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Milton Friedman and U.K. Economic Policy: 1938-1979

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Milton Friedman and U.K. Economic Policy: 1938-1979 II Milton Friedman and U.K. Economic Policy: 1938-1979 Edward Nelson Milton Friedman’s publications and commentaries became the subject of enormous publicity and scrutiny in the United Kingdom. This paper analyzes the interaction of Milton Friedman and U.K. economic policy from 1938 to 1979. The period under study is separated into four subperiods: 1938-46, 1946-59, 1959-70, and 1970-79. For each of these subperiods, the author considers Friedman’s observations on, and role in, key developments in U.K. monetary policy and in general U.K. economic policy. (JEL E31, E32, E51, E52) Federal Reserve Bank of St. Louis Review, September/October 2009, 91(5, Part 2), pp. 465-506. INTRODUCTION that he was part of the U.K. economic policy debate whether he liked it or not. The fact is that hen invited to comment on economic Friedman’s celebrity was proportionately much developments in the United Kingdom, greater in the United Kingdom than in the United W Milton Friedman frequently prefaced States. The January 1977 issue of the U.K. business his remarks with a caveat. Thus in 1964 he tes- magazine Management Today referred to the tified, “I have not followed in detail the current “present controversy, more acute in Britain than 1 circumstances of the British economy.” And anywhere else, over the teachings of Professor much later in 2005, Friedman likewise stated, Milton Friedman”; and even in 2001, long after “I have no expertise on recent British experience.” the peak of his fame, the London Independent But it was rare for him to confine his remarks to newspaper described Friedman as “one of the few this caveat. U.K. economic conditions were an economists to have become a household name” unrelenting source of interest to Friedman, a self- (Independent, August 28, 2001).3 described “life-long student of the monetary and Friedman’s emphasis on the effects of mone- economic experience” of the United Kingdom,2 tary policy, and his opposition to state interven- who, as we will see, was as early as 1943 citing tion in the economy, guaranteed that he would speeches by contemporary U.K. policymakers be classified as a marginal figure—if not ignored and drawing on U.K. economic data. outright—by U.K. academic and policy circles In time, Friedman’s influence on U.K. eco- in the early postwar period. Friedman discovered nomic discussion would become so pervasive t his for himself during spells in the United 1 From the question-and-answer portion of Friedman’s March 3, 1964, 3 testimony, in Committee on Banking and Currency (1964, p. 1144). A bibliographical appendix gives details for newspaper and periodi- cal articles cited in this paper. Sources in the appendix are arranged 2 Friedman (1980a, p. 55). chronologically. The author is indebted to Charles Goodhart, David Laidler, Alvin Marty, Anna Schwartz, and Gloria Valentine for answers to many inquiries on the subject matter of this paper. For help on specific issues, he thanks Terry Arthur, Anna Burke, Elizabeth Ennion, Robert Leeson, Mervyn Lewis, and Louise North. The author also made considerable use of the services of the Federal Reserve Bank of St. Louis Research Library in the course of obtaining material for this paper; the library staff who have helped include Adrienne Brennecke, Kathy Cosgrove, Barbara Dean, Julia Seiter, Katrina Stierholz, and Anna Xiao. Luke Shimek and Faith Weller provided research assistance. © 2009, The Federal Reserve Bank of St. Louis. The views expressed in this article are those of the author(s) and do not necessarily reflect the views of the Federal Reserve System, the Board of Governors, or the regional Federal Reserve Banks. Articles may be reprinted, reproduced, published, distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis. FEDERALRESERVEBANKOFST. LOUIS REVIEW SEPTEMBER/OCTOBER, PART 2 2009 465 Nelson Kingdom in the early 1950s. The marginal status the leading Keynesians in the United Kingdom. of Friedman and his positions persisted, with As Cobham (1984, p. 160) observes, “British short-lived exceptional periods, well into the Keynesianism has traditionally been more 1960s. But from the late 1960s and afterward, ‘extreme,’ more ‘hardline,’ than that prevalent Friedman’s positions, while still encountering for example in North America.” In particular, in resistance at the policymaking level, became the the first several postwar decades, U.K. Keynesians subject of enormous publicity and scrutiny in the were more inclined than their U.S. counterparts United Kingdom. The control of inflation was at to dismiss altogether the importance of monetary the center of U.K. political debate from 1968 to policy. The United Kingdom featured a greater 1979, dominating other policy issues during that and much longer-lasting “nonmonetary,” or period in a way that it did not in the United States, “money does not matter,” brand of Keynesianism. where Vietnam, Watergate, and superpower rela- That this viewpoint was the establishment posi- tions competed with, and frequently superseded, tion in U.K. economics until the 1980s is reflected inflation in prominence. in the names of those U.K. economists leading the Particularly over this most intense period, opposition to Friedman and monetarism. Among Friedman made interventions himself on the U.K. them were an array of knights and barons: Sir Roy scene. He provided commentary on British policy Harrod, Sir John Hicks, Sir Alec Cairncross, Lord developments during U.K. visits as well as by Kahn, Lord Kaldor, and Lord Balogh.6 long distance from the United States. Friedman’s Because Keynesianism took a more militant U.K. contributions also included some fundamen- form in the United Kingdom than in the United tal statements of his positions—most notably his States, the U.K. debates on monetary policy were lecture, “The Counter-Revolution in Monetary more fundamental, and their outcome produced a Theory” (Friedman, 1970a). This lecture, delivered greater break in the direction of U.K. policymaking. at the University of London in September 1970, This brings me to the subject matter of this was treated by Bernanke (2004) as the most rep- paper, which is the interaction of Friedman and resentative statement of Friedman’s views on U.K. economic policy over the period from 1938 monetary matters and was what Friedman cited to 1979. An obstacle to carrying out a study of this as the place for a list of “some fundamental propo- kind is that Friedman never published a single, sitions of monetarism.”4 definitive account encapsulating his views on U.K. Friedman’s contributions to the U.K. scene developments. True, Friedman and Anna Schwartz included several rebuttals to criticisms of his wrote a detailed study of U.K. monetary relations, research findings on monetary relations. In 1970 their Monetary Trends (Friedman and Schwartz, he had stated, “I am so happily blessed with critics 1982). But while Friedman once made a shorthand that I have been forced to adopt the general rule reference to this book as a study of “U.K. monetary of not replying to them.”5 In light of this policy, history” (Wall Street Journal, February 12, 1987), the extent to which critics based in the United the volume was not, in fact, a U.K. counterpart Kingdom were able to smoke him out, and pro- to Friedman and Schwartz’s (1963) A Monetary voke a direct, published rejoinder from Friedman, History of the United States. Rather, its focus is impressive: Nicholas Kaldor in the 1970s, was on the quantitative analysis of longer-term Frank Hahn and Robert Neild in the 1980s, David economic relations, with Friedman and Schwartz Hendry and Neil Ericsson in the 1990s. (1982, p. 605) acknowledging, “We have not made The emergence of the United Kingdom as a a similarly exhaustive study of United Kingdom major battleground for the debate on Friedman’s monetary history.” Monetary Trends does contain views, and particularly on Friedman’s versfion o along the way many observations on U.K. develop- monetarism, was amplified by the positions of 6 After 1979, as governments more sympathetic to monetarism took 4 Friedman, quoted in Snowdon, Vane, and Wynarczyk (1994, p. 174). charge of the honors system, the tables were turned, and some of the U.K. monetarist writers received titles: Sir Alan Walters, Sir 5 Friedman (1970b, p. 326). Samuel Brittan, Sir James Ball, Lord Griffiths, and so on. 466 SEPTEMBER/OCTOBER, PART 2 2009 FEDERALRESERVEBANKOFST. LOUIS REVIEW Nelson ments that are relevant to the present paper and repeated himself often, he rarely repeated himself that are incorporated into my discussion. But the completely. It would, furthermore, be misguided book is not a sufficient statistic when it comes to think that Friedman’s most relevant observa- to studying Friedman’s views on U.K. economic tions on a particular subject appeared in his most developments; it does not contain most of prominent journal publications or in his most Friedman’s observations on the year-to-year course widely cited articles. If anything, the opposite is of U.K. economic policy. For that, one must turn the case. This reflects the pattern summarized by to other places. Johnson (1974, p. 346) as Friedman’s “life-long And, for a comprehensive account, this means habit of scattering his new empirical results and looking in a lot of places. Friedman’s remarks are ideas in unlikely places.” Friedman’s tendency widely dispersed across time and location. Not to “fractionate” his written output by spreading only his writings but also many interviews are it across an enormous variety of outlets means relevant, as they frequently contain, in the words that, to obtain the full picture, one has to recon- of Friedman and Schwartz (1982, p.
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