Milton Friedman: Greenspan Ruled with Discretion

Milton Friedman is impressed that Alan Greenspan was able to achieve price stability without committing to a strict money rule:

'He Has Set a Standard', by Milton Friedman, Commentary, WSJ: Over the course of a long friendship, Alan Greenspan and I have generally found ourselves in accord on monetary theory and policy, with one major exception. I have long favored the use of strict rules to control the amount of money created. Alan says I am wrong and that discretion is preferable, indeed essential. Now that his 18-year stint as chairman of the Fed is finished, I must confess that his performance has persuaded me that he is right -- in his own case.

His performance has indeed been remarkable. There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind. For the first 70 years after it opened in 1914, the Fed did far more harm than good... We would clearly have been better off for those 70 years if the Federal Reserve System had never been established.

In 1979, Paul Volker was named chairman of the Fed... The great inflation of the 1970s was still raging ... Supported by President Reagan, Mr. Volker broke the back of inflation, in the process producing a recession. The recession produced a public reaction that seriously lowered the president's popular standing. Fortunately, President Reagan did not waver in his support, reappointing Mr. Volker to a second term. He later appointed Alan to succeed him as chairman. ...

Inflation averaged 3.7% per year from the end of World War II to the Volker era, but only 2.4% per year during the Greenspan era. Even more important, inflation was much less variable. ... Greater price stability had far-reaching effects. By greatly reducing the uncertainties, enterprises could use their resources more efficiently and steadily. Price stability fostered innovation and supported a high level of productivity. ...

It has long been an open question whether central banks have the technical ability to maintain stable prices. Their repeated failures to do so suggested that they did not -- whence, in part, my preference for rigid rules. Alan Greenspan's great achievement is to have demonstrated that it is possible to maintain stable prices. He has set a standard. Other central banks around the world, whether independently or by following his example, are following suit. The timeworn excuses for central bank failure to stem inflation will no longer do. They will have to put up or shut up.