He is known, of course, for his work on money and inflation. But he did not propose, as Hayek did, competition in currency production. He thought the reality of our times is that governments are in control of the money supply, so the question is simply how to sustain them. He thought a gold standard impractical – inevitably, rather than using the metal itself as money, people would use paper (or electronic) receipts for it, so you have the same problem of potential over-printing of that paper as you do today. So he thought the best thing was to have a monetary rule, preventing politicians from over-producing the paper money we have today.

While having a consistent ideology is important, it is always tempered by pragmatism. This is due to the very simple fact that humans are finite beings and cannot possibly fight every possible ideological battle that could possibly be fought. There are limits to what one person can do. Therefore, every person usually compromises his ideals at some point in life. Sometimes this leads to regret, sometimes this leads to relief.

Milton Friedman is no exception to this. Though he was very much a libertarian, he thought monetary policy to be a point of pragmatism. I’m not sure it’s wise to fault him for this, given the setting in which he made his decision. Government interference in all aspects of the economy was pretty rampant, and the general trend towards statism was ramping up when he hit it big. He had respect and was listened to by many people. But even Friedman had to pick his battles. It’s easy to criticize his decisions ex post, but it’s helpful to remember that he could not foresee most of the consequences.

Now, one can credibly argue that it’s foolish to trust the government to arbitrary rules about money policy. This assertion is true. One could also argue that “sound” money forces the government to be honest. This is also true, assuming you can keep the money sound. See, the United States used to be on a gold standard, then it left it. Going back to a gold standard, though desirable, was no guarantee against this happening again. As such, from a practical standpoint, it didn’t really matter what rules the government constrained the government; the government was going to look for ways to get around them and inflate the currency, one way or another.

It is certainly legitimate to criticize Friedman for his failure to harp on sound money, given the scope of his influence. Perhaps then much of the mess the United States face today would have been headed off earlier. Perhaps not; we can’t be sure. However, it is unfair to paint Friedman as a statist when his record is clearly libertarian. He may have been unnecessarily pragmatic on monetary policy, which is a matter with plenty of room for reasonable disagreement, but he certainly worked to advance the cause of freedom, and for that he should be thanked.

Jim asked: “How confident are you about the U.S. starting to grow in 2010?” I started making excuses about my lack of knowledge of the U.S. economy and my poor knowledge of short term macroeconomics. That was when Jim said: “You know that political leaders all over the world have been saying that they will do what it takes to restore confidence and get sustainable recovery.” I nodded as Jim went on: “What they seem to be implying is that they will just keep increasing government spending until people become more confident. Does that make you feel confident?”. I shook my head. Jim then asked: “So what will it take to restore investor and consumer confidence and get sustained recovery?”

I told Jim that was a very good question. That only bought me about a second to gather my thoughts. The only sensible answer that I could think of was that restoring confidence was a matter of establishing a general expectation in the U.S. (and other major economies) that GDP would grow at about the same rate as the trend rate of growth in their productive capacity.

Jim interrupted: “That means boosting aggregate demand. Isn’t that what governments are trying to do now?” My response was that our focus should be on establishing the expectation of sustainable growth in the monetary aggregates rather than just a short-term boost in aggregate demand, with the expectation of a subsequent contraction as soon as inflation raises its ugly head again.

Jim interrupted again: “Next you will be telling me that Milton Friedman was right and what we need is a rule requiring the monetary authority to maintain a specified rate of growth in the stock of money.” I admitted that I still thought Friedman was on the right track, but technical difficulties involved in targeting the money supply would make it more sensible to target growth in nominal GDP (i.e. PY rather than M).

Jim said: “So what you are saying is that if the U.S. central bank were to announce a target rate of growth of nominal GDP and start making appropriate adjustments in monetary policy to achieve that target, then this would restore confidence and promote a sustainable recovery.”

I wish I had sufficient confidence to tell Jim that he had hit the nail on the head. Instead I suggested that rather than trying to put words in my mouth he should take a look at Scott Sumner’s blog: TheMoneyIllusion.

Postscript:
I particularly liked the following posts on Sumner’s blog: Why did monetary policy fail?; and The Economics Babel.