End the Fed is Perfectly Sensible

August 3, 2009 2:57 PM by George Selgin

Here is my piece on this Ron Paul idea in the Christian Science Monitor:

Since it was introduced in February, Representative Ron Paul's "Audit the Fed" bill (H.R. 1207) has gained 282 congressional cosponsors. If adopted, the bill would allow the Government Accountability Office to review, not only the Federal Reserve's balance sheet, but its recent monetary policy deliberations and transactions.

Fed Chairman Ben Bernanke opposes the plan, saying it would undermine the Fed's hallowed independence.

But Mr. Paul, a noted libertarian who ran for president last year, also wants to keep the Fed out of Congress's clutches - by scrapping it altogether. That's the goal of his follow-up Federal Reserve Board Abolition Act (H.R. 833). Although that measure has yet to gain a single cosponsor, it has plenty of grass-roots support, and Paul hopes that members of Congress will jump on the bandwagon once their eyes are opened by a no-holds-barred audit.

Wacky stuff? Well, if not having a ghost of a chance is enough to make a bill bonkers, Paul's measure probably qualifies. But that doesn't mean you've got to be crazy to believe that the US economy would be better off without the Fed. MORE

Interview on Free Banking

April 29, 2009 12:52 PM by George Selgin

Region Focus interviewed me. It's a publication of the Fed of Richmond.

"The way I envision free banking, it does not rely on a particular base regime. It's true, as a matter of history, that if you had free banking from the get-go, you wouldn't have central banks and you would almost certainly have a commodity money standard, probably gold.... The fiat money we currently have is purely the product of central banks. I think it's pretty clear that if we never had central banks, we wouldn't have fiat money. Instead, we'd still have commodity money."

In Defense of Monetarism

November 11, 2008 2:17 PM by George Selgin

In response to my recent reply to Henderson and Hummel's defense of Alan Greenspan's Fed, I received a number of e-mail messages. They included one asking me for my two-cents concerning a dispute my correspondent was having with a friend of his who insisted that monetarism, and Milton Friedman's monetarism in particular, had been a complete failure.

Although I realize that Austrian-school economists have themselves been highly critical of monetarism, many of its most fundamental claims are in fact fully consistent with their own understanding of monetary theory. Indeed, back in the 1970s the difference between Austrian and monetarists writings about money seemed trivial compared to the difference between them and the writings of other (broadly "Keynesian") economists. I recall very well how I myself got "deprogrammed" from mainstream thinking about money and inflation by reading Henry Hazlitt's wonderful book, The Inflation Problem, and How to Resolve It. Hazlitt was, of course, a thoroughgoing Misesian. Yet no one who reads his book can fail to note the many crucial similarities between his arguments and those of Milton Friedman concerning the same subject.

Consequently I came to the defense of monetarism, and of Milton Friedman. Here is that defense, accompanied by the message that elicited it.

Professor Selgin,

I'm a relatively new reader of mises.org, and read your recent post about Greenspan.

I thought maybe you could help me settle an argument a friend and I are having about monetarism (as defined by Friedman in the 70s). My knowledge of it dates from about then, but my friend says that there were further developments in the 90s and earlier this decade when Friedman renounced it.

This is what my friend wrote:

So first, we can't ignore the fact that the modern father of monetarism (Milton Friedman) acknowledged in an FT interview in 2003 that it doesn't work. Importantly, Friedman knew of what he spoke because Israel, the Fed and the Bank of England all tried it in the late '70s and early '80s with disastrous results. That Volcker's three-year flirtation with it caused the worst recession since the Great Depression is not even debatable.

Secondly, Friedman as early as '84 had to admit how wrong he was (this was when the economy started growing again - the experiment ended in October of '82, but not soon enough to stave off massive GOP losses in Congress thanks to the collapsing economy) because with the falling gold price suggesting a rising dollar in terms of value, Friedman went to everyone who would listen on Wall Street and said we were inflating. His reasoning was M1 figures, but as anyone who understands M1 knows, it's when a currency is more useful and worth holding onto that people hold it. Friedman saw skyrocketing M1 figures as evidence that the Fed was creating too much money (despite the collapsing gold price), but in truth the signal was just the opposite. I can send you the quotes where Friedman admitted how incorrect he was when I get back to the office.

Beyond that, even if monetarism were useful, as in if the M signals told us anything worthwhile, there's still no way the Fed can control the amount of dollars within these fifty states. That is so because dollars are used around the world, and there are markets for dollars around the world. Assuming the Fed sought to reduce the supply of dollars here, money would simply flow here from somewhere else. Indeed, that's what happened in the US and England when the dunces at the Fed actually believed Friedman's theory might work.

So unless you can tell me how the Fed can control money supply here despite overwhelming evidence and logic showing it to be an impossibility, there's not much I can do. You can send me critical e-mails, but the ship on this subject has sailed. If even Friedman finally admitted publicly that it didn't work (in private, he admitted it long before '03), isn't it time for the holdouts to give in?

So, is my friend right? Is monetarism dead?

I'm happy to share some of my reactions to your friend's statements about Friedman's monetarism, for whatever they may be worth.

I should begin, though, by noting that "monetarism" has a broader meaning than the one your friend appears to assign to it. To refer to Wikipedia's definition, which I think is consistent with most economists' understanding, including my own, monetarism as formulated by Friedman "argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability." That "excessive" begs the question, but the point is that monetary authorities are in principle always capable of avoiding inflation through the exercise of sufficient monetary restraint, that is, by limiting the availability of currency and bank reserves, which they alone have the power to create or destroy.

I should think that, far from being considered "dead," this perspective appears today perfectly banal.

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