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The Crackpot Economist Who Provided Milton Friedman With His Monetary Theory

Gary North
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In my article on the hijacking of Milton Friedman's monetary helicopter, I contrasted him with Murray Rothbard. This goes back to the battle of their respective mentors, half a century earlier: Irving Fisher and Ludwig von Mises.

Fisher was the most influential economic crank in American history. Fisher offered a simple formula that supposedly enables economists to understand the complexities of monetary policy and its effects on the price level: MV=PT. It relies on an intellectual construct, namely, the price level. This must be created by statisticians and economists. The formula does not explain cause-and-effect in terms of the transmission and spread of newly created money throughout the economy. It is totally an aggregate concept. It ignores individuals who make decisions: in government, central banks, commercial banks, and specific markets.

Ludwig von Mises' theory of money begins with real central banks, real borrowers, and the spread of fiat money over time: none of which is considered by Fisher or Friedman.

Fisher proved in 1929 that he was the most highly educated economic fool in the world. He went public with two predictions.

"There may be a recession in stock prices, but not anything in the nature of a crash." (i>New York Times, Sept. 5, 1929)

"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months." (Oct. 17, 1929)


Then, over the next four years, he lost his own personal fortune. He was so poor in 1933 that Yale University had to subsidize housing for him. Yet this consummate fool, whose economic theories not only led to a catastrophic personal error, but which to a great extent were responsible for the original monetary policies of the Federal Reserve, which it pursued in the late 1920s, is now heralded as some kind of economic genius. Friedman regarded him as "the greatest economist the United States has ever produced." (Money Mischief, p. 37).

Fisher was a crank, and Mises exposed him as a crank within a year of the publication of Fisher's 1911 book. If you want to get an idea of how different their theories are, read Mark Thornton's article. Fisher believed that we can safely trust the government or its central bank to formulate monetary policy. He opposed the gold coin standard, because he thought it is inefficient. That was also true of Friedman. Neither of them ever understood that the free market is capable of providing a sufficient quantity of money, by means of gold mining, for a market economy. Supply and demand for goods and services are regulated by means of a private currency system that itself is created by market processes. Neither Fisher nor Friedman ever believed this. They both believed that the government must intervene in order to create a reliable monetary system, so that there can be economic growth, market clearing processes, and individual liberty. They both believed in the wisdom and power of the state with respect to the central commodity in an economy, namely, the money supply.


Fisher was a crank in other areas. He was a great promoter of eugenics. He wanted the scientific regulation of marriage and birth so as to promote the influence of the white race. Thomas Leonard in 2005 brought this to the attention of mainstream economists in The Journal of Economic Perspectives in an article about the Progressive movement and eugenics. He quoted Fisher's statement in 1907: "The world consists of two classes--the educated and the ignorant--and it is essential for progress that the former should be allowed to dominate the latter. . . . [O]nce we admit that it is proper for the instructed classes to give tuition to the uninstructed, we begin to see an almost boundless vista for possible human betterment." He cited Fisher's textbook on economics.

In the latter half of the Progressive Era, race-suicide and proposed eugenic solutions had enough currency to appear in leading textbooks. In his Elementary Principles, Irving Fisher (1907, p. 715) declared that "if the vitality or vital capital is impaired by a breeding of the worst and a cessation of the breeding of the best, no greater calamity could be imagined." Fortunately, said Fisher, eugenics offered a means, "by isolation in public institutions and in some cases by surgical operation," to prevent the calamity of "inheritable taint."

He also noted another connection. "Many proponents of eugenics in economics were also statistically oriented. Francis Amasa Walker, Richmond Mayo-Smith, Irving Fisher and Walter Wilcox were all statisticians, by training and/or by inclination. They regarded statistical measurement and inference as the method that put the 'science' in social science." Fisher was a co-founder of the American Eugenics Society.

It was only after the Nazis began to adopt eugenic policies, which had been pioneered in the United States before World War I, and which Fisher had loudly supported, that Fisher finally caught on to the fact that it was not politically correct to go into print on the great benefits of racial eugenics. So, he shut up. But he never changed his views on the matter.

The man was a crackpot on eugenics. He was a crackpot on accurate entrepreneurial investing, and that also should have tipped off the public about his inability to think straight on the monetary issue. But, in our day, primarily because of Friedman, there has been a resurrection of respect for this crackpot economist. This indicates the extent to which people accept ideas, not on the basis of the inherent power of the ideas, but on the basis of establishment opinion. In our day, Keynesian fiscal policy is supposed to run deficits in times of recession, and the only way to do this, in the opinion of modern economists, is to rely on central bank monetary inflation to buy the government's debt, so as to keep down interest rates. So, as Keynesians have gone in search of cheap money, they have returned like dogs to their vomit to the monetary policies recommended by Irving Fisher in the years before the Great Depression.

Fisher seemed to be scientific. He had this formula. He had ideas for creating index numbers. It all seemed so logical. All you needed was a government run by people who understand these formulas, and who stick to policies that would produce a stable price level, as measured by government statistics. We could then have positive economic growth. There would never be uncleared markets, because the government would be there to guarantee the steady expansion of money. Government was a savior in Fisher's view, whether in monetary matters or genetic matters.

Why Milton Friedman gravitated to the writings of this racist crackpot is one of the mysteries of the libertarian movement. But he did, and his ideas on money were then picked up by the Keynesians, and modified accordingly. Instead of providing steady monetary growth, they use his helicopter to provide below-market subsidies to the federal government for its IOUs.


For all of Friedman's genius, it was not sufficient to protect him against the ideas of Irving Fisher. They both lacked faith in the free market as a means of providing a reliable monetary system. To defend their positions, both of them relied on formulas, statistical constructs, and government-supplied statistics. This faith bankrupted Fisher. In the case of Friedman, it led to the hijacking of his helicopter metaphor, which was used to justify the unprecedented expansion of the monetary base by the Federal Reserve in 2008 and thereafter. It was not possible for the Keynesians and the salaried bureaucrats with the Federal Reserve to hijack Ludwig von Mises's theory of money in order to justify such a policy. But, then again, if the Federal Reserve had heeded Mises's policy, it would have shut down its operations before they got started in 1914.

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