I'm going to make this very simple. Milton Friedman supported quantitative easing, and we know he supported quantitative easing, because he told us he supported quantitative easing. Are you listening, Rand Paul?
Now, in a rational world, we wouldn't be playing this game of Milton Friedman's Next Top Fed Policy. It doesn't matter what Friedman (or Keynes, for that matter) would have said about the Fed today. What matters is what Friedman's ideas tell us about the Fed today given what experience has taught us since. But we don't live in a rational world. The idea that Friedman, on the right, or Keynes, on the left, would have supported this or not supported that is a powerful rhetorical device. So we keep playing this game about the Real Friedman™ over and over again. And Senator Rand Paul keeps losing it over and over again.
Against all evidence -- and there's plenty of it -- Rand Paul thinks Milton Friedman would have opposed Bernanke's bond-buying of the past few years. That's what Paul implied last week in an interview with Joshua Green of Bloomberg Businessweek, which just shows that he knows nothing of Friedman's work on monetary policy. As I pointed out (and others have before), Friedman explicitly called on the Bank of Japan to try quantitative easing (QE) back when it first got stuck in its own liquidity trap 15 years ago. But Paul did what any ideologue does when confronted by contrary evidence -- he ignored it. His latest op-ed in National Review doesn't mention Friedman's support for QE, and instead claims that "it is a stretch to try to make Friedman into some Krugman-like apologist for quantitative easing."
In reality, it's a stretch to try to make Krugman into some kind of Friedman-like apologist for QE. But then, you'd have to have actually know something about Friedman to know that.
Look, this isn't hard. We can use the Internet find out what Friedman actually thought about QE. And what he thought was that QE could cure a depression (not that the depression itself was the cure, like Paul does). Indeed, here's what Friedman and co-author Anna Schwartz wrote about the Great Depression in their opus, A Monetary History of the United States, 1867-1960:
Measures that might have been adequate to cope with the earlier [crises] would have been inadequate for the later ones. On the other hand, as we shall see, the bond purchases actually made in the spring and summer of 1932, which did halt the decline in the stock of money but were inadequate to prevent a substantial relapse some months after, would have been more than adequate to cope with the earlier crises.
In other words, Friedman thought the Fed could have kept the Great Depression from being quite so great if it had tried QE sooner. This gets at Friedman's two, related critiques of the 1930s-era Fed: it let the banks fail, and it let the money supply fall. Now, it is true, as Paul points out, that Friedman argued that the pre-Fed bank clearinghouses did a better job managing crises than the Fed did during the depression. (A low bar, to be sure). But Friedman was a pragmatist who recognized that you fight panics with the financial system you have -- so the question was what the Fed could have done.
Plenty, Friedman answered. For one, it could have taken its lender-of-last-resort responsibilities seriously, and stopped runs from forcing otherwise healthy banks into collapse. (But that would have been a bit tricky politically, since half of all banks weren't part of the Federal Reserve System back then). For another, it could have bought bonds, and kept buying them, until the money supply started increasing again. It's mostly forgotten now, but the Fed did half-heartedly try this -- that is, QE -- in 1932 to try to preempt Congress from making it do more. That bond-buying is what Friedman was talking about above, and, as you can see, his only problem with it was that it wasn't tried earlier.
Now, the Bank of Japan's argument is, "Oh well, we've got the interest rate down to zero; what more can we do?" It's very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high-powered money starts getting the economy in an expansion.
Now, in retrospect, Friedman was too sanguine about what QE could do. It's not enough to just increase the money supply. The increase has to be permanent. Nor is it enough to just say it will be permanent. People have to believe it will be permanent. And that's not easy for an independent central bank to do. As Paul Krugman put it back in 1998, a central bank has to "credibly promise to be irresponsible" if it wants to increase inflation. But central banks are nothing if not responsible nowadays, and have trouble convincing us otherwise. They -- and we -- have become the victims of their inflation-fighting success now that a little more inflation is what we need.
But the question here isn't how right or wrong Friedman was about fighting depressions. The question is what Friedman thought about fighting depressions. And that couldn't be more clear: he thought the Fed should buy bonds for however long it took to jumpstart a recovery. Again, Friedman was a pragmatist. He understood that conservatives needed an answer to the problem of depressions -- and couldn't keep saying that depressions were the answer to our problems. Otherwise, there wouldn't be many conservatives left. Liberals would be libertarians who'd been mugged by the invisible hand. So monetary stimulus became Friedman's conservative alternative to fiscal stimulus. A smart enough and aggressive enough central bank was supposed to be enough to prevent depressions and make Keynesian spending unnecessary -- or so the story went.
But Rand Paul seems completely unaware of this. He only knows the Milton Friedman of Free to Choose, not the Milton Friedman of A Monetary History. In other words, he knows the Friedman who championed free markets and tax cuts, but not the Friedman who championed an active central bank. Paul's mistake is assuming that because he agrees with Friedman on spending, he must also agree with Friedman (and vice versa) on the Fed. That couldn't be more wrong. But it's one thing to be uninformed, and another to be unempirical. Paul doesn't seem capable of processing information that contradicts his worldview. He saw the evidence that he was wrong about Friedman and QE, and ... just went on living his life like it didn't exist. Dogma won.
The irony, of course, is that Milton Friedman was trying to save conservatism from people exactly like Rand Paul.
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