Last week, Senator Rand Paul commented to Bloomberg Businessweek that he would choose Milton Friedman to run the Federal Reserve (if he could), presumably because the Nobel laureate would pursue a more restrained monetary policy than Chairman Ben Bernanke. I criticized this position on Friday, and now he has responded in an NRO piece. But the arguments in his NRO piece don’t actually vindicate his claim, which holds that Friedman favored an always-restrained policy, opposed aggressive central-bank policies, and wouldn’t choose an expansionary policy in our current situation. Paul’s position, to me, represents a serious misreading — intentional or unintentional — of Friedman’s thinking about monetary policy (work that happens to be central to modern macroeconomics).


Paul’s piece argues, correctly, that Friedman was no fan of the Fed. He cites a Hillsdale professor, Friedman in Free to Choose, and a George Mason professor all arguing basically the following, in Paul’s words: “Friedman’s insight that the Fed should have acted to avert deflation in the face of bank runs is a conclusion based on the scenario of a Federal Reserve System that has monopolized the function of ‘lender of last resort.’”

This is essentially correct — but irrelevant to the question at hand and whether Friedman’s prescription then might apply now. The Federal Reserve still has a monopoly. Whether Friedman was right that the freer banking that existed prior to the Fed’s creation in 1913 would have done a better job of managing monetary policy during the Great Depression doesn’t matter and doesn’t help Paul’s case, since the Federal Reserve exists today and the senator was asked whom he’d like to run it.


You go to war with the lender of last resort you have, as they say, and Paul remains incorrect in arguing that Friedman was either “an economist famous for monetary restraint” when he was famously in favor of monetary consistency, which sometimes requires an expansionary, aggressive policy like the one he said the Fed should have pursued during the Great Depression.

A consistent monetary policy of the kind Friedman supported for most of his career means trying to maintain constant growth in the monetary supply, which can mean quite an unrestrained policy indeed. At times, such as the Great Depression and likely the 2008 financial crisis, it requires what is essentially highly aggressive monetary policy, because the Fed should use its control over the money base to try to expand a shrinking money supply.


By endorsing Friedman’s view of the Great Depression (regardless of the caveat that an aggressive Fed would have been inferior to free banking), Paul tacitly admits that, at times, expansionary monetary policy is justified and Friedman didn’t think universal restraint is sensible. Paul thus can’t claim Friedman would want a restrained policy today merely on the grounds the man was an advocate of restraint, period — because he wasn’t.


The question becomes whether today’s circumstances, and those of 2008, justify a response that Friedman thought the Fed failed to provide in 1929 (and has largely failed to provide now). The only comment Paul provides on this matter is a quote from Anna Schwartz to the effect that Friedman thought monetary restraint would be useful to keep inflation under control — this is indubitably true, but irrelevant. It held true during at times like the 1970s, when inflation was a serious problem, and says nothing of what Friedman would think we should do now, when deflation is a far greater risk than inflation (inflation — and market expectations of future inflation — is currently running especially low).

As Jim Pethokoukis explains today, Friedman endorsed a central bank bond-buying program for Japan in the 2000s; we can’t say with absolute surety that he would support the Fed’s similar policy today (we can be more confident he’d have wanted a more aggressive policy immediately as the stock market fell in 2008), but he would not have had a knee-jerk policy of restraint. This abstract question is important because Friedman’s most famous, revolutionary work on monetary policy makes this point fairly clear, and if Paul has strong views on monetary policy (as he seems to), he should be more clear on whence they come.


I suspect — given the affection Paul displays for the Austrian school of economics in the original interview — that despite the implication of his piece, the senator does lean toward universal restraint in monetary policy. Whatever policy Friedman might pursue today, he did not.