What can we learn from Milton Friedman in the current credit crunch?


¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† On tuesday night I spoke at a Centre for Policy Studies event to remember Milton Friedman’s contribution to economics 100 years from his birth. Deepak Lal gave a forensic talk about the main contributions of Milton Friedman to the development of economic thought.¬† Niall Ferguson powerfully and elegantly set Friedman in historical context, and explained the importance of his wider work popularising free enterprise friendly economics.

¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† I drew on Friedman’s work in his Monetary History of the United States where he stressed the need to keep money growth at a sufficient level to prevent depression. His commentary on the monetary errors of the 1930s was seminal when he wrote it, and is influencing Mr Bernanke at the Fed as he fights the latest ¬†danger of recession in America.

                       I pointed out that the Coalition government offered a Plan A for recovery based on a tight fiscal policy, bringing the deficit down by reducing spending, and a loose monetary policy. This was the formula which has fuelled some successful past recoveries. We have discussed many times before the fiscal stance, where so far spending has gone up in real terms and new borrowing remains at high though reduced  levels. I also pointed out that money growth is far from easy or loose.

               Over the last year the growth of M4 lending has been around 1%. Broad money growth has also been sluggish. The large amounts of created money through the quantitative easing programmes has stuck within the banking and state credit system. Tough banking controls allied to some weak bank balance sheets has prevented this money being released into the private sector to power a faster private sector led recovery.

               The figures beneath show the fast growth of QE money and the inability of the banks to use or pass this on:

M4 lending   annualised growth           Q2    2011           +0.1%

                                                                            Q3 2011              +1.2%

                                                                           Q4 2011              +1.6%

                                                                           Q1 2012             +1.2%

                                                                            April/May         +1.5%


Reserve balances               June 2012 (12 months annualised)                 +77%

Notes and Coin                     June 2012  (12 months annualised)                +5.9%

          Plan A, tight fiscal and loose monetary policy for UK recovery was a good one. The problem is we are not getting either a  tight fiscal or loose money stance.

            For those interested, the three speeches are available on video through a link to the Centre for Policy Studies website.


  1. lifelogic
    July 5, 2012

    Indeed in effect QE is just another tax on savers doing nothing for the wealth producing sector and enabling the government to continue enlarge while suffocating real industry.

    I see George Entwistle the BBC insider chosen as the next BBC Director General has said that Mark Thompson a hard act to follow. Well if you want a BBC as a propagandist for an absurdly pro EU, big tax borrow and waste, over regulation and quack green science exaggerations and scares, while dumbing down nearly all the programs to aim them at rather dim 8 years old’s perhaps he is right.

    1. Stephen Almond
      July 5, 2012

      lifelogic, you need to stop dithering and get off the fence regarding the BBC…

      1. lifelogic
        July 5, 2012

        I particularly like the way the BBC like to list “global warming sceptics” with creationist, devotees of alternative medicine and flat Earthers before adding “the usual overwhelming majority of scientist ……. drivel”.

        In my experience is usually devotees of alternative medicine and other religions that are the most “convinced” on the global warming exaggerations (and also anti nuclear) not the other way round (Prince Charles perhaps). If you are susceptible to irrational belief systems then you are just susceptible to them it seems. The BBC certainly is.

        The BBC similarly often likes to try to gently brand UKIP and similar as being right wing loons with racist hints often added often for good measure.

  2. colliemum
    July 5, 2012

    You write:
    “The figures beneath show the fast growth of QE money and the inability of the banks to use or pass this on: …”

    So – I’d like to ask this perhaps naive question: why, with all that money, are banks “unable to pass this on” – in the form of loans, I suppose.

    On the back of Bob Diamond’s extraordinary performance at the Treasury Select Committee yesterday, I wonder if this ‘inability’ hints at some nefarious reasons for this inability, of which we of course don’t know anything, because those tasked with oversight and regulations are either not looking, or are being dazzled by b*llsh*t …

    Reply: They are stopped from passing the money on by the tight regulatory controls which now apply

    1. Stephen Almond
      July 5, 2012

      So, the government (through the BOE) hands out money for the banks to make loans, but they can’t because of new government/BOE regulations?

      Inspired governing!

      1. libertarian
        July 5, 2012

        The government doesn’t hand out money for the banks to make loans. The government inflates the gilts market in order to put money into banks that the government can then borrow at low rates.

        The government then fraudulently manipulate the base interest rate market ( just like the banks did with Libor) to make it look as if people can access cheap loans whilst systematically defrauding, savers, depositors and pensioners.

        Here’s the solution, STOP voting for them. Lodge a protest vote

    2. lifelogic
      July 5, 2012

      My main impression of the Bob Diamond theatrics yesterday was the moronic level of the questioning (do you live in a parallel universe? and similar) these silly questions needless to say failed to achieved anything of any use. Many MPs particularly on the left spectrum seem to be very stupid indeed, mainly interested in self publicity and the evil politics of envy.

      Whatever the regulatory hurdles for the banks on lending I can certainly confirm they are not lending, they are charging huge margins and fees, are clawing money back and are deterring people from even applying for loans. RBS/Natwest group seems the worst but all are similar. This totally unrelated to risk you can have a property worth £1M a good income and credit record and still have trouble borrowing say 40% of it on sensible terms.

      They have gone from too easy credit to far too tight and this alone is one of the main causes of the lack of growth. That and the idiotic socialist direction Cameron has selected.

      1. Sebastian Weetabix
        July 5, 2012

        Yes, like Clouseau in pursuit of Carlos the Jackal.

    3. AJAX
      July 5, 2012

      Johnny …. the banks aren’t passing on the funny money ¬£s that King/Osborne are printing because they’re trying to use it as a hedge against the default of the oceans of bad debt that they fear they have on their books, not because of the “tight regulatory controls”.

      Friedmanism went “P-O-P” in 2008, get out of the 20th Century & into the 21st, it’s a new world we’re in now.

      You need to find a new economic star to steer yourself by.

  3. Single Acts
    July 5, 2012

    If it’s the seminal work on US monetary errors of the 1930’s you want, put aside Friedman and have a look at Murray Rothbard’s “America’s Great Depression”

    Best economics book I’ve read in a few years and entirely busts the myth that Hoover was hands off.

    1. waramess
      July 5, 2012

      Seconded. Monetary policy is all well and good if not taken too far as a panacea.

      No substitute however for good governance and frugal government spending to promote growth.

      1. lifelogic
        July 5, 2012

        “frugal government spending” that will be the day. They do not have a clue what frugal even is. They have just appointed a new DG of the BBC on ¬£450,000 plus a gold pension I assume – so that will cost perhaps up to 90,000 licence fees (on perhaps 20K PA) just for him over his period of employment. Were the licence payers asked or consulted on their thoughts on this by Lord Patten? Please ¬£250K for a head hunter for the position it is reported.

        Plenty of very good people could do it better than the current one for nothing or perhaps £100K and no pension!

  4. Mike Stallard
    July 5, 2012

    I cannot really understand this, I am afraid.

  5. AJAX
    July 5, 2012

    Amazing, from reading this you wouldn’t know the crisis of 2008 ever happened & would think that all that’s going on now with the saturation of debt wherever one looks, bankrupted banks & governments with broken Treasuries printing money & 0% interest rates in a desperate attempt to inflate their way out of the situation … was perfectly normal.

    Friedman was 1 of the architects of this disaster that’s all about us


    1. Single Acts
      July 5, 2012

      Yes indeed, time to review Mr Friedman’s legacy somewhat.

  6. Gary
    July 5, 2012

    Friedman, a central bank statist wearing a free market coat. As many conservatives are. Many recoil in horror at LIBOR rigging, Friedman was an advocate of central bank rate rigging.



    1. Single Acts
      July 5, 2012

      It is very encouraging reading comments just how many people have taken the trouble to work this out for themselves and now see the LIBOR fixing, Fiat currency scam for what it is.

      Radio 4 had a program on the return of the gold standard on Monday at 8.30pm. It’s conclusion was predictable enough but the very fact that this is now discussed rather than ignored means it’s moving up the agenda.

      Interesting times.

  7. Acorn
    July 5, 2012

    Answer: not a lot. I think it has basically it has been proved that the “money multiplier” is a myth. Targeting monetary growth Friedman Chicago School style, did not work; ask the Japanese.

    Try a portion of Minsky. Bill Mitchell has actually answered your question this morning. Google: “If only they were operating in the tradition of Minsky!” (If I put the URL link in, it will be stuck in moderation)

  8. GJ Wyatt
    July 5, 2012

    Don’t the weak money growth numbers reflect weak demand for money as well as increased reserve requirements in banks?

  9. Brian Tomkinson
    July 5, 2012

    I read that we are in for another dose of QE which to me has been no more than enabling the government to carry on spending. Hence plan A isn’t working because it hasn’t been tried. As a consequence gilt yields fall and the pension pots of BoE staff increase – nice work if you can get it. On the other hand, anyone retiring who is not in a final salary scheme has found that their pension pot does not buy them as generous an annuity as expected. Companies are also required to put even more money into their pension schemes. In whose interest is the BoE acting?

    1. alan jutson
      July 5, 2012


      I go along with what you say.

      Plan A not really started, so it can hardly have failed.

      Plan B, C or even D, what is the point if we have not even started Plan A so do not know how that works.

      QE agree, a busted flush for all savers and those who are just about to retire.

      Makes you weep really.

    2. Ted Greenhalgh
      July 5, 2012

      I have long held the view that no government and I include the BoE and all those on inflation proof pensions, should not do anything re pensions that affects our pensions unless it affects equally their own.

      What incentive do they have to control inflation. Perhaps there pensions should be inversely linked to inflation.

  10. waramess
    July 5, 2012

    What a great relief that most responses so far are entirely in disagreement with your post this morning. Of course Friedman did much to explain many monetary phenomonea such as inflation but I think one can easily become obsessed with the theory and miss the elephant in the room

    1. nicol sinclair
      July 5, 2012

      “…miss the elephant in the room.” The ‘Clunking Fist’?

      1. waramess
        July 5, 2012

        Government spending

  11. zorro
    July 5, 2012

    Ah yes…..’helicopter Ben’……The government is good at talking a good game but look at what it actually does. It continues to raise taxes (tight fiscal measure) and chokes spending (tight monetary policy)…….

    When it does pretend to have a ‘loose fiscal policy’ by undertaking QE, it doesn’t use it to stimulate growth in the economy by necessary infrastructure spending or a rebate to pay down people’s debts….Oh no, it configures it a way to cover its own inefficient spending, and prevents banks from lending by insisting on high (regulatory) capital requirements/cover their lousy ‘investments’.

    They should have had a looser fiscal policy by increasing aggregate demand/lower taxes and have a tight monetary policy on its own spending, and have sensible interest rates so that money could find its way back into the productive economy. I think that is what has worked previously….

    You couldn’t make it up…..


    1. Richard
      July 5, 2012

      You have got it spot on, yet again.
      With UK Goverment spending over 50% of the total GDP and needing to fund its debts its no wonder that most bank lending and money supply growth is going straight to the Government and this is why commerce and home buyers find finance difficult to obtain at reasonable rates.
      Plus the virtual zero rate of return for savers means Freidmans theory isnt being followed in this element as on many others.
      Labour said they were Keynesian but then just over spent and over taxed and we now have a coalition that says it follows a Freidman Monetrist school but only the bits that are politically expedient.

    2. sm
      July 5, 2012

      If i understand this correctly, the QE funds government spending whilst keeping interest low by selling new debt to banks with one hand and buying back earlier issued debt.

      S0,the banks probably make a nice turn on the business, by commission or if they have any capital gains to make on old debt with higher coupons.

      Now if we knew how big the banks ‘toxic investment hole really was we would know how much was required as a bung. Until the bung gets close enough to fill the hole – nothing happens as they just announce a further newly discovered loss, just after bonus time. I think palliative treatment for banks is an emergency fix, but i would prefer the stimulus spent in a real hospital.

      Why not ban bank distributions temporarily and impose a wage freeze?
      Why not pass an act of parliament to do this to expire at a predetermined point? or target?

      Would it not be better to engage growth directly with tax cuts for low earners.

      Or direct QE to individuals to pay down debt.(ref Prof Steve Keen)

      Or Direct funding grants to new independent banks if they agree to intermediate only, no fractional reserve banking, £1 grant £1 share capital raised.

      We can then hopefully get some growth, and new banks, with a more stable money base (not private interest debt money).

      Unfortunately i suspect careers, politics, power and banking are so entwined they are hold each other hostage to the misfortune of the public.

      Some say money doesn’t seem to be circulating via transactions because a lot of us are waiting for the manipulations to stop,the dead to be buried and for life to go on. Note Steve Keens suggestion.

  12. Sebastian Weetabix
    July 5, 2012

    Taking the logic of expanding the money supply to get us out of depression to its ultimate expression, perhaps for the next round of QE the Bank of England should cut out the middlemen and simply give a cheque for ¬£10,000 to each taxpayer. Why bother having insolvent banks as intermediaries? Those who have debt can pay it down, savers get a little back, and it can go towards supporting Chinese and German industry as the country starts buying again. What’s not to like? Inflation, you say? Well a little inflation never hurt….

    1. Bazman
      July 7, 2012

      A money scrapage scheme? Interesting. The car scrapage scheme did little for the economy scrapped a lot of good cars, saved little for the driver as most just whacked two grand onto the price. I got a few hours overtime out of it making van chassis. Can we have another for the building industry or just send me a few quid. I’ll put it to good use in the local economy. LOL.

  13. forthurst
    July 5, 2012

    We have an economy dependent for growth on government spending and waste, untrammelled immigration, house price inflation and banksterism.

    Too many real jobs which have the potential to add value and pay for good government have been outsourced, consequently gainful employment is focused on working for the government, including killing brown people, or working for the supplier of services to the government or working in the City to expropriate other peoples’ savings for current indulgence. We are in a spiral of decline which no economic theory can repair. The Germans have a stronger economy than ours because they make stuff people want not because they spend their time weighing the relative merits of various poseurs of economics.

  14. David Hope
    July 5, 2012

    I am not entirely clear as to how monetary stimulus “stimulates”.

    Handing money to big corporations or buying government bonds continuously with made money is big state or highly corporatist and anti-capitalist.
    More importantly there is no new production, no new services and no delayed consumption – for this is what savings are, a time preference for something and delayed consumption. Obviously money is just a medium of exchange and if so, I see not how injections of that medium can be good in the long term. Rather they distort the market. Worse, right now, we aren’t even getting the short term lending that is the aim.

    Surely the better approach is to let bank leaders take on risk personally, to allow failed banks to collapse and be bought up, split etc, to make regulation simple so there are more new banks . Competition is needed, not keeping failed businesses going by money printing.

    We need to keep delaying the pain (like labour before the last election), let defaults take place and then people can get back to buying and selling to one another as they always have.
    Armageddon will not occur!

  15. Michael C.
    July 5, 2012

    It’s lovely to hear Milton friedman remembered. A throughly engaging and eloquent
    economist. I would love to know what his thoughts were currently. He, like others,
    pointed out the Euro folly from the off. I also know ideally he wouldn’t have had a
    Federal Reserve. My instinct is, I’m not an Economist, We are stuck and We need
    time to pay off debt let some Banks go to the wall,encourage savings, cut the state
    back eek! (getting fully out of entire areas-rather than cutting broadly).” thoughtful
    and creative supply-side reform. We must also hope the external gets better, Euro!

  16. Antisthenes
    July 5, 2012

    Everyone is treating the current crisis as an economic boom bust cycle. It is not this a society boom bust cycle. There is only one way out of the bust part of a cycle and that is to let it run it’s course. Of course an economic bust is just painful but a society bust can be fatal.

  17. Derek Emery
    July 5, 2012

    Estonia shows what can happen if you bite the austerity budget. Estonia was hit hard by the financial crisis in 2008-9 and the economy shrank by 18%. The economy grew 7.6% last year and Estonia is now the only country in the EU with a budgetary surplus and national debt is just 6% of GDP .
    However all three main parties here have very similar policies of increasing debt in to 2015 and probably beyond.

    I wouldn’t expect QE to do anything much for the private sector. The big plus is for the public sector as it maintains very low interest rates allowing huge public sector debts at low cost to the government.

    Isn’t is obvious that the private sector will only want to borrow when there is an increase in demand making it worthwhile? Big companies are said to be holding huge piles of cash waiting for an upturn in demand.

    Banks have never lend much to many SMEs because usually they have no collateral and are a very high risk as many are likely to fail over a 5 year period. They should be looking to private investors to buy a stake in their company if they need money and not to banks.

    1. Bazman
      July 5, 2012

      Estonia? What are you like? You have absolutely no idea how desperate life is for many in Eastern Europe have you? Many also like to compare Britain with India, China, Saudi Arabia, Singapore Honk Kong and many more with no idea how the average citizen lives. Ex pats? Ram it

  18. uanime5
    July 5, 2012

    So has Plan A failed because Osborne has had to increase Government borrowing rather than reducing it, or is it impossible to know if Plan A has failed because Osborne is currently doing the opposite of it.

    Other comment was posted in the wrong place.

  19. Lindsay McDougall
    July 6, 2012

    Milton Friedman believed that the primary cause of the American great crash and depression was that the American money supply was allowed to contract by 25%. Herbert Hoover’s administration funded the enormous Hoover dam but it clearly didn’t bother too much about seeing that the private sector was adequately funded. We are nowhere near that situation.

    There are two fallacies at the heart of the loose money theory. The first is that a slowdown in personal spending is a bad thing. It’s not. Those who can are quite rightly reducing their levels of debt and risk. The savings ratio usually increases during a recession and this one is no exception. The second fallacy is that a loose monetary policy (and the consequential inflation) leads to increased real economic growth. It doesn’t, either in theory or in practice. Look at the numbers for the last few years. Look at the statistics from the mid-seventies and late eighties. And how about the hyperinflations of Germany (twice) and Zimbabwe?

    Why are you fixated on the broad money aggregate measure M4? What about the narrower measures of money – what are they telling us?

  20. Lindsay McDougall
    July 6, 2012

    Peter Thorneycroft, Enoch Powell and Nigel Birch resigned from the treasury at Epiphany 1958, in protest against public expenditure approved by Harold MacMillan’s cabinet that they believed to be excessive and likely to lead to inflation. This was on the assumption that in due course the authorities would be forced to print money to finance the deficit.

    This, I think, pre-dated Milton Friedman’s main body of work on monetarism, although he may have had the general idea in the 1950s.

    So why no recognition of the contribution of the three heroes of Epiphany 1958? Is it because a prophet is honoured everywhere except in his own country? Or is it for the despicable reason that Enoch said ‘Vote Labour’ in February 1974 on a point of principle, and was never going to be forgiven by the Conservative Party.

  21. Andrew M
    July 11, 2012

    Dear Mr Redwood

    I came and saw you speak at this event and having followed your excellent analysis of monetary policy prior to 2007 on this very blog, wonder if you, like me, are starting to question the ‘Friedman’ solution to this problem and at the very least are cautious over the inflationary dangers a successful monetary expansion could achieve.

    I listened with great interest to the argument put to us that day, that Bernanke had only increased credit, not money and this was why QE had dampened but not defeated the recessionary slump. What concerns me is that I believe the great recession was caused by loose monetary policy, as I believe you do, but I am not convinced that a return to monetary targeting will steer us clear of high inflation. Is expanding M4 a pragmatic approach to a very desperate situation, or do you consider it acceptable in times of stability and for future economic policy?

    When an audience member asked Deepak Lal about his view on the Austrians, he stated that “Hayek knew what caused the bust, Friedman knows how to get us out of it and Keynes was right that AD must increase to do so.” Does this mean that we expand M4 now to avert the crisis and look to remove government control of currency in a more stable time?

    I find myself caught philosophically somewhere between Austria, Chicago and Stockholm and wonder if you have tackled this crisis of confidence yourself in light of our latest economic experiment?

    Considering these points and your past references to the importance of saving, do you not worry that the monetary expansion proposed will result in inflation and damage the prudent savers and reward the imprudent debtors? Are we really clever enough to avoid inflation?

    I am seriously concerned that we are forming a new and more devious form of socialism. Monetary policy must be considered much more dangerous than fiscal policy, because it’s effects are hidden in the inflation figures, not printed in your tax bill.

    Kind regards


    Reply I have argued that the current QE is a cheap money machine for the public sector only, as the broken or heavily regulated banks cannot lend it on to the private sector. I have recommended mended and competitive banks, which would then require careful money targets to keep inflation under control.

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