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How Keynesians Hijacked Milton Friedman's Helicopter

Gary North - January 11, 2013
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Reality Check

Milton Friedman was very smart and a great debater. I knew him. I liked him. But he was no different from other very clever fellows. When he got something conceptually wrong, he was dangerous.

My professor of apologetics at seminary was Cornelius Van Til. Apologetics is the philosophical defense of the Christian faith. Van Til was every bit as smart as Friedman. He had a bunch of great metaphors in his arsenal of rhetoric. My favorite was the buzz saw metaphor. He said this: "You can sharpen a buzz saw all you want, but if it is set at the wrong angle, it will never cut straight."

Milton Friedman's "buzz saw" on monetary theory was always set at a crooked angle. It never cut straight.

He described the distribution of fiat money in terms of a metaphor: a helicopter full of paper money. It drops this money on the population below. He used this metaphor in a chapter titled "The Mystery of Money." It is chapter 2 in his 1994 book, Money Mischief. His goal for the chapter was to show that this free money from the sky, if it continues, will raise prices. He introduced the metaphor on page 29. (For the moment, you can read the chapter here. But Web pages come and go.)

What the metaphor does not show is what Austrian School monetary theory emphasizes: the new money is introduced at specific points in the economy. It is spent into circulation by the national government, which sells its IOUs to the official counterfeiter: the central bank. The national government gets first access to this money. It then spends it. The recipients of this government spending get access to the newly created money earlier than other citizens do. So, prices in general do not rise uniformly. They may not rise at all if overall economic production increases. What always rises is government spending. This fact, not the general price effects of counterfeit money, is the heart of any accurate analysis of central bank money. It is discussed in detail only by Austrian School economists.

Friedman never admitted that this process of sequential spending is relevant. He, like his intellectual mentor Irving Fisher, self-consciously rejected the Austrians' analytical approach. What is this approach? The approach of the script of All the Presidents' Men: "Follow the money."

Ludwig von Mises refuted Fisher's 1911 book on monetary theory in Mises' 1912 book, The Theory of Money and Credit. Fisher never responded explicitly to Mises. Their respective disciples did battle. Murray Rothbard repeatedly critiqued Friedman on this same point. Friedman never responded explicitly to Rothbard.

His helicopter metaphor became a powerful rhetorical tool to persuade others of his arguments against free-market pricing. He always said he preferred free-market pricing. But there was always this glaring exception: the pricing of money. He spent his career trying to undermine the legitimacy of the idea of free market money (gold coins) and a price system based on it. He became a public figure with his 1961 book, Capitalism and Freedom. Chapter 3 is on money. It begins with a rejection of the gold coin standard.


From the beginning, Keynesians loved his metaphor of the helicopter full of paper money. Why? Because that metaphor portrayed the central bank as a supplier of free goods. They understood what the Austrian School economists understand: The national government gets to sell its IOUs at a lower rate of interest to the central bank than the private investors who cannot legally create money out of nothing. This lets the government spend more money than it collects from taxes and loans from the private sector. Here is the law of economics: When the price of something is reduced, more of it is demanded. Fiat money issued by a central bank therefore allows the government to buy more power and influence in the overall economy. Central bank fiat money subsidizes the national government.

Keynesians believe that government can and should increase its purchase of goods and services. Friedman always said that the government shouldn't be allowed to do this very often, and only on an efficient basis (e.g., school vouchers). But he ignored the obvious: fiat money lowers the government's cost of issuing IOUs. This means that the central bank provides lower-cost power and influence for the government. The government demands more of this money at artificially low interest rates, because it expands the range of government operations.

This was the heart of his analytical error all his life. This error has played well among Keynesians. They see the greatest benefit of the central bank as providing "free extra money" for government spending.

Friedman de-emphasized this aspect of the arrangement. He promoted the idea of a required 3% to 5% monetary inflation as a way to keep the "engine" of the economy moving smoothly. Friedman's necessary economic lubricant -- my metaphor, not his -- was money. He really did believe that it can be supplied by the central bank free of charge.

He made his reputation with his jointly authored book, A Monetary History of the United States (1963). In it, he and Anna Schwartz blamed the Federal Reserve for the Great Depression. Why? Because it did not inflate enough to save 9,000 banks and thereby stop the contraction of M1. This was ideological manna from heaven for Keynesians. This was Friedman's "helicopter drop" of free anti-capitalist ideology: blaming central banking for insufficient price inflation and insufficient monetary stimulus by way of increased government spending.

Friedman therefore believed in a free lunch in this one area of the economy. It colored his entire economic analysis. It also got him a Nobel Prize.

It was dead wrong.


Its dead-wrongness was why Keynesian Ben Bernanke invoked the metaphor in his November 21, 2002 speech against price deflation.

Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

Yes and no. Friedman did not discuss government and taxation in the section on the helicopter drop. But Bernanke had it right. Ultimately, because central banks buy the IOUs of the national government, central bank monetary expansion results in increased government spending apart from added taxation. This really is the implication of Friedman's position.

This position's inescapable implication was stated clearly by Murray Rothbard. What Bernanke called "a money-financed tax cut" is the equivalent of Murray Rothbard's explanation of the expansion of government by means of monetary inflation. This appears in his book, What Has Government Done to Our Money?

The emergence of money, while a boon to the human race, also opened a more subtle route for governmental expropriation of resources. On the free market, money can be acquired by producing and selling goods and services that people want, or by mining (a business no more profitable, in the long run, than any other). But if government can find ways to engage in counterfeiting -- the creation of new money out of thin air -- it can quickly produce its own money without taking the trouble to sell services or mine gold. It can then appropriate resources slyly and almost unnoticed, without rousing the hostility touched off by taxation. In fact, counterfeiting can create in its very victims the blissful illusion of unparalleled prosperity.

Counterfeiting is evidently but another name for inflation -- both creating new "money" that is not standard gold or silver, and both functioning similarly. And now we see why governments are inherently inflationary: because inflation is a powerful and subtle means for government acquisition of the public's resources, a painless and all the more dangerous form of taxation.

Frederick Bastiat in 1850 warned us to pay close attention to the things unseen whenever we do economic analysis. He used the metaphors of the broken window and the spending which this stimulates. We must think through this spending, he said. The broken window shifts spending from consumption and investment of what had been high-priority goods and services before the window was broken to the new priority: window repair. The man with the broken window has suffered a loss. Thus, Bastiat argued, there is no intellectually valid case for regarding the repair spending as a net personal benefit. It is therefore also not a net social benefit. This is the heart of his analysis.

Applying this principle to the helicopter dump of paper money, the resulting shift in spending from the private sector to the government sector must not, ipso facto, be assumed to convey a net social benefit. On the contrary, it should be regarded as producing a net social loss.

Friedman never came clean on any of this. He always maintained that there is some sort of theoretically valid judicial rule that can be applied by the government to prohibit this misuse of the helicopter, i.e., in expanding government spending beyond what (1) taxpayers are willing to accept and (2) private lenders are willing to fund at low interest rates. The possibility of such a rule implied that the foxes can be relied on to guard the hen house. (We all love metaphors, don't we?) The idea was preposterous from day one, yet this brilliant man never came to grips with its utter absurdity -- an absurdity in terms of his theory of civil government, a position he presented in his little-known book, There Is No Such Thing as a Free Lunch (1977).


Two weeks before Bernanke gave his famous helicopter lecture, he gave another lecture. This was in honor of Milton Friedman's 90th birthday. The two lectures are sometimes recalled as one speech. They were unified conceptually, but they were separate public exercises.

Bernanke had been invited to the University of Chicago to honor Friedman by giving a speech. In this speech, he visibly hijacked A Monetary History of the United States for Keynesian purposes. In fact, the Keynesians had done this successfully, beginning 39 years earlier. In 1963, Keynesians had symbolically invited Friedman into the professional academic establishment on the basis of this book. He had been a pariah before this.

In the next-to-last paragraph, Bernanke said this regarding Federal Reserve policy, 1930-33.

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

Then he concluded: "Best wishes for your next ninety years."

Bernanke's speech was an analysis of the failure of the Federal Reserve 1930-33. It ignored what should have been discussed: Federal Reserve policy 1926-29. That was what Murray Rothbard's book, also published in 1963, discussed: America's Great Depression.

Bernanke never once mentioned the central fact of Federal Reserve policy, 1930-33: the FED expanded the monetary base, but this could not offset the deflationary effects of bank failures. So, M-1 shrank. This did not cease until after the government created the FDIC in 1933. After this, the expansion of the monetary base was matched by an expansion of M-1. The statistical evidence is here. Not once in his speech did Bernanke mention the FDIC. Not once did he mention that the FED had no legal authority to extend deposit insurance to banks, which was what stopped the contraction of M-1.

From 1963 until his death in 2006, Friedman never went into print with this message:

Keynesians have misused my thesis on the Great Depression. They have called for an expansion of central bank money and commercial bank money in order to offset price deflation and economic depression. So have I. They blame the FED, 1930-33, for not inflating enough. That was what I argued, and what Dr. Schwartz provided lots of statistics to prove. But I do not take any responsibility for the expansion of federal government spending since 1933. None. Not a shred. My hands are clean.

Keynesians call for more government spending. I do not. Yes, it is true that because the Federal Reserve expands the monetary base by purchasing Treasury debt, this of necessity means that federal government spending has increased. That is not my fault. The FED could just as easily buy corporate bonds instead. I never actually recommended this, but it is just not fair to use my theory and Dr. Schwartz's historical evidence to justify an expansion of the federal government. I disclaim all responsibility for any expansion of the federal government.

He should either have publicly adopted this obviously implausible line of reasoning, or else he should have admitted that he and Schwartz were guilty as charged. He never did.


The metaphor of a helicopter full of paper money serves the purposes of Keynesians and monetarists. But it is not a correct metaphor. It is also not relevant to the process of monetary inflation.

The correct metaphor is a bag man. A bag man acts as an agent for the mob. He carries currency in bags to pay off corrupt politicians.

The American mob is the fractional reserve banking cartel. The Federal Reserve is its designated agent. It pays off politicians: the purchase of Treasury debt with newly counterfeit money.

Milton Friedman was the theoretical bag man for the large commercial bankers' operational bagman: a supposedly reformable Federal Reserve System. He paid off the politicians' spokesmen, the Keynesians, in the currency they do business with: footnotes and formulas. He was hailed as an economic pioneer by the Keynesians because of this crucial ideological service.

In contrast, Rothbard and Mises, because they argued that free market pricing under a gold coin standard will clear markets without government intervention, spent their careers as prophets, crying in the wilderness.

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