Inflation and Deflation: A Biography of Milton Friedman
The Great Depression of the 1930s was blamed on free markets and brought a vast expansion of government interference with the economy. Anybody who favored rolling back the power of government inevitably faced the question, “What about the Great Depression?” Without all the laws from that era, it was feared, there would again be high unemployment, chronic monopolies and gross inequality.
Nobel Laureate Milton Friedman did more than anyone else to change thinking on these issues. He gathered massive documentary evidence that the Great Depression occurred primarily because the money supply contracted by one‐third between 1929 and 1933, although a central bank (the Federal Reserve) had been granted the power to prevent just such a catastrophe. The Great Depression was a government failure.
Moreover, Friedman showed that “inflation is always and everywhere a monetary phenomenon.” He made a formidable case that government “fine‐tuning” is more likely to backfire: by the time central bankers realize the economy is slipping into a recession or depression, and they inflate the money supply, the effects are likely to be felt after the economy has already recovered, worsening the subsequent inflation. Conversely, by the time central bankers realize inflation is a problem, and they contract the money supply, the effects are likely to be felt after the economy has slowed down, worsening a the next recession or depression. Government, Friedman made clear, is the biggest source of instability in the economy.
While champions of liberty have generally done well to achieve significant impact on a single area of public policy, Friedman has had an impact on many public policies. He helped usher in the era of free foreign exchange markets. He campaigned for ballot initiatives to limit government spending and taxes. He inspired the movement for educational choice via tuition vouchers which would enable poor people to opt out of government schools. He courageously spoke out against drug prohibition. He helped fight President Clinton’s effort to seize an eighth of the U.S. economy via the scheme for government‐run health care. Friedman is proudest of helping to end military conscription in the United States.
Friedman has gained influence through his scholarly achievements, his teaching at the University of Chicago for 30 years, the Newsweek column which he wrote for 18 years, popular books which sold over a million copies, dozens of articles in the Wall Street Journal, Reader’s Digest, Harper’s, New York Times Magazine and other publications, and countless speeches, debates and TV interviews. Milton and his wife Rose showed how to tell the story of liberty on television, reaching millions around the world with their 10‐part documentary Free to Choose.
Although Friedman has welcomed opportunities to urge that politicians pursue free market policies, he has had no interest in public office. Controversy dogged him, though, after it was reported that University of Chicago‐trained Chilean economists advised Chilean dictator Augusto Pinochet. His military regime followed the catastrophic runaway inflation of Marxist Salvador Allende, as military regimes have followed runaway inflation elsewhere, and the Chilean free market economists urged a policy of economic liberty, including spending cuts, tax cuts, free trade and privatization. These policies brought prosperity and generated pressure for political liberty which ended the military regime. Ironically, when Friedman offered free market advice during his 1980 and 1988 visits to Communist China, nobody complained.
Friedman displayed buoyant energy throughout his life. He rebounded from a 1972 open heart operation to campaign for a spending limit by the state of California. He wrote two books as well as resuming tennis after his 1984 heart attack and open heart operation. He was past 80 when he enjoyed skateboarding with his grandson Patri.
As Playboy wrote when the magazine published an interview with him, “It is testimony to Milton Friedman’s tireless, good‐natured efforts and the vigor of his arguments that economic ideas once regarded as hopelessly out of date are now being seriously discussed again.” The New York Times gushed that “In economics, he is certainly the most irrepressible, outspoken, audacious, provocative and inventive thinker in the United States — and even at 5 foot 3, he may stand taller than all his colleagues in the profession.”
Friedman’s friend and colleague George Stigler reflected, “He has an extraordinarily lucid mind. His ability to think very fast and to conduct himself with complete propriety in the heat of debate makes him an extremely formidable debater in person as well as on paper. He is a marvelous empirical worker, prepared to isolate what he believes are the essential elements of a problem, and to bring the analysis to bear most ingeniously upon empirical data. Finally, he is quite talented in outraging his intellectual opponents, who have accordingly devoted much energy and knowledge to advertising his work.”
Milton Friedman was born on July 31, 1912 at 502 Barbey Street, Brooklyn, New York. He was the fourth child and only son of Jeno Saul Friedman and Sarah Ethel Landau, both of whom were from Beregszasz, Carpatho‐Ruthenia which was part of the Austro‐Hungarian empire and now part of Ukraine. She worked as a seamstress in a “sweatshop.” With 13‐month‐old Milton, the family moved to Rahway, New Jersey, about 20 miles from New York, where his father started a clothing factory. “The one thing I know,” Friedman recalled, “is that he never made much money.” He died at age 49 because of heart problems.
He entered Rutgers University, New Brunswick, New Jersey, in 1928. “I originally intended to major in mathematics,” he explained in his autobiography Two Lucky People (written with his wife). “The only paying occupation I had heard about that used mathematics was actuarial work, so I had informed myself about that and planned to become an actuary.”
He switched his major from mathematics to economics because of two teachers: Arthur F. Burns who was completing his Ph.D. dissertation at Columbia University, and Homer Jones who was completing his Ph.D. dissertation at the University of Chicago. Burns, recalled Friedman, “instilled a passion for scientific integrity and for accuracy and care that has had a major effect on my scientific work.” Jones steered him toward the University of Chicago.
He went there after his 1932 graduation from Rutgers because he got a $300 scholarship. In Jacob Viner’s price theory class, Economics 301, students were seated alphabetically, and Friedman found himself next to petite and lively Rose Director. She had been born during the last week of December 1911, the youngest of five children in Charterisk (spelled various ways), a Russian village now part of Ukraine. She grew up in a home without electricity or running water. Her father, a grain miller, had sisters and cousins who had emigrated to America, and he traveled there to establish himself. He began as a peddler, opened a general store and earned enough money to have his family join him and most of their relatives in Portland, Oregon. They arrived just before World War I began, a good thing since emigration might have been impossible afterward. Rose’s older brother Aaron went to Yale University, then the University of Chicago for graduate work. Rose stayed closer to home, commuting to Reed College, but after two years she transferred to the University of Chicago.
She decided to pursue a Ph.D. in economics. She worked as an assistant to Frank Knight, while Milton worked as an assistant for another economics professor, Henry Schultz. Milton’s first published article was a byproduct of his work with Schultz, a critique of “Professor Pigou’s Method for Measuring Elasticities of Demand from Budgetary Data.” Since A.C. Pigou, among the most respected economists of his day, was at Cambridge University, Milton submitted it to the Economic Journal published there, and he received a rejection from the editor, John Maynard Keynes. The article was subsequently published by Harvard University’s Quarterly Journal of Economics (November 1934). Friedman was 22.
There was another Chicago economist, Henry Simons (-1946), who had a big impact on Friedman. In 1934, Simons wrote A Positive Program for Laissez Faire, a pamphlet distributed by the University of Chicago Press. He emphasized that people generally share common goals, such as promoting prosperity, and the major differences of opinion are about the most effective ways to achieve the goals. Friedman won over millions by embracing this approach and making a practical case that private individuals in competitive markets are much better at solving problems than bureaucrats. Simons warned that “political liberty can survive only within an effective competitive economic system,” and this became a major theme of Friedman’s. Simons believed a monetary contraction was primarily responsible for bringing on the Great Depression, and Friedman documented this thesis. Simons, however, supported nationalization of railroads, a graduated income tax and other policies which Friedman opposed. Unfortunately, Friedman couldn’t keep going on the $300 scholarship. Columbia University offered him a $1,500 fellowship (tuition plus living expenses), so that’s where he decided to do his Ph.D.
In September 1937, future Nobel Laureate Simon Kuznets invited Friedman to work at the National Bureau of Economic Research. Friedman studied independent professionals — lawyers, accountants, engineers, dentists and doctors. This became Friedman’s doctoral dissertation and first book: Income from Independent Professional Practice, co‐authored by Kuznets. Although the manuscript was finished in 1941, publication was delayed four years because of controversy about the book’s contention that barriers to entry into the medical profession, enforced by the government, artificially raised the incomes of physicians.
Meanwhile, Milton and Rose decided to get married in New York, since that’s where they planned to live. The ceremony was held at the Jewish Seminary, June 25, 1938. Their daughter Janet was born in 1943, their son David two years later.
From 1941 to 1943, Friedman worked in the Treasury Department’s Division of Tax Research, when government spending soared because of World War II. Until then, people calculated tax due and paid it in quarterly installments the following year. Friedman analyzed proposals that employers withhold taxes from paychecks, and it began in 1943. He regretted that withholding was one of those “temporary” wartime measures which became permanent.
In September 1946, Friedman began teaching at the University of Chicago where he was to be based for three decades. His most widely‐quoted essay, “The Methodology of Positive Economics,” was published in 1953. He maintained that when one makes statements about phenomena, they ought to be verified by some kind of observation. The primary test of economic analysis is the correctness of predictions.
In A Theory of the Consumption Function (1957), Friedman explained that people decide how much to spend and save according to their expected earnings, not the amount of government spending. Friedman’s work, together with data developed by Simon Kuznets and others, overthrew a key Keynesian claim that government spending was essential for prosperity.
Friedman’s most important single work on economics was A Monetary History of the United States, 1867–1960 (1963), co‐authored with Anna Jacobson Schwartz. They amassed overwhelming evidence to show that changes in the money supply best explain the boom and bust cycle. In particular, prevailing opinion was that the 1929 stock crash caused the Great Depression, but Friedman and Schwartz showed it occurred because the Federal Reserve System failed to prevent the money supply from contracting one third between 1929 and 1933.
Writing in The Journal of Monetary Economics, Nobel Laureate Robert Lucas reflected on the book after 30 years: “It told a coherent story of important events, and it told it well—its beautiful time series on the money supply and its components, extended back to 1867, painstakingly documented and conveniently presented. Such a gift to the profession merits a long life, perhaps even immortality.” As for the main contention that monetary fluctuations explain major economic events, Lucas added, “I will say that I find the argument of A Monetary History wholly convincing…I find their diagnosis of the 1929–33 downturn persuasive and indeed uncontested by serious alternative diagnoses, and remain deeply impressed with their success in explaining the remarkable events of these four years.”
F.A. Hayek, whose book The Road to Serfdom appeared in 1944, did much to stimulate Friedman’s desire to influence public opinion for liberty. Friedman’s first popular work on public policy was Roofs or Ceilings? which he wrote with George Stigler. It was a booklet attacking rent controls, published by the Foundation for Economic Education (FEE) in 1946.
Friedman was an original member of the Mont Pelerin Society which Hayek launched in April 1947. “Here I was,” Friedman recalled, “a young, naive provincial American, meeting people from all over the world, all dedicated to the same liberal principles as we were; all beleaguered in their own countries, yet among them scholars, some already internationally famous, others destined to be; making friendships which have enriched our lives, and participating in founding a society that has played a major role in preserving and strengthening liberal ideas.”
In 1956, the William Volker Charities Fund arranged for Friedman to deliver a series of lectures about general principles and major public policy issues such as unemployment, monopolies, racial discrimination, Social Security and international trade. Rose Friedman edited the lectures into a book, Capitalism and Freedom, which the University of Chicago Press published in 1962. Friedman recommended abolishing farm subsidies, tariffs, import quotas, rent controls, minimum wage laws, subsidized housing, occupational licensing, Social Security, the U.S. postal monopoly, military conscription and many regulatory agencies.
Capitalism and Freedom went on to sell some 500,000 copies. “We have been told that it was smuggled into the Soviet Union and served as the basis for an underground edition,” the Friedmans reported. “We know that an underground Polish version was published sometime in the early eighties. Since the fall of the Berlin Wall, the book has been translated into Serbo‐Croatian, Chinese, Polish, and Estonian, and still other translations are pending.”
In 1962 and 1963, the Friedmans travelled around the world. They visited 21 countries altogether. He reported in Harper’s: “Wherever we found any large element of individual freedom, some beauty in the ordinary life of the ordinary man, some measure of real progress in the material comforts at his disposal, and a live hope of further progress in the future—there we also found that the private market was the main device being used to organize economic activity. Wherever the private market was largely suppressed and the state undertook to control in detail the economic activity of its citizen—there the ordinary man was in political fetters, had a low standard of living, and was largely bereft of any conception of controlling his own destiny.”
The Friedmans decided they wanted to spend their summers in Vermont, and in 1965 they bought about 120 acres overlooking Lake Fairlee. They built a hexagonal house with a fireplace in the center, the design inspired by Robert Lefevre’s Freedom School, Colorado Springs, Colorado, where Friedman had taught a couple years before. They named the house Capitaf after Capitalism and Freedom—royalties from which, they hoped, would pay for it. That’s where Friedman did much of his work until 1980 when they began living full‐time in California.
In 1966, Newsweek’s editors decided to drop the “Business Tides” column which libertarian journalist Henry Hazlitt had written for two decades. They decided they wanted to try rotating three economists: Friedman, “liberal” Paul Samuelson and mainstreamer Henry Wallich. The limited column space forced Friedman to express his views more simply and concisely than before. “My writing style improved not only in the columns but everything else I wrote, and so did my coherence in stating a position,” he reflected. There were three collections of his Newsweek columns, An Economist’s Protest (1972), There’s No Such Thing as a Free Lunch (1975) and Bright Promises, Dismal Performance (1983). Friedman’s output of popular articles continued after Newsweek—82 op‐eds and letters to the editor for the Wall Street Journal, New York Times, Washington Post, San Francisco Chronicle and other publications.
Being awarded the Nobel Prize in 1976 was a highlight of Friedman’s career, but what Rose Friedman called “the most exciting venture of our lives” was suggested by Robert J. Chitester, president of Erie, Pennsylvania public TV station WQLN. A “liberal” Democrat, Chitester had been given a copy of Capitalism and Freedom and found it persuasive. He proposed that Friedman consider doing a lecture series on topics which could be developed into a TV documentary and companion book. On July 26, 1977, Friedman agreed to pursue the project.
Chitester raised about $2.8 million for production and promotion of a 10‐part documentary. This was a remarkable achievement because corporate executives generally didn’t want to sponsor a show about political issues, even economic liberty. Moreover, Chitester had to assure potential backers that if the show were produced, it would be broadcast. Although PBS executives and producers were openly hostile to Friedman’s views, they had been criticized for broadcasting socialist John Kenneth Galbraith’s documentary Age of Uncertainty. They decided to provide some balance by broadcasting the proposed Friedman documentary.
Documentaries of the highest technical quality were done in Britain, and Ralph Harris, director of the Institute of Economic Affairs, London, suggested Anthony Jay who had broken away from the British Broadcasting System bureaucracy and become a partner at the TV production company Video Arts. Jay proposed that each program should consist of a 30‐minute documentary and a 30‐minute discussion, since this would be much less expensive than filming an hour‐long documentary with footage from around the world. “Who protects the consumer?” was the pilot program, to work out production problems and provide a sample for raising money. It was filmed in San Francisco, Sacramento and Washington, D.C. Friedman spoke his own words without a script. The suggested title of the pilot program was “Free to Choose,” and the Friedmans thought this would be a great title for the series.
In one of the most memorable scenes, Friedman talks while walking behind stacks of the Federal Register (listing new federal regulations) arranged in chronological order. There are only one or two volumes per year from the 1930s, so viewers can see his full figure. Then during the 1940s came ever increasing numbers of regulations, and each year’s stack of volumes block the view of his legs. The 1960s brought an explosion of regulations, and the stacks of volumes are so high that Friedman can no longer be seen.
The first part of Free to Choose was broadcast January 1980 over 196 PBS stations (72% of all PBS stations). Free to Choose reportedly attracted a bigger audience than Masterpiece Theater, one of the most popular PBS programs. The series was subsequently broadcast in more than a dozen countries with and without subtitles. Free to Choose was reportedly smuggled into Communist China and the Soviet Union, among other places. Encyclopedia Britannica distributed 16mm prints of the series and sold them for $3,000 apiece. In 1987, the Friedmans bought the rights for $25,000 and arranged distribution of the video at $110.
“The book Free to Choose,” Friedman recalled, “which we wrote to accompany the video, is…the only book [of ours] that is based almost entirely on spoken rather than written English. Partly for that reason, it has sold many more copies than any other book that we have written.” Free to Choose reached bookstores in December 1979. It became the top‐selling non‐fiction book in 1980. More than 400,000 hardcover copies were sold, and the paperback edition brought total sales over 1,000,000. The book was translated into 17 languages.
Over the years, Friedman helped many campaigns for liberty. In 1969, President Nixon, who had long supported conscription, appointed Friedman to the 15‐member Advisory Commission on an All‐Volunteer Armed Force. Friedman helped achieve a unanimous recommendation for an all‐volunteer military, and conscription ended on January 27, 1973.
In 1971, after the U.S. government abandoned efforts to dictate currency exchange rates, Friedman advised Chicago Mercantile Exchange Chairman Leo Malamed that the era of free exchange rates had arrived. In June 1972, the Chicago Mercantile Exchange opened the International Monetary Market which dramatically expanded global currency trading.
Friedman launched the movement for educational choice. Back in 1955, he wrote an article, “The Role of Government in Education,” which became the basis for chapter 6 of Capitalism and Freedom. Only parents who could afford to pay tuition twice—school taxes plus private tuition—had any real choice. He proposed that “Parents who choose to send their children to private schools would be paid a sum equal to the estimated costs of educating a child in a public school.” They established the Milton and Rose D. Friedman Foundation to promote the privatization of government schools.
Friedman challenged the Keynesian doctrine that inflation cured unemployment, in his American Economic Association presidential address (1967) and elsewhere. He was vindicated during the 1970s when many countries suffered through “stagflation” — both high inflation and high unemployment. Friedman put pressure on governments to stop inflating the money supply, and those following his advice set the stage for extraordinary prosperity without inflation.
Friedman promoted ballot initiatives to limit government spending and taxes, starting in 1973 when he went on a speaking tour with California governor Ronald Reagan. Friedman helped Reagan assistant Lewis K. Uhler establish the National Tax Limitation Committee which has campaigned for a constitutional amendment limiting government spending. In recent years, ballot initiatives have proven to be the most effective strategy for limiting government power.
Friedman ranks as the greatest champion of liberty during the 20th century. He worked in more media on more issues than anyone else. He kept at it for more than 50 years, and his influence extended around the world. He could never forget that Jews and other persecuted minorities found refuge in free markets. He was grateful his parents and his wife’s family got to America. He appreciated that because there was reasonably secure private property, an independent university could hire individuals like himself with unorthodox views—and he could speak and write freely. He inspired millions to help carry the torch of liberty on its next lap.