Nobel laureate economist Milton Friedman died today at the age of 94.
Today, the idea that the availability of more money causes inflation seems obvious: if there's more money chasing the same amount of goods, people are likely to be willing to pay more for any given increment of goods.
The idea seemed obvious to me in the early 1970s, too, when I first encountered it in Milton Friedman's columns in Newsweek magazine. It had little currency among policy makers at the time, though - nor even in the field of economics itself, which was then a largely empirical pseudoscience. It's a tribute to Friedman's explanatory abilities that teenagers reading his columns could learn more about economics than policy makers knew.
Friedman had been expounding on his ideas since the 1950s, but it was not until 1978, when President Carter appointed Paul Volcker as chairman of the Federal Reserve Board, that they were actually put into practice. Volcker raised interest rates as high as they needed to go to stop the runaway growth in the money supply. This plunged the U.S. into a brief recession, but also brought inflation down from double digit levels to the low single digits - setting the stage for an end to more than a decade of economic stagnation, and for the more than two decades of generally strong economic growth that has existed since.
Today, largely as a result of Friedman's efforts, economics can lay valid claim to being a true science. Economists haven't figured out all of their governing constants to the number of decimal points that physicists have, but they are solidly beyond their days of phlogiston, ether, and the economics equivalent of believing that if you flap your arms hard enough, you can fly. This permits central bankers to provide a stable economic environment in which we all have an opportunity to prosper.
Thank you, Milton Friedman.