We note the passing this week of the great American economist, libertarian and public thinker Milton Friedman, who died at the age 94 in San Francisco, of all places, where he was a senior research fellow at the Hoover Institution.
As member and then dean of the University of Chicago’s economics department from the late 1940s to the early 1980s, Friedman was the leader of the “Chicago School” of supply side economics, or monetarism, whose lineage traces back to such libertarian heroes as Friedrich Hayek, Ludwig von Mises and Adam Smith.
The Chicago School was indispensable in undermining the misguided spirit of the age, which had been characterized since the 1930s by high taxes, extensive economic regulations and the wildly deficient monetary theories of British economist Maynard Keynes.
Friedman wanted to stop America from travelling down Hayek’s “road to serfdom,” and return to the principles that had made it great: principles of freedom in both the economic and political realms, of relying on individual instead of social responsibility, and keeping government in its place as an umpire and not a player in the economy.
As the new Federal Reserve chairman Ben Bernanke has said: “Friedman’s monetary framework has been so influential that in its broad outlines it has nearly become identical with modern monetary theory.”
While Friedman served as an economics advisor to Senator Barry Goldwater during his doomed presidential bid in 1964, his first real influence at the very highest levels of American power started with the election of Richard Nixon in 1968.
Of interest to gold historians, during the transition period between Nixon’s election and swearing in, Friedman wrote a letter to Nixon imploring him to start his presidency by closing the increasingly untenable “gold window” (the backing of the U.S. dollar by gold) because sooner or later the marketplace would demolish the system as it existed. The reasoning was simple: the U.S. didn’t have the enough gold to back its currency, and it was a good idea to stay ahead of the game.
Nixon ignored Friedman, and the modified “floating” Bretton Woods system reigned from 1968 to the early 1970s.
Finally, in response to a constant flood of assets leaving the U.S., Nixon unilaterally closed the gold window on Aug. 15, 1971, and — against the advice of Friedman, who never spoke to him again — imposed popular but ultimately futile 90-day wage and price controls, and a 10% import surcharge.
Gold prices, unshackled from their fix at US$35 per oz., have never looked back.
By 1973, U.S. Secretary of the Treasury George Schultz was depending heavily on Friedman’s advice and ideas, in particular in the establishment of a floating exchange rate system in the clothing of a par value system.
The 1970s, as most of us remember, were characterized by tremendous political and economic turmoil that included raging “stagflation” — the deadly combination of high inflation and high unemployment that Keynesian theory said was impossible.
It was during this pivotal period that Friedman moved decisively beyond his usual roles of academic and policy advisor, and blossomed as an avuncular public intellectual, spreading the word on libertarianism through such venues as the Dinah Shore and Phil Donahue TV shows.
The peak of Friedman’s public exposure was his 10-hour documentary Free to Choose, which aired — on PBS, ironically — in the winter of 1980. It was watched in part by some 20 million Americans, and an accompanying book was a number-one, non-fiction bestseller. (You can still pick up copies of the series at www.freetochoose.com).
Free to Choose, along with Ronald Reagan’s radio commentaries heard through America in the late 1970s, helped lay the groundwork for Reagan’s landslide election to the presidency in November 1980.
Reagan had the sense and will to fully support Federal Reserve chairman Paul Volcker’s monetarist policies that, while unpopular and recession-inducing in the short term, held down and then broke the back of inflation.
The U.S. inflation rate, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983 and has stayed low ever since — ushering in the greatest period of economic expansion and stability in U.S. history.
The low-inflation period in the U.S. also brought with it a two-decade bear market for gold, which may explain the distinct lack of tributes to Friedman from the gold-bug community, which is otherwise dominated by libertarian types.
While Reagan didn’t reverse the amount of government spending as a fraction of national income, he did stop it in its tracks at about 40% — halting a trend that had risen from 10-12% for two centuries before the World Wars to 20% after the Second World War and up to 40% by the late 1970s.
Regrettably, government spending in the U.S. and its grasping into the lives of citizens has started to creep up again in the last few years.
We see that while Friedman’s lessons are now being spoken of widely, they’re starting to be ignored in practice by U.S. politicians again — a trend that lost the Republican Party both houses of Congress in the recent mid-terms and seriously compromised America’s ability to lead the vital War on Terror.