Milton Friedman Interview
Milton Friedman is Professor Emeritus of Economics at the University of Chicago and Senior
Fellow at the Hoover Institution. Dr. Friedman received the 1976 Nobel Memorial Prize for
Economic Science. Member of the research staff of the National Bureau of Economic Research
from 1937 to 1981. He is a co-author of Free to Choose: A Personal Statement and Two Lucky
People: Memoirs. He is the author of Capitalism and Freedom and other works.
NEW RIVER MEDIA INTERVIEW WITH: MILTON FRIEDMAN
Professor Emeritus of Economics, University of Chicago
Senior Fellow, Hoover Institution
QUESTION: Do Americans know enough about social statistics?
MILTON FRIEDMAN: Americans know very little about social statistics, but I am not sure
that it's important that Americans know about social statistics. The people who are
interpreting America to them, the people whom they count on for advice and for instruction
ought to know a great deal about social statistics.
QUESTION: We had this huge argument about inequality, how you measure it.
MILTON FRIEDMAN: In the particular problem of inequality, what is true, what is
unquestionably true, is that there's been a widening difference in wages earned. You have
had the skilled wages go up relative to the unskilled wages. However, there has been no
comparable widening in the levels of consumption. If instead of looking at income, you
look at levels of consumption, if anything that's become more equal. The fraction of
families that have a dishwasher, that have a sewing machine, that have a television set.
In respect to consumption, it's very hard to avoid the view that people have been getting
more equal rather than more unequal.
So, partly it depends on what questions you're asking what you want to get an answer to. I
don't believe that statistics, as somebody has said, statistics do not speak for
themselves. Alfred Marshall once said, "There is no person, no theorist so reckless
as he who says that the facts speak for themselves." The facts never speak for
themselves. They have to be interpreted in terms of some understanding of where they come
from and what the relation between them is.
QUESTION: Who have been, in this century, the great luminaries, in economics, who have
expanded our ability to measure precisely?
MILTON FRIEDMAN: Simon Kuznets was an immigrant from Russia that came to this country at
the age of, I think, sixteen or seventeen or eighteen, something like that, and studied at
Columbia, where he came to the attention of Wesley Mitchell. And he got his Ph.D. in
economics, taught to begin with at the University of Pennsylvania, but was a research
associate at the National Bureau of Economic Research.
The National Bureau of Economic Research which, in a way, in answer to the question of
what promoted and developed methods of measurement perhaps ought to be given very high
ranks. It was established in 1920 by a group of people who were very much interested in
pursuing a more scientific approach to public issues and economics. And one of their first
projects was the development of measures of national income. Simon Kuznets operated in
that area, wrote a number of important books in the 1920s. In 1932 or 1933, the middle of
the Depression, the Department of Commerce launched on a project of developing official
estimates of national income, national output. And Simon Kuznets undertook to supervise
that project and produced the first official estimates of national income which were
published, as I remember it, for the first time in 1934 in a congressional document. And
that was the beginning of the enormous efforts from that day to this in developing
national income statistics. He started in 1936 or 1937 a conference on national income,
conference on income, I don't have the name exactly right, but that is still existing. It
now recently celebrated its fiftieth anniversary, and it's going very strong.
QUESTION: What happened during the Depression?
MILTON FRIEDMAN: We have to distinguish what we mean when we talk about the Great
Depression. What you had was that in 1929 the United States was in a boom. It hit a
relative high point. And the stock market crashed in October 1929. But that was not the
cause of what caused the Great Depression. It was, in my opinion, a very minor element of
it. What happened was that from 1929 to 1933 you had a major contraction which, in my
opinion, was caused primarily by the failure of the Federal Reserve System, to follow the
course of action for which it was set up. It was set up to prevent exactly what happened
from 1929 to 1933. But instead of preventing it, they facilitated it.
The Depression, I may say, which started in 1929 was rather mild from 1929 to 1930. And,
indeed, in my opinion would have been over in 1931 at the latest had it not been that the
Federal Reserve followed a policy which led to bank failures, widespread bank failures,
and led to a reduction in the quantity of money.
What happened was that for every $100 of money, by which I mean the cash that people keep
in their pockets, and the deposits they have in the bank, for every $100 of money that
there was in 1929, by 1933 there was only $67. The Federal Reserve allowed the quantity of
money to decline by a third. While, at all times, it had the possibilities and the power
of preventing that from happening.
QUESTION: Why did they act that way? What was their theory?
MILTON FRIEDMAN: It was a combination of internal power struggle within the system between
the several Federal Reserve Banks, New York on the one hand, Chicago, Boston on the other,
and the Federal Reserve Board. It was partly the acceptance by the people who ran the
system of a false economic theory, of a false idea of how the quantity of money should be
determined. It's not easy to excuse what they did, in my opinion. I think it was
disgraceful, and that they did know better. And some of the people within the system knew
better, particularly as it happens those who were at the New York bank. But there were
other people who kept talking while the economy was falling through the floor, kept
talking about how the banks have to hoard their funds so they'll be ready when a real
emergency develops. Now, you've asked a very complicated question to which there is no
really simple answer.
I think there is universal agreement within the economics profession that the decline -
the sharp decline in the quantity of money played a very major role in producing the Great
People will also go on to say, there were other factors at work. There are some people who
are saying, you were suffering from over-expansion in the 1920s. Other people who are
saying that at the same time that this was happening, there was a collapse, for
independent reasons, of consumption. But here is no doubt that everybody will agree that
whether this was the sole source or not, it was a major factor. And many people attribute
it to over-acceptance of the idea of the gold standard. One of the explanations given for
the Federal Reserve action was that they were tied to the ideology of the gold standard.
The gold standard is not a limiting factor, and the Federal Reserve at all times had
enough gold so they could have maintained the requirements of the gold standard at the
same time that they expanded the quantity of money.
The Great Depression in the United States was caused - I won't say caused, was enormously
intensified and made far worse than it would have been by bad monetary policy. Now, the
bad monetary policy was not the result of one decision. It was the result of a whole
series of decisions. But the fact that that bad monetary policy was carried out was, in
part, the result of a real accident, which was that the dominant figure in the Federal
Reserve System, Benjamin Strong, who was Governor of the Federal Reserve Bank in New York,
had died in 1928. It is my considered opinion that if he had lived two or three more
years, you might very well not have had a Great Depression.
QUESTION: If the Depression told the American people that government is the solution
rather than government is the problem, some decades later you get deeply involved in
trying to change that perception. What did you preach, and how did you ultimately prevail,
in a sense?
MILTON FRIEDMAN: I believe that one of the important factors that affected it, [that is]
professional opinion, was the result of our book on the history of money, and the
demonstration of the role that the Fed had played in the Great Depression. I think that
played a very important role on professional opinion. But, so far as popular opinion about
the role of government, I believe that has been changed by experience. People have
observed that government policies don't work. The government sets out to eliminate
poverty, it has a war on poverty, so-called "poverty" increases. It has a
welfare program, and the welfare program leads to an expansion of problems. A general
attitude develops that government isn't a very efficient way of doing things. The Post
Office becomes an object of scorn.
Now, you never have real changes unless you have a time of crisis. And when you have a
time of crisis what happens depends on what ideas are floating around, and what ideas have
been developed, and thought through, and are made effective. And I believe the role that
people like myself have played in the transformation of public opinion has been by
persistently presenting a different point of view, a point of view which stresses the
importance of private markets, of individual freedom, and the distorting effect of
governmental policy. That may not persuade anybody, in one sense, but it provides an
alternative when the time comes that you have a crisis and people realize that you have to
In this particular area what was the crisis? What is it that has produced so dramatic a
change? The fall of the Berlin Wall, [which] really demonstrated beyond the shadow of a
doubt that there was a bad system, and what subsequently happened in the Soviet Union,
that that system was a failure. And it made people, I think, much more receptive to the
kind of ideas that I and others of my persuasion had been promoting for years.
QUESTION: I thought you were going to say that the big crisis that started turning people
around was the inflation and the stagflation of the 1970s, that's where we hit a wall.
MILTON FRIEDMAN: So far as monetary policy is concerned, about attitudes toward inflation
and monetary policy, there's no doubt that the stagflation of the 1970s was the major
factor that turned people around. That was a very interesting case, because the argument
had been made in the abstract, it was predicted that that was happening. I gave a
presidential address to the American Economic Association in 1967, I believe it was, in
which I essentially predicted that if you continue to use monetary policy to attempt to
promote full employment the result would be that you would have higher inflation, and that
you would not have lower unemployment.
Up until in the 1950s and 1960s, a view that came to be called Keynesian came to be
accepted. And John Maynard Keynes, was a great economist at Cambridge, England. I happen
to believe that his particular theory about the Depression was wrong, but I don't want to
denigrate him, he was a great economist. And the policy had been accepted that you could
push and create a little inflation, and you would get in return for that a lower level of
unemployment, and that there was a tradeoff between more inflation on the one side, and
less unemployment on the other. And in the presidential talk I gave I argued that that was
a fallacy, in 1967, that was where I coined the term, a natural rate of unemployment, and
argued that if you tried to follow the policy of using inflation to try to cut down
unemployment you would end up with both more inflation and more unemployment.
And I said, you can't keep fooling the people all the time, and people will recognize
what's happening, and as they recognize what's happening you'll have to have more and more
inflation to achieve that objective. And even that won't work because people will catch on
to it. And what happened in the 1970s was about as clear a demonstration of something that
had already been predicted in advance as you could have. And that's what made the
stagflation. It's another example of where a crisis came along and a theory was already
developed which explained it. So that it was accepted.
QUESTION: Did an increase in the money supply at that time coincide with the reelection of
MILTON FRIEDMAN: Yes. You had inflation running at about 3 to 4 percent, per year, in
1971. Yet, on August 15th, 1971, Richard Nixon imposed wage and price control in order to
stop inflation, which was at a level that today we would consider very moderate. And he
really didn't impose it in order to stop inflation, he imposed it because we go back to a
more complicated picture in which you are having a drain in the U.S. currency. The U.S.
currency was pegged to gold at that time, again. We were supposedly maintaining the price
of gold at $35 an ounce. At that price gold was abnormally cheap, and people were wanting
to buy gold, so we were having a drain on gold.
Nixon had to do something about that, and what he did was to close the gold window, that
is to take the U.S. off the gold standard. But, if he had done only that every newspaper
in the country would have had a headline about negative Nixon, and Nixon takes the country
off gold. Instead he wrapped it up in a big package, as a package to get the U.S. moving
again, bring prosperity to the U.S. And the package included closing the gold window, but
also wage and price controls, which he sold as a positive program.
That unquestionably in my opinion, the wage and price controls not only did not cut down
inflation, but it was a major reason why we had both inflation and stagnation during the
rest of the 1970s.
QUESTION: Now, how did we get out of that mess?
MILTON FRIEDMAN: We got out of that mess because in 1980 to 1982, newly elected President
Reagan supported the Federal Reserve in following a policy of slowing down sharply the
rate of monetary growth. No other president in the twentieth century in my opinion would
have stood by without trying to prevent the Fed from doing what it was doing, because the
only way you could get out of that inflation was by suffering a recession. And the
contractionary policy of the Fed from 1980 to 1982 led to a very severe recession,
triggered by a later chairman of the Fed, Paul Volcker. And Reagan's courage in your
judgment was to back him. At the time, at the depth of the depression in 1982, Reagan's
poll standings had gone way down. Every other president, in my opinion, would have brought
pressure on Volcker to reverse policy. Reagan did not do so.
In 1983 Volcker sort of reverses course and starts expanding the money supply a little
more rapidly. Appropriately, he did the right thing. The economy recovers, but inflation
keeps on going down. And then you get Alan Greenspan coming in, in 1988, I think it's
1988. I'm not sure. He follows Volcker, and he and his board follow a very good policy of
relatively slow and stable monetary growth. And inflation keeps on coming down. And in my
judgment, it is the stability more than the slowness that is important.
I believe that the monetary stability is an absolutely critical element in the
satisfactory operation of a system. A private enterprise system needs some measuring rod,
it needs something, it needs money to make its transactions. You can't run a big
complicated system through barter, through converting one commodity into another. You need
a monetary system to operate. And the instability in that monetary system is devastating
to the performance of the economy.
QUESTION: So, right now, things have been going very well for the last fifteen or so
years. Is it unprecedented?
MILTON FRIEDMAN: Current behavior is not unprecedented. The 1920s were a very good period
from about 1922 to 1929 was a long period of rapid - in fact, more rapid economic growth
than we've had in the last seven years. We've had a period in which inflation has come
down, and the economy has been relatively stable. But if you look at the average rate of
growth of the economy, it's been relatively slow in this last expansion compared to
earlier expansions. So, it's not the unmatched performance it is sometimes referred to.
What really has been bringing euphoria is not the extraordinary behavior of the economy,
but it's the behavior of the stock market, and the bull market bubble.
QUESTION: You said the magic word, "bubble." You think it's going to go splat?
MILTON FRIEDMAN: Yes.
QUESTION: I have to call my broker. Tell me about your views of how we measure poverty?
MILTON FRIEDMAN: We measure poverty by what I believe is a very, very crude concept. We
actually measure poverty by trying to get some kind of an estimate of the minimum
expenditures on food that are required to maintain health, multiplying that number by
three, and saying that's the level of poverty. And it's a very crude, inaccurate
arrangement. There is no good way of measuring poverty, don't misunderstand me. I don't
have a magic way of doing it. And I think in some ways it would make more sense to have as
a poverty level a relative concept and say, the level of poverty is that level of income
or that level of consumption below which 10 percent of the people now are.
QUESTION: But then you could never cure poverty.
MILTON FRIEDMAN: You never can cure poverty. Poverty is in the eye of the beholder.
QUESTION: Let's stipulate that the measurements of poverty are not accurate, they're
crude, as you say. But if you take them year after year, as we have done for the last, I
guess, about thirty-five years now, doesn't the direction tell you something?
MILTON FRIEDMAN: Yes, it does. Obviously, any measurement which you make consistently will
tell you something. And it says that this arbitrary level has been moving in a certain
way, and a certain fraction of people are below it.
QUESTION: Do you see any harbinger that it's been running sort of between 12 and 15
percent ever since Johnson's time when it went down?
MILTON FRIEDMAN: Yes.
QUESTION: Do you see any possibility now in this euphoric economic age that it will dip,
say, into single digits?
MILTON FRIEDMAN: I think the measures that would do the most to get the poverty level to
come down are, number one, decriminalizing drugs; and, number two, introducing parental
choice in schooling, because the place where poverty has been really serious and
disastrous for the country has been in the inner cities, and in the inner cities that
poverty is driven by the way in which the attempt to prohibit drugs has destroyed the
stability and safety of the inner city, and the way in which our school system has
shortchanged the low income classes in this country.
I think it's a scandal what has been happening in the school system so far as lower income
classes. The dropout rates, the illiteracy rate, you know literacy in the United States
was a lot higher in 1890 than it is now.