FEATURE Milton friedman on the wallaby track
Milton Friedman and monetarism both visited Australia in the 1970s, writes William Coleman
he recent death of Milton Friedman Australia, then, was besieged by ‘stagflation’. immediately produced a gusher of Which of the two ills of this condition—inflation obituaries, blog posts and editorials. or unemployment—deserved priority in treatment But among the rush of salutes was a matter of sharp disagreement. But on and memorials, one could not certain aspects of the policy problem there existed Tfind any appreciation of Friedman’s part in the a consensus; that the inflation Australia was Australian scene. This is surprising: his extensive experiencing was cost-push in nature, and (with an travels provided several quirky intersections with almost equal unanimity) that some sort of incomes Australian public life, and his ideas had—for policy would be a key part of its remedy. This was a period of time—a decisive influence on the certainly a politically bipartisan view, supported Commonwealth’s monetary policy. by both the Labor Party and the Liberal Party Milton Friedman visited Australia four times: during the 1974 election campaign.2 The reach 1975, 1981, and very briefly in 1994 and 2005. of this consensus is illustrated in its sway over the On none of these trips did he come to visit Institute of Public Affairs. The IPA was almost shrill Australian academia, or to play any formal policy in its advocacy of fighting inflation first. But the advice role. Instead his first visit was initiated and IPA’s anti-inflation policy, as outlined in the ‘10 organised by Maurice Newman, then of the Sydney point plan’ it issued in July 1973, was perfectly stockbroking firm Constable and Bain (later neo-Keynesian. Neither the money supply, nor Chairman of the Australian Stock Exchange, and monetary targets, were mentioned. The Central presently Chairman of the Board of the ABC, and Bank barely appeared. But a 3–6 month wage Chancellor of Macquarie University). price freeze was prominent. Friedman arrived in Australia on 1 April 1975 It was in this economic and intellectual in a country on the verge of political turmoil. environment that Milton Friedman arrived Jim Cairns had been elevated to Deputy Prime declaring, ‘There is only one cure for inflation Minister and Treasurer, and was pursuing the and that is for the quantity of money to be eerie, erratic course that was to destroy him and critically damage the Labor Government; it was during Friedman’s sojourn that the key William Coleman is a Reader in meetings of the ‘Loans Affair’ were to take place.1 Economics at the Australian National Milton Friedman’s first experience of Australia University. His books include The Causes, also coincided with economic turmoil. Over the Costs and Compensations of Inflation preceding 12 months the Consumer Price Index (Edward Elgar, 2007) and Economics had risen 17.6%, the largest annual increase on and its Enemies: Two Centuries of record. Further, over the preceding twelve months Anti-Economics (Palgrave, 2002). real GDP had contracted, by 1%.
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increased at a slower rate’.3 This message was exclaiming ‘Who is this Friedman guy? What put to public addresses in Canberra, Melbourne have we got on him?’ I cannot resist noting an and Sydney (the audience in the last location equally rebarbative (if very different) personality numbering 500). It was aired to seminars at the also chanced to be in Australia that month: Joan Reserve Bank and the Treasury. It was repeated in Robinson, who gave her own ‘Monday Conference’ Friedman’s television performance on the ABC’s programme, in which she launched darts of a ‘Monday Conference’. more intellectual character at Friedman. When the This message would certainly also have been programme compere challenged any ‘Friedmanites’ repeated to Gough Whitlam, whom Friedman in the studio audience to come forward, Maurice had an appointment to see. Whitlam, however, Newman rose dauntlessly to speak. The collision cancelled the appointment. So Friedman made of vivid characters that Australia saw in April 1975 do with observing, from the Visitors’ Gallery, is worthy of dramatic representation by the talents Whitlam being asked in Question Time whether, of a David Williamson. in the light of Milton Friedman’s theories, the After 18 days Friedman’s swing through government had advised Bob Hawke that it no Australia was complete. Did it leave its mark? longer held excessive wage rises to be responsible One recent researcher of the monetary policy of for inflation. ‘A clever debater’ in Friedman’s the period suggests that ‘Friedman’s visit had little or judgment, Whitlam responded by paying tribute no impact within the Reserve Bank and Treasury.’5 to both Friedman and Hawke, and then expressed Underlining that suggestion, the then Deputy a preference for Hawke’s advice on account of the President of the Conciliation and Arbitration trade unionist’s closer knowledge of Australian Commission later recalled that Friedman’s visit ‘was circumstances. In the same chamber, a less clever a rather amusing episode because I don’t think he debater, Jim Cairns declared on 9 April, in reply had any effect on our thinking’. to another tail-twisting question from Phil Lynch, But influence is better measured by events than that ‘The Labor government will never see … recollections. In the late 1970s and early 1980s the resources remain unemployed because of a shortage structure of monetary policy in Australia broadly of money’. Implicitly invoking the Theodore Plan conformed to monetarist precept. It will be recalled that the core of monetarism was a certain theory of the value of money, The collision of vivid characters that the Quantity Theory of Money, that sought to Australia saw in April 1975 is worthy explain the value of money by means of the most fundamental and successful of all economic models: of dramatic representation by the the model of supply and demand. As the economist talents of a David Williamson. explains the value of oil by reference to the demand and supply of oil, so the Quantity Theory proposes to explain the value of money by reference to money’s of 1931, Cairns continued, ‘That battle was fought supply and demand. in this country 50 years ago and we are not going To help it sustain a doctrine of policy the to fight it again.’4 A week later, Bert Kelly asked Quantity Theory was supplemented in monetarist Cairns ‘if printing money is a good solution to teaching by a certain framework of ‘goals’, ‘targets’, the unemployment problem why not print more ‘instruments’ and ‘policy authorship’. The ‘goal’ of of the stuff and get rid of the unemployment monetary policy was to be price stability; the ‘target’ problem all together’. Cairns response: ‘We might would be a broad measure of the money supply that do precisely that’. include bank deposits (M3); the ‘instrument’ of Evidently, Australian government had by April policy (or ‘lever’ in more popular language) would 1975 acquired the air of the mad-house. Certainly, be government-issued money that constitutes the configuration of personalities that was soon a necessary reserve of banks, and was under to reduce it to a circus was then forming. Junie government control (the money base). Finally, Morosi had been appointed personal secretary the ‘policy authorship’ would lie with technical to the Treasurer by Cairns. One story has her functionaries firmly under the direction of the
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executive of a democratic government. Thus—in earlier, ‘I don’t blame George [Schulz for inflation]. the monetarist policy vision—functionaries, at the I blame you, Mr President.’8 behest of the political executive, would adjust the But around 1980 was the zenith of the money base in response to any deviations of M3 influence of monetarism. Monetary targeting was growth from a target level that was consistent with commonplace, if not universal.9 The decline was price stability in the medium to long run. not long in coming. From the late 1970s through to the early On 29 January 1985 monetary targets were 1980s Australian policy resembled this regimen. suddenly dropped by Paul Keating in the face of Without ever making price stability the sole goal money growth obviously in excess of target. In the of monetary policy, Malcolm Fraser, it is fair to nine years since their institution M3 had grown say, made a reduction in inflation the primary 168%, barely less than the 178% they had grown in goal of monetary policy. Under Fraser Australia their nine years before their institution. This fact was also instituted a system of monetary targets. hardly encouraging, but could be blamed on the size (On 4 March 1976 monetary ‘projections’ of targets, rather than their existence. Nevertheless, were introduced for annual growth in M3 of in the early 1980s the strenuous and unsuccessful 10–12%). Further, just before the announcement attempts of monetarist policy in the United Kingdom of these targets, the Reserve Bank—betokening a to control the money supply had brought out that manipulation money base to control M3 growth— the market component of money (bank deposits) was had increased the ‘Statutory Reserve Deposits’ that commercial banks held ‘frozen’ at the central bank, thereby constricting banks’ reserves. Finally, the Friedman left with no ‘high opinion’ location of policy authorship was in accordance of Fraser’s intellect. Such a personal with monetarist predilections. For decisions over antipathy is rarely met in Friedman’s the target and instruments were decided by the sweet tasting memoirs. Monetary Policy Committee of Cabinet, which was very firmly in the hands of the Prime Minister, Malcolm Fraser. a slippery, intractable and contrary magnitude. Still Thus the tenets of monetarism were influential. more importantly, the experience of targeting had In saying this, I am not suggesting any personal increased the awareness that central banks supplied influence of Milton Friedman. Any insinuation money on demand, by means of short-term lending that Friedman played the guru to the Fraser to the financial sector, and could barely imagine any government would be ludicrously off the mark, other way of conducting themselves. The upshot as was pungently demonstrated by Friedman’s was that, as the 1980s wore on, the money supply second visit in 1981 (also organised by Maurice (however measured) was increasingly perceived as Newman). Friedman came with an appointment an endogenous variable, not an exogenous one. And with the Prime Minister on this second trip as well, as an endogenous variable, the money supply was but this time the appointment was kept. It lasted something to be explained by inflation, rather than something like an hour, but produced ‘less than to explain inflation. harmonious feelings’: But if money growth was merely explained by inflation, what then explained inflation itself? And The discussion with Mr Fraser was not how to control it? An answer eventually emerged, among the most friendly discussions we ever that was by the early 1990s to become a consensus. engaged in. He was very cold, arrogant, quite The goal of monetary policy would be price stability, uninterested in hearing anything other than 6 as with monetarism. But the target was now to be an echo of what he himself said. the inflation rate itself. And the instrument was Friedman left with no ‘high opinion’ of Fraser’s to be the rate at which central banks lent to the intellect. Such a personal antipathy is rarely met in financial sector, ‘the cash rate’ in Australian parlance. Friedman’s sweet tasting memoirs.7 The truth is that Finally—and this was critical—the policy author Friedman was no courtier. In the same memoirs he would be an independent central bank. Thus in this recalls telling Nixon in White House a few years new dispensation the central bank would adjust the
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cash rate in response to any deviations of actual recently issued by the Federal Reserve of the United inflation from some target level that was consistent States of America: with ‘price stability’. This framework has become almost canonical On March 23, 2006, the Board of Governors monetary policy today. And—with the exception of the Federal Reserve System will cease of the goal of policy—it is highly inconsistent with publication of the M3 monetary aggregate. Friedman’s views. US Federal Reserve, November 10th 2005. Yet the monetarist episode had long-term Even if Friedman oversold effects. ‘monetarism’ as a policy prescription, Firstly, monetarism successfully killed off neo- he was useful in bringing debate in Keynesian theories of inflation that that had been Australia to fundamentals. dominant. Again we may illustrate by reference to the IPA. In January of 1973 the Institute issued an impassioned condemnation of inflation. It also Firstly, Friedman, both early and late in declared ‘The underlying basic cause of inflation his career, was distinctly averse to central bank was a persistent imbalance between investment independence. Friedman was always doubtful of and consumption’.10 This is pure Keynesian discretion in monetary policy; he wanted monetary ‘inflationary gap’ analysis, and could have been policy to be a matter of rules, not discretion. written in 1943. Independence gave central banks discretion, or Secondly, even if Friedman oversold ‘monetarism’ at least the opportunity of exercising it. And, he as a policy prescription, he was useful in bringing believed, they would use their discretion in order to debate in Australia to fundamentals. Small-scale gratify their impulse to be ‘players’. Thus it would societies, I suggest, are given to small-scale theories be best if central banks were not independent. In of their problems; theories that are ‘particularist’; fact, it would be best if they were abolished, their emphasising—or overemphasing in my view—a functions integrated into Treasury departments, mass of particulars, especially institutional and and their senior personnel demoted from being historical ones. Friedman brought some large- media icons to anonymous functionaries. scale ideas from a larger-scale society; ideas with Additionally, and paradoxical as it may sound, deeper theoretical foundations and empirical Friedman always opposed making a target of corroboration. Even those tail-twisting questions in the inflation rate. This was because, even with a Question Time of April 1975 had a useful function smoothly growing broad money supply, inflation in raising fundamentals among policy makers. over the short term would be subject to ‘noisy’ Despite these uses, monetarism never movements, owing to unpredictable disturbances to acclimatised here, never struck a chord, never really money demand. This meant that inflation, over the resonated with local conditions. A contrast might short term, was not the variable that would signal if be made with Henry George, who in some ways the ‘levers’ of policy were set too loose or too tight. was the nineteenth century equivalent of Friedman: It was broad money growth that would signal if an economic liberal (Free Trader and individualist) levers of policy were set too loose, or too tight. Thus who distilled from the economics of the day certain money growth was to be targeted, not inflation. potent theoretical spirits, and pressed their practical And the lever of policy was to be the money base, implications. George, too, visited Australia. In not the cash rate of the central bank. 1890 he spent 98 days criss-crossing the continent. Whatever their value, these counsels of Friedman He was welcomed at Sydney’s Circular Quay ‘by have been refused over the past 20 years, as the cheering crowds who … in procession with a brass wisdom of targeting inflation by an independent band … accompanied the Georges, in a four horse central bank’s through adjustments of the cash rate coach, to the Town Hall.’11 There followed 11,000 has become universally accepted. kilometres of travel within Australia, 48 lectures, 9 The final demise of monetarism may be sermons and many newspaper interviews. considered symbolised in a stark two line statement Ninety years later Friedman recorded of his
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own public addresses in Sydney and Melbourne Netherlands, Spain, Brazil and South Africa had also that he would be met with ‘the almost inevitable pursued monetary targets. question from the floor from a Henry Georgite’. I 10 The Institute of Public Affairs, ‘A Kind of Madness’, suspect, sadly, that in a century’s time some future Institute of Public Affairs Bulletin (January–March, prophet visiting Australia will not be faced with an 1973). 11 John Pullen, ‘Henry George in Australia: Where inevitable question from a Milton Friedmanite. Landowners are “more destructive than the Rabbit or Kangaroo”’, The American Journal of Economics Endnotes and Sociology 64:2 (2005), p 684. 1 Paul Strangio, Keeper of the Faith: A Biography of Jim Cairns (Melbourne: Melbourne University Press, Additional references 2002), pp 328–329. 2 See Simon Guttman, The Rise and Fall of Monetary Friedman, Milton ‘Should There Be an Independent Targeting in Australia (Melbourne: Australian Monetary Authority?’ In Search of a Monetary Scholarly Publishing, 2005), p 29. Constitution , L. Yeager, Cambridge: Harvard 3 Quoted in Guttman, The Rise and Fall of Monetary University Press, 1960 Targeting, p 57. ______‘Monetary Policy for the 1980s’, To 4 Strangio, Keeper of the Faith, p 334. Promote Prosperity, ed. John H. Moore, Stanford: 5 Guttman, The Rise and Fall of Monetary Targeting, p 274. Hover Institution Press, 1984. 6 Milton Friedman and Rose Friedman, Two Lucky ______1973b ‘What Should Be Done About People: Memoirs (Chicago: The University of Chicago Inflation? A Memorandum’, Institute of Public Press, 1998), p 432. Affairs Bulletin, July-September. 7 One witness to this encounter has recalled: ‘Rather than listen, he berated Friedman for America’s agricultural policies and used them to defend Australia’s then protectionist ways. I remember Billy Snedden raising his considerable eyebrows at me in frustration and embarrassment … Friedman later confided in me that he had had meetings in recent times with many leaders … but he had never experienced anything as unpleasant or disappointing as the meeting with Malcolm Fraser’ (Maurice Newman, Milton Friedman tribute event, CIS, 12 March 2007, www.cis.org.au/Events/tribute_ friedman/m_newman.html.) 8 Friedman and Friedman, Two Lucky People, p 487. Yet the encounter with Fraser was not the ‘most acrimonious and least cordial’ one Friedman experienced on that trip. That categorisation belonged to a dinner he has with the front bench of the ALP. Hayden ‘hardly said a word’. Bob Hawke, in Friedman’s memory, ‘made a long and involved statement out of which I could make neither hide nor hair’ (Friedman and Friedman, Two Lucky People, p 432). 9 ‘By the late 1970s, all of the seven largest Western economies—the US, Japan, West Germany, the UK, France. Italy and Canada—and two smaller economies—Australia and Switzerland—had monetary targets of one form or another in place’ (Victor Argy, Anthony Brennan and Glenn Stevens, ‘Monetary Targeting: The International Experience’, paper to the Reserve Bank of Australia (Sydney: RBA, 1989), p 10). This authority adds that the
Vol. 23 No. 2 • Winter 2007 • Policy