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Friedman's Fancy
September 2016

Milton Friedman (1912-2006): Economists shouldn't make jokes (Friedman Foundation, CC01.0)

Helicopter money sounds wonderful. The state builds a printing press and hires a helicopter; the printing press prints notes and the helicopter drops them randomly on the population at large; people pick them up, spend them in the shops and — in the immortal words of the Keynesian textbooks — thereby “boost aggregate demand”. Everyone lives happily ever after.

The idea is attributed to Milton Friedman, who mentioned helicopter money in a recondite 1968 academic paper on “The optimum quantity of money”. In current discussions about monetary policy Friedman’s authorship is often noted and then used to endorse a proposal for outright money-printing. However, any sensible reader of the 1968 article can see — or ought to be able to see — that Friedman was joking. In order to discuss the article’s important concern (that is, the optimum quantity of money), Friedman assumed an economy quite different from that found in the real world of today. In his “hypothetical simple economy”, the population, capital stock and technology are given, and — crucially — “lending and borrowing is prohibited and the prohibition is effectively enforced”. If it cannot have lending and borrowing, Friedman’s hypothetical economy cannot have a commercial banking system or a central bank. The tendency of contemporary advocates of helicopter money to call on the central bank to organise the printing of the notes and their drop on the citizenry is therefore absurd.

Friedman posited his simplified economy precisely because the 1968 paper was theoretical; it was a large-scale thought experiment to stimulate the imagination. He did not want to become bogged down in the institutional complexities of modern monetary policy-making. The 1968 paper appeared as the title essay in a 1969 collection which included other contributions that were far more practical. For example, its 1963 article (co-authored with Anna Schwartz) on “Money and business cycles” was concerned with the American economy from 1867 to 1960, particularly with the instabilities that might arise from accidents in the commercial banking system and blunders committed by the central bank. 

The 1963 article offered “a tentative sketch” of how changes in monetary policy might be transmitted through the economy. It analysed “an unexpected rise . . . in the rate of change in the money stock” attributable, in the situation to be analysed, “from an increased rate of open-market purchases [of securities] by the central bank”. The sellers of the securities might be either commercial banks or non-banks, but both would “seek to readjust their portfolios”. The 1867-1960 evidence persuaded Friedman and Schwartz that “sizeable changes in the rate of change in the money stock are a necessary and sufficient condition for sizeable changes in the rate of change in money income”.

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September 27th, 2016
8:09 AM
" . . . an annual rate of money growth in the high single digits would be excessive and take risks with inflation." “Thank you for posting a reply, M.. Again, however, I’m afraid I don’t see a direct answer to my question. I asked what mechanism in the real world the Fed has available to raise money supply above money demand (something that you said above is necessary if inflation is to occur). Money supply can rise if the Fed buys assets or if loans are made from available reserves. To my way of thinking, neither of these can occur without the full and conscious participation of the other side of the transaction. Hence, the supply of money cannot be increased in the absence of demand. Yet you say (above) that inflation only occurs when money supply is in excess of money demand. You have defended this with analogies, but not with real-world examples of the underlying process. I am a huge fan of using analogies to get the essential idea across; however, unless these mirror something that is going on in the real world (and in a very real and tangible sense), then recommending policies based on such stories is dangerous to say the least. I hope you don’t think I’m being rude, but I think this is a key question and one that I have never found a monetarist able to answer: how is it in the real world that the central bank raises money supply above money demand? Can you please tell me this and in the context of actual Federal reserve policy tools? This is not a trivial question. The entire monetarist superstructure rests on it. If the answer is that in reality this cannot happen, then I’m not sure how the rest of the monetarist analysis survives.” "Supplying money is like supplying haircuts: you can’t do it unless a corresponding demand exists."

September 27th, 2016
8:09 AM
"However, any sensible reader of the 1968 article can see — or ought to be able to see — that Friedman was joking." Joking? It's taken 48 years to finally conclude that Friedman's influential {and damaging} 'recondite 1968 academic paper' paper is nonsense?

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