First of all let me note that I'm beyond delighted, I'm honored that a person of the genius of Harold Desmetz continues to read my blog. That's a privilege and pleasure not to be under-estimated! – that someone you deeply respect considers your views worthy of some attention.
Yesterday Harold noted a view re: my recent blog post in which I suggested that Friedman might have 'recanted' from his earlier monetarist views.
Here's what Harold has noted:
Sanjeev: There is no inconsistency in simultaneously preferring an end to centralized control of money supply and, if we are stuck with central banking, to criticizing the central bank for not having increased the supply of money when people were demanding more cash. It may well have been Friedman's belief that a free banking system would have made the additional cash available. — Harold
Here's my response.
I note there are typos, etc. in my response but I'm desperately time constrained, so I'll publish "as is":
Fully accept what you say. Indeed, I had deliberately qualified the word 'monetarism' with the adjective 'active' precisely on this ground, to distinguish it from the theory underpinning monetarism which is merely a truism, in the end. (although the theory can't be "proven" since its variables can't be measured precisely).
My understanding is that Friedman (for most of his life) did not limit himself to arguing the theory. He did not say that private money-producing banks (minimally regulated; with no central bank) will naturally arrive at the best adjustment to liquidity constraints. His analysis of the Great Depression, instead, chides the Fed for inadequate intervention.
His new statement (towards the end of his life) would have implied a qualified advocacy of central bank intervention of the sort you've stated, and which I meant to imply. I'm therefore keen to read more about what he wrote on this subject towards the end of his life.
If he has argued this new position (that banks should be left alone, and that theory would automatically apply), this should be widely made known. My hypothesis is that he finally came to the view that public choice dynamics (which in his view applies to all government interventions), also applies to central banks. That government failure cancels out any benefits that central banks might, in some circumstances, provide.
The key result, in my view, is that central banks can't outperform the free market in the long run. Isolated examples of what they do (or don't do) are to be distinguished from long run performance, and that's what economics should focus on. Selgin is doing a lot of work in this area.
This (new) view of Friedman makes it important for mainstream economics to study this matter further and make clear to the world that central banks are not the solution. I've been looking at Selgin's data and the existence of central banks can no longer be justified by the economics profession.
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