Thursday, December 7, 2006

Sennholz on Friedman

Hans Sennholz has written extensively on economics issues, largely from an Austrian perspective. Unlike other freedom advocates -- see Sheldon Richman and Jacob Hornberger and Richard Ebeling and Sheldon Richman for examples -- as well as the mainstream media -- see Fox News and The New York Times (registration required) -- Sennholz is not afraid to censure the recently-deceased Milton Friedman for his reckless and naive monetary prescriptions. In a recent commentary on Friedman's passing Sennholz says
It is strange that Professor Friedman and his fellow monetarists, who are such defenders of the market order, should call on politicians and bureaucrats to provide the most important economic good -- money. Granted, monetarists do not trust them with discretionary powers, which led Friedman to write a detailed prescription, a Constitutional Amendment; however, the Constitution is supreme force, backed by courts and police. The amendment is a political formula to be adopted by political authorities and, when enacted, a constitutional prohibition of monetary freedom.

According to Richard Ebeling and Sheldon Richman, Friedman
argued that it was misguided Federal Reserve policy in the early 1930s that generated the severity of the Great Depression -- and not any inherent failures in the market economy.

This led Friedman to make the case for a "monetary rule," under which the monetary authority would be denied any discretionary powers over the money supply. Instead, the Federal Reserve would be limited to increasing the supply of money at a fixed annual rate of around 3 percent. This would create a high degree of predictability about monetary policy and generate a relatively stable price level in a growing economy.

Sennholz, by contrast, points out that
Contrary to monetarist doctrine, an expansion of the money stock of three to five percent suffices to generate the business cycle. Economic booms and busts occur in every case of fiat expansion, whether the expansion is one percent or hundreds of percents. The magnitude of expansion does not negate its effects; it merely determines the severity of the maladjustment and necessary readjustment.

Monetarists are quick to proclaim that business recessions in general, and the Great Depression in particular, are the result of monetary contraction. Mistaking symptoms for causes, they prescribe policies that treat the symptoms; however, the prescription, which is reinflation, tends to aggravate the maladjustments and delay the necessary readjustment.

Sennholz claims that Friedman's amendment
would create income and wealth with the stroke of a pen, and then distribute the booty to a long line of eager beneficiaries. The amendment would fix the quantity of issue, but the mode of its distribution, which confers favors and assigns losses, would be left to the discretion of the monetary authorities.

More precisely, the amendment would allow a favored few to seize wealth at the stroke of a pen, but his point is well-taken. Sennholz concludes that
What Professor Friedman called the dethroning of gold was, in truth, the default of central banks to make good on their legal and contractual obligations. Following the example set by the United States on August 15, 1971, central banks all defaulted in their duty to redeem their currencies in gold. The default, unfortunately, did not bring stability and prosperity; it opened the gates for world-wide inflation.
Milton Friedman had the rhetoric of a free market champion but his monetary recommendations were more on the order of Keynesian-lite. It took a bold man to blame the Fed for the Depression, as Friedman did, but it was a gross blunder to say that the Fed's mistake was not inflating enough. No wonder the Fed's Bernanke honored Friedman on his 90th birthday. In Friedman's world, the Fed was mistaken but not fundamentally wrong.

Thank you, Hans Sennholz, for bringing these issues to light.

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