Federal Reserve Chairman Ben Bernanke responded to the sub-prime crisis in the US with a 50 basis point reduction in the Fed Funds rate. This controversial move may have temporarily stabilized the swooning stock market, but has also caused the dollar to drop against major currencies and brought back inflation concerns. Gold and Oil are up, and the bond market has responded by steepening the US Govt. Yield Curve.
If you did not follow some or all of the above, take comfort in Alan Greenspan’s(Bernanke’s predecessor) light hearted statement. He said that only about 20% of surveyed Americans were right about the Federal Reserve, 25% thought it was an Indian reservation, and 50% identified it as a brand of whiskey. The Federal Reserve is the central bank of the USA, the equivalent of the Reserve Bank of India; and current Prime Minister Manmohan Singh used to be Bernanke’s counterpart. If you had read Free To Choose, you probably would be participating in debates on the operation of free markets, monetarism, and the link between freedom and a prosperous economy. Written in an easy to read conversational manner, this book should be of interest and use as general reading material as well as introductory economics.
Free To Choose, based on a 1980’s TV series, was written by Milton Friedman and his wife Rose. Prof. Friedman, who died in Nov 2006, was referred to by the New York Times as "one of the 20th century’s leading economic scholars, on a par with giants like John Maynard Keynes and Paul Samuelson". He is widely acknowledged to be the grandfather of monetarism, an economics branch dealing with supply and demand of money. In 1976, Prof Friedman was awarded the Nobel Prize in Economics, for his achievements in consumption analysis, monetarism, and stabilization policy. His accomplishments are all the more creditworthy as he had to challenge the reigning Keynesian environment created by the political and economic elite within the USA.
"Inflation is primarily a monetary phenomenon, produced by a more rapid increase in the quantity of money than in output", and its cure is a reduction in money growth with a recession being a painful side-effect; is Prof. Friedman’s most famous monetarist assertion. Central bankers and economists may disagree on the precise linkage details, and they may not always adopt money-growth-reduction as a strategy to fight inflation, but there is no doubt that this mantra is universally accepted. This acceptance did not come easy, it took Paul Volcker’s(Greenspan’s predecessor) clampdown on money growth accompanied by a harsh recession in the early 1980’s. This experiment succeeded in lowering US inflation rates to low single digits from the double digits of the earlier decade. In the 1970’s Pres. Nixon instituted wage-price controls to fight inflation, Pres. Ford handed out "Whip Inflation Now"(WIN) buttons, Democrats blamed profit-hungry businessmen, Republicans blamed idle union workers, and almost everyone blamed greedy Arab sheiks. Prof. Friedman was one of the few who targeted the Federal Reserve’s policy of excessive money supply growth, ultimately leading Pres. Carter to appoint Paul Volcker; and the rest as they say is history.
Ben Bernanke on Milton Friedman and the Great Depression of the 1930’s, "You’re right, we(Federal Reserve) did it. We’re very sorry. But thanks to you, we won’t do it again." This confirms Prof. Friedman’s hypothesis that the Great Depression was caused by the inability of the Fed to combat a substantial collapse in money supply. Just as the solution to inflation is a reduction in money, the solution to recession/depression is an increase in money. This partially explains the reason for that aforementioned cut in the Fed Funds rate(result is an increase in money supply). A Central bankers dilemma is the appropriate level of money growth, too much may cause inflation and too little may cause a recession. Prof. Friedman has a controversial solution, use a computer to increase the money supply at a constant rate. Although central bankers have never implemented this solution, the better ones have attempted to reduce money supply growth volatility.
FTC takes a strong stand in favor of fewer govt. controls and regulations and whole heartedly supports free trade. Prof. Friedman paints an unflattering picture of India in the 1950’s, lamenting its central planning, and its numerous rules and regulations, and its un-free trade policies. He rightly points out that the result was an abysmal growth rate(3%), derided by many as the "Hindu" rate of growth. An eye-opener memo submitted by him to the Indian Govt. in 1955 is certainly worth reading, in it he argues against a large public sector, for fewer controls on the private sector, for a stable monetary policy and a free floating exchange rate. Manmohan Singh began implementing a few suggestions in 1991, and the result is growth rates of 6-8%, a fall in inflation from double digits to 5-7%, and a substantial increase in foreign exchange reserves.
Many other topics are explained from a free market perspective - choice in schools, consumer protection, worker’s rights, Social Security and welfare. Each probably requires a separate review, and even though some of Prof. Friedman’s solutions may sound extreme; please remember that they are usually a bargaining position.
FTC was recommended in my B.Tech. days as a more practical version of Ayn-Rand’s Atlas Shrugged. Ms-Rand was much more popular, many of us would endlessly debate the virtues of Francisco D’Anconia, Hank Rearden and John Galt. This changed after reading Free To Choose, Milton Friedman’s Money and its use in slaying inflation was infinitely more fascinating than Francisco D’Anconia’s speech about Money. Prof. Friedman essentially agrees with Ayn Rand’s laissez-faire philosophy, and discusses his own version of it; but also presents ideas and tools to monitor and tune capitalist economies.
Another Friedman, Thomas, now dominates current thinking on Global Capitalism; especially with regard to outsourcing. My wife and others keep throwing(figuratively) "The World is Flat" at me. Sometimes I politely ignore, and sometimes I throw(again figuratively) FTC and other Milton Friedman books(Capitalism and Freedom, A Monetary History of the United States) back at them. Much of what Thomas Friedman says is valid and is going to be the way things happen in the future, I feel that most of it is either discussed by Milton Friedman or is derivable from the free trade ideology. WIF certainly discusses more modern technologies than FTC; but I believe that the "Information" contained in the latter is likely to be more valuable in the long run than the "Technology" contained in the former.
It would be remiss of me not to subject FTC to the same critical arguments. Prof. Friedman acknowledges that his ideas and books have been influenced by many people, Adam Smith’s "Wealth of Nations" being one them. I would also recommend readings of other Nobel Prize winning Economists(Paul Samuelson, Robert Solow, James Tobin) as a potential counterweight to Milton Friedman. Lastly, applying the practicality argument, books on modern finance(equities, bonds, derivatives, currencies) and global capital markets assume greater significance than FTC.