I realize that this is old news but I can’t help but want to respond. On a Mises Daily entry Mr. Stockman raves that Milton Friedman is a Freshwater Keynesian, most of it I’ll respond to in due time. I regard Friedman as one of the best if not the best economist ever. Before I start one should realize that the type of Austrians that partake in activities in the Mises Institute are almost all Praxeology loving Rothbardians. So, the usual blogging is filled with “look at these Keynesians” or “what a statist!” or the more patronizing tone of “yah sure lets use M2 as a monetary indicator”. The extent of the truthfulness of such statement is meaningless when they seem to be the primary form of argument of many commentators and contributors; the community is falling down the political talking points of other ideologies.
First David Stockman makes sure to use statist word to note that Friedman’s argument for government why the gold standard doesn’t work.
Friedman jettisoned the gold standard for a remarkable statist reason.
However, I think Stockman is both wrong about the Friedman’s political perspective in such an issue as well as his methodology when making the argument. In Capitalism and Friedman makes the so-called “statist” claim:
Under such a standard, any monetary powers of government would be very minor in scope. But, as just noted, such an automatic system has historically never proved feasible. It has always tended to develop in the direction of a mixed system containing fiduciary elements such as bank notes and deposits, or government notes in addition to the monetary commodity. And once fiduciary elements have been introduced, it has proved difficult to avoid governmental control over them, even when they were initially issued by private individuals.
Capitalism and Freedom, pg. 41
Friedman’s argument is anti-statist if anything. He’s correct in noting that because the fractional reserve tendencies of finance the introduction of notes will cause the government to intervene. The way the government does this is by issuing their own notes and by attempting to institute statutes regulating counterfeiting. I don’t necessarily agree with Friedman when he says that
“[Commodity standards] enhance the difficult of enforcing the contract and hence also the temptation to issue fraudulent contracts.”
To me this would only be arguable a danger if the commodity, such as gold, was determined to be the only legal tender, which it was. Under a free banking system I don’t think that gold or fiat would be the basis of all transactions and contracts and thus it has a lesser likelihood of leading to fraud.
In the end Friedman proved Mr. Stockman and for that matter hard money crowd wrong for believing that the gold standard was good or even feasible. The idea that it was truly redeemable is laughable at certain times in history, even in the good ole days before the progressive era. As well Friedman also points out in the same chapter in Capitalism and Freedom that the idea of backing money is in its self “fiduciary” meaning fractional. Thus the Rothbardians that think fractional reserve banking is fraud may find themselves almost contrary. Of course they will tell you its no longer dollars but gold coins, and some think the government can magically run it while not intervene. As shown by Friedman that’s practically and politically impossible. I assume Stockman studied law or had some knowledge of tort and civil law would be able to understand the process and the complexity of the imposition of such statutes and that they are far more expansive and easily passed than many assume. While I don’t say no to free banking as Friedman does (possible changed later) I do think that Friedman’s argument is unfairly characterized as against gold standard and for fiat when it’s really unfavorable of government gold standard because a pure one run by no government can’t exist and it would be impractical as he later explained. Our current state in the “fiat universe” is far better than the gold standard days.
Also regarding the idea of fractional reserve banking. I know that some Rothbardian out there is inching to tell me that Rothbard’s gold standard has no fiduciary notes. Please go read this wonderful article on fractional reserve banking by George Selgin, I think he explains himself very well.