Which Fed Bill Would Milton Friedman Have Liked?

Writing last week on the Cato at Liberty blog, Steve Hanke argued that Milton Friedman would have supported the “Audit the Fed” bill recently introduced in the Senate.  Steve’s reasoning is based on Friedman’s 1962 essay “Should there be an Independent Monetary Authority?” where Friedman said, as Steve pointed out, that “The case against a fully independent central bank is strong indeed.”  However, in that same essay Friedman concluded—based on the history and experience with central banking in many countries—that legislating rules for the instruments of policy was the preferred alternative.

For this reason, it is very likely that Milton Friedman would have preferred the policy rules bill rather than the Audit the Fed bill.  The policy rules bill is Section 2 of HR 5018 that passed the house Financial Services Committee last year and that the Senate Banking Committee considered in a hearing last week This bill would require that the Fed “describe the strategy or rule of the Federal Open Market Committee for the systematic quantitative adjustment” of its policy instruments. It would be the Fed’s job to choose the strategy and how to describe it. The Fed could change its strategy or deviate from it if circumstances called for a change, but the Fed would have to explain why.

Such a bill would meet the goal enunciated by Milton Friedman.  As he explained in Capitalism and Freedom, (p. 53) he preferred “legislating rules for the conduct of monetary policy that will have the effect of enabling the public to exercise control over monetary policy through its political authorities, while at the same time it will prevent monetary policy from being subject to the day-by-day whim of political authorities.”

As Steve emphasized “we don’t know for certain” what Milton would have thought, but in my view there is substantial evidence that he would have liked something like the policy rules bill.

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