In continuing my sometimes-reported study of money, I have been reading Milton Friedman’s “Capitalism and Freedom”.

After dismissing a thoroughly automatic commodity standard, chiefly on the grounds of practicality, Friedman moves on. Reviewing the establishment and effects of the Federal Reserve System, he writes:

No sooner was the [Federal Reserve] Act passed than World War I broke out. There was a large-scale abandonment of the gold standard. By the end of the war, the Reserve System was no longer a minor adjunct to the gold standard designed to insure the convertibility of one form of money into others and to regulate and supervise banks. It had become a powerful discretionary authority able to determine the quantity of money in the United States and to affect international financial conditions throughout the World.

That is, the Reserve System surpassed its intended purpose before the Great Depression. Should something have been done immediately it became apparent that the environment in which the Reserve System operated had changed?

Perhaps. Concluding his analysis of the Great Depression, Friedman writes:

The Great Depression in the United States, far from being a sign of the inherent instability of the private enterprise system, is a testament to how much harm can be done by mistakes on the part of a few men when they wield vast power over the monetary system of a country.

It may be that these mistakes were excusable on the basis of the knowledge available to men at the time — though I happen to think not. But that is really beside the point. Any system which gives so much power and so much discretion to a few men that mistakes — excusable or not — can have such far-reaching effects is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic — this is the key political argument against an “independent” central bank. But it is a bad system even to those who set security higher than freedom. Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, an which thereby makes important policy actions highly dependent on accidents of personality. This is the key technical argument against an “independent” bank. To paraphrase Clemenceau, money is much too serious a matter to be left to Central Bankers.

He proceeds to discuss the control of money by rules rather than authorities: I continue reading. Next on the list is Rothbard’s “The Mystery of Banking”. It’s going to be fun tying this lot up to the way money actually works today.

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