Money Mischief by Milton Friedman

Friedman explores the subject of monetary policy and especially inflation with remarkable clarity. This guy's ability to cut straight to the heart of a complex topic and make it understandable with bold, simple language is astonishing. (I think that's why all his books are so short. He makes his point so concisely that no further padding is necessary.) And this is the perfect topic: monetary policy is something that has serious ramifications for everyone, yet is very poorly understood.

He opens with a description of the gian t stone money used on by Micronesian islanders. The description seems ludicrous (they can't carry this money with them, so they leave it sitting wherever it is and just claim ownership). But Friedman points out that our own banking system is just as silly: we mine gold out of the ground, press it into bars, move it halfway across the globe, then burry it again in a bank vault. Rarely do we ever see or touch it, but instead ownership is transferred around between people who will probably never see the actual gold.

The primary focus of the book is inflation. Inflation is a monetary issue only, though politicians like to blame other reasons. When currency in circulation is increased without a corresponding increase in output, you get inflation. More dollars are chasing the same goods and services. Similarly a decrease in currency (or an increase in output) will produce deflation: fewer dollars chasing more goods.

Historically currency has always been tied to a commodity, typically gold or silver. This kept price levels relatively stable throughout the centuries; inflation was virtually 0% for most of the developed world for hundreds of years. This was a happy coincidence of the rate of gold mining being proportional to the increase in economic output. (New techniques for extracting and purifying gold also have an affect on the quantity of currency under a gold standard.) The book spends a few chapters on the history of the gold and silver standard debate in the US, which I found pretty dull - they can easily be skipped.

Only in the past century has fiat money (that is, money that's worth something because the issuer says so, not because it is redeemable for a commodity) has become increasingly more common. And as it has done so, the temptation for abuse by government has grown.

When government can print money any time it needs capital, it often does so. This is effectively a tax that does not need to be voted on. Inflation is functionality a tax on balances held; when you print more money, it devalues all the existing money just a little bit, and people holding the most money are hurt the most. This encourages people not to save for the future but instead spend all their money as soon as possible.

Starting in the 1970s, we have a unique global situation: almost every single nation uses fiat money. This is a new and unstable situation. In particular, how can government officials avoid the overwhelming temptation to use currency creation (and thus, inflation) as a stealth tax?

The solution, Friedman believes, is already underway: a combination of market forces and political pressure for good monetary policy. As fiat money is better understood and information on where the true responsibility for inflation lies, individuals and businesses in a given nation are getting less willing to put up with government shenanigans attempting to make nothing out of something. Many nations have been gravely damaged by poor monteary policy causing hyperinflation (including the US in the 1970s, and many such as Brazil continuing to this day). These stories are penetrating the mass consciousness and making us understand that fiat money only works when the issuer exercises discipline to keep the currency value steady.

Friedman is also famous for (in fact, I think he got a Nobel prize for it) debunking the widely-held view that inflation and unemployment are inversely proportional. That is, economists used to think that you could have low inflation or low unemployment, but not both. Friedman shows that while there is a connection in the short term, they are not really linked. Inflation produces a temporary misperception of increased demand which also increases employment for a period of 6 - 18 months. Then perception catches up with reality (the dollar value of prices are higher, there is not actually more demand) and employment returns to previous levels. Conversely, putting an end to inflation produces a perception of lower prices and thus lower demand and lower employment, but this is also temporary (6 - 18 months). After that, you end up with less inflation and employment returning to its previous level.

Rating: 3 of 5
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Other books by Milton Friedman:
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Economics Capitalism and Freedom Milton Friedman
Milton Friedman is probably the greatest economist to ever live, and his ideas are made accessible in this slim,...