49 pages • 1 hour read
Milton Friedman, Rose FriedmanFree To Choose
Nonfiction | Book | Adult | Published in 1980A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Chapter 9-AppendicesChapter Summaries & Analyses
Chapter 9 Summary: “The Cure for Inflation”
Many things have been used for money, from shells to metals to paper. If more money is produced, it will take more of it to buy the same goods. This is called inflation: “Inflation is a disease, a dangerous and sometimes fatal disease, a disease that if not checked in time can destroy a society” (253).
In 1600s America, tobacco acts as money in some colonies, and growers learn how to produce so much that the value of each bale keeps declining. Fraud and abuse are rife. Finally notes are issued to represent warehoused bales. In Russia and Germany after World War I, hyper-inflation “prepared the ground for communism in the one country and nazism in the other” (253). Decades later, hyper-inflations in Brazil, Chile, and Argentina lead to military takeovers. Inflation can happen under communist or capitalist governments. It can happen in the US, where the money supply rises by about 9% per year between 1968 and 1978 and prices roughly double.
Unions and businesses often get the blame, but they can’t print the currency that pushes consumer prices upward. Only governments can do that. When OPEC reduces oil production, gas prices rise, “[b]ut that was a once-for-all effect” (263), whereas printing money, with its accompanying inflation, can continue indefinitely.
Governments are under pressure to improve employment. In the US, instead of trying to increase taxes, which can increase unemployment, the government sells Treasury bonds to the Federal Reserve, which pays for them by writing itself a deposit in its own accounts and then using that deposit to purchase the bonds. The bonds add to banks’ reserves, enabling them to make more loans, which at first increases employment.
Unfortunately, the new money also increases demand for products, which causes prices to go up (inflation), which makes everything more expensive, which leads to layoffs. The Fed fears a deflation—like the one that the Fed itself caused by pulling money from the economy, worsening the Depression—more than it fears inflation. It thus leans toward adding yet more money to prop up employment, which causes inflation, leading to more unemployment, and so on: “The end result of higher government spending, the full employment policy, and the Fed’s obsession with interest rates has been a roller coaster along a rising path” (267).
As the economy adjusts to higher prices, salaries also creep upward, which puts more and more taxpayers into higher income brackets. This automatically increases government revenues. Inflation also enables the government to pay off its bond debts in cheaper dollars.
Reduced government spending would solve the problem but lead to a temporary increase in unemployment, as the effects of inflation get wrung out of the economy: “The cure for inflation is simple to state but hard to implement” (270) because a government wants to inflate the money supply the way an alcoholic wants a drink: it feels good now and the pain will come later. The Friedmans write that “[i]n both cases, it takes a larger and larger amount—of alcohol or money—to give the alcoholic or the economy the same ‘kick’” (271). Voters want this solved except where it might deprive them of benefits, so support for the cure is weak.
How does inflation cause business activity and employment to go up and back down again? Inflation, to a business owner, at first appears as an increase in demand. The owner orders more supplies to accommodate the increase. Soon, supply costs begin to creep up, so the owner raises prices. Then demand drops back as buyers find that most of their purchases now cost more. The business owner cuts back on supplies and lays off workers. As unemployment climbs, the government adds more money to the economy, and the cycle begins again.
If inflation were to stay consistent at, say, 10% per year, everyone would adjust their buying habits accordingly, and the ups and downs would diminish: “Such an inflation would do no great harm, but neither would it serve any function” (276). But inflation rates tend to bob up and down—especially up—as governments respond to multiple political pressures and incentives, so a stable amount of inflation is unlikely.
One way to mitigate the pain of halting this economic vicious circle is to reduce inflation gradually. This protects, somewhat, those who depend on long-term contracts. Another mitigation involves cost-of-living adjustments that account for inflation in salaries, rentals, and loans.
Governments are always tempted to use price and wage controls as a shortcut or substitute for monetary discipline, but these actions distort price signaling, and inflation finally bursts through anyway: “In light of the experience of forty centuries, only the short time perspective of politicians and voters can explain the repeated resort to price and wage controls” (280).
Japan’s experience in the early 1970s shows it’s possible to wring out inflation: “Monetary growth was reduced sharply, from more than 25 percent a year to between 10 and 15 percent” (280). Consumer price inflation soon settles back. Employment suffers for a year or so then recovers, and the economy improves “more modestly than in the boom years of the 1960s but at a highly respectable rate nonetheless” (281).
Inflation leads to unemployment, but Americans “have been misled by a false dichotomy: inflation or unemployment. That option is an illusion” (282).
Chapter 10 Summary: “The Tide Is Turning”
Climates of opinion come and go. As they change, political change follows. In America, the climate “moved away from a belief in individual responsibility and reliance on the market toward a belief in social responsibility and reliance on the government” (286). The Socialist party of the early 20th century never receives more than 6% of the presidential vote, but “almost every economic plank in its 1928 presidential platform has by now been enacted into law” (287). The Constitution was slowly reinterpreted, largely through judicial rulings, to permit the accretion of central authority: “What had been intended to be barriers to the extension of government power were rendered ineffective” (287).
After fifty years of New Deal liberalism, however, a reaction sets in. People resent the high taxes and poor results of the myriad government programs. They face, however, a daunting task: Washington, DC is a beehive of entrenched bureaucratic activity that sometimes works at cross purposes but generally for the benefit of special interests. The Friedmans write that “[s]uch a system tends to give undue political power to small groups that have highly concentrated interests” (292)—for example, restricting Japanese steel imports to save American steelworker jobs—that are concrete and easy to reward. On the other hand, diffused interests—workers “in export industries who will lose their jobs because fewer imports from Japan mean fewer exports to Japan” (293)—are hard to notice, much less fight for.
In small, town hall meetings, citizens get a good grasp of their local governance and its issues, while “[i]n large cities, states, [and] Washington, we have government of the people not by the people but by a largely faceless group of bureaucrats” (295). The edicts of these bureaucrats can be arbitrary and very hard to fight. Piecemeal legislative efforts to control the growth of bureaucracy are unlikely to succeed.
The Friedmans suggest enactment of “an economic Bill of Rights to complement and reinforce the original Bill of Rights” (299). Such a process would be decentralized—three-fourths of the states would have to ratify such a Bill—and free from bureaucratic sabotage, and would involve a thorough discussion of the merits, thus contributing to an enhancement of the climate of opinion that favors liberty. Many states already have passed amendments to their constitutions “that limit the amount of taxes that the state may impose, or in some cases the amount that the state may spend” (301). Similar amendments could limit federal spending and balance the federal budget. Other amendments would limit import duties, forbid wage and price controls, restrict occupational licensing, change federal income tax to a flat tax, and limit inflation.
The Friedmans believe that “we are as a people still free to choose which way we should go—whether to continue along the road we have been following to ever bigger government, or to call a halt and change direction” (310).
Appendices Summary
Appendix A is the Socialist Party platform of 1928, with notes on how each part has subsequently been adopted by state and federal governments. Appendix B is “A Proposed Constitutional Amendment to Limit Federal Spending” that specifies in great detail how the federal government would be restricted in its spending, including restrictions on inflation, annual spending increases, and so forth.
Chapter 9-Appendices Analysis
Economist Milton Friedman is quite at home dealing with inflation: he won the 1976 Nobel Prize in Economics for his theories on prices and currencies. Friedman is a monetarist: he believes that the amount of money in an economy should, as far as possible, stay in proportion to the amount of goods and services available. If production rises by, say, 3%, then so should the amount of money.
Precious metals (favored by most fiscal conservatives) have been used as money, along with agricultural products and even seashells, but their amounts rise and fall with every new discovery of ore, with bad weather, or with beach erosion. As “tobacco, precious metals from the New World, and gold in the nineteenth century illustrate, commodity money has at times grown far more rapidly than output in general” (255).
The easiest medium for a stable currency is paper bills. The problem with paper backed by nothing except good faith is that it is the easiest medium to abuse. In the US, the government essentially writes checks to itself, then spends this new cash on federal programs. No law limits the government’s discretion in money creation; the nation relies instead on the judgment of the Federal Reserve Board, which often has exacerbated economic problems by mishandling the money supply. The Friedmans want to remedy this with Constitutional amendments that specify how money is to be controlled and how much the government may spend.
Today’s media and the Internet provide much more thorough coverage of events than was available when the Friedmans’ book was first published. The concentrated benefits of government programs—for example, the Trump administration’s hardball tactics against unfair trading partners—can now be contrasted more effectively with the more diffuse drawbacks of that policy, such as cost increases and job losses in import-related industries. Whether this will affect voting behavior remains to be seen.
The Friedmans suggest that Americans are losing patience with centralized control over their activities. That view is prescient: shortly after the book is published in 1980, Ronald Reagan wins the presidency on a platform of reducing government interference in American lives. Fiscal conservatives will assert that the twenty-five years that follow are prosperous because of Reagan’s reform efforts, and that the growth stumbles in 2008 because government once again meddles with the economy—specifically, pushing banks to provide home mortgages to poorer people, many of whom are unable to pay back the loans. Liberals will respond that Reagan merely let fat cats run free while recessions plagued us in the early ‘90s and 2000s, and that the 2008 Great Recession is caused by bankers gambling with derivatives. Either way, Free to Choose becomes part of the conversation during the Reagan era and beyond.
