”Money Mischief: Episodes in Monetary History,” by Milton Friedman, Harcourt Brace Jovanovich, 274 pages, $19.95
Anyone who claims to be an authority on economics but has not read Milton Friedman`s and Anna Schwartz`s ”A Monetary History of the United States, 1867-1960” is like a Russian literature scholar who hasn`t read ”War and Peace.”
In their 1963 tome, Friedman and Schwartz established once and for all the central role of money creation in shaping economic events. He reiterates the message in ”Money Mischief”: ”Inflation is always and everywhere a monetary phenomenon. . . . It is and can be produced only by a more rapid increase in the quantity of money than in (economic) output.”
Friedman, 79, has spent his entire career popularizing his findings and warning against politicians who dilute the public`s money as a pernicious way to buy votes.
His latest book, however, is a curiosity. ”Money Mischief” is a distillation of research and opinion that Friedman disciples already know well and newcomers to his point of view will have a hard time grasping. Unlike his popular book, ”Free to Choose,” which became a television series, ”Money Mischief” will strike the uninitiated as largely irrelevant. To the veteran Friedman student, it`s redundant.
There are several explanations for Friedman`s newest book: Any book written by Friedman will sell well enough to more than cover its cost, which, in terms of Friedman`s contribution of new material this time, is very little; Friedman wanted to rebut a scholarly article that disputes his view that a U.S. government silver purchase program under Franklin Roosevelt opened the door to communism in China; Friedman fears world economic leaders and the public at large may wrongly come to believe that inflation is no longer a problem and take their eye off the ball.
Whatever the reason, ”Money Mischief” is a worthwhile ”Friedman Reader” and an insight into his reasoning. The Oliver Stone of economists, Friedman-with the full benefit of hindsight-delights in spinning elaborate tales about the consequences of seemingly inconsequential acts. Here are a few:
– A short phrase deleted from an 1873 act of Congress regarding coinage sets the stage for what came to be known by some as the ”crime of the century.” The missing phrase would have pegged the value of U.S. money to silver as well as gold.
– The discovery by Scottish chemists of technology for extracting gold from low-grade ore in South Africa dooms the political career of U.S. populist William Jennings Bryan, an advocate of easy money whom, oddly, Friedman came to admire.
– Roosevelt`s political sop to powerful senators from silver-mining states disrupts the global silver market at a critical moment in China, which was then on a silver standard for its money, and stokes the rise of communism. These and other examples of ”money mischief” could only be deduced by a strict monetarist economist.
Today, Friedman remains bothered that all major economic powers have abandoned any link between money and a commodity, such as gold or silver. ”It is worth stressing how little precedent there is for the present situation,” Friedman warns.
Why? There is also little precedent for personal computers, interest rate and currency futures or nuclear power. A lack of precedent by itself shouldn`t imply danger. Yet somehow, the ubiquity of fiat money troubles Friedman. He repeatedly cites the warning of economist Irving Fisher, who said in 1929,
”Irredeemable paper money has almost invariably proved a curse to the country employing it.”
(Fisher also said in 1929, a week before the market crash, ”Stock prices have reached what looks like a permanently higher plateau.”)
Friedman`s mistrust of politicians and central bankers is widely known and justified by history. Some of his disciples have advocated eliminating the human element from managing a nation`s money supply and instead rigging computers to maintain stable money growth in line with economic output and the public`s demand for money.
Monetarists also worry about the increasing importance of unpredictable global currency relationships under the current floating exchange rate regime. But financial markets now provide effective hedging mechanisms.
Friedman does not advocate directly a return to the gold standard or any commodity standard for money. Indeed, the early chapters of ”Money Mischief” note persuasively the folly of believing that money made of or redeemable in anything tangible, from gold to carved rocks, thereby holds value.
Although the U.S. public`s fear of inflation has been demonstrated amply in recent years, Friedman retains the belief that politicians` ”propensity to inflate” may ”force a return to a commodity standard.”
Some of Friedman`s fellow economists say the public`s anxiety over inflation is evaporating and inflation expectations are being rung permanently out of interest rates. Friedman doesn`t have to worry about selling books. He could sell these economists long-term bonds.
