This clip was taken from the “How to Cure Inflation” episode of the original Free To Choose TV series.
Inflation results when the amount of money printed or coined increases faster than the creation of new goods and services. Money is a “token” of the wealth of a nation. If more tokens are created than new wealth, it takes more tokens to buy the same goods. Friedman explains why politicians like inflation, and why wage and price controls are not solutions to the problem. Friedman visits Japan, U.S. and Britain.
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Milton Friedman on Inflation and Money Supply
Milton Friedman, an eminent economist of the 20th century, made significant contributions to the understanding of inflation and its relationship with money supply. His groundbreaking theories have greatly influenced policymakers and left an indelible mark on the field of economics. In this article, we will explore Friedman’s views on inflation and his belief in the importance of controlling money supply.
Friedman spent a substantial portion of his academic career studying the causes and consequences of inflation. He argued that inflation is fundamentally a monetary phenomenon, fueled by excessive growth in the money supply. According to him, inflation occurs when there is more money chasing the same amount of goods and services, leading to a sustained increase in prices.
One of Friedman’s most influential ideas was the Quantity Theory of Money, which states that there is a direct relationship between the quantity of money in circulation and the level of prices. In simple terms, if the money supply grows at a higher rate than the output of goods and services, inflation will occur. Conversely, if the money supply grows at a slower pace relative to the output, deflation or price stability will prevail.
Friedman strongly believed that controlling money supply was the key to maintaining stable prices and preventing inflation. He advocated for a rule-based monetary policy framework, which suggested that central banks should focus on strict and predictable money supply growth rates. By adhering to a predetermined rule, the central bank could insulate the economy from the harmful effects of discretionary policies, thereby reducing inflationary pressures.
Critics of Friedman argued that his theories oversimplified the complex nature of inflation dynamics, neglecting other important factors such as consumer expectations, real shocks to the economy, and wage-price spirals. However, Friedman acknowledged that there might be short-term factors that could temporarily influence inflation rates, but in the long run, it was the growth rate of the money supply that played a crucial role.
Friedman’s ideas were supported by empirical evidence from various historical periods, including the hyperinflations of Germany in the 1920s and Zimbabwe in the 2000s. In both cases, excessive money printing led to astronomical price hikes, devastating the economies of these countries. These examples, among others, strengthened Friedman’s case for the importance of sound monetary policies and disciplined money supply growth.
Friedman’s ideas on inflation and money supply have left a lasting impact on macroeconomic policymaking. Many central banks now explicitly target inflation rates as a way to promote price stability and anchor inflation expectations. The belief in the effectiveness of controlling money supply to manage inflation became a cornerstone of monetary policy regimes worldwide.
In conclusion, Milton Friedman’s work on inflation and money supply remains highly influential, shaping the way economists and policymakers approach macroeconomic stabilization. His emphasis on controlling money supply growth as a means to prevent inflation has had a profound impact on monetary policy frameworks across the globe. While the complexities of inflation dynamics cannot be fully captured by a single theory, Friedman’s ideas have laid the foundation for understanding the monetary causes of inflation and the importance of maintaining price stability.
Friedman is a legend.
I remember this guy. Deregulate the airlines, costs will drop and the public will benefit. So they deregulated. Most of the airlines went under or merged. Routes were dropped, the number of flight decreased, and they jammed more people into the same cramped space.
Oh, and the costs went trough the roof, plus they nickel and dime fliers to death.
Now the only way I would ever get on a plane today is if the ship my corpse in a coffin! Milton, your ideas sounded good, but the reality turned out horribly!
US in 2022
FJB
this is what's going to happen in the USA at 2023
The fact that the average pay 45 years ago ,4.00 an hour, would have the purchasing power today of 25.00 an hour. Compared to the current minimum and current average in the US, 45 years ago your purchasing power wast 13 percent more with the same amount as today. People making much less than the current average of 23.00 an hour, which I can't believe that to be true, or even minimum wage, would have an impossible task of living. It simply cannot be done.
So the reason why inflation is so so bad in the US, where there are many examples of goods and services being exorbitantly more expensive compared to 30 years ago while the average pay rate is not even close to the percentage of thr price increases, is because just like the last 4 presidents we've had just keep begging the National Reserve to print money?
Buy Bitcoin!
If aggregate supply capacity in the economy increases at the same rate as the money supply, will inflation occur?
So unlimited QE under 2020 pandemic will produce sky high inflation? Or are these complex monetary tools that Milton friedman have not accounted for in today's world
MONEY PRINTER GOES BRRRRRRRRRRR
Everything these days is price fixes, so we’ll have shortages instead of inflation, with hyperinflation on a back market like amazon or eBay sellers.
Why has inflation been so low the past decade or so?
Dat transition doe
Then according to Milton our government and big corporations are drunk on trillions of dollars of cheap money. Something bad is going to happen.
It was so effective that it led to a prolonged period of deflation. Now they are printing money furiously trying to generate inflation
Love Milton Friedman, could listen all day.
try ron paul
A Friedman and Sowell or Friedman and Paul ticket would have been nice. Mr.
Friedman would never have run with Mitt.
no
Such a simple Civics lesson. I just need to stock up on lots of food because food prices will go through the roof. We are headed for a bad fall and if you ever see these animals go crazy on Black Friday sales can you imagine what heinous acts of violence that will descend upon these animals when there is not food in the supermarkets?
They cant see logic if you smother it in their face.
the arguments on those topics are full of fallacies. E.g. roads are a market failure, that the market would never fulfill that demand so the government has to do it, and the same with education and healthcare which are listed as examples of market failure. And that the government has to deal with negative externalities even though the market provides mechanisms for dealing with those too.
none of it exists?
as you probably school economics is full of fallacious keynesian rubbish such as certain market failures, negative externalities
Johnson/Friedman 2016!! (David Friedman)
passed As-level eco with an A grade but only now do i understand why they would print so much money when it was obvious it would lead to inflation. haha
Romney?
Romney/Friedman '12!
If only he was still with us…. *sigh*