n107, 434n120, 436n149, 439n183, 458n373. See also Friedman-­Meiselman, critique of the fiscal multiplier aggregate supply, 84, 174, 202–5, 268, 284, 417n107, 417n111, 419n128, 430n73, 443n225, 445n246, 449n278, 453n313. See also Phillips curve Akerlof, George A., 367n63 Algan, Yann, 388n97 Allen, Stuart D., 16 Allen, William R., 223 Alogoskoufis, George S., 395n185 Amacher, Ryan C., 369n74, 374n137 American Bankers Association, 94, 247, 349n40, 459n386

American Economic Association presidential address by MF (“The Role of Monetary Policy,” delivered 1967, published 1968), 43, 46, 100, 106, 112, 129, 138–63, 199, 226, 298, 308, 316, 322, 372n121, 395–96n186, 397n201, 398n214, 399n234 American Economic Review, 19, 23, 46, 53, 71, 93, 165, 310, 374n147 AM/FM debate, 94, 169, 200. See also Friedman-­Meiselman, critique of the fiscal multiplier Andersen, Leonall C., 124–29, 385n71, 385n72, 386n79, 386n85 Andersen-­Jordan equation. See St. Louis equation (Andersen-­Jordan equation) Anderson, Martin, 422n168 Anderson, Richard G., 194 Ando, Albert, 46, 93–95, 128, 375n153, 384n62, 386n80. See also AM/FM debate anti-­inflationary/anti-­inflation policy strategy, 242, 255, 258, 266, 332, 430n73. See also disinflation Argy, Victor, 108, 294 Arrow, Kenneth J., 410n49, 416n98 Artis, Michael J., 398n218, 414n81 assassinations, 57, 362n223 Auerbach, Robert D., 119 Australia, 401n248, 407n20 Axilrod, Kathy, 55, 361n211, 362n213 Axilrod, Stephen H., 256–57, 378n199, 434n123, 441n207

558 I n d e x Bach, George L., 123, 144, 256, 365n38, 371n108, 413n70 Bach Committee, on measuring monetary aggregates, 123, 413n70 Baer, Werner, 402n253 Bailey, Martin J., 30, 142, 354n111, 354n113, 368n65, 393n161 balance of payments: capital account of, US, 48–49, 379n7; current account of, US, 50, 295, 379n7; deficits in, US, 47–49, 51, 108–9, 288–89, 292, 380n8, 380n11, 442n14; disequilibria in, 294, 379n5, 380n9; US monetary policy and, 50–51, 108–9, 360–61n197, 379n5, 379n6. See also Bretton Woods system; exchange rates, flexible/floating/free; Operation Twist Balbach, Anatol B., 92, 440n201 Ball, R. J., 362n1 bank capital (commercial bank capital funds), 357n157 bank credit proxy, 122, 255 bank reserves (commercial bank reserve balances), 38–40, 43, 49, 60, 65–66, 85, 104, 117–18, 123–24, 128, 167, 195, 197– 98, 245, 254, 285–86, 364n32, 378n199, 385n70, 414n80, 414n81; borrowed, 286, 378n198; excess, 357n153, 383n47; nonborrowed, 118, 286; precautionary demand for, 403n267; required, 286. See also discount window, provision by Federal Reserve of bank reserves via; high-­powered money; monetary base; open market: operations; reserve requirements; reserves against private deposits (RPDs) Barnett, William A., 194, 413n72 Barro, Robert J., 16, 34, 61, 121, 129, 302, 309, 363n10, 367n55, 391n137, 400n240, 401n248, 449n271, 451n292, 453n312, 454n315 Batini, Nicoletta, 256, 429n56 Bator, Francis, 145 Batten, Dallas S., 127, 384n62 Baumol, William J., 221, 398n217, 409n43, 410n45 Bean, Charles R., 155, 300, 414n82, 446n253

Becker, Gary S., xiii, 1, 143, 226, 306, 351n73, 449n275, 452n304; colleague of MF in Department of Economics, 334, 342; on comparison of Capitalism and Freedom and Free to Choose books, 22; hostility at MIT toward social economics of, 408n27; MF and others on social-­economics approach of, 387– 88n97; on MF’s wish to have him as a departmental colleague, 58; on non-­ appearance of putative MF book on capital theory, 18 Beebe, Jack, 195 Bell, Geoffrey L., 412n62, 415n84 Belongia, Michael T., 413n72 Bénabou, Roland, 187, 410n52 Benati, Luca, 300 Berkman, Neil G., 194 Berle, Adolf A., Jr., 410n49 Bernanke, Ben S., 38, 39, 40, 44, 93, 138, 154–55, 157, 169, 232, 238, 356n144, 356n147, 360n192, 364n36, 398n212, 418n118, 428n51, 433n110 Bernheim, B. Douglas, 391n137 Bhagwati, Jagdish, 29, 351n71 bills-­only policy, of Federal Reserve, 47. See also Operation Twist Birnbaum, Eugene A., 414n77 Black, Fischer, 357n252, 446n257 Blanchard, Olivier J., 140, 141, 306, 449n278 Blaug, Mark, 380n22, 388n99, 397n209, 447n258, 447n263, 449n280 Blinder, Alan S., 128, 140, 156, 164, 169, 211, 214, 230, 354n112, 392n147, 396n193, 398n217, 409n43, 410n45, 441n201 Blume, Lawrence, 307 Bodkin, Ronald G., 394n173 bond market, US government: in 1958, 47; in 1970s, 314–15. See also interest rates; Operation Twist Boorman, John T., 381n29 Boote, Alexander H., 124 Bordo, Michael D., xi, 40, 43, 44, 101, 203– 4, 355n133, 370n91, 372n117, 372n120, 374n141, 377n186, 378n188, 379n5, 404n274, 417n103, 460n394

I n d e x   559 Boskin, Michael, 138, 437n160 Boughton, James M., 361n200 Boulding, Kenneth E., 130–31, 387n93 Bowsher, Norman N., 349n38 Brainard, William C., 58, 113, 179, 185–86, 204, 407–8n25 Brazil, 164, 372n118, 402n253 Breit, William, 351n67 Bretton Woods system, 49–51, 106, 108– 10, 288–97, 438n176; Federal Reserve’s monetary sterilization of US balance-­ of-­payments deficits under, 379n5; MF’s dating of end of, 288, 291–92, 442n210, 442n213. See also balance of payments; dollar standard; exchange rate: fixed/pegged; gold; Smithsonian Agreement Brigham, Eugene F., 381n29 Bright Promises, Dismal Performance (MF), 223 Brill, Daniel H., 68, 114, 115, 365n40, 382n35, 425n15 Brimmer, Andrew F., 114, 257, 434n123 Brinner, Roger, 421n148 Brittan, Samuel, 401n241 Brock, William A., 452n298 Bronfenbrenner, Martin, 165 Brookings Institution, 210–15, 420n138, 420n142, 421n145, 448n264 Brookings Papers on Economic Activity (Brook­ ings Institution), 161, 210–16, 420n137 Brown, Arthur J., 145, 295, 394n177 Brown, E. Cary, 46 Brown University, 422n153 Brozen, Yale, 129, 387n90 Brumberg, Richard, 351n63 Brunie, Charles H., 1, 27, 320 Brunner, Karl, 10, 40, 42, 43, 46, 65, 68, 92, 93, 103, 124, 126, 162, 163–71, 201, 205–6, 230, 256, 349n33, 349n38, 364n20, 364n29, 370n93, 371n103, 374n150, 378n195, 379n2, 381n29, 384n68, 386n77, 398n210, 402n252, 403n263, 403n265, 403n266, 403n267, 403n268, 403–4n269, 404n271, 404n272, 404n273, 404n274, 404n277, 404n278, 404n282, 405n285, 405n286, 415n90, 447n264

budget deficits, 275; aggregate nominal income and, 73, 126–27; economy and, 137; interest rates and, 155, 246; investment spending and, 445n245; money creation (monetization) and, 16–17, 246, 271, 333, 437n160, 437n162; US monetary policy and financing of, 245. See also crowding out; fiscal policy Buiter, Willem H., 68, 160 Bullard, James B., xi, xii Bullock, Charles Jesse, 228 Burgin, Angus, 26, 44, 352n85, 352n86, 375n157 Burks, David D., 164 Burns, Arthur F., 257, 358n158, 369n80, 431n84, 455n334, 455n335, 455n350, 456n351, 456n365, 457n367; absence of an enduring Phillips-­curve relationship, discussion of, 140, 455n338; business-­cycle research, 317, 320, 323; consultant to Federal Reserve Board, 365n38; counselor to the US president, 243, 435n146; as critic of Keynesian economics, 75; declining to grant PhD to Anna Schwartz in the early 1950s, 79; developments in views during 1970, 258–59; in Eisenhower administration and policy circles, 2, 320, 323, 330; Friedman-­Schwartz monetary-­ research findings, early reactions to, 34, 233, 355n134, 355n136; improved relationship with MF, on inflation, 455n346; interactions with MF, 245, 355n138, 458n378, 458n379; interactions with MF in the early 1960s, 35, 143, 352n76; interest-­rate control by FOMC, acknowledgment of, 441n206; job in government as US ambassador to the Federal Republic of Germany (1981– 85), 457–58n372; Kennedy administration’s macroeconomic paradigm, critique of, 3–6, 348n9, 348n10, 348n13, 348n14; memorial service for (1987), 405n292; MF’s macroeconomics, attitude toward, as of 1970, 35, 238, 249, 319–21, 428–29n55, 454n330, 455n333; on MF’s writings, 415n87; 1960s wage-­ price guideposts, critique of, 320,

560 I n d e x Burns, Arthur F. (continued) 455n333, 455n336; nominated and confirmed as Federal Reserve chair, 248, 430n72, 455n338, 455n343; oversight role in NBER, 35, 355n137; propounding incomes-­policy prescription and nonmonetary view of inflation process, x, 259, 261, 265, 267, 277, 294, 318–19, 321–28, 330, 370n89, 421n148, 455n346, 456n362; rift between MF and, as well as MF’s criticisms of, 334–36, 355n138, 443n221, 455n347; role in producing high inflation, denial of, 359n182, 392n153; settings of monetary policy under, 5, 228, 249, 251, 253, 254, 260, 261, 263, 271, 286–87, 289, 321, 328– 34, 336–37, 361n203, 414n75, 432n96, 434n128, 437n164, 438n170, 441n207, 441–42n208, 444n231, 456–57n366, 457n368, 458n374, 458n382; shift to tighter monetary policy stance during 1973, 336, 457n367; on US inflation, 349n25, 364n17. See also Federal Open Market Committee (FOMC); Federal Reserve; Federal Reserve Board; National Bureau of Economic Research (NBER) Burns, Joseph M., 35, 320, 329, 335, 352n76, 371n100, 458n374, 458n379, 458n382 Bush, George Herbert Walker, 432n96 business cycles, 166, 323, 388n97; Friedman-­Schwartz 1963 article on money and, 32, 33, 47, 69, 100, 210, 230, 236, 425n16 Butkiewicz, James L., 433n106, 436n156, 437n164, 456n362, 457n368 Butler, Eamonn, 365n42 Cagan, Phillip, 29, 41, 64, 65, 79, 123, 143, 154, 164, 191, 195, 196, 349n38, 354n109, 363n8, 364n24, 364n29, 371n108, 372n117, 372n119, 385n70, 411n60, 413n70, 426n27, 432n99, 445n242 Cambridge-­vs.-­Cambridge debate, 416n99 Cameron, Colin, xi Campbell, Thomas, 439–40n186

Campbell, W. Glenn, 409n32 Canada, 260, 327 Canes, Michael, 111, 380n23 Canto, Victor, 60 capital goods, 185 Capitalism and Freedom (MF), 2, 3, 17, 22–28, 30, 36, 44, 53, 55, 59, 65, 77, 97, 98, 131, 136, 137, 185, 216, 217, 339, 352n84, 352n85, 352n86, 353n88, 353n101, 353n103, 375n158, 388n99, 422n166, 423n171 capitalist system/capitalism, 79, 219, 422n160, 423n176 capital stock, 297 capital theory, 18, 351n67 Card, David, 130 Carleton, Willard T., 417n111 Carlson, Keith M., 126, 127, 278, 385– 86n75 Carnegie Institute of Technology, 445n248, 446n258 Carnegie Mellon University, 445n248, 450n290; business school of, 302 Carnegie-­Rochester Conference Series, 169, 392n151, 447n264 Carpenter, Seth B., 124, 424n77 Carson, Thomas, 409n52 Cassese, Anthony, 12, 108, 198, 279, 434n130 causality/causation, 229–32, 337–38, 425n20, 426n23, 459n385, 460n405 central-­bank independence, 22, 352n84. See also Federal Reserve certificates of deposit (CDs), negotiable, 86–87, 89, 191–96, 260, 263, 371n106, 382n37, 412n66, 413n70, 413n75, 413n76, 413n77, 432n99, 434n127 Chamberlin, Edward H., 376n173 Chandler, Lester V., 383n50 Chase, Samuel B., Jr., 68, 103, 104, 372n110, 378n196, 402n255 Chen, Chau-­nan, 101 Chicago School, xiv, 28, 125, 170, 354n109, 376n173, 402–3n263, 405n284, 436n154 Chick, Victoria, 69, 453n309 Chile, 91, 341, 372n118 Choudhri, Ehsan U., 43 Chow, Gregory C., 19, 101, 198–99, 315,

I n d e x   561 354n120, 374n141, 415n92, 454n317, 460n405 Christ, Carl F., 17, 383n50, 402n251 Christiano, Lawrence J., 129, 188, 238, 381n29 Civil Rights Act of 1964, 98–99, 376n171 Claassen, Emil Maria, 308 Clark, J. M., 426n29 Clark, Joseph S., 349n24, 353n90 Clark, Lindley, 459n388 Clark, William, 409 Clayton, George, 456n353 Clements, Kenneth W., 406n9 Clower, Robert W., 81, 199, 370n91, 415n93 Coase, Ronald H., 423–24n180 Coats, Warren L., Jr., 211, 286, 383n47 Cochrane, John H., 381n29 Coelho, Philip R., 410n50 Cogley, Timothy, 307, 449n281 Cohen, Wilbur J., 135, 390n126 Cole, Harold L., 148 Collins, Sean, 194, 371n108 Columbia University, 31, 64, 78–79, 100, 188 commercial paper, 86, 87, 192–94, 414n75 Commission on Money and Credit, 45–47, 91, 359n177 communism. See Lenin, V. I.; Marx, Karl; USSR Congdon, Tim, xi, 164, 167, 348n16, 415n86, 427n40 Connally, John B., Jr., 243, 274, 294–95, 444n232 constant-­monetary-­growth rule, 30, 54, 63, 96, 102, 112, 118, 150–51, 227, 231, 282, 305, 310, 314, 324, 354n112, 375n150, 451n293, 451n295, 451n297 consumer protection and product safety. See Nader, Ralph consumption (households’ purchases of goods and services), 92, 104, 120–21, 137, 224, 298; and interest rates, 384n58; ratio of, to income, 448n264; smoothness of, 453n305 consumption function, 33, 75, 78, 137, 152, 302, 303–8, 311, 348n5, 377n180, 447–

48n264. See also permanent income hypothesis concerning consumption Corrigan, E. Gerald, 434n121 cost-­push inflation: MF as skeptic regarding empirical importance of, 54–56, 83–84, 142, 154, 257–61, 266, 327, 330, 370n89, 379n6; officialdom’s embrace of, as description of actual US experience in early 1970s, 15, 257–61, 264–65, 276–77, 319, 326–27, 330–33, 370n89, 421n148, 443n225, 456n362; partial, 15; pure/hard-­line, 154, 325, 396n189, 399n234, 420n135, 421n150; theories of, 46, 105, 118, 164, 202, 215, 268, 322, 361n210. See also Burns, Arthur F.; incomes policy; New Economic Policy; wage and price controls, US (1971–74) cost-­push shock (in Phillips curve), 54 Council of Economic Advisers (CEA), 2, 4–5, 10, 24, 59, 64, 84, 97, 140, 172, 201, 240–42, 269, 274, 293, 319, 323, 340, 348n10, 370n94, 370n96, 384n51, 426n21, 429n64, 430n69 Courchene, Thomas J., 70, 101 Cowles Foundation (formerly Cowles Commission), 105, 163, 376n179, 394n173, 399n233, 445n251, 459n385 Cox, Albert H., Jr., 367n62 Cox, Charles, 343, 459–60n392 Cox, William N., III, 412n66 credit: bank, 104, 382n37, 413n75, 414n82; creation of, by commercial banks, and money creation, 103, 167, 191–96, 378n199; nonbank, 167, 414n82 credit conditions, 257 credit crunch of 1966, 63, 82–90, 190 Cross, Rod, 164 crowding out, 92, 120–21, 129, 384n53 Culbertson, John M., 28, 46, 201, 232, 236, 256, 364n20, 368n65, 426n31, 447n261 currency, 13, 37, 39–40, 85, 190, 193, 194, 239, 378n199, 385n70, 413n68; as term for foreign exchange rate, 292–96 currency-­deposit ratio, 403n267. See also money multiplier Currie, Lauchlin B., 40–41, 44, 356n152, 357n155, 357–58n158, 358n159, 411n59 Czechoslovakia, 91

562 I n d e x D’Amico, Stefania, 361n201 Darby, Jane, 145, 295 Darby, Michael R., 316, 325, 358n166, 365n43, 384n62, 414n79, 436n152, 441n202, 441–42n208, 449n272, 453n312, 454n320 Davidson, Paul, 201, 208–9, 419n127 Davis, Kevin T., 235 Davis, Richard G., 1–2, 256, 347n2, 386n80, 411n57 debt management policy, 48–51, 246, 359n185 Decker, Kevin S., 410n50 defense spending, US government, 269, 270, 275, 350n52 deflation rule, 227, 424n4 de Leeuw, Frank, 425n20 DeLong, J. Bradford, 1, 226, 457n366 demand debt of the government, 378n198 demand deposits, 13, 85, 190, 193, 411n59. See also M1 demand for money, 65, 68–73, 86, 152, 166, 193, 194, 206, 209, 230, 232, 301, 315, 345, 365n41, 365n42, 365–66n46, 366n49, 366n50, 366n53, 366n54, 367n63, 368n64, 376n179, 378n188, 403n266, 403n268, 407n25, 412n67, 413n68, 418n124; income elasticity of, 101–2, 377n185, 377n186, 378n190, 378n192; liquidity trap and, 76; multiple asset yields and, 168; shocks to, 115; stability and instability of, 115, 139, 278, 382n38; uncertainty and, 271. See also velocity Demiralp, Selva, 414n77 Democratic Party, 3, 133, 171, 213, 269, 272, 339, 340, 353n90, 369n82, 376n165, 391n143, 438n175 de Oliveira Campos, Roberto, 164, 402n253, 402n254 Department of Economics, University of Chicago, 17, 19, 21, 27–30, 78, 81, 126, 215, 216, 240, 309, 319, 334, 342, 351n71, 370n90, 396n193, 453–54n314, 458n376, 460n398, 460n400 DePrano, Michael, 26, 93, 94, 112, 366n54 Desai, Meghnad, 145, 210, 395n184, 400n239

Determinants and Effects of Changes in the Stock of Money 1875–1960 (Cagan), 41 Dewald, William G., 29, 65, 145, 165, 195, 354n109, 364n20, 383n50, 402n255, 414n79 DiCecio, Riccardo, xi, 242, 365n36, 394n170, 395n180, 398n212, 420n135, 432n96, 441n208, 455n338, 455n346, 456n362 Dillon, Douglas, 56 Director, Aaron, 369n86 discount rate, 37, 42, 246, 371n100, 431n86, 433n111; December 1965 increase in, US, 85–86 discount window, provision by Federal Reserve of bank reserves via, 38–39, 66. See also bank reserves (commercial bank reserve balances) disinflation, 100, 237, 242, 246, 248, 259, 318, 322, 339; policy/strategy of, 157, 244, 247, 252, 259–62, 289, 305, 323, 328; velocity dynamics and, 367n55, 368n64 disposable income, private real, 119 distribution of income, 388n97 Dolan, Edwin G., 58 dollar standard, 289, 290, 294, 295, 442n213, 444n234 domestic spending/nondefense spending, US federal government, 96, 97, 270, 275 Domitrovic, Brian, 439n180 Donahue, Phil, talk show of, 135, 217, 382n34, 390n128, 391n132, 405n293 Dornbusch, Rudiger, 38, 44, 121, 140, 287, 367n55, 371n101, 385n70, 409n32, 428n43, 454n314, 457n366 Driffill, John, 232 drugs, 216; pharmaceutical, 219, 222 Duesenberry, James S., x, 31, 287, 354n114, 365n38, 430n78, 448n264 Dunn, Robert M., 460n405 Dwyer, Gerald P., 406n9 dynamic stochastic: general equilibrium analysis, 387n88; model, 314 earned income tax credit, 134 Easley, David, 307 Ebenstein, Lanny, 369n81

I n d e x   563 Eberl, Jason T., 410n50 Eccles, Mariner S., 245–46, 359n77, 431n85 Eckstein, Otto, 59, 421n148 economic growth. See output/real output/ aggregate output/real national income economic stabilization, 6, 109, 131, 310, 430n71 Economic Stabilization Program. See New Economic Policy Ehrenberg, Ronald G., 17 Ehrlichman, John, 433n106 Eichenbaum, Martin, 129, 139, 151, 154, 188, 381n29 Eichengreen, Barry, 1, 226, 360n192, 385n70 Einstein, Albert, 400n240 Eisenhower, Dwight D., 2, 4, 9, 35, 51, 172, 319, 320, 323, 330, 349n31 Eisner, Robert, 121, 344, 384n59, 460n402 Elliott, Donald Allan, 384n62, 434n121 Elmendorf, Douglas W., 127, 129 English, William B., 361n201 environmental protection measures, 186; MF and, 223–25, 423n79 Equal Rights Amendment (ERA), 99 equity prices. See stock market Ericsson, Neil R., xi, 102, 377–78n188 Eurodollar market, 192–93, 195–96, 412n62, 412n63, 413n69, 414n76, 414n77, 415n84 Europe, 156; MF’s travels to, 177, 395n185. See also individual countries Europe, continental, 166; MF’s gaps in knowledge concerning, 178–79 Evanoff, Douglas D., 383n46 Evans, Charles L., 188 Evans, Michael K., 350n51 Evans, Paul, 60, 81–82, 308, 446n256, 454n314 Evans, Rowland, 439n184 exchange control (foreign exchange controls/capital controls), 51, 109, 110, 173, 192, 360n189, 361n199, 375n157, 442n218, 444n231 exchange rate: arrangements, 291; fixed/ pegged, 80, 291, 361n199, 444n234; in 1960s, 51–52, 108–11, 173, 288, 294, 295, 297, 339 (see also Bretton Woods

system; gold standard; Smithsonian Agreement); overvalued, 442n214; policy, 357n157; systems, 175, 293–94, 339 exchange rates, flexible/floating/free, 445n250; introduction of (1971–73), 288, 294–95, 297; MF’s advocacy of, 49, 108– 9, 276, 291, 293, 296, 379n7, 444n231; MF’s 1953 article on, 49–50, 293, 307, 406n16, 443n225, 443n227, 449n282. See also Bretton Woods system expectations: adaptive, 302–7, 448n267, 450n287; rational, 149, 297–318, 392n147, 404n278, 447n259, 448– 49n271, 449n272, 449n278, 449n280, 450n283, 450n284, 450n288, 451n295, 451n297, 452n298, 452n303, 452n304, 454n314, 454n316. See also Phillips curve; rational-­expectations revolution Fama, Eugene F., 374n135, 440n201, 454n314 Fand, David I., 17, 117, 213, 350–51n61, 351n66, 370n93, 371n104 Farmer, Roger E. A., 144 federal funds rate, 67, 85, 88–89, 117–18, 197, 253–54, 262–63, 286–87, 364–65n36, 371n100, 373n123, 433n111, 434n112, 441n206, 442n209. See also interest rates federal income tax surcharge of 1968, 119–22; extension/renewal of (1969), 242, 275, 430n71, 457n369 Federal Open Market Committee (FOMC), 1, 3, 13, 15, 43, 47, 67, 117, 120, 127–28, 155, 246, 249, 253–56, 263, 285, 287, 331–33, 348n8, 350n43, 350n50, 358n168, 371n100, 386n82, 431n88, 432n95, 434n112, 440n195, 457n366, 458n374 Federal Reserve: acknowledgment of and attention to MF, increase in, during 1960s, 1–2, 64–68, 116, 255; and debates with monetarists over the decades, 115; and fight back against monetarist movement, 256, 434n121; policy in 1961–69, 30, 90, 122, 253, 365n36, 371n100, 431n91, 432n96 (see

564 I n d e x Federal Reserve (continued) also credit crunch of 1966; gradualism; Martin, William McChesney, Jr.; money/monetary aggregates; Operation Twist); policy in 1970–72, 83, 197 (see also Burns, Arthur F.). See also Federal Reserve Bank of St. Louis; Federal Reserve Board; monetary policy; reaction function of the Federal Reserve Federal Reserve Bank of Boston, 175, 293, 412n66 Federal Reserve Bank of Dallas, xi–xii Federal Reserve Bank of Minneapolis, 114, 303, 308, 317, 414n81 Federal Reserve Bank of New York, 1, 31, 41, 245, 256, 282, 434n121 Federal Reserve Bank of Richmond, 371n99 Federal Reserve Bank of San Francisco, xii, 355n128, 356n141, 358n166 Federal Reserve Bank of St. Louis, xi, xii, 8, 9, 10, 12, 87, 89, 122–29, 198, 234, 262, 279, 305, 356n141, 373n124, 380n22, 384n62, 384n66, 385n71, 385n72, 386n76, 386n77, 412n65, 415n88, 436n153, 438n167, 440n191. See also St. Louis equation (Andersen-­Jordan equation) Federal Reserve Bank of St. Louis Review, 124, 127, 128, 164 Federal Reserve Board, 2, 104, 123, 127, 256, 261, 262, 299, 324, 333, 364n33, 371n105, 378n198, 378n199, 382n37, 384n70, 413n74, 454n315, 458n378; consultants to, meetings and memoranda of, 5, 8, 85, 88, 89, 112, 113, 190, 196, 236, 245, 249–50, 255, 260, 263, 264, 304, 312, 335, 349n28, 357n154, 360n192, 364n29, 364n31, 365n37, 365n38, 381n29, 385n71, 392n151, 403n268, 415n87, 427n39, 431n79, 431n89, 434n126, 442n212; governors of, 3, 65, 114, 116, 122, 245, 247, 249, 254, 257, 261, 334, 358n158, 369n75, 430n75, 431n89, 433n111 (see also individual board members); MF on research and data-­collection priorities of, 128, 386n84; policies of, 56, 246, 357n153;

staff analyses of, and attitude toward, MF’s and Friedman-­Schwartz writings and proposals, 31, 66–68, 73–74, 114, 116, 194, 256–57, 286, 354n115, 427n29 Federal Reserve/US Treasury Accord (1951), 43, 47, 246, 373n123 Feldstein, Martin S., ix–x, 106, 127, 129, 136–38, 347n4, 347n6, 391n137, 398n218 Felix, David, 402n253 Fellner, William J., 141–42, 393n162, 393n165, 399n235, 428n54, 452n301 Finan, Frederico, 5 financial innovation, 189, 196 financial intermediaries, 37, 411n60, 415n85 financial intermediation, 457n366 fine-­tuning, 56, 120 fiscal deficits. See budget deficits fiscal multiplier, 59–60, 91, 95, 121, 129, 374n139. See also Friedman-­Meiselman, critique of the fiscal multiplier fiscal policy, 16, 24, 53, 56, 61, 69, 72–73, 91, 92, 119, 121, 125, 131, 151, 152, 201, 204, 209, 242, 259, 269–71, 276, 277, 320, 327, 333, 334, 363n10, 376n173, 386n79, 417n109, 430n71, 436n153, 439n183; activist, 2; history of, 58, 276; MF’s debate with Walter Heller on (conducted 1968, published 1969), 125, 200–201; modern, 59; pure, 129, 209; rules for, 305, 451n293. See also budget deficits; crowding out; federal income tax surcharge of 1968; Kennedy-­ Johnson tax cut; Ricardian equivalence Fischer, Stanley, 33, 38, 44, 121, 140, 145, 287, 300, 313, 334, 343–44, 367n55, 367n63, 371n101, 385n70, 392n158, 409n32, 415n86, 428n43, 450n290, 452n304, 453n312, 457n366, 458n376 Fisher, Irving, 73, 112, 207, 241, 367– 68n63, 393n158 Fisher effect, 52, 71, 88–89, 145, 197, 202, 241, 246, 304, 309, 358n162, 372n117, 372n118, 372n119, 372n120, 372n121, 381n29, 381n30, 382–83n44; gains attention in US debate, 111–17. See also interest rates Fisher relationship. See Fisher effect

I n d e x   565 Fitzgerald, Terry J., 238 Foley, Duncan K., 113, 209, 301–2 Food and Drug Administration (FDA), US, 218–19 Forder, James, 393–94n170, 395–96n186, 398n211 Fordham University, 47, 50, 190 foreign policy, of US government, 109, 178, 179 Formuzis, Peter A., 414n78 Fourcade, Marion, 388n97 France, 91, 178, 406n16 Francis, Darryl R., 127–28, 278, 386n77, 386n82 Fratianni, Michele, 86, 124 Frazer, William, 125, 375n159 Freedman, Craig D., 368n72 free-­market economics. See market economics Free to Choose (MF and Rose D. Friedman), 22–24, 27, 99, 134, 136, 224, 390n113 Free to Choose (1980 television series), 134, 138, 245, 389n104, 391n141, 411n60, 422n158, 422n161, 431n81, 431n82 Frenkel, Jacob A., 392n158, 454n314 Friedland, Claire, xii, 387n90, 392n151 Friedman, Benjamin M., 93, 115, 168, 236, 349n40, 382n39, 412–13n68 Friedman, David D., 220 Friedman, Milton: activities and research output (1961–63), 1–57; activities and research output (1964–66), 58–105 (see also Newsweek); activities and research output (1967–68), 106–73; activities and research output (1969–72), 174–346; as commentator on US national television, 344; death of (2006), 125, 226, 460n405; debating qualities of, divergent perceptions of on part of debate audience, 55; dictators or dictatorships, tendency to employ unseemly parallels with in US domestic debate, 26, 222–23, 423n175; economics, not interested in some areas of, 215–16; financial markets react to public statements of, 175; foreign policy and on geopolitical affairs, commentaries on,

178; health problems of (1971–72), 159, 337–46; Hoover Institution, based at (1977–2006), 408n26, 449–50n283; indexation, engagement in debate on, 217, 421–22n153; inflation, early views on (pre-­monetarist period), 326; interests outside economics, limited nature of, 177–79; lecture and appearances in London (1974), 162, 422n153, 450n288; Nobel Prize receipt of (see Nobel Prize in economics); presidency of American Economic Association, 82; public debate, adeptness and effectiveness in, 344; public-­policy activities, focus on after early 1970s, 44–45, 320, 341–46; research and writing, base at Friedmans’ second home in New England, 21; research, monetary, with Anna Schwartz (see Schwartz, Anna J.); sense of humor, 178; set of economic positions crystalizing around 1950, 319; team sports, disinclined to participate in, 170; temperament, not very introspective in, 339; trip to Chile (1975), 341; trip to Yugoslavia (1973), 162; University of Chicago, closing years at, 311, 316, 351–52n75, 396n193, 452n301, 453n307; University of Chicago, retirement from (1976–1977), 345, 406n9; writings and public-­policy activity with Rose Friedman (see Friedman, Rose Director); writing style and choice of words, 34, 219, 274, 439n181 (see also monetarism). See also individual topics Friedman, Milton M. (writer on music), 407n18 Friedman, Rose Director, 79, 99, 224, 344–45, 350n61, 355n125, 369n75, 387n91, 407n18, 440n198, 458n379, 458n383, 460n396, 460n403, 460n407; books with MF, 22–23, 27; on collaborating with MF, 23; on experience of 1964 presidential election campaign, 171; on MF’s illness in early 1970s, 337, 459n385; role in producing Newsweek columns with MF, 77–78; role in writing and editing of Capitalism and Freedom, 23, 352n86, 352n88; taped

566 I n d e x Friedman, Rose Director (continued) commentaries with MF, 369n78; travels with MF, 36, 356n141; upturn in public-­ policy activities starting in mid-­1960s, 77; wish to relocate to the Bay Area, 79, 369n86 Friedman-­Meiselman, critique of the fiscal multiplier, 45–47, 56, 63, 69, 90–95, 373n133, 373n134, 374n135, 374n137, 374n138, 374n145, 374n147, 374n148, 374–75n150, 375n151, 375n154, 445n245. See also Meiselman, David Friedman-­Schwartz monetary project (post-­1963 developments): book draft, follow-­up to Monetary History (circulated in late 1966), 41, 45, 101, 111, 112; companion volume covering cycles, scrapping of (in the early 1970s), 229, 345; monetary-­statistics component of sequel recast to become separate book, 111, 229 (see also Monetary Statistics of the United States [MF and Schwartz]); monetary-­trends component of sequel revamped to include coverage of United Kingdom, 111; monetary-­trends project, modest progress made during 1967–72, 64, 228–29; monetary-­ trends project, preliminary empirical results arising from, made public during the early 1970s, 229; theoretical-­ framework coverage, portion of published by MF in 1970, 199 Frost, Peter A., 403n267 Fuhrer, Jeffrey C., 253, 364n36 full employment, 4, 5, 46, 54, 62, 117, 125, 257, 386, 421n148; goal, 7, 105, 158, 394n173 full-­employment unemployment rate, 6, 153. See also natural rate of unemployment Gable, Lester G., 414n81 Galbraith, John Kenneth, 27, 175, 186–87, 258, 265, 267, 406n11 Gale, Douglas, 188, 403–4n269 Garrison, Charles B., 396n186 Gavin, William T., xi, 124, 139 Gayer, A. D., 79

Geddes, Patrick, 402n254 general equilibrium theory and approaches, 19, 30, 71, 153, 169, 204, 300– 301, 315, 351n73, 352n75, 387n88 General Theory of Employment, Interest, and Money, The (Keynes), 29–30, 39, 73, 75–76, 202–3, 206–9, 370n89, 418n120, 419n125, 419n126, 419n127. See also Keynes, John Maynard Germany: division of, 461n410; Federal Republic of, 91, 458n372 Gertler, Mark, 188, 391n139, 416n98, 446n254 Gibson, William E., 370n93, 371n104, 372n117, 373n122, 381n29, 382–83n44, 413n75, 415n84, 441n206 Gilbert, John Cannon, 377n186, 456n353 gold, 290; price of, 51, 106, 109–10, 173, 289–90, 294, 442n217, 443–44n229; window for, closing of (1971), 290–91, 443–44n229. See also Bretton Woods system Goldberger, Arthur S., 394n178 Goldfeld, Stephen M., 382n38 Goldin, Claudia, 34 gold standard, 50, 291, 360n192, 443n219; Bretton Woods system sometimes misconstrued as, 290 Goldston, Eli, 185 Goldwater, Barry, 78, 80, 95–99, 136, 171, 369n82, 370n89, 375n157, 376n163, 376n164, 376n165, 389n102 Golub, Stephen S., 377n179 Goodfriend, Marvin, 314, 383n47 Goodhart, Charles A. E., 103, 156, 167, 235, 354n114, 415n86 Gordon, Robert J., 45, 94, 120, 126–27, 129, 148, 162, 169, 176, 198–217, 272, 300, 315, 338, 345, 359n173, 362n2, 363n13, 365n41, 366n50, 367n61, 367n63, 392n152, 397n209, 400n240, 401n245, 401n246, 414n77, 415n94, 416n95, 416n96, 420n137, 420n138, 420n139, 420n140, 421n144, 421n148, 421n149, 421n152, 422n153, 422n155, 440n200, 453n312 Gould, John P., 29, 354n113, 454n319 Grabbe, J. Orlin, 414n76

I n d e x   567 gradualism, 242, 282, 318, 332, 456n352, 458n382 Graduate, The (film), 138–39 Graduate School of Business (University of Chicago), 81, 84, 129, 239–40, 305, 342, 348n9, 387n90, 428n43, 429n62, 447n258 Gramley, Lyle E., 2, 58, 68, 103–4, 106, 114, 115, 128, 226, 256, 335, 336–37, 347n3, 372n110, 378n196, 386n82, 402n255, 427n39 Granger causality, 338 Gray, Jo Anna, 311, 313, 453n312 Great Contraction of 1929–1933 (event). See Great Depression of 1930s Great Contraction, 1929–1933, The (MF and Schwartz), 64, 228 Great Depression of 1930s, 76, 92, 202, 370n89; Friedman-­Schwartz’s Monetary History account of, 32, 36–44, 64, 112, 228, 321, 329, 356n152, 358–59n168, 423n175; nonmonetary explanations for, 358n168 Great Inflation of 1970s, US, 261, 370n93, 402n56, 437n164, 441n201, 457n368 Great Society, 97–98, 132, 143, 371n104, 375n163, 387n94, 389n107 Greenspan, Alan, 213, 436n153, 439n181 Greenwood, John, xii Greenwood, Robin, 360n185 Griffiths, Brian, 414n81 gross domestic product, nominal. See nominal income/nominal national income/nominal spending gross domestic product, real. See output/ real output/aggregate output/real national income Grossman, Herschel I., 17, 399n232 Grossman, Sanford J., 187 Grubel, Herbert G., 445n250 Gruen, Fred, 369n79, 456n356 Guillebard, C. W., 368n70 Guttentag, Jack M., 414n83 Haberler, Gottfried, 370n89 Hafer, R. W., 70, 123, 198, 378n188, 383n47, 384n62 Hahn, Frank H., 396n197

Haldeman, H. R., 295, 433n108 Hall, Robert E., 99, 121, 129, 176, 199, 203, 214, 309, 376n173, 404n278, 407n19, 408n28, 421n145 Halliwell, Leslie, 391n146 Hamburger, Michael J., 415n85, 440n193, 444n234 Hamermesh, Daniel S., xi, 1, 351n70 Hamilton, James D., 360n185 Hamilton, Mary T., 140, 395n184 Hammond, Claire H., 319 Hammond, J. Daniel, xi, 40, 319, 352n79, 352n82, 353n100, 353n102, 355n129, 365n42, 417n103, 420n131, 426n29, 427n32, 447n261 Hansen, Alvin H., 5, 207, 209, 348n14, 448n264 Hansen, Lars Peter, 354n120 Hanson, Samuel G., 360n185 Harberger, Arnold C., 19, 21, 28–29, 55, 298, 308, 311–12, 361–62n211, 362n213, 387n91, 446n256, 452n304 Harcourt, Geoffrey C., 368n72 Hargraves, Monica, 124 Haring, Joseph R., 388n98 Harrington, R. L., 33, 365n43, 414n83 Harris, Laurence, 143 Harrison, George L., 31, 354n118 Hart, Oliver, 187, 188 Harvard University, ix, x, 27, 98, 199, 200, 258, 354n114, 370n92, 376n173, 388n97, 416n101 Haubrich, Joseph G., 373n123 Hauser, Rudolf, xii, 431n79, 433n101, 433n103 Havrilesky, Thomas M., 381n29 Hayek, Friedrich A., 27 Hayes, Alfred, 1, 3, 120, 282, 347n1, 440n195 Hazlitt, Henry, 75–76, 368n68 health care and medicine, MF’s views on and interest in, 97, 179, 375n161, 407n23, 410n49 Heebner, A. Gilbert, 413n70 Hein, Scott E., 16, 198 Heller, H. Robert, 338 Heller, Walter W., 2, 6, 13, 57, 64, 109, 125, 166, 200–201, 244, 267, 334, 349n38,

568 I n d e x Heller, Walter W. (continued) 350n59, 359n182, 361n209, 363n7, 363n10, 367n58, 376n176, 377n185, 385n73, 403n263, 413n73, 416n100, 416n101, 420n137, 425n18, 427n38, 430n71, 458n373 Henderschott, Patric H., 378n196 Hendry, David F., 102, 377–78n188 Hester, Donald D., 93–94, 374n148 Hettinger, Albert J., Jr., 36 Hetzel, Robert L., xi, 332, 373n133, 401n248, 440n201, 455n346 high-­powered money, 103, 104, 123, 124, 360n186, 378n198, 384–85n70, 403n267. See also monetary base Hildreth, Clifford G., 123, 371n108, 413n70 Hinshaw, Randall, 427n40 Hitler, Adolf, 222–23, 423n175 Hodrick, Robert J., 453n307 Hoffman, Dennis L., 70, 382n38 Hoffman, Eileen B., 456n354 Holmes, Alan R., 255 Holzman, Franklyn D., 165 Hommes, Cars H., 307, 449n282 Hood, Stedman B., 377n188 Hoover, Kevin D., 231, 447n259, 454n316 Hoover Institution, 352n82, 369n86, 408n26, 422n162, 450n283, 454n320. See also Stanford University Horn, Karen Ilse, 148, 150 housing loans/mortgage lending, 87 Houthakker, Hendrik S., 433n106 Hsieh, Chang-­Tai, 44, 354n118, 356n151, 360n192 Huertas, Thomas F., 191 Human Events (magazine), 77, 369n76 Hume, David, 71, 141, 206, 366n54, 392– 93n158, 393n162, 453n309 Humpage, Owen, 355n133 Humphrey, Hubert H., 171, 376n165 Humphrey, Thomas M., 40, 367n54, 392n158, 394n177, 395n178, 426n23 Ihrig, Jane, 124 import surcharge (1971), 292, 443n223, 443n225 Income from Independent Professional Practice (MF and Simon Kuznets), 18, 36

incomes policy, 55, 243, 258–61, 264, 267– 68, 275, 277, 294, 321, 324, 326–29, 331, 334, 336, 340, 455n333, 455n348. See also wage and price controls, US (1971–74) industrial production, US, 11, 90, 250, 373n124, 386n84, 426n31 inflation, 76; analysis of, MF’s influence on, 112, 162, 255, 341; behavior of, in early 1960s, US, 6–9, 61–62, 428n47; behavior of, in middle and later 1960s, US, 62–63, 107, 141, 243, 281, 288, 349n28, 350n46, 363n10, 363–64n17, 372n119, 379n2, 379n4; behavior of, in 1970–72, US, 237, 250–52, 281–83, 421n146; behavior of, in rest of 1970s after 1972, 197, 208, 244, 276, 306, 314, 324, 336, 337, 430n77, 440n198, 440– 41n201, 449n277; cause of, 370n96; control, 153, 321, 327, 329, 434n120, 436n151, 438n173; determination of, 75, 157, 256, 278, 319, 321; dynamics of, 147, 150; employment and, 157; expectations/expected, 52, 62, 115, 122, 141, 145–46, 157, 158, 162, 163, 214–15, 250, 251, 299, 303–6, 393n168, 394n176, 394n180, 398n210, 422n153, 447n263, 448n267, 449n272, 449n276, 450n287 (see also inflationary expectations); government revenue from, MF on, 315, 459n390; high, 144, 251, 330, 379n4, 433n101, 458n372; low, 9, 10, 107, 173, 452n301; management of, 53; monetary growth and, 8, 14–15, 84, 119, 151, 197, 234–38, 270, 312, 324, 420n132, 428n43, 429n56, 430n74; monetary instruments and, 156; monetary phenomenon, status as, 119, 154, 259, 341, 367n55; nominal aggregate demand and, 90, 172, 235, 244, 282; output gap and, 154, 155, 202, 257, 258, 285, 287, 396n189, 398n209; peacetime, 6, 67; policy, 151; recessions and, 100, 143, 265; roller-­ coaster pattern of, 14, 107, 379n4; secular, 6, 379n6; tax cuts and, 16, 83, 363n10; unbounded, 397n205; underlying, 283, 287; unemployment and, 10, 46, 54, 140, 143–46, 153, 158, 211, 214, 217, 227, 242, 266, 304, 392n147,

I n d e x   569 392n151, 394n173, 397n205, 397n209, 398n211, 401n242, 401n244, 421n145, 430n69, 445n250, 449n278, 455n338. See also cost-­push inflation; Phillips curve; wages inflationary expectations, 9, 89, 112, 197, 246, 262, 301, 312, 349n31, 441n208 inflationary psychology, 247 inflationary recession, 143 inflationary slowdown, 443n101 inflationary spiral, 332, 363n17 inflation targeting, 139, 154–55, 398n213 Instructional Dynamics Economics Cassette commentaries, MF’s series of: begins (1968), 6, 124; MF’s interlocutors on, 369n78, 409n31. See also individual topics instrumental variables. See two-­stage least squares interest equalization tax, 109, 412n62 interest rate rules, 350n46, 451n295 interest rates, 257; alleged reluctance of MF to refer to, 73–74; behavior of, in early 1960s, US, 7, 9; behavior of, in middle and later 1960s, US, 7, 9, 88–89, 241, 371n104, 448n264; behavior of, in 1970–72, US, 197, 251, 261–62, 286– 87, 441n208, 456n362; ceilings on, for US bank deposits, 11–12, 86–88, 190, 412n64 (see also Regulation Q); determination of, 75, 360n186, 381n29; Federal Reserve management of, 16, 42–43, 47, 51, 61, 67, 126–27, 167, 253– 54, 260, 285–86, 359n182, 441n206, 456–57n366; high, 241, 372n118; inflation and, 88–89, 113, 116–17, 207, 241, 314, 441n208 (see also Fisher effect); long-­term/longer-­term, 47–49, 52, 74, 250, 261–62, 287, 314, 360n186, 404n272, 417n106 (see also Operation Twist); low, 43, 49, 89; monetary policy stance and, 42, 59–61, 89, 114–15, 205, 358n166, 363n11, 368n65, 382n37; physical assets and, 382n30; price of credit, status as, 72; real, x, 25, 42, 43, 72, 112, 113, 115, 202, 309, 321, 331, 372n119, 381n27, 381n30, 398n14, 456n366; short-­term, 7, 12, 42, 47, 51, 66, 69, 74,

85, 88–89, 167–68, 253–54, 261–62, 287, 360n186, 361n203, 383n47, 417n106; steady-­state, 424n4; total spending and, 202, 384n58; unobserved, 71, 129. See also budget deficits; demand for money; liquidity effect; natural rate of interest interest sensitivity of the demand for money, and MF’s framework, debate regarding, 68–73, 76, 101, 169, 206– 7, 365n41, 365n42, 365n43, 366n49, 366n50, 366n51, 366n52, 366n53, 366– 67n54, 367n55 international reserves, 110 investment multiplier, 91, 373n134. See also fiscal multiplier investment spending (capital formation by firms), 16, 57, 104, 113, 129, 186, 366n51, 388n97, 445n244; interest rates and, 120–21, 384n58; not a major research area for MF, 185, 297, 445n245 investment tax credit, 16, 242, 270, 430n71 Iran, 406n7 Ireland, Peter N., 139, 151, 387n88, 413n72 Irwin, Douglas A., xi, xii IS function, 168 IS-­LM framework/system, 202–6, 417n109, 418n116 Israel, 406n7 Jacobs, Donald P., 372n113 Janeway, Eliot, 278 Jansen, Dennis W., 70, 378n188 Japan, 17, 91, 175, 272, 291, 295, 406n7 Jay, Peter, 397n202 Jevons, W. Stanley, 239, 429n59 Johannes, James M., 170 Johnson, D. Gale, 420n137 Johnson, Harry G., 29, 143, 151, 158, 203, 207, 215, 293, 365n42, 366n50, 373n134, 377n187, 394n170, 394n175, 395n185, 402n253, 416n99, 418n116 Johnson, Lyndon B., 15, 16, 57, 58, 59, 60, 78, 83, 96–99, 109, 131, 132, 135, 172–73, 183, 201, 230, 242, 269, 270, 274, 288, 289, 293, 321, 362n1, 362n2, 363n10, 383n51, 385n73

570 I n d e x Johnson, Marianne, 351n69 Joines, Douglas H., 60 Joint Economic Committee, US Congress: hearings of, 46, 54, 116, 122, 201, 347n1, 349n38, 358n166, 359n175, 359n182, 371n100, 379n2, 381n32, 382n42, 383n45, 383n50, 384n51, 384n52, 401n248, 428–29n55, 448n264, 455n334, 455n350, 457n367, 458n373, 460n402; leadership of, 266, 383n49; MF’s submissions and testimony to, 63, 217, 273, 359n185, 360n191, 360n195, 412n62, 426n31, 442n217, 443n223, 448n270, 459n391; monetary policy of, recommendations regarding, 47, 118, 383n48 Jones, Daniel Stedman, 25, 36 Jones, Homer, 31, 122–23, 125, 126, 127, 384n63, 386n76 Jonung, Lars, 101, 377n186, 378n188 Jordan, Jerry L., 77–78, 123–29, 369n78, 380n23, 384n62, 384n68, 385n72, 386n77, 386n79, 386n85, 432n99, 433n109 Journal of Law and Economics, 73 Journal of Monetary Economics, 170, 171 Journal of Money, Credit and Banking, 100, 169, 297 Journal of Political Economy, 388n97, 402n253, 345; series of articles and debate in, on MF’s monetary framework, 176, 199–210, 345, 416n96, 416n98, 417n107, 418n118, 419n125 Judd, John P., 365n36, 372n117, 382n38 Kahn, Charles M., 449n278 Kalchbrenner, John, 425n20 Kaldor, Nicholas, 53, 166, 169, 361n209, 403n269, 440n190 Kane, Edward J., 286 Karadi, Peter, 188 Kareken, John H., 46, 303–4, 306, 416n99, 447n261, 448n271 Karnosky, Denis S., 304, 372n117, 440n201, 448n266 Katona, George, 433n106 Kaufman, George G., 100, 192, 371n104 Kavajecz, Kenneth A., 194

Kemp, Jack, 401n248 Kendall, Leon T., 57, 357n154, 362n214, 362n215, 362n216, 427n34 Kennedy, David M., 239, 244, 260, 434n128 Kennedy, John F., ix, 1, 3, 4–6, 9, 13–15, 24, 25, 47, 51, 55–57, 58, 132, 172, 183, 201, 274, 288, 321, 347n2, 348n21, 349n31, 350n52, 353n93, 362n222, 362n1, 362n3, 363n10, 423n175 Kennedy, Joseph P., Sr., 57 Kennedy, Robert F., 57 Kennedy-­Johnson tax cut, 16, 58–60, 356n141, 362n2 Keran, Michael W., 125, 349n38, 356n141, 358n166, 386n77 Ketchum, Marshall D., 57, 357n154, 362n214, 362n215, 362n216, 384n63, 391n130, 402n252, 427n34 Keynes, John Maynard, 39, 55, 75–76, 111, 141, 166, 182, 183, 241, 339, 365n42, 377n181, 393n160, 417n106, 418n120; MF criticizes demonization of, 76; MF’s esteem for, 76, 432n93; MF’s interpretation of framework of, 202–3, 205, 207–8, 325, 361n210, 419n125, 419n126; MF on achievement of, in offering original and internally consistent hypothesis regarding depressions, 76–77, 369n73; MF on contributions of, 76; MF on errors of, 76–77, 432n93; MF on open-­economy insights of, 49–50, 360n190; MF on pre-­General Theory monetary work of, 73; MF on probability analysis of, 368n72; MF’s teaching of work of, 29; MF’s utility work (with Savage) not an attack on, 368n72. See also General Theory of Employment, Interest, and Money, The (Keynes) Keynesian: analysis, 30, 60, 72, 370n89; approach, 74, 416n99; doctrine, 64, 419n126; economics/macroeconom­ ics, 2, 24, 30, 57, 63, 74–76, 210, 320, 419n126, 445n250 (see also New Economics); era, 264; ideas, 350n52; model, 45, 158, 301; perspective/ view(s)/thinking, 53, 58, 205, 301, 303, 363n10, 368n67; policies, 57, 201, 362n1;

I n d e x   571 terminology/language, 75, 368n67, 418n114; theory, 29, 30, 78, 91, 92, 154, 374n141 Keynesian-­monetarist debate, 78, 103, 145, 169, 177, 256, 316, 369n82, 416n99, 425n20 Keynesian multiplier, 95. See also fiscal multiplier Keynesian revolution, 2, 166, 201, 418n120 Keyserling, Leon H., 362–63n6 Kindahl, James, 421n150 Kindleberger, Charles P., 293, 365n38, 443n228 King, Robert G., 140, 211, 314, 392n152 Kirkpatrick, C. H., 165 Kitch, Edmund W., 432n180 Klamer, Arjo, 22, 25, 159, 315, 351n74, 355n129, 356n145, 367n61, 392n155, 402n251, 404n277, 420n134, 421n148, 452n303 Klee, Elizabeth, 124 Klein, Benjamin, 342, 365n45, 372n117, 411n60, 414n77, 415n86 Klein, Lawrence R., 19, 120, 394n178 Knight, Frank H., 267, 368n72, 370n89, 418n122, 436n154 Kohn, Donald L., 52 Korea, 461n410 Korean War, 119, 140, 234, 250, 340, 350n46 Kormendi, Roger C., 121, 427n40 Kotlikoff, Laurence J., 391n130 Kozicki, Sharon, 434n123 k percent rule, 451n293. See also constant-­ monetary-­growth-­rule Kriesler, Peter, 368n72 Kristol, Irving, 423n179 Krooss, Herman E., 36 Krueger, Alan B., 130 Krugman, Paul, 152, 218–20, 224, 422n162, 449n271 Kuh, Edwin, 133, 389n110 Kuttner, Kenneth N., 382n39 Kuznets, Simon, 18, 36, 410n49, 426n22 Kydland, Finn E., 5 labor market, 144, 147, 149, 155, 301, 430n73, 446n252; variations in hours

as summary of state of, 149. See also natural rate of unemployment; unemployment labor supply, 18, 184, 298 labor unions, 79, 265, 327–28, 456n353, 456n355 Laffer, Arthur B., 60, 192, 240, 276, 401n248, 414n77, 427–28n41 lagged reserve requirements/lagged reserve accounting system, 67, 117– 18, 286, 371n100, 383n47, 441n207 lagrange multiplier, 19, 351n69 lags, in reaction of economic aggregates to monetary policy: MF’s and Friedman-­Schwartz’s work on, 7–9, 46–47, 107, 228, 231–39, 250, 282, 303, 348n23, 359n180, 427n34, 427n36, 427n38, 427n39, 427n40, 428n43, 428n44, 428n46, 428n51, 428n53, 447n261; others on, 238, 427n36, 428n54, 428–29n55, 429n56 Laidler, David, xii, 1, 29, 40, 58, 68, 70, 101, 106, 143, 151, 153, 154, 158, 165, 169, 174, 207, 215, 226, 227, 231, 235–36, 307, 353n102, 364n24, 366n49, 366n50, 382n38, 394n171, 397n206, 400n238, 403n266, 403n268, 404n274, 404n282, 414n83, 417n103, 421n148, 449n283, 460n405 Landau, Daniel, 460n394 Lange, Oskar R., 361n207 Latané, Henry A., 366n52 Latin American countries, debate on inflation in (1950s and 1960s), 88, 164–65, 402n253 Laubach, Thomas, 154–55, 157, 238 Laurent, Robert D., 387n87 law and legal system, limited character of MF’s writings and statements concerning, 219–20, 423n171 Leeson, Robert, 40, 145, 206, 236, 357n158, 367n63, 369n81, 369n82, 395n185, 401n248, 455n347 Leijonhufvud, Axel, 419n125 Lemgruber, Carlos Braga, 395n181, 421n144 Lenin, V. I., 222, 436n152

572 I n d e x Lerner, Abba P., 23, 53–55, 76, 141–42, 352n85, 361n207, 361n208, 361n210, 393n162, 399n235 Leube, Kurt R., 353n104 Levin, Andrew T., 314, 370n93 Levin, Fred J., 323 Levitt, Theodore, 409n41 Levy, David, 308, 422n168 Lewis, Mervyn K., 235, 414n81 liability management, 191–92, 195, 414n78, 414n81 libertarian(ism), 98–99, 132, 180, 218, 221, 223, 422n162 Lindbeck, Assar, 308 Lindsay, Robert, 414n83 Lindsey, David E., 58, 98, 358–59n168 Lipsey, Richard G., 145, 394n178, 395n185, 401–2n250 liquidity effect, 71, 112–13, 361n203, 367n54, 381n29, 398n214, 417n108 liquidity trap, 39, 53, 55, 76, 202, 205, 207– 8, 417n106, 417n111, 418n120, 419n125, 419n126 Llewellyn, David T., 414n79 LM curve, 127. See also demand for money London School of Economics (LSE), 143, 163, 349n386, 395n185, 402n250 López-­Salido, David, xi, 361n201 Lothian, James R., 12, 108, 198, 212, 217, 279, 358n166, 414n79, 434n130 Lovell, Michael C., 374n137 Low, Richard E., 422n166 Lucas, Robert E., Jr., 19, 20, 21, 22, 24, 25, 29, 30, 37, 40, 81–82, 121, 140, 141, 142, 146, 149, 150, 158, 160, 203, 210–11, 214, 215, 297–318, 351n74, 351n75, 352n77, 354n108, 355n129, 356n145, 370n90, 382n38, 392n147, 392n151, 392n155, 393n161, 394n174, 395n178, 396n193, 399n232, 401n244, 414n317, 417n110, 420n140, 424n5, 445n244, 445n245, 445n247, 445n248, 445n249, 445n250, 445n251, 445–46n252, 446n254, 446–47n258, 447n260, 447n263, 447–48n264, 448–49n271, 450n287, 450n290, 451n293, 452n303, 453n305, 454n314

M1, 7, 11–12, 13, 14, 60, 70, 85, 89, 101, 108, 123, 125, 128, 167, 189–90, 194, 196–98, 246–47, 253, 260, 261, 263, 271, 278– 80, 350n42, 366n47, 366n49, 373n122, 382n38, 383n48, 411n57, 412n65, 412– 13n68, 413n71, 415n87, 434n127; 1980 redefinition of, US, 198, 415n90. See also money/monetary aggregates; velocity M2, 3, 7, 11, 12, 13, 85, 101, 108, 122, 126, 129, 167, 189–90, 192–98, 246–47, 255, 260–63, 271–72, 278–79, 282, 324, 350n42, 365n46, 366n47, 366n49, 371n107, 377n183, 378n188, 382n37, 383n48, 411n57, 412n66, 412–13n68, 413n71, 413n75, 415n87, 415n90, 427n36, 431n89, 432n99, 434n127, 437– 38n167; 1980 redefinition of, US, 10–12, 14, 70, 86, 87, 194, 198, 272, 279–80, 371n106, 415n90, 438n167. See also money/monetary aggregates; velocity M3: pre-­1980 definition, US, 85–86, 371n106, 438n167; revised definition, US, 194, 413n74 macroeconomics, 29–30, 160, 185, 186, 211, 215–16, 226, 300, 306, 307, 368n72, 381n29, 449n271, 450n290, 452n303, 454n326; MF’s dislike of term, 91; modern, 232; US Keynesian, 24 macroeconomic theory, 176, 418n116 Maisel, Sherman J., 87, 254, 334, 433n111 Makinen, Gail E., 367n55 Mankiw, N. Gregory, 393n158 Manne, Henry G., 174, 186–87, 410n52 Marcuse, Herbert, 222 Mark, Shelley Muin, 27 market economics, 75, 352n75, 398n217. See also Capitalism and Freedom (MF) market solutions, 22, 24, 30, 99 Markowitz, Harry, 351n66 Marschak, Jacob, 351n66, 448n264 Marshall, Alfred, 207, 418n122, 426n22, 456n256 Marshallian, 18, 301, 446n256 Martin, George R., 339, 368n69, 404n283, 404n17 Martin, William McChesney, Jr., 14, 85, 120, 228, 350n46, 359n182, 371n106,

I n d e x   573 412n63, 440n195; correspondence and interaction with MF, 1, 31, 64, 85–86, 245, 247, 430–31n79, 431n83, 431n87, 432n93; discussion of link between easy money and high interest rates, 116–17, 246, 382–83n44; MF calls for early departure of, 244–45; service as Federal Reserve chair ends, 245, 249, 253, 432n97; television appearance with MF on Free to Choose, 245 Marty, Alvin L., 354n109 Marx, Karl, 40 Masera, Rainer S., 403n268, 414n77 Massachusetts Institute of Technology (MIT), x, 94, 127, 128, 133, 166, 178, 199, 200, 211, 213, 239, 293, 301, 375n151, 376n173, 386n85, 387n86, 387n95, 406n12, 407n19, 408n27, 416n97, 416n98, 416n99, 421n145, 429n62 Matusow, Allen J., 295, 340, 379n4, 429n64, 429n65, 432n93, 433n103, 433n108, 435n144, 436n153, 438n172, 440n195, 458n379 Mavroedis, Sophocles, 393n158 Mayer, Thomas, 26, 58, 93–94, 196, 357n153, 363n9, 370n93, 372n111, 392n158, 397n203 McCallum, Bennett T., xi, 19, 93, 124, 127, 139, 140, 143, 144, 145, 146, 151, 162, 166, 181, 211, 295, 306, 343, 358n166, 360n187, 374n143, 383n47, 384n62, 385n75, 395n184, 401n45, 404n278, 420n139, 422n153, 445n245, 445n247, 446n258, 447n262, 450n290, 451n293, 451n295, 452n301, 453–54n314 McCloskey, Deirdre, 342, 460n393 McClure, James E., 410n50 McCracken, Paul W., 241, 243, 244, 340, 430n68, 430n69, 433n106 McCrickard, Donald L., 16 McCulloch, J. Huston, 349n40 McGovern, George S., 133–34, 339–40, 389n109, 389n111 McIvor, R. Craig, 356–57n152 McKinnon, Ronald I., 58, 379n5 McLure, Charles E., Jr., 242, 379n4 McManus, T. F., 357n153 McNees, Stephen K., 440n201

Means, Gardiner C., 410n49 Medicaid, 97, 375n161 Medicare, 97, 375n161 Meek, Paul, 382n37 Meguire, Philip, 121, 427n40, 437n160 Mehrling, Perry, 357n152, 424n4, 446n257 Meigs, A. James, 41, 62, 65, 91, 183, 241, 256, 358n168, 361n202, 372n117, 373n134, 378n199, 381n30, 382n44, 383n48, 384n56, 385n71, 440n193 Meiselman, David, 1, 30–31, 45–46, 47, 56, 58, 63, 69, 90–95, 101, 125, 143, 174, 201, 207, 347n4, 353n103, 366n54, 367n63, 372n119, 373n133, 373n134, 374n136, 374n137, 374n138, 374n141, 374n142, 374n143, 374n145, 374n148, 374n150, 375n151, 375n152, 375n154, 377n183, 413n71, 417n102, 418n116, 418n122, 435n143, 445n245. See also Friedman-­ Meiselman, critique of the fiscal multiplier Melamed, Leo, xii, 290, 296–97, 444– 45n239 Meltzer, Allan H., xi, 1, 4, 10, 28, 40, 41, 42–44, 47, 51, 65, 67–68, 85, 101, 103, 106, 113, 115, 117, 118, 121, 124, 126, 162–71, 189, 192, 196, 201, 205–6, 226, 276, 286, 294, 325, 354n118, 355n131, 356n151, 358n161, 358n167, 359n168, 364n20, 364n29, 365n37, 370n93, 370n96, 379n3, 383n48, 384n56, 384n68, 386n77, 386n82, 403n265, 403n266, 403n267, 403n268, 403– 4n269, 404n271, 404n273, 404n274, 404n278, 412n66, 429n56, 431n79, 431n83, 431n91, 432n93, 432n96, 434n115, 442n212, 447n264, 448n264, 457n368, 458n379 Melvin, Michael T., 365n43 Meulendyke, Ann-­Marie, xi, xii, 176, 255, 354n113, 406n10, 414n76, 441n206 microeconomics, 18, 216, 388n97, 452n303; analysis of, 188, 388n97; data, 421n150; foundations of, 149, 167, 301; literature, 187; orientation, 24; policy, 430n73. See also price theory (field) Mihov, Ilian, 364n36 Mikesell, Raymond F., 402n253

574 I n d e x Miles, Marc A., 192, 338 Miller, Marcus, 232 Miller, Roger F., 19 mini-­recession of 1967, US, 90, 379n2 Mints, Lloyd W., 31, 39, 207, 356–57n152 Miron, Jeffrey A., 33, 40, 231–32 Mirrlees, James, 174, 187, 391n139, 410n49 Mishkin, Frederic S., 47, 154, 157, 238, 374n146, 381n29, 433n110, 453n312 Mitchell, George W., 3, 65, 114, 122, 247, 249, 256, 371n100, 430n75, 432n95, 433n111, 434n122 Mitchell, Wesley C., 317, 320 modern quantity theory. See demand for money; monetarism; quantity theory of money Modigliani, Franco, x, 19, 52, 53, 61–62, 75, 93–98, 118, 121, 128, 139, 145–46, 200, 207, 315, 349n34, 361n206, 363n13, 364n20, 365n38, 366n50, 374–75n150, 375n153, 383n50, 384n62, 386n80, 392n148, 394n178, 397n205, 416n99, 428n44 Moffitt, Robert A., 409n36 Mondale, Walter F., 391n143 monetarism, 53, 128, 151–52, 163, 167– 70, 181, 206, 209, 226, 256–57, 274, 276, 277, 282, 309, 357n156, 397n202, 397n203, 422n153, 425n20, 434n121, 435n144, 438n172, 453n309; Kaldor on scourge of, 440n190; MF as the face of, 166; MF’s dislike of term, 165–66; MF’s use of term (or of “monetarist”), 40, 166, 255, 314, 402–3n263, 418n118, 439n182; occurrence of term before 1968, 164–65; originator of term not being Brunner, 164; Samuelson on delirium of, 365n42; Samuelson on plague of, 278; University of Chicago and, 29–30, 354n109, 439n184; Volcker on, 449n273. See also quantity theory of money; velocity monetarist: accounts, 11; analysis, 167, 206, 312; challenge, 201; conclusion, 165; critique, 43, 175; early use of term, 402n253, 402n254; elements, 152; ideas, 168, 434n123; interpretation, 256; lit-

erature, 53, 117, 164, 378n191, 381n27; message, 125; model, 93; movement, 166; outposts, 436n153; perspective, 374n145; position, 117, 118, 126, 195, 246; prediction, 119; prescription, 354n112, 435n132; propositions, 151, 203, 205, 209, 235, 257, 357n156, 397n201, 451n296; relationships, 151; revolution, 164, 316; theoretical framework, 202; theory, 256, 322; thinking, 205; thought, 168; view(s), 120, 127, 255, 326, 363n10, 417n107, 448n264; work, 230. See also Keynesian-­monetarist debate monetarists, 40, 42, 47, 57, 65, 67, 68, 74, 76, 85, 92, 103, 104, 113, 115, 117–18, 119, 126, 161–62, 164–67, 170, 181, 195– 96, 204–5, 230, 278, 310, 332, 349n38, 364n20, 371n102, 402n255, 403n263, 427n41, 431n91, 435n132; Tobin on, 357n156 monetary analysis, 18, 29, 40, 68, 79, 104, 114, 126, 151, 152, 153, 171, 189, 190, 191, 193, 196, 199, 203–6, 210, 238, 305, 308, 351n61, 365n43, 386n75, 416n99, 457n368 monetary base, 51, 85, 86, 103–4, 108, 117, 123–24, 167, 197–98, 247, 254, 364n29, 378n198, 382n38, 385n70, 404n271, 404n275, 414n76, 414n77, 442n217, 451n293. See also bank reserves (commercial bank reserve balances); currency; high-­powered money; money multiplier; open market: operations; ­reserve requirements monetary control, 65, 126, 156, 167, 189, 193–96, 245–46, 254, 256, 412n64, 441n207 monetary growth as a summary of monetary policy, 127, 205, 317, 374n145. See also money/monetary aggregates Monetary History of the United States, 1867–1960, A (MF and Schwartz), 5, 44–45, 47, 51, 63, 64, 65, 67, 68, 69, 99–100, 103, 111, 123, 124, 166, 169, 189, 198, 230, 231, 233, 236, 304, 316, 325, 355n137, 356–57n152, 358n161, 358n168, 360n185, 364n24, 364n29, 375n158, 376n179, 385n70, 404n272, 405n284,

I n d e x   575 420n131; finalization and release of, 2, 28–36, 353n107, 354n115, 354n120, 356n146, 380n21; methodology of, dissimilarity of, to Friedman’s work on consumption, 355n129; narrative of 1930s, 36–44; sales of, 228. See also Friedman-­Schwartz monetary project (post-­1963 developments); Schwartz, Anna J. monetary policy: academic experts on, 45; agenda, 112; analysis, 153, 154, 188; conservative, 435n140; countercyclical, 30; debate, US, 128, 416n99; discussion(s), 116, 198; doctrine, 365n36; exchange rate and, 50, 109; field of, 131; fundamental issues in, 73; incorrect, 74; inflation analysis and, 84, 370n96; literature, 47, 152, 355n129; MF’s characterization as “incredibly expansive” in early months of 1972, 272; MF’s differences from Kennedy Administration on, 25; MF’s evaluation of early-­ 1960s performance of, 10, 304, 350n47; MF’s retrospective on 1970s US record with regard to, 254; MF’s testimony on, in 1950s and 1960s, 3; mix, with fiscal policy, 242; neutral, 61, 261, 363n11; operations, 255, 285–86, 441n206; postulates of, 113; postwar, 63, 73, 107, 201; proper target of, 113; regime, 304; researchers in area of, 63; setting of, 156, 243, 331; status as sufficient tool for inflation control, 434n120; task for, 119; theoretical foundations of, 199; versus other influences on money stock, 37, 39. See also bills-­only policy, of Federal Reserve; Burns, Arthur F.; central-­bank independence; Federal Reserve; Federal Reserve Board; interest rates; Martin, William McChesney, Jr.; money/monetary aggregates; Operation Twist monetary shocks/monetary policy shocks/policy surprises, 33, 310, 427n40, 451n293, 453n312 Monetary Statistics of the United States (MF and Schwartz), 41, 45, 63, 188– 89, 193–94, 198, 228–29, 357n158, 358n159. See also Friedman-­Schwartz

monetary project (post-­1963 developments); money/monetary aggregates; Schwartz, Anna J. monetary targeting, 118, 139, 257, 434n112, 434n115; adoption of, in United Kingdom (1976), 256 monetary theory, 18, 29, 63, 154, 176, 199, 308, 315, 325, 345, 376n179, 398n210, 413n68, 416n99; definition of, 152–53; fundamental issues in, 73; modern, 163, 164; neoclassical, 207, 418n124; of nominal income, 126, 199; postulates of, 113; postwar trends in, 73; of rate of interest, 72 Monetary Trends (Federal Reserve Bank of St. Louis data circular), 384n66 Monetary Trends in the United States and the United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867– 1975 (MF and Schwartz), 41, 45, 64, 70, 90, 102, 169, 199, 204, 205, 227, 228, 229, 234, 283–84, 317, 400n236, 416n95. See also Friedman-­Schwartz monetary project (post-­1963 developments) monetization rule, 451n293 money, demand for. See demand for money money demand shocks, 72, 115 money/monetary aggregates, 2; advent of official multiple definitions of, in US (1971), 194; behavior in early 1960s, US, 7–12, 60, 350n42; behavior in middle and later 1960s, US, 12–14, 85–87, 89, 247–49, 382n37, 432n99 (see also credit crunch of 1966; recessions, US); conflicting signals in 1970–71 given by different measures of, 189–98, 415n87; Federal Reserve, declaration of emphasis on (1970), 253–55; Friedman-­ Schwartz, definition of, 11, 70, 86–87, 193–94, 412n66 (see also M2); monetary policy stance in 1960s and, 114–15, 246, 413n71; rapid growth of, during early 1970s, US, 197–98, 262–64, 415n90, 437–38n167; relationship with income or spending aggregates, in US, 3, 33, 34, 69, 71–72, 90–95, 101, 230–35, 276–78, 374n145, 374n148, 375n154, 385n75,

576 I n d e x money/monetary aggregates (continued) 387n88, 425n20, 426n21, 427n36 (see also St. Louis equation [Andersen-­ Jordan equation]; velocity); rule proposed by MF for constant growth in (see constant-­monetary-­growth rule) money multiplier: behavior in early 1930s, US, 38–39; role alongside monetary base in the analysis of the money-­ supply process, 64, 103–4, 167, 196, 357n153, 364n29, 385n70, 403n267, 414n76, 414n78 monopolist, 265 monopolistic-­competition theory, 313 monopolistic power, 353n96 monopoly, 185, 388n97 Moore, Geoffrey H., 34, 233, 426n22 Moore, George R., 253, 364n36 Moritz, Charles, 429n64 Mortensen, Dale T., 302, 394n174, 401n244, 446n252 Moynihan, Daniel Patrick, 184, 409n39 Mulhearn, Chris, 396n196 Mulligan, Casey B., 377n186 multiple-­yield view of monetary policy transmission, 71, 92, 127, 168, 205–6, 374n145, 417n107 Mundell, Robert A., 293, 427n40, 442n216 music, MF’s indifference toward, 178, 407n18 Mussolini, Benito, 423n175 Muth, John F., 302–3, 310, 404n278, 446– 47n258, 447n260, 449n280, 452n303 Muth, Richard, 226, 446–47n258 Myhrman, Johan, 309 Nader, Ralph, 217–25 Nadler, Paul S., 414n78 National Bureau of Economic Research (NBER), 28, 31–36, 90, 136, 153, 188, 205, 229–33, 249, 252, 317, 319, 336, 355n137, 376n173, 394n170, 401n245, 402n256, 411n53, 424n1, 426n22, 428n52, 460n405. See also Friedman Schwartz monetary project (post-­1963 developments); Monetary History of the United States, 1867–1960, A (MF and Schwartz)

national income. See nominal income/ nominal national income/nominal spending; output/real output/aggregate output/real national income National Review, 77, 369n76, 380n9, 388n98 natural level of output/natural rate of output, 155, 396n199. See also potential output natural-­rate hypothesis, 84, 139, 141–43, 145–48, 150–62, 322, 391n147, 392n158, 393n161, 394n170, 394n174, 395n185, 397n205, 398n218, 399n225, 399n232, 399n234, 399–400n235, 400n240, 401n241, 401n244, 401n249, 430n69, 445n250, 445–46n252, 447n263, 448n271; 1970s debates on, in US, 210–17, 297, 299–304, 309, 392n151, 397n202, 397n204, 420n137, 420n140, 421n148, 422n153, 445n251, 446n254 natural rate of interest, 363n11, 397n205 natural rate of unemployment, 54, 130, 142, 149, 150, 153, 156–57, 159, 162, 243, 299, 304, 327, 363n13, 393n165, 396n197, 397n205, 398n217, 399n221, 400n241 negative income tax, 130–34, 179, 183– 85, 387n93, 387n94, 387n95, 387n96, 388n98, 389n101, 389n102, 389n109, 389n111, 389n112, 390n113, 390n118, 390n120, 391n140, 402n258 Nelson, Charles R. 303, 392n158, 454n314, 454n319 Nelson, Edward, 33, 35, 96, 119, 151, 178, 242, 256, 258, 259, 266, 267, 321, 324, 332, 336, 348n17, 353n107, 354n117, 354n119, 354n121, 355n135, 357n154, 359n183, 360n186, 361n201, 364n24, 365n36, 367n54, 367n55, 369n84, 380n13, 382n34, 382n37, 382n43, 391n147, 394n170, 395n180, 395n184, 396n186, 398n212, 404n270, 404n274, 404n276, 404n281, 405n285, 406n15, 407n16, 408n29, 409n42, 420n135, 421n148, 421n153, 424n186, 425n22, 426n33, 429n56, 432n96, 439n183, 441n206, 441n208, 447n261, 448n267, 451n295, 452n300, 455n331, 455n338, 455n344,

I n d e x   577 455n346, 455n347, 456n356, 456n362, 457n368 Nelson, R. W., 357n153 Nerlove, Marc, 79–80, 216, 343, 351n63, 460n398 Neumark, David J. M., 130 Nevile, John W., 368n72 New Deal, 37, 40–41, 80, 97–98, 375n162 New Economic Policy, 260, 266, 268–70, 272–74, 277–78, 282, 284–85, 288, 294, 318, 328–29, 332–34, 428n41, 436n152, 438n170, 444n232, 454n328, 456n352, 458n382. See also wage and price controls, US (1971–74) New Economics, 2, 5, 76–77, 175, 201, 405n2 New Economists, 14, 119 New Keynesian, 113, 203, 421n150 Newsweek, 175, 344, 368n68; instals MF as columnist (1966), ix, 6, 26, 75, 89, 343, 359n170; judgments concerning respective qualities of MF and Samuelson as columnists for, 77, 177–81; MF columns for, basis for book collections, 390n115, 438n168; MF columns for, production process regarding, 77–78; profile of MF, in syndication (1970), 409n33; profile of MF, published in wake of his Nobel Prize (1976), 23; various economics columnists for, 75–77, 369n74, 369n75, 383n49. See also Friedman, Rose Director; and specific topics New View, 102–4 New Zealand, 401n248, 410n50 Niehans, Jürg, 424n4 Niskanen, William A., 339, 459n389 Nixon, Richard M., ix, x, 217, 223, 228; abolition of foreign exchange controls (1974), 442n218; Arthur Burns’s influence on, 329, 443n221; candidacy and election victory, 171; contacts of MF with administration of, 175, 240, 429n60, 429n64; conversation with MF (October 1976), 346; credence and weight given to MF’s macroeconomic views by administration of, 183, 240–42, 255, 259, 322, 430n69, 435n144;

deposition of (1975), 436n152, 444n232, 444n234; disclosure of White House taping system of (July 1973), 274; discussion of MF’s work in conversation with Burns, 415n87; discussion of wage/price controls (April 1973), 277, 440n187; economic and political problems in second term of, 269, 346; enthusiasm on MF’s part regarding victory and forthcoming presidency of, 171–73, 405n289, 409n35; fiscal commitments of, 437n160; inflation predictions by members of administration of, 435n146; international economic policy of, 288–97, 443n225; last days of presidency of, 405n294, 444n237; MF’s criticisms of domestic economic policies of, 267, 270, 273, 318, 330, 435n142, 439n180, 440n198; MF’s early criticisms of administration of, 183–84, 242–43, 430n71; MF’s meetings, correspondence, and conversations with, 244, 248, 252–53, 260, 263–64, 275, 412n62, 431–32n92, 433n103, 433n106, 433n108, 435n137, 442n218; MF’s meeting with (September 1971), 268–69, 273–74, 331, 433n106, 436n156, 437n157, 438n175, 439n178, 440n198, 443n223, 444n229, 444n233, 456n364; MF’s memorandum to (December 1968), 361n198, 405n290, 405n294; MF’s non-­ break with, and support for reelection of, 272, 277, 340, 438n170; MF’s ongoing positive assessment of character of, 273, 276, 440n186; MF’s praise for governance of, and optimism regarding prospects of change under, 239, 251–52, 260–62, 328, 459n391; MF’s praise for personality and character of, 261–62, 266, 270; midterm economic forecasts of administration of, 427– 28n41; New Economic Policy of (see New Economic Policy); 1972 reelection campaign of, and US economic policy, 331–34, 432n96, 457n370; perception that MF was losing influence on, 264– 65, 277, 319; resignation (August 1974), 318, 346, 444n237; Rochester (Minne-

578 I n d e x Nixon, Richard M. (continued) sota), call to, for pre-­surgery conversation with MF (December 1972), 346, 460–61n409, 461n410. See also Bretton Woods system; gold: window for; wage and price controls, US (1971–74) Nixson, F. I., 165 Nobay, A. Robert, 395n185 Nobel lecture by MF (“Inflation and Unemployment,” delivered 1976, published 1977), 141, 143, 162, 217, 227, 304, 306, 310, 401n244. See also natural-­rate hypothesis; Phillips curve Nobel Prize in economics: for MF (1976), 159, 171, 345, 346, 400n236; for other economists, 91, 180, 308, 310, 320, 394n174, 400n236, 401n244, 408n28, 438n168, 450n290 nominal income/nominal national income/nominal spending, 3, 7–8, 10, 59, 60, 65, 71–72, 115, 126, 127–28, 139, 151, 155, 182, 199, 202, 230, 282, 284, 317, 363n10, 366n52, 398n210, 425n16, 425n20, 441n203; growth in, 7–8, 10, 60–61, 72–73, 90, 101, 151, 234–36, 250, 278, 282, 377n185, 385n75, 427n36, 427n41, 454n317, 454n324; private-­ sector, 104 nominal rigidity/rigidities, 148–49, 401n249, 419n127 noninflationary growth, 9, 10 nonmonetarists, 30, 151, 195, 256, 397n204 nonmonetary analysis/view/theories of prices and inflation, 119, 154, 238, 257– 59, 325, 333, 426n23, 436n149, 456n362. See also cost-­push inflation nonmonetary factors/influences/disturbances, 155, 256, 310, 321 nonmonetary measures/actions/policies/ tools/weapons, 15, 51, 109, 157, 259, 340 Nordhaus, William D., 353n93, 360n185, 406n14 Northwestern University, 121, 215, 216, 344, 387n90, 421n152 Novak, Robert, 439n184 Nowak, Laura, 12, 108, 198, 279, 434n130 Nutter, G. Warren, 96–97, 429n60

Obama, Barack, 138 objectives of policy. See policy goals/ policy objectives O’Driscoll, Gerald P., Jr., 387n91 Ohanian, Lee E., 148 Okun, Arthur M., 25, 59–61, 64, 69, 70, 71, 98–99, 100, 119, 121, 123, 213, 221, 267, 329, 331, 340, 348n15, 363n9, 364n26, 371n108, 374n139, 379n4, 413n70, 420n133, 420n137, 420n138 O’Leary, James, 433n106 Ollion, Etienne, 388n97 open market: operations, 38, 103–4, 193, 195–96, 371n99, 414n82, 433n111; policy, 458n374; purchases, 38–39, 66, 357n152; sales, 195. See also bank reserves (commercial bank reserve balances) Operation Twist, 47–52, 359n185, 361n201 Optimum Quantity of Money, The (MF), 226, 424n7 “Optimum Quantity of Money, The” (MF), 301; unrepresentative of MF’s monetary economics, 226–27, 399n224. See also deflation rule Orphanides, Athanasios, 4, 5, 261, 266, 285, 348n13, 364n36, 432n96 Oulton, Nicholas, xi output, maximum feasible level of, 5 output gap, 4–6, 61–62, 153, 154, 155, 202, 257, 258, 285, 287, 325, 348n10, 397– 98n209, 457n370 output/real output/aggregate output/ real national income, 4, 6, 11, 46, 60, 69, 90, 107, 127, 129, 142, 145, 149, 151, 155, 156, 168, 209, 215, 230, 231, 233, 235, 236, 237, 238, 250, 251, 252, 259, 269, 272, 273, 284, 285, 310, 311–13, 317, 348n10, 348n15, 348n23, 365n46, 378n191, 378n192, 381n29, 392n158, 398n210, 419n125, 425n16, 425n20, 427n40, 428n46, 438n172, 445n251, 447n261, 449n279, 451n293, 453n309, 453n312; deflator for, 441n202; growth in, 8, 10–11, 15, 61, 74, 82, 90, 102, 107, 127, 151, 164, 217, 218, 225, 235, 236, 237, 243, 247, 272, 282, 300, 427n40, 428n44, 438n172. See also potential output overfull employment, 5

I n d e x   579 Pareto, Vilfredo, 19 Parker, Randall E., 40, 361n205 Parkin, Michael, 7, 308, 446n258, 449– 50n283, 451n295, 452n303 Patinkin, Don, 40, 72, 201, 206–8, 365n43, 367–68n63, 392n158, 395n178, 399n226, 416n96, 416n97, 416n99, 418n120, 418n124 Paustian, Matthias, 414n82 payroll tax, 136, 391n130. See also Social Security, US Pechman, Joseph A., 213, 387n96 Peltzman, Sam, 20–21, 27, 351n74 Penalver, Adrian, 414n82 Perez, Stephen J., 231 Perlman, Morris, 424n4 permanent income, 28, 306, 366n50 permanent income hypothesis concerning consumption, 120–21, 137, 305, 309, 320, 363n9, 384n53 permanent income model, Friedman/ Muth, 303 Perry, George L., 420n133, 420n137, 420n138 personal income, nominal, 126, 278, 282 Pesek, Boris P., 373n134, 413n71 Peterson, Mary Bennett, 219, 422n165 Phelps, Edmund S., 105, 140–43, 145, 151, 153, 154, 157–63, 210–15, 242, 258, 299, 300, 301–2, 313, 315, 322, 392n157, 393n159, 393n161, 393n162, 393n168, 394n174, 394n176, 395n185, 396n196, 398n209, 398n211, 399n225, 399n233, 399–400n235, 401n249, 404n278, 417n109, 422n153, 424n4, 445n243, 445–46n252, 446n254; differences between his and MF’s Phillips-­curve analysis, 146–50; Nobel Prize for (2006), 400n236, 401n244 Phillips, Almarin, 410n51 Phillips, A. W., x, 145, 162, 394n177, 394n178, 395n185, 400n239, 402n250 Phillips, Chester Arthur, 357n153, 385n70 Phillips curve, x, 400n236, 401n245, 401n249, 416n99, 420n135, 422n155, 450n288; analysis, 398n210, 398n217, 398n218, 399n225, 454n317; downward-­

sloping/permanently-­nonvertical, 10, 18, 139, 242, 298, 393–94n170, 394n171, 395n180, 395n181, 395n184, 396n189, 397n204, 399n220, 421n148, 422n153; empirical findings on, pre-­1958, 394n177; expectations-­augmented, and long-­run vertical, 54, 104–5, 139– 63, 200, 202–3, 210–17, 227, 241–42, 258, 265, 299, 300, 303–6, 309–10, 322, 392n151, 393n158, 393n161, 393n168, 394n176, 395n185, 395–96n186, 397n206, 397–98n209, 398n217, 398n218, 399n227, 400n239, 400n240, 401n241, 417n109, 445n243, 445n249, 447n263, 450n287, 453n309, 453n313 physics, 179, 407n22, 407–8n25; nuclear, 408n26 Pierce, James L., 123, 167, 434n115 Pigou effect, 18 Pigovian approach to pollution, 224, 423– 24n180 Plagborg-­Møller, Mikkel, 393n158 Plosser, Charles I., 101, 303, 305, 313, 345, 374n148, 375n154, 377n183, 403n266, 450n291 policy goals/policy objectives, 6, 46, 50, 52, 109, 155, 158, 394n173, 398n213, 460n392 policy rules, 139, 151, 155, 156, 256, 305, 376n173, 397n205, 398n213, 398n217. See also constant-­monetary-­growth rule; monetization rule; Taylor rule pollution, 223–25, 424n180; noise, 178; taxes on, 224, 423n179 Poole, William, 213–14, 215, 245, 253, 254, 259, 374n135, 393n161, 420n143, 431n80, 455n346 Porter, Michael, 369n79, 456n356 Porter, Richard D., 5 Posen, Adam S., 154, 157, 238 potential output, 4–6, 151, 284, 285, 441n203 pound sterling, UK: end of link to gold (1931), 356n146; devaluation of (1967), 109, 380n13; floating of (1972), 295 Pratt, Richard T., 372n113 Prescott, Edward C., 5, 19, 150, 297, 299, 302, 316, 445n244, 453n305

580 I n d e x presidential election: of 1960, ix, 2, 14, 347n2, 350n52, 353n93, 379n6; of 1964, 80, 95–98, 136, 171, 376n165; of 1968, 171–73, 183, 405n289; of 1972, 133–34, 268, 269, 272, 277, 331–34, 339–40, 389n109, 389n111, 457n368; of 2004, 130 price level, 118, 155–56, 176, 208, 227, 354n113, 363n10; behavior of, 54, 309, 426n23; endogeneity of, versus treating as datum, 72, 325, 369n73, 421n150; expectations of, 148, 396n187; movements in, 349n26, 426n23 (see also inflation); US, 83, 88, 364n17, 441n202 price measurement, 215–16, 349n26; distortion of, during periods of price control, 283–84, 287, 436n156, 440–41n201, 442n208, 442n209 price of money, 72, 367n58 price stability, 9, 13, 15, 52, 54, 62, 63, 82, 83, 90, 105, 107, 121, 144, 154, 155, 157, 158, 227, 243, 289, 322, 331, 363n13, 370n92, 394n173, 398n211, 399n220, 420n137, 430n75, 435n140 price stickiness, 148, 300, 387n88, 453n313. See also nominal rigidity/ rigidities price theory (field), 18, 34, 76, 79, 153, 345, 388n97, 446n256. See also microeconomics Price Theory (MF), 17–19, 22, 351n67, 400n239, 445n249; revised version (Price Theory, published 1976), 18, 153, 400n236 Price Theory (University of Chicago graduate economics class), 17–21, 176, 298, 345, 350–51n61, 351n63, 351n66, 351n69, 351n70, 351n73, 406n9, 418n123 principal/agent problem, 186–88, 410n46, 410n49, 410–11n52 profit maximization, 185–88, 409n41, 409–10n43, 410n45, 410n46 Program for Monetary Stability, A (MF), 1, 22, 53–54, 65 Prouty, Winston, 132 Proxmire, William, 1, 118, 119, 121, 122,

383n49, 383n50, 384n52, 384n53, 401n248 public choice, theory of, 224, 342, 403n266 public housing, 25 Purvis, Douglas D., 308 q-­theory. See Tobin’s q quantity theory of money, 29, 45, 69, 71–73, 91, 102, 116, 165–66, 168, 205– 7, 231, 235, 365n42, 368n63, 400n240, 418n124, 450n284. See also monetarism Quarterly Journal of Economics, 100, 229, 231 Quinn, Daniel W., 124 Radcliffe Committee (UK), 45 Ramey, Valerie A., 129 random walk, 306, 449n277 Ransom, Roger L., 351n67 Ranson, R. David, 427–48n41, 443n225 Rapping, Leonard A., 298–99, 302, 392n151, 445n250 Rasche, Robert H., 70, 106, 115, 122, 170, 278, 371n106, 378n198, 382n38, 383n47, 411n54, 413n74 rational-­expectations revolution, 149, 157, 161, 302, 307–8, 309, 311, 313, 316, 341, 399n223, 424n5, 446n254, 452n301, 454n326 reaction function of the Federal Reserve, 92–93, 365–66n36, 370n457, 387n88 Reagan, Ronald, 98, 181, 275, 375–76n163, 391n143, 408n28, 458n372 real balance effect, 206, 369n73, 418n120. See also Pigou effect Rebelo, Sergio, 129 recessions, US, 15, 107, 265, 323, 328; avoidance of, 11, 247; in 1950s, 89; MF’s definition of, 90; MF’s fears and predictions concerning, during 1960s and early 1970s, 89–90, 106–7, 143, 182, 248–49, 251, 269, 271, 282–83, 321, 323; 1953–54, 323; 1957–58, 248; 1960– 61, 6–7, 63, 248, 249, 347n2; 1969–70 or 1970, 182, 249–52, 268, 431n91, 438n173; 1973–75 or 1974–75, 285; postwar, 63, 100, 181, 373n123, 377, 408n28 Redlick, Charles J., 61, 129, 363n10

I n d e x   581 reduced form, 95, 128, 204, 278, 448n264 Rees, Albert, 140, 392n151, 395n184 Regulation Q, 12, 86–88, 188–93, 247, 372n111, 382n37, 411n57 Reifschneider, David, 5 Republican Party, 95–98, 132, 136, 138, 171, 291, 358n168, 369n82 research methodology: MF’s 1953 article on, 179, 186, 307, 404n277, 449n281; MF’s views on, 410n45 reserve currency, 49 reserve requirements, 66–67, 117, 192, 372n111, 412n63, 414n75, 433n111; adjustment of monetary base and reserves series for changes in, 123–24, 197–98, 404n271; zero, case of, 196. See also bank reserves (commercial bank reserve balances); lagged reserve requirements/lagged reserve accounting system; monetary base reserves against private deposits (RPDs), 286, 441n206 retail deposits, 194–95, 411–12n60, 412n64, 413n68, 413n69, 414n75 Reuss, Henry S. (member of US House of Representatives), 118–19, 266, 292, 435n149 Reynard, Samuel, 367n55 Rhys-­Williams, Juliet, 131, 387n95 Ricardian equivalence, 16, 121, 137, 209, 391n137, 419n129, 451n292 Ricardo, David, 241, 367n54 Rinfret, Pierre, 433n106 Ritter, Lawrence S., 417n107 Roberts, Russell, 353n104 Robertson, Dennis H., 345, 460n108 Robertson, James L., 249, 431n89 Robinson, George Buchan, 357n153 Robinson, Romney, 65 Rockoff, Hugh, xi, 40, 372n117, 372n120 Romer, Christina D., xi, xiii, 1, 4, 5, 33, 44, 61, 83, 85, 87, 93, 129, 192, 226, 231–32, 241–42, 246, 259, 325, 347n1, 348n13, 350n46, 354n118, 355n129, 356n151, 360n192, 360n196, 362n3, 363n10, 365n36, 377n181, 398n212, 432n96, 437n160, 455n333, 455n346, 457n368 Romer, David H., xi, xiii, 1, 4, 5, 33, 61, 83,

85, 87, 93, 129, 192, 226, 231–32, 241–42, 246, 259, 326, 347n1, 348n13, 350n46, 354n118, 355n129, 360n196, 362n3, 363n10, 365n36, 377n181, 398n212, 432n96, 437n160, 455n333, 455n346 Roosa, Robert V., 108, 109, 111, 350n53, 360n197, 379n6, 379n7, 380n10, 380n19 Ross, Leonard, 399n231 Rostow, Eugene V., 409n41, 410n46 Rostow, Walt W., 79 Rotemberg, Julio J., xi, 360n196, 421n150, 455n333 Rothbard, Murray, 132 R-­squared, 375n154 Rudd, Jeremy, xi, 441n202 Rudebusch, Glenn D., xi, 365n36, 373n123 Rudolph, Joshua S., 360n185 Russia, 40 Rutgers magazine, 44 Rutgers University, 122, 209 Rutner, Jack L., 119, 198, 385n70, 404n271 Sachs, Jeffrey, 423n179 Safire, William, 433n106 Sala-­i-­Martin, Xavier, 377n186 Salas, Ian, 130 Salin, Pascal, xiii, 308 Samuels, Warren J., 351n69 Samuelson, Paul A., x, 15, 25, 54, 58, 61, 70, 77, 84, 110, 111, 128, 132, 135, 137, 139, 143–46, 168, 176–83, 200, 207–8, 222, 227, 232, 239, 257, 267–68, 272, 277– 78, 293, 296–98, 300, 301, 321, 334, 340, 347n2, 348n13, 349n25, 350n42, 353n93, 353n94, 359n170, 365n38, 365n41, 365n42, 369n74, 369n75, 376n173, 383n49, 386n85, 386–87n86, 389n101, 391n135, 391n140, 391–92n147, 393n161, 393n168, 393n169, 393–94n170, 394n172, 396n200, 398n211, 400n239, 400n241, 406n11, 406n13, 406n14, 407n19, 408n26, 408n27, 408n28, 408n29, 409n30, 409–10n43, 416n97, 416n98, 416n99, 418n124, 419n125, 419n126, 419n127, 424n4, 427n41, 430n71, 433n101, 436n154, 438n168, 440n190, 441n205, 443n227, 458n373,

582 I n d e x Samuelson, Paul A. (continued) 460n401. See also monetarism; Newsweek; Phillips curve; stock market Sanchez-­Fung, José R., 378n191 Sanderson, Allen R., 351n74 Sandilands, Roger J., xii, 40–41, 402n252 Sargent, Thomas J., 5, 142, 145, 146, 163, 211, 212, 214, 226, 270, 297–318, 354n120, 372n119, 389n109, 392n147, 393n161, 401n244, 402n250, 417n110, 420n135, 421n148, 424n5, 445n242, 445n243, 446n254, 447n260, 447n263, 449n279, 449n281, 450n287, 450n289, 451n293, 451n295, 451n296, 452n302, 454n326, 459n385 Savage, Leonard J. (Jimmie), 179, 368n72 Saving, Thomas R., 387n91, 413n71 saving(s), 16, 58, 87, 120, 137, 382n34, 391n137. See also Social Security, US savings and loan institutions, 55, 86, 381n28, 381n29, 414n77 savings banks, 85, 86, 358n166 Savona, Paolo, 86, 124 Scadding, John L., 287, 382n38 Schmalensee, Richard, 376n173 Schmitt, Karl Michael, 164 Schnittker, John A., 420n137 Schultz, Henry, 307 Schultze, Charles L., 174, 213, 399n226 Schwartz, Anna J., xi, 7, 48, 50, 55, 63, 72, 103, 143, 162, 164, 165, 170, 236, 335, 336, 403n267, 405n286, 411n53, 426n22, 438n168; on clarity of MF’s writings, 171; on contrast between MF and Arthur Burns in wanting policy position, 319; denied PhD during 1950s, 79; on direct financial controls, 193; on MF’s early-­1970s debate with his critics, 204; on MF’s market economics, 25; on MF’s originality, 177; on MF’s professional peak, 226; on MF’s public-­policy ­influence, 343; on monetary control, 414–15n83; New York Times interview with (1970), 188; receipt of PhD (1964), 79; rela‑ tions with, and assessment of, Arthur Burns, 34–35, 79, 324–25; reservations concerning breadth of MF’s knowl-

edge and ­interests outside economics, 177, 179, 406–7n16; working arrangements with MF, 34, 428n52; writings on Great Depression (1990s), 43. See also Friedman-­Schwartz monetary project (post-­1963 developments); Monetary History of the United States, 1867– 1960, A (MF and Schwartz); and specific topics Schwarzer, Johannes, 401n248 Schwert, G. William, 101, 303, 374n148, 375n154, 377n183 Sedgwick, Robert C., 456n353 Seers, Dudley, 402n253 Selden, Richard T., 28, 78, 383n50, 405n20, 458n381, 459n387, 459n389, 459n391 Shadow Open Market Committee, 170, 411n53 Shapiro, Eli, 370n92 Shapiro, H. T., 70, 101 Sheehan, John E., 358n158 Shepherd, George B., 451n294 Sherman, Gordon, 409n40 Shiller, Robert J., 178, 180, 299, 386n85 Shleifer, Andrei, 391n137 Shore, Dinah, talk show of, 134, 407n18 Shriver, R. Sargent, 389n109 Shultz, George P., 239–40, 249, 253, 263, 273–76, 294, 295, 329, 331, 340, 346, 412n62, 429n62, 430n70, 430n73, 432n96, 432n99, 436n151, 436n153, 439n178, 439n184, 439n185, 443n225, 444n233, 458n381 Sidrauski, Miguel, 113 Siegel, Jeremy J., 342 Silver, J. Lew, 306 silver movement, 312 Simon, Carly, 297 Simpson, Thomas D., 123, 157, 411n54 Sims, Christopher A., 91, 92–93, 231, 232, 307, 311, 314, 316, 317, 337–38, 385n70, 426n26, 451n297, 454n315, 459n385, 460n405 Sinclair, Peter J. N., 306 Sinclair, Tara M., xi Skousen, Mark, 26, 353n103 Slate, Daniel M., 27

I n d e x   583 Smith, Adam, 207 Smith, Graham W., 398n218 Smith, Robert S., 17 Smith, Ron, 395n185 Smithsonian Agreement, 292, 294, 296, 297, 443–44n229. See also Bretton Woods system Snowdon, Brian, 361n205, 392n148, 392n156, 394n178, 396n194, 397n201, 397n209, 447n260 Sobel, Lester A., 321, 457n367 social policy, 131, 387n97 social responsibility of business, MF’s position on, 185–88, 409–10n43, 410n50 Social Security, US, 131, 135–38, 390n122, 390n124, 390n127, 390n128, 391n130, 391n137, 391n138, 391n139, 420n142, 437n160 Solow, Robert M., 4, 46, 54, 82, 84, 128, 134, 139, 143–46, 159–62, 170, 175, 181, 186, 187, 200, 211–13, 240, 300, 301, 303, 348n11, 392n147, 393n161, 393n168, 393–94n170, 398n211, 399n227, 399n234, 400n238, 400n239, 405n284, 406n5, 408n27, 410n45, 410n49, 416n97, 416n99, 419n125, 420n140, 421n148, 429n62, 447n261 Sowell, Thomas, 376n171 Spain, 341 Special Drawing Rights (SDRs), 110 Spindt, Paul A., 383n47 Sprinkel, Beryl W., 123, 358n166, 431n91 Spry, John A., 410n50 stabilization policy, 2, 5, 6, 16, 24, 46, 53, 131, 151, 184, 239, 357n153, 379n6, 388n97, 420n135, 420n137, 428n41, 448n264. See also gradualism; New Economic Policy stagflation, 215 Stammer, Don, 369n79, 456n356 standard error of estimate, 282, 375n154 Stanford University, 79–80, 106, 143, 355n128, 358n166, 369n86, 416n98 “starve the beast” view of fiscal policy, 16, 275, 362n4, 459n390 Stein, Ben, 275, 429n63 Stein, Herbert, 240, 241, 274–77, 429n63,

429n64, 430n69, 430n70, 433n106, 435n146, 439n183, 439n185 Stein, Jerome L., 164 Steindl, Frank G., 357n152, 357n155 Sterling, Arlie, 121 Stevens, Neil A., 432n99, 433n109 Stigler, George J., 216, 349n26, 387n90, 388n97, 389n104, 421n150, 423n180; joins University of Chicago, 240; mixed outlook toward MF’s public-­policy activities, 342–44, 459–60n392, 460n393, 460n394; praise for MF as debater and expositor, 343–44; unfamiliarity with MF’s macroeconomic research debates, 376n173 Stigler, Stephen, 339, 342 Stigler Committee, 421n150 St. Louis equation (Andersen-­Jordan equation), 125–29, 278, 382n39, 384n62, 385–86n75, 386n85, 440n191, 440n192 Stock, James H., 127, 129, 382n38, 393n158 stock market, 113, 175, 381n34, 405n2, 408n29; Samuelson on, 181, 267–68. See also Tobin’s q Stokey, Nancy L., 19, 452n305 Strong, Benjamin, 41–43 structural change, 101, 265 structuralism/structuralist, 164, 402n253 structural model, 158, 204, 304, 448n264, 450n287 structural relationship, 210 structural unemployment, 157, 348n21. See also natural rate of unemployment Strunk, Norman, 384n63, 391n130, 402n252 Summers, Lawrence H., 221, 353n94, 360n185, 372n117, 388n97, 391n137, 450n287 Sununu, John, 432n96 superneutrality of money, 145, 392n158 supply function, 394n174; for money, 104, 166–67. See also aggregate supply; demand for money surtax, 125. See also federal income tax surcharge of 1968 Sutch, Richard C., 52 Sutton, F. X., 24, 27 Svensson, Lars E. O., 155, 398n213

584 I n d e x Swanson, Eric T., 52 Sweeney, Richard James, 369n74, 374n137 Swoboda, Alexander K., 414n76 Symington, Stuart, 116 Tamarkin, Bob, 445n239 Tarhan, Vefa, 383n47 Tatom, John A., 61, 129, 441n202 Tavlas, George S., xi, 357n155, 460n405 taxation: of corporations, 16, 59; cuts in, demand rationale for, 24, 58; excise, 83; increases in, demand rationale for, 119, 362n3; system, US, 59. See also federal income tax surcharge of 1968 tax cut of 1964, US federal. See Kennedy-­ Johnson tax cut tax revenues, 16, 60, 127 Taylor, John B., 24, 113–14, 121, 142, 155, 205, 262, 311, 313, 314, 322, 349n31, 353n91, 360n196, 370n93, 373n123, 400n239, 401n249, 442n209, 455n333 Taylor, Tim, 414n82 Taylor rule, 155, 373n123, 442n209 Teigen, Ronald L., 417n104 Teller, Edward, 408n26 Telser, Lester, 361n207 term premium, 48, 360n186 Tetlow, Robert, xi, 5 Theory of the Consumption Function, A (MF), 33, 302, 303, 306, 307, 308. See also permanent income hypothesis concerning consumption Thirlwall, A. P., 394n177 Thomas, R. L., 145 Thomas, Woodlief, 63 Thompson, J. Arthur, 402n254 Thornton, Daniel L., 127, 383n47, 384n62 thrift institutions, deposit accounts in, 11–13, 86–88, 190, 194, 366n49 Thygesen, Niels, 91, 369n74, 373n134 time deposits, 11, 12, 68, 85–88, 190– 97, 350n42, 372n110, 382n37, 411n59, 412n65, 412n66, 413n75, 433n111. See also M2; Regulation Q; retail deposits; wholesale deposits Time magazine, 7, 26, 27, 75, 182, 187, 244, 248, 265, 277, 368n66, 431n91

Tinsley, Peter A., 434n123 Tirole, Jean, 187, 410n52 Tobin, James, x, 2, 5, 16, 24, 52, 68, 73, 99–105, 113, 132, 133, 139, 145, 156, 158–61, 168, 169, 185, 267, 300–301, 315, 357n156, 364n20, 364n29, 365n38, 365n41, 366n46, 366n54, 367n61, 368n65, 374n145, 376n174, 376n176, 376n178, 377n180, 377n181, 377n186, 378n188, 378n197, 378n198, 379n7, 381n31, 381n33, 381–82n34, 389n101, 391n147, 394n170, 397n204, 398n209, 398n211, 399n225, 399n227, 399n228, 399n231, 399n232, 404n275, 404n278, 411n60, 412n64, 416n98, 416n99, 419n126, 419n128, 419n129, 419n130, 420n131, 425n15, 437n163, 450n283; monetary theory of, 376–77n179, 412– 13n68 (see also Tobin’s q); 1970 Quarterly Journal of Economics exchange with MF on timing evidence, 229–32, 426n22, 426n26; 1972 Journal of Political Economy exchange with MF on monetary theory, 201, 204, 208, 209–10 Tobin’s q, 113, 168, 185–86 Tooke, Thomas, 241 Torquemada, Tomás de, 222 Townsend, David, 354n115 Townsend, Robert M., 424n4 trade-­off, 46, 139, 144, 146, 154, 158, 211, 242, 322, 392n147, 393n168, 393– 94n170, 394n171, 394n173, 397n204, 397n205, 398n211, 398n217, 398n218, 399n225, 401n242, 401n244, 445n251, 455n338. See also Phillips curve trade unions. See labor unions Tran, Hong-­Anh, 102 transfer spending, US government, 131– 34, 183, 270 Treasury, US Department of the, 48, 52, 56, 59, 108, 239, 240, 243, 247, 252, 260, 270, 274, 276, 294, 319, 340, 359n185, 441n208, 443n225 Treasury bill rate, US, 7, 9, 287, 381n34. See also interest rates Treasury bills, 47, 360n186; liquidity of, 48 Triffin, Robert, 288, 365n38

I n d e x   585 Tsyrennikov, Viktor, 307, 449n281 Tulip, Peter, 130 Turnovsky, Stephen J., 398n209, 422n153 Two Lucky People (MF and Rose D. Friedman), Anna Schwartz’s reservations concerning, 336. See also individual topics two-­stage least squares, 127 Tyranny of the Status Quo (MF and Rose D. Friedman), 23 Ulman, Lloyd, 433n106 unemployment, 6, 10, 15, 46, 54, 75, 129– 30, 140, 142–46, 149–51, 153, 155–59, 161, 211, 214, 217, 227, 242–43, 258, 263, 266, 273, 304, 306, 327, 348n21, 363n13, 387n91, 392n147, 392n151, 393n161, 394n170, 394n173, 395n178, 397n205, 397n209, 398n211, 399n220, 401n242, 401n244, 421n145, 430n69, 445n250, 449n278, 455n338; MF’s criticisms of targeting or directly responding to, 6, 139, 457n370. See also natural rate of unemployment; output/real output/aggregate output/real national income; recessions, US unemployment gap, 153 United Kingdom, economic analysis in, 5, 258; Eurodollars in, 192, 412n62; MF on monetary policy in, 456n356; MF’s influence on policy agenda in, 112; MF’s media appearances in (1970s), 341; MF’s 1970 visit to, 175, 229, 456n353; monetary relations in, 111, 229; monetary targeting in, 256; traditional Phillips-­curve analysis not influential on policymaking in, 394n171 University of California, Los Angeles (UCLA), 111, 125, 170, 384n68 University of Chicago, 1, 4, 17, 19, 55, 68, 73, 79, 81, 84, 90, 98, 104, 111, 116, 122, 126, 143, 163, 199, 206, 207, 211, 217, 220, 223, 240, 267, 298, 302, 308, 311, 313, 323, 337, 338, 342, 345, 350n61, 354n109, 361–62n211, 368n72, 369n86, 370n90, 376n173, 380n22, 402n253, 403n263, 407n25, 416n98, 418n124, 439n184, 439n186, 441n207, 445n245,

445n248, 446n256, 447n258, 450n290, 451n295, 459n385, 459n392; administration of, 172; MF’s absences each year from, 21, 174, 406n9. See also Chicago School; Department of Economics, University of Chicago; Workshop on Money and Banking (University of Chicago) University of Chicago Magazine, 388n97 University of Chicago Round Table television special (1974), 162, 277, 430n69, 439n183 University of Minnesota, 201, 303, 317, 354n109, 417n102 US dollar reserves (of non-­US countries), 49, 380n8. See also international reserves; Special Drawing Rights (SDRs) USSR, 341, 436n152. See also Russia utility of households, 301, 307, 424n4; maximization of, 166, 300, 368n72, 408n27 Vaizey, John, 389n104 Valentine, Gloria, xi, 78, 220, 338, 369n79, 400n240, 454n325, 460n405 Vane, Howard R., 361n206, 392n148, 392n156, 394n178, 396n194, 396n196, 397n201, 397n209, 447n260 Van Hoa, Tran, 238 Van Horn, Robert, 369n87 Vatter, Harold G., 59 Veblen, Thornstein, 410n49 vector autoregression (VAR) analysis, 93 velocity, 182, 373n134; dynamics of, relationship with those of monetary growth, 71, 367n55, 417n105; fiscal policy and, 73, 384n57; Friedman-­ Schwartz’s construction of series for, using US data, 28; Friedman-­ Schwartz’s explanation of, 100; MF on behavior of, 7, 166; in nineteenth-­ century US, 101–2, 377n186, 377– 78n188; positive relationship with interest rates, 71, 120, 250, 367n55, 367n62, 367–68n63, 384n57; relative stability of, tests regarding, 91–92; Samuelson on, 181; stationary behavior of, for US M2 measure of, 13, 189, 278, 280; uncer-

586 I n d e x velocity (continued) tainty and, 271; upward trend in, for US M1 measure of, 189, 278, 280; in US vs. UK, 229. See also demand for money; M1; M2; money/monetary aggregates Vietnam War, 440n186, 461n210. See also defense spending, US government Viner, Jacob, 418n124 Volcker, Paul A., 3, 38, 88, 144, 239, 243, 244, 344n8, 356n148, 449n273 von Mises, Ludwig, 393n159 vouchers, school/educational, 99 Vrooman, John, 385n75 Wachter, Michael L., 398n209 wage and price controls, discussion of (as US policy option), prior to August 1971, 56, 119, 242–43, 257–59, 265, 321, 326, 456n362; MF’s criticism of, 84, 259, 266, 436n156 wage and price controls, US (1971–74), x, 264–69, 274–77, 294, 329, 337, 340, 346, 436n152, 440n187, 443n225; MF’s reaction to, 267–69, 272–74, 277, 282–85, 291, 318, 330–31; monitoring of interest and dividend income during imposition of, 456–57n366. See also Burns, Arthur F.; incomes policy; New Economic Policy; Nixon, Richard M. wage/price guideposts or guidelines, US, 1960s, 24, 83, 104–5, 144, 154, 242, 259, 321, 324, 421n148; discontinuation and avoidance of, and calls for reinstatement of (1969–71), 244, 328, 436n153, 456n362 wage/price spiral, 443n225 wage-­push, 56, 96, 142, 154, 322; MF’s rejection of, as explanation for nominal wage growth or inflation, 327–28, 456n355, 456n356 wages, 395n182; endogeneity of, 202; fixity of, in simple Keynesian analysis, 207–8, 419n127; growth in, and unemployment, 140, 145, 147–48, 392n151, 395n178, 395n184; prices and, 56, 105, 145, 208, 259, 395n186; real, 147– 48, 163, 392n151, 395n185, 396n186, 401n242, 455n348, 456n355; setting/de-

termination of, 54, 158, 258, 265, 298, 322, 326, 398n211; stickiness in, and contracts for, 149, 237, 300, 313–14, 325, 395–96n186, 396n187, 453n313. See also Phillips curve Waiwood, Patricia, 373n123 Walker, Charls E., 239, 441n208 Walker, Daniel, 225 Walker, Greg, 236 Walker, John F., 59 Wallace, Amy, 450n285 Wallace, George, 171 Wallace, Irving, 450n285 Wallace, Neil A., 18, 19, 270, 301, 317–18, 446n254, 451n293, 451n295 Wallace, T. Dudley, 306 Wallechinsky, David, 450n285 Wallich, Henry C., 4, 77, 180, 261, 365n38, 369n75, 383n49, 383n50, 393n159, 412n66, 420n137 Wallis, Kenneth F., 450n287 Wallis, W. Allen, 388n97 Walras, Leon, 19 Walrasian approaches, 399n233, 446n256. See also general equilibrium theory and approaches Walrasian equations, 454n317 Walsh, Carl E., 374n137 Walters, Alan A., 351n70, 355n131, 370n93, 377n186 Warburton, Clark, 31–32, 39, 44, 92, 143, 354n118, 356n152, 359n169, 368n63 war on poverty, 131 Warsh, David, 369n75 Wascher, William, 130 Watson, Mark W., 140, 211, 382n38, 392n152 wealth, 70, 369n73, 412; shareholder, 188, 410n46. See also permanent income wealth effect of money. See real balance effect Weidenbaum, Murray L., 252, 270 Weintraub, Sidney, 361n210 Wells, Wyatt C., 348n13, 437n164, 455n347, 456n366 Weyl, E. Glen, 351n73, 446n256 Wheelock, David C., xi, 358n167, 384n62 white noise, 396n188

I n d e x   587 Whitley, John D., 450n287 wholesale deposits, 86–87, 191–96, 411n60, 412n64, 412–13n68, 413n69, 413n75 Wickenden, Elizabeth, 389n102 Wicker, Elmus S., 361n200 Wicksell, Knut, 241, 368n63, 450n289 Williams, John C., 373n123 Williamson, John, 290 Willms, Manfred, 414n76 Wonnacott, Paul, 94, 344, 374n137, 456n366 Wonnacott, Ronald J., 456n366 Wood, Geoffrey E., xi, 392n158 Wood, John H., 375n154 Woodford, Michael, 196, 451n295 workshop, econometrics, 302, 337–38, 451n295 Workshop on Money and Banking (University of Chicago), 30, 79, 81–82, 91, 126–27, 176, 199, 211–12, 217, 245, 298, 308, 313, 315, 316, 345, 370n90, 370n91, 374n135, 406n9, 420n138, 441n207, 446n256, 446n258, 452n302, 453n307, 453–54n314, 454n319

World War I, 443n219 World War II, 100, 114, 207, 234, 238, 267, 340, 345, 377n181, 394n170, 426n23 Worthy, James C., 409n41 Wriston, Walter B., 412n62 Wu, Jing Cynthia, 360n185 Wynarczyk, Peter, 397n201 Wynne, Mark, xi X, variable, dynamic relationship with variable Y, 232 Yale University, x, 77, 105, 160, 376n173, 445n251, 459n385 Yeager, Leland B., 352n84, 378n196 yield curve, 48, 51, 373n123. See also interest rates yields. See interest rates Yohe, William P., 304, 372n117, 448n266 Young, Ralph A., 378n199 Yugoslavia, 162, 341 Zecher, Richard, 344, 460n400 Zellner, Arnold, 451n295, 454n314 Zingales, Luigi, 188