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Friedman and Bitcoin
What would the last century's greatest exponent of free market economics say about Bitcoin?
Even to this day, Milton Friedman is the greatest economist of the last century: a masterful communicator, a prolific researcher, and a fearless thinker. He touched almost all areas of economics. As an undergraduate at the University of Chicago in the late 1990s, I still felt the influence of Friedman’s intellectual shadow, even though he was no longer there. Chicago was still Chicago back then, and Friedman had planted the seeds of the future by educating the next generation of Chicago Nobel economists, like Gary Becker, Robert Lucas, James Heckman, and Edward Prescott.
Was Friedman a micro or macroeconomist? Both. His early work on price theory established the power of markets and the perverse effects of government intervention. He wrote widely and publicly about the problems of price controls, excessive state interference in education, prohibition and drugs, and the social responsibility of business, which would be uniquely relevant today. But he is equally, if not more, famous for founding the monetarist school of economics. And that is where his views begin to touch Bitcoin.
The most common definition of monetarism is advocating a continual increase in the money supply. Even as an undergraduate at Chicago, we would joke that if Friedman asked a question in class, a student could respond, “I'm sorry, Professor, I did not hear the question. But the answer is to increase the money supply.” Indeed, in his essay from 1968, The Role of Monetary Policy, he advocates for a “3 to 5% per year rate of growth currency plus all commercial bank deposits.”
This attracts the ire of the Bitcoin community, who defend Bitcoin’s schedule of declining issuance over time, ultimately converging to zero issuance in the year 2140. But to cast Friedman as an opponent of Bitcoin for this reason alone would be a mistake, and a misreading of his larger body of work. There are more fundamental reasons why Friedman's ideas support Bitcoin.
Money matters, but it’s complex
Friedman first and foremost made the case that money matters: “Every major inflation has been produced by monetary expansion: mostly to meet the overriding demands of war, which have forced the creation of money to supplement explicit taxation.” And more famously, “inflation is everywhere a monetary phenomenon.” This argument matters today. The current US president and Federal Reserve chair have repeatedly denied the role of the money supply in our current inflation, citing a wide manner of other factors, like pandemic constrained supply, the Russia war in Ukraine, the semiconductor shortage, etc.
They are in effect deflecting attention away from money. Friedman knew that money mattered because he observed that the quantity money fell by a third during the Great Depression. In fact, it is this power of the Fed to control money that is the chief enemy of liberty. In his essay Monetary Policy for the 1980s, Friedman writes “I have found that few things are harder even for knowledgeable non-experts to accept than the proposition that 12 (or 19) people sitting around a table in Washington, subject to neither election or dismissal nor close administrative or political control, have the power to determine the quantity of money. That power is too important, too pervasive to be exercised by a few people, however public-spirited.”
Thus, Friedman calls out the extreme concentration of power embedded within the fiat system, with central banks deciding on their whim on the supply of money for the entire economy. And why is this problematic? Because the money supply is simply too complex for humans to reliably manage. “We simply do not know enough to be able to recognize minor disturbances when they occur, or to be able to predict either what their effects will be with any precision, or what monetary policy is required to offset their effects.”
And thus Friedman was deeply skeptical of the central power embedded within central banks, and their ability to correctly fine-tune and stabilize the economy. This is where Friedman's views align with those of Bitcoin, which takes the money supply decisions outside the hands of individuals deciding on their discretion, and places them inside a protocol that is deployed and protected by a worldwide network of independent computer nodes.
Rules, not discretion
In writing with his longtime co-author Anna Schwartz in Has Government Any Role in Money? he says in no uncertain terms: “A rigid monetary rule is preferable to discretionary monetary management by the Federal Reserve.” And so the focus on the 3 to 5% expansion is less important than the fact that this rule is rigid. Friedman himself acknowledges this. “I believe that a monetary total is the best currently available immediate guide or criterion for monetary policy, and I believe that it matters much less which particular total is chosen, than that one be chosen.” In essence, Friedman is saying that it does not matter what the rule is, whether it's 3%, 5%, or even Bitcoin’s declining schedule today. What matters more is that the rule is predictable and unchangeable.
All of the damaging effects from unsound money today emerge from the discretion exercised by a handful of individuals on the Federal Open Market Committee (FOMC). For these reasons, I believe Friedman would support Bitcoin as an alternative to the current Federal Reserve regime. We know that it is impossible for the Fed to commit to a fixed rule; this is why the Taylor rule, which pegs the interest rate to a predictable formula based on publicly available macroeconomic indicators, has never been adopted since its invention 30+ years ago. Given this impossibility, Bitcoin’s predictable and unchangeable supply schedule is surely better than the current discretionary regime.
In a 1999 interview, Friedman received a question on what he remains optimistic about in the next century. His answer:
“The internet is going to be one of the major forces for reducing the role of government. The one thing that's missing, but that will soon be developed, is a reliable e-cash: a method whereby on the internet you can transfer funds from A to B, without A knowing B or B knowing A.”
And so Friedman calls it, a decade before Bitcoin emerged.