People Who Interact Over and Over Again Milton Friendman Son
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My Friend, Milton Friedman
Reminiscences of a bang-up man
April 11, 2007
It was my practiced fortune to come across Milton Friedman in February 1968, while I was at Oppenheimers. The stock market place was in what looked like the early stages of a comport market, with the S&P 500 down 8 percentage in a couple of months. My partner and good friend, Fred Stein, feared that the U.S. was going back to the low of the 1930s. Afterwards all, he reasoned, "All consumers had caused their needs; everyone had a car." A very recent University of Chicago grad working in the inquiry department suggested that Fred bring in a relatively unknown economist, Professor Milton Friedman—which he did.
Milton said something like, "Yous're completely wrong. Politicians always try to avoid their last big mistake—which was conspicuously the 1930s. So every time in that location's a contraction in the economy, they'll 'overstimulate' the economic system, including printing also much money. The result will exist a rising roller coaster of aggrandizement, with each high and low being college than the preceding 1." Oppenheimer hired Milton that day, despite having 6 economical consultants at the time. He remained one of them for 16 years—and a skillful friend thereafter.
What a superb forecast of the devastating inflation of the 1970s! Very different from everyone'southward expectations, it was amazingly right—and for all the correct reasons. Indeed, it was Milton'southward understanding of what causes inflation that was among his greatest contributions to economics.
In 1976–77, inflation hovered effectually 6 pct. By October 1978 (when the yield curve inverted, with short-term interest rates higher than long-term ones because of the strong need for credit), the consensus forecast was for nigh the aforementioned inflation rate, or lower. Some other of Oppenheimer'southward consultants, Alan Greenspan, was more than pessimistic, predicting "vi percent to 7 percent, mayhap 8 percent." But Milton thought Alan was wrong, likewise. "Every bit inflation rises, people accommodate by taking their money out of the banking concern and spending it, as they perceive its value decreasing. As they go on on spending, the nominal economy will abound somewhat faster, and inflation will rise faster, every bit well. So I expect the CPI to elevation at 10 percent to 12 percent." It peaked at 14.6 percent in March 1980. At that time, Milton said information technology would decline to around 6 percentage past mid-1982—way beneath consensus expectations. It hitting 7.9 percent in June 1982 and four.9 percent past September 1982, and then went lower to 3.eight percent by December 1982 and to a low of 2.four percent by mid-1983.
What incredible calls. Non simply did he correctly forecast what he called the "rising roller coaster of inflation," but he was twice as high every bit the consensus on the tiptop likewise as manner below it on the slowdown of aggrandizement. And he held these forecasts with conviction, both times.
His predictions rested on assumptions that were very different from the decades-old prevailing wisdom that there was a merchandise-off between aggrandizement and unemployment—a view that still persists within a wide swath of the investment community, academe, and the media. In essence, according to the one-time orthodoxy, if you had a stiff economy, you'd get low unemployment simply some combination of rising inflation, inflation exceeding expectations, and rising inflation expectations. This view, labeled the Phillips Curve, afterward Professor Alban Phillips of Cambridge Academy, was an offshoot of Keynesianism. (John Maynard Keynes, incidentally, was one of four economists with whom Milton always said he would take loved to accept had dinner. The others were Adam Smith, Keynes's mentor Alfred Marshall, and George Stigler, a fellow Nobel laureate with whom he did have dinner, since he became Milton and Rose Friedman's all-time friend.)
By contrast, in The Monetary History of the United States, 1867–1960, Milton and his co-writer Anna J. Schwartz argued that higher wages don't cause inflation. "Aggrandizement is e'er and everywhere a monetary phenomenon," they contended. As the government increases the rate at which information technology prints coin, the outcome is too much money chasing besides few goods and services. As the Wall Street Journal put it in explaining Milton'due south Nobel Prize: "In layman's terms, the Swedish Academy credited Milton with nothing less than shredding the Keynesian consensus."
And merely as college wages don't cause aggrandizement, the whopping oil price increases between 1973 and 1980 didn't cause the "stagflation"—the stagnant economy with rising aggrandizement—of the 1970s. Rather, the price hikes were the class inflation took.
Not long before Milton died, I was rereading his articles in Newsweek from 1966 to 1984, collected as An Economist'southward Protest. I told him how relevant I idea those ideas yet were. He replied, "Of course they are."
A generation ago, at a speech to the New York Society of Security Analysts, Milton said something similar, "Significant changes in the growth rate of coin supply, even small ones, touch the financial markets starting time—normally fairly coincidentally. And so, they impact changes in the real economic system, ordinarily in six to ix months—but in a range of three to 18 months. Fifty-fifty after, commonly in about two years in the U.S., they correlate with—or, more than likely, cause—changes in the rate of inflation/disinflation/deflation. The leads are long and variable"—though "the more than inflation a lodge has experienced, history shows, the shorter the time pb will exist between a change in money supply growth and the subsequent alter in aggrandizement."
What happened to the Japanese economic system in the 1980s is a prime number case in point. When the U.S. was printing M2—that is, increasing the money supply—at 12 pct in 1971–72, Japan, under a fixed commutation-rate policy of 360 yen to the dollar, ended up increasing its coin supply at 25 percent. After a couple of years, inflation at that place got up to 25 percent. Then the Bank of Japan shifted from a fixed commutation-charge per unit policy to controlling—and gradually slowing—money growth, down to vi percent to 8 per centum by the early 1980s. With nominal GDP steady at around five percent, and with no aggrandizement and no deflation, it was truly a aureate era—and information technology showed that gradualism worked.
Money growth stayed at this rate until then–treasury secretary James B. Baker rolled the dice with the globe's fiscal markets in guild to get the dollar downwardly, so the GOP could win some votes in the Rust Belt and the Farm Belt. In September 1985, he convinced the British, the Germans, and the Japanese to "overstimulate" their economies, while we promised to "understimulate" ours. They did information technology; we didn't. The Japanese increased money growth from 7 percent to 12 percentage. The "chimera economy" followed, heavily concentrated in the stock market and in existent estate, both domestic and international. My friend Charles J. Urstadt was then an advisor to Mitsui-Fudosan in its bid for Rockefeller Center. Its bid, he recounted, was "half again, or mayhap fifty-fifty more, higher up the market value." However, he said, "We were outbid past Mitsubishi, which bid another ane-third higher."
The monetary policy discipline that produced Nihon's gilt era had a similar effect when practiced hither at dwelling house. Five or and so years ago, Roger Hertog, and then the outstanding chairman of the Manhattan Institute, City Journal's publisher, asked the executive committee, "Given that Reagan deregulated and lowered marginal income tax rates, I can easily understand why his economic expansion of 92 months was almost twice as long every bit the prior longest peacetime expansion since 1857. But, since Clinton reversed those policies, why was his expansion fifty-fifty longer, at 102 months?"
My reply was, "Nosotros've had the best monetary policy—that is, the slowest, steadiest, withal positive wide coin supply growth—under Greenspan, since the founding of the Fed in 1913." One-time Citicorp CEO Walt Wriston interjected, "Alan's been four times better than any prior Fed chairman, simply each of you is underestimating the importance of the Information Revolution." (Incidentally, at a 1981 board meeting, Walt had asked George Gilder, writer of Wealth and Poverty—the book Reagan handed out while in the infirmary after the March 1981 assassination attempt—what he was going to write virtually adjacent. "I don't know," Gilder responded. "Why don't you write about the Information Revolution?" Walt suggested. "Information technology's going to be bigger than the Industrial Revolution." Call back, this was substantially a decade earlier the digital era was in full swing.)
It's almost universally said that Milton flourished in the Chicago school of economic science. Certainly, he had some outstanding teachers, including Frank Knight and Jacob Viner. But 1 of Milton's first students, James A. Meigs, told me, "There actually wasn't a Chicago school. Information technology was simply Milton's innate graciousness that allowed such an appellation. It should accept been called the Milton Friedman schoolhouse." My confirmation of Jim's view came when I saturday in the audition in 1980 for six of the ten Q&A tapings for the outstanding and nevertheless worthwhile Free to Cull TV serial. Whenever ane of the numerous left-wing panelists said something in opposition to Milton, the audience of perhaps 25 Chicago faculty members would raucously approve. They wouldn't boo Milton, simply it sure was another affirmation of the opprobrium he experienced not also long agone.
On my visits to Chicago for these tapings, I would become to the bookstore near the "onetime library" where the tapings had occurred. Not just were Milton's books on the bottom shelf, just big posters of Lenin and Trotsky were all over the walls. This must be a university-owned bookstore, I thought, as no entrepreneur would downplay a local son similar that.
Many years ago, my married woman and I spent a weekend at Rose and Milton's unique octagonal "overthrust" summer home in Ely, Vermont. Nosotros arrived the day after their son, David, had received his Ph.D. in physics. On learning that David loved economics, my wife asked Rose, "Why not a Ph.D. in economics?" The sorry reply: "Milton'south name is such an anathema in academe, it would be a millstone around David's neck." In a similar vein, author Leo Rosten, a classmate and lifelong friend of theirs, told me, "At kinesthesia club lunches, Milton was often by himself; others just didn't desire to argue with him." All the same, despite social opprobrium for many years, he stuck to his philosophical principles.
At the book launching of Costless to Choose in 1980, Bob Chitester, producer of the fabulous TV series that sparked the book, held up a copy of Milton'due south earlier book, Capitalism and Liberty, and said, "This was my bible." Milton, always quick, replied, "That was the old attestation; Complimentary to Choose is the new testament."
And so Milton remarked, "I've never had a book of mine reviewed past any major paper, not even the [Republican] New York Herald Tribune." I was sitting directly behind the head of marketing at Harcourt Brace Jovanovich, the publisher, and on hearing these words, she began to slide off her chair, being stopped only by her knees hitting the too shut chair in front of her. Conspicuously, she was panicked about having to push a book her boss dearly wanted—without a review.
I remember hearing that the Harcourt staff virtually universally opposed publishing Complimentary to Choose. Information technology concluded upward selling about 500,000 copies in hardcover, and nearly 1 one thousand thousand total. It may well have been the precursor to today's vast market for conservative books, talk radio, so on.
Milton and Rose took Harcourt chief William Jovanovich and his wife (along with Alan Greenspan and me) to dinner at La Caravelle in New York. "This is the offset time whatsoever writer has ever taken me to any repast," Jovanovich remarked—"even breakfast."
In one case my wife asked Milton, "What's been your biggest mistake?" He thought seriously, for a proficient 45 seconds or more. "I've e'er been too early; I don't empathise why others cannot see what I do."
I've managed Milton and Rose'due south personal portfolio for over three decades. The solar day afterwards Milton received the Presidential Medal of Freedom from Ronald Reagan in 1988, my married woman and I visited them at their superb new apartment, with magnificent views of San Francisco. When Milton opened the door, Rose broke out into song and Milton tagged along, à la Rex Harrison, "Welcome to the firm that Chuck built . . ." That was a vast, but very gracious, exaggeration, and certainly a highlight of my life.
We likewise spent a weekend at Rose and Milton's more than recent country retreat, a couple of hours due north of San Francisco. It was a charming place overlooking the water, with a magnificent garden, which Rose loved. When we arrived, Milton took my wife up to see their bedroom—where he pointed out the water bed. On the day Milton died, I reminded Rose of this. She chuckled and said, "Well, it didn't last very long."
When Milton was driving united states of america dorsum to San Francisco, he idly commented, "I've never been in an accident in which anyone was hurt." Rose interjected, "What about the two times y'all rolled over?" To which he replied, "What well-nigh the time you lot did?"
On that same drive, Milton told us that during World State of war II, he was working in the Advanced Mathematics Department of the Statistical Research Grouping for War Purposes. The U.Due south. learned that the Germans had developed the jet engine and a aeroplane—the ME 262—that went faster than the manually operated car guns on our latest Boeing bombers could track them at close range. Milton was asked to determine the best materials with which to brand jet-engine blades. "It was a uncomplicated statistical problem, concerning how long the blades would last," he recalled. "Using known properties of diverse metals, I designed ii alloys: one that would final six months and the other nine months. MIT was asked actually to brand the alloys: 1 lasted iii weeks, the other six weeks. That certainly lowered my conviction in regression analysis."
Milton once told me that when another team in the Statistical Research Group came to his team and said, in effect, "We've been working on this equation for two weeks without results," his colleague Dan Estimate got upwardly from his seat adjacent to Milton and finished the equation without proverb a word—just like a scene in the 1951 scientific discipline fiction movie The Twenty-four hours the Earth Stood Still.
After I had sent Milton a re-create of prominent economist and investment strategist Peter Bernstein'southward outstanding volume, Against the Gods—almost how mathematicians had improved society over the centuries by developing tools of analysis that immune chance to be measured and split up into various pieces, increasing liquidity in the markets and spreading shocks around—Milton wrote to Peter congratulating him, merely complaining that he hadn't paid enough attention to mathematicians in non-financial areas, such every bit Dan Judge. "Dan was a truthful genius," Milton told me. Peter, for his part, remarked: "I should have included Milton in the book; he was an outstanding mathematician."
Fiftyeo Rosten told me a story that has since get part of Milton'southward legend. President Nixon, inaugurated in January 1969 subsequently narrowly beating Vice President Hubert Humphrey, shortly established a commission on the volunteer ground forces. Milton testified before that committee, along with General William Westmoreland. The testimony became a debate between the general and the professor. The full general said, "Professor, everything you say makes then much sense, only I'm not sure I'd similar to command an army of mercenaries." Milton immediately replied, "Would you rather command an ground forces of slaves?" The general indignantly retorted that he didn't like to run across our patriotic draftees labeled slaves, to which the professor responded he didn't like to see our patriotic volunteers labeled mercenaries. Farther, the professor pointed out that he, the full general, and most people they both dealt with were "mercenaries." The commission broke out in laughter, and the draft was abolished that afternoon.
Milton regarded this as the prime achievement of his life. "I take often said I would gladly merchandise off a degree of economic freedom for more personal freedom. It turns out, empirically, you don't have to."
On Sun, August 15, 1971, President Nixon announced wage and cost controls (and closed the gold window). I called Milton that night and asked what was going to happen. He replied, "We're going to have more than inflation." I asked how—given that we now had the controls. In order to get reelected in 1972, he explained, Nixon will spend and spend to win voter loyalty, like most incumbents, and and then, having created a huge deficit, he will print coin to pay for information technology all. And he'll print even more imprudently than most presidents, believing that the wage and toll controls will mask some of the resulting inflation. And certain enough, in February 1972, the Treasury announced a $28 billion deficit—very big for that time, even as the real economy grew strongly at seven percentage that quarter and fifty-fifty faster during the next ane. The ensuing double-digit aggrandizement is legendary.
Recently, I related this chat to Don Rumsfeld, who said, "Equally deputy secretary of the treasury under George Shultz, I was put in charge of administering phase 2 of the controls. 'Why put me,' I asked, 'since I don't believe in them?' Shultz replied, 'That's exactly why I want you to do it.' I kept giving exemptions—to small businesses, for food, whatever—considering I knew of the distortions the controls acquired. I was kind of proud of the task we were doing, because we were doing as little damage as possible. Some fourth dimension later I received an irate phone call from Milton maxim, 'Cease giving exemptions. The more you practice, the more the public volition call back controls worked instead of being an absurd idea—just as Nixon knew they were from his experience in the Function of Price Administration in World War 2.' "
Milton also worked with Ronald Reagan, when he was governor of California, on Proposition One, intended to limit the rate of growth in country spending to the rate of growth in the state'southward nominal economic system the prior year. The proposition failed, unfortunately (though past a small margin), due to a major ad entrada by state employee and teachers' unions, bureaucrats and some legislators, and other special interests. Before long thereafter, Milton initiated an amendment to the U.S. Constitution along the same lines, and he campaigned to go it adopted. Thirty-ii states passed such bills; 34 were needed for the amendment to laissez passer.
Milton and George Shultz—who served as President Nixon's labor and treasury secretary and President Reagan's secretary of state—had a mutual admiration for 1 another. "George is the near able man in America," Milton would say. At a June 2005 fund raising dinner for the Milton and Rose D. Friedman Foundation, which advocates for vouchers and charter schools in M–12 educational activity, the secretarial assistant was the second speaker, afterward Alan Greenspan. He said something like: "As secretary, I met a number of kings and queens, more a few dictators, and innumerable heads of country. Often I'm asked, 'Who was the most impressive, important individual you ever met?' Clearly, information technology was Milton Friedman. He was the showtime academic economist to state strongly what John Q. Public innately knew: that it's non but the quality of an economist'south thinking that matters; his forecasts also have to exist correct." George so broke out into song—to a Cole Porter tune—"A fact without a theory is like a gunkhole without a sail, like a kite without a tail. . . . Simply there's one matter worse in this universe, that'south a theory without a fact." He brought the house downwards. Incidentally, in the hour long Q&A, hosted by the very able John Stossel of ABC News, I didn't see anyone leave the room, even though we closed at 10 PM, quite late for Manhattan on a weeknight.
Milton had proposed floating substitution rates some five decades ago. George Shultz told me, in issue, "I stayed in as secretary of treasury 9 months longer than I wanted to, only to get Milton's idea in."
Milton once told me: "Anti-Semitism may have been a factor in causing the depression of the 1930s, particularly the 1929–1932 part, when the money supply declined over one-third. Ane of the governors of the Fed kept a very gossipy diary," Milton explained. "In it, he noted he had had lunch with J. P. Morgan, Jr. in the fall of 1930." At that time, Milton connected, there were only two prominent Jewish banks in the country: Manufacturers, which catered to the rag trade around Seventh Avenue in New York; and the Bank of the United states of america, many of whose depositors were Jewish immigrants. With no deposit insurance, and with deflation approximating 10 percent per year, one could have fabricated a very respectable real return during those times of adversity by pulling out of the bank and putting currency in the mattress. And then at that place was a classic "run" on the Bank of the United States. The Fed governor asked Morgan, "Are you going to provide liquidity to the Bank of the United States, every bit y'all accept done for some 2 dozen other banks in the past few years?" Morgan replied, "No, I'm going to get those Jewish b------south for what they did to my late father."
The son reputedly believed in the ability of the and so-chosen "Jewish press," and his anger probably stemmed from how embarrassed his male parent and family had been during the Pecora Investigation of 1911, a follow-on to the coin panic of 1907–08. J. P. Morgan, Sr. had a bad case of rosacea, an inflammation of the confront, which resulted in a particularly big red nose in his case. One of the papers had dressed a dwarf in a young girl'south wearing apparel; J. P. picked "her" up and put "her" on his lap. Whereupon "she" reached up and twisted his nose. Flashbulbs went off all over the identify, and information technology was front-folio news the next day.
In the absence of help from the younger Morgan, the Banking concern of the U.s.a. failed, the first major bank to do so. In a chain reaction, depositors in other banks began to withdraw their coin, banks failed across the land, the coin supply contracted by a 3rd, and GDP shrank by the same proportion.
By dissimilarity—and a very dramatic contrast, at that—at the terminate of the 1907–08 money panic, J. P. Morgan, Sr., who reputedly had the ability to stay awake for two or iii days direct, had locked up 24 or and then major coin men and investors on a Sunday dark in his magnificent library on 36th Street, off Madison Avenue. He said, in result, "I'm putting up some money on the opening tomorrow morn, and none of y'all is getting out of hither until yous promise to practice the aforementioned." (When I moved into my current dwelling house in Bronxville, New York in 1968, my side by side-door neighbor—Jackson Chambers, so in his 80s—told me, "I was a banking examiner for New York Country during that crunch. As I recall, J. P. Morgan said, 'I'k putting up 100 pct of my net worth on the opening, and none of y'all is getting out until you pledge to practice the aforementioned.'" Clearly, investing 100 percentage is a earth of difference from "putting upwards some money.") That ownership caused a lesser to the market place and concluded the panic. But because they were ownership when the Dow was down over 50 percent in a bit more than a year, they were pilloried for "making coin during arduousness." Hence (among many other reasons) the Pecora Investigation, which led to the creation of the Federal Reserve System, the imposition of a federal income tax, and the passage of the Sherman Anti-Trust Act.
In 1947, Friedrich von Hayek assembled some 39 classically liberal scholars, including Milton, at Mont Pelerin, Switzerland, for a calendar week-long seminar. Its rationale was: The world's going socialist or communist, and perhaps fascism will resurface. Each of united states believes in limited regime and economical and political freedom. Why don't we get together every couple of years, exchange ideas, take some drinks, and and then on?
Ane twenty-four hours at that place was a long give-and-take among seven or eight of them. Nearly the finish, Ludwig von Mises stood upwardly, declared in a huff, "Yous're all a agglomeration of socialists," and stormed out. Milton said he learned from that feel that "Information technology'due south not plenty to accept audio, rational ideas—one has to get forth with people as well."
Once when Milton was in New York visiting some of Oppenheimer'southward clients, we had a cocktail party after a long day. A young man asked him a question in an exceedingly rude manner—again and again. Milton's response was very gracious. The next morn Milton was debating James Tobin, another Nobel laureate, at the Institutional Investor briefing, with perhaps ane,000 attendees. Tobin asked about the exact aforementioned question every bit had the young human the prior evening, just he did it very politely. Milton went at him hammer and tongs. Subsequently, I asked Milton why he was and then polite to the young homo and so aggressive with Tobin. He replied, "The young chap didn't know what he was talking nigh. Conversely, James did—it was an ambush question, and I wasn't going to let him get abroad with information technology."
Let me close with a few of Milton'south choicest epigrams.
- "Aye, it'southward truthful consumer spending accounts for almost 70 pct of nominal GDP. But that doesn't cause anything. It's 2 per centum or 3 percent or 5 percent of the population who are the risk-takers, the entrepreneurs, the innovators, who cause the growth."
- Milton liked to quote his skilful friend, UCLA professor Armen Alchian: "The ane affair you tin be virtually sure of in this life is that everyone volition spend someone else's money more liberally than they will spend their own."
- "I've oft wondered whether the departure between mankind and animals is not then much the power to reason every bit it is the power to rationalize."
Mr. Brunie spent most four decades at Oppenheimer, has been on the lath of the Manhattan Establish almost since its founding, and is a member of Urban center Journal's publication committee.
Source: https://www.city-journal.org/html/my-friend-milton-friedman-10239.html
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