Milton Friedman

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in the output.

“There ain’t no such thing as a free lunch”. As you probably know, Milton Friedman helped to popularize that phrase. But he was wrong. This article about Friedman and gold is completely free for you. So who was the one of the most influential economists of the second half of the 20th century whose direct and indirect influences on contemporary monetary economics would be, according to Ben Bernanke, difficult to overstate?

Milton Friedman was born in 1912 in New York and died in 2006 in San Francisco.  He received his Ph.D. from Columbia University in 1946. The same year, Friedman accepted a position at the University of Chicago where he taught economics until 1976, when he retired. Soon after, Friedman was awarded the Nobel Prize for Economics “for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.”

The ‘demonstration of the complexity of stabilization policy’ was Friedman’s opposition to Keynesian view that government may counteract the business cycle by using the fiscal policy. Instead, Friedman believed that monetary policy was more effective, as money matters. After all, he was one of the leading proponents of monetarism in the second half of the 20th century.

Although Friedman’s contributions to economic theory are numerous, he is best known as an articulate spokesman for free markets and for his book (co-authored with his wife) “Free to Choose”.

Friedman and Gold

What was Friedman’s impact on gold? Well, he was the leader of the so-called monetarist counter-revolution aimed against the Keynesian revolution. Friedman was skeptical of fiscal policy and government’s meddling with the economy, and argued for a steady, small expansion of the money supply. Therefore, Friedman’s views led to a higher macroeconomic stability, which was negative for the gold prices. The best example may be the disinflation from the 1980s and 1990s caused by the monetarist Paul Volcker, when the yellow metal remained in the bear market

Chart 1: Gold prices (yellow line, left axis, London P.M. Fix, in $, monthly averages) and inflation annual rates (red line, right axis, in %) during the 1980s and the 1990s.

Gold prices (yellow line, left axis, London P.M. Fix, in $, monthly averages) and inflation annual rates (red line, right axis, in %) during the 1980s and the 1990s

And what was Friedman’s stance on gold? He was less friendly than one would expect. Friedman opposed Keynes, but he shared some of his macroeconomic views (in contrast to Hayek and the Austrian School). First of all, he also criticized the gold standard, and supported the idea of elastic money. In other words, Friedman believed that the central bank should increase the money supply along with the economic growth, while gold standard puts constraints on the money supply. He also believed that the gold standard would be too costly, as gold has to be mined. However, this is a poor argument as gold is still mined today, even when the gold standard is a song of the past. Remember: not all supporters of the free markets are gold’s friends!