I am pleased to report from a Milton Friedman tribute conference, held by the Federal Reserve Bank of Dallas. Milton, now 91 years old, remains incredibly sharp and quick on his feet. Gary Becker, in his talk this evening, challenged Milton as to why he does not believe in competitive supply of currency. Milton replied by saying he does not have a good answer to that question, but that he does not see how to get government out of the money business, given that dollars are already in place. He did suggest freezing the supply of high-powered money, and otherwise letting markets work and supply whatever forms of outside money might be demanded. Richard Ebeling discusses how Friedman’s thoughts on this issue have evolved.
My take: For a long time I favored Friedman’s position. In the meantime I have been more influenced by behavioral economics. I fear that some downward adjustments of prices and wages might be required, which people often find painful or resist, so I wonder if a very slight rate of price inflation might be superior. Of course a frozen supply of high-powered money does not necessitate deflation, but sometimes it will bring it. I also wonder how much short-run interest volatility would result. The supposed advantage of freezing high-powered money is to limit the potential for a repeat of the bad monetary policy of the 1970s, but has the Fed or government really engaged in effective precommitment? I doubt it. So right now I count myself as a monetary agnostic.
Addendum: Virginia Postrel, who is attending the conference, tells us about a forthcoming television biography of Friedman.
Second addendum: Here is a detailed conference report, written by a very smart and articulate attendee, his blog will be giving you updates as well.