Friedman on Inflation

“Perhaps the single most important and most thoroughly documented yet obstinately rejected proposition is that “inflation is always and everywhere a monetary phenomenon.” That proposition has been known by some scholars and men of affairs for hundreds, if not thousands, of years. Yet it has not prevented governmental authorities from yielding to the temptation to mulct their subjects by debasing their money—taxation without representation—while vigorously denying that they are doing anything of the kind and attributing the resulting inflation to all sorts of other devils incarnate.”

That quote is from Milton Friedman’s final chapter “An Epilogue” of his 1992 book Money Mischief. Governments, he correctly notes, cheat people out of their wealth by inflating the currency. It’s a pernicious way of levying taxes. This is exactly what the US government is recently doing with gay abandon. But as certain as the fact that the sun will rise tomorrow is the fact that inflating the dollar will end up badly.

Let’s continue with what Friedman wrote:

Rapid increases in the quantity of money produce inflation. Sharp decreases produce depression. That is an equally well documented proposition. It is not directly documented in this book, though some episodes of it are referred to: the 1873–79 depression in the United States, the depressed years of the early 1890s, the great contraction of 1929—33 that brought Franklin Delano Roosevelt to the White House and set the stage for the silver purchase program of the 1930s.

Why are these and similarly well documented propositions about money so often neglected in shaping policy? One reason is the contrast between the way things appear to the individual and the way they are to the community. If you go to the market to buy some strawberries, you will be able to buy as many as you wish at the posted price, subject only to the dealer’s stock. To you, the price is fixed, the quantity variable. But suppose everyone suddenly got a yen for strawberries. For the community at large, the total amount of strawberries available at a given time is a fixed amount. A sudden increase in the quantity demanded at the initial price could be met only by a rise in price sufficient to reduce the quantity demanded to the amount available. For the community at large, the quantity is fixed, the price variable—just the opposite of what is true for the individual.

The individual faces different tradeoffs from those the community faces. This is the general problem of aggregation. What is true at the individual level need not be true at the community level, even though the community is just an aggregation of individuals. The individual in this case takes the price as given and adjusts the quantity he buys (to suit his budget) but for the community, the quantity is fixed while the price changes to equate demand and supply.  Friedman:

Such a contrast is true of most things. In the area of money that we have been dealing with, you as an individual can hold any amount of cash you wish, subject only to the level of your wealth. But at any time there is a fixed total amount of cash, determined primarily by the Federal Reserve if cash is defined as the base, or by the Fed and the banks if cash is defined more broadly. You can hold more only if someone else is holding less, yet there is nothing in your personal situation to make you aware of that.

More money is always good for the individual. But more money chasing the same amount of goods is bad for nearly everyone in a community.

To you as an individual, an increase in income is a good thing, whether its ultimate source is your own enhanced productivity or the government’s printing of money. Yet to the community at large the two sources are very different: the first is a boon, while the second may be a curse, …

It is natural for individuals to generalize from their personal experience, to believe that what is true for them is true for the community. I believe that that confusion is at the bottom of most widely held economic fallacies—whether about money, as in the example just discussed, or about other economic or social phenomena.

That’s an important point: people’s intuition about economic (which is a subset of social phenomena) is generally wrong. I believe that is due to the fact that our intuition evolved over the hundreds of thousands of years when humans existed as hunter-gatherers in small bands of a few dozen people. The modern world is quite different. What was true then is no longer true now.

It is human, also, to personalize both the good and the bad, to attribute anything bad that happens to the evil intent of someone else. However, good intentions are at least as likely to be frustrated by misunderstanding as by an unseen devil. The antidote is to be found in explanation, not recrimination.

The “evil intent of someone else” is a fundamental attribution error. Check that link if you’re interested in the details but for now, let’s continue with Friedman. The following is the main point that motivated the extended quote from his book.

The importance of a correct understanding of economic relations in general and of monetary matters in particular is vividly brought out by a statement made two centuries ago by Pierre S. du Pont, a deputy from Nemours to the French National Assembly. Speaking on a proposal to issue additional assignats—the fiat money of the French Revolution—he said: “Gentlemen, it is a disagreeable custom to which one is too easily led by the harshness of the discussions, to assume evil intentions. It is necessary to be gracious as to intentions; one should believe them good, and apparently they are; but we do not have to be gracious at all to inconsistent logic or to absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally .

To add emphasis on the important bit, I highlighted in bold what I consider du Pont’s point: that while we should be gracious in our evaluations of people’s intentions, we have no such obligation to errors of logic and reasoning. Regardless of intentions, bad logic and reasoning should be condemned.



Author: Atanu Dey


3 thoughts on “Friedman on Inflation”

  1. If the interest rates are raised, then the inflated stock market will crash, bringing the economy down with it. If the Feds don’t raise the interest rate, Inflation will kill the Economy.

    What is the middle way out of this precarious state of affairs.


    1. this ugly stock market bubble needs to be deflated one way or other. Extreme overreaction by the governments around the world has created asset bubbles around the world by printing money like crazy.
      Either way, whether a Fed induced or as a reaction to runaway inflation, only way to get out of this predicament is a recession.


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