It was my good fortune to meet Milton Friedman in February 1968, while I was at Oppenheimers. The stock market was in what looked like the early stages of a bear market, with the S&P 500 down 8 percent in a couple of months. My partner and good friend, Fred Stein, feared that the U.S. was going back to the depression of the 1930s. After all, he reasoned, “All consumers had acquired their needs; everyone had a car.” A very recent University of Chicago grad working in the research department suggested that Fred bring in a relatively unknown economist, Professor Milton Friedman—which he did.
Milton said something like, “You’re completely wrong. Politicians always try to avoid their last big mistake—which was clearly the 1930s. So every time there’s a contraction in the economy, they’ll ‘overstimulate’ the economy, including printing too much money. The result will be a rising roller coaster of inflation, with each high and low being higher than the preceding one.” Oppenheimer hired Milton that day, despite having six economic consultants at the time. He remained one of them for 16 years—and a good friend thereafter.
What a superb forecast of the devastating inflation of the 1970s! Very different from everyone’s expectations, it was amazingly correct—and for all the right reasons. Indeed, it was Milton’s understanding of what causes inflation that was among his greatest contributions to economics.
In 1976–77, inflation hovered around 6 percent. By October 1978 (when the yield curve inverted, with short-term interest rates higher than long-term ones because of the strong demand for credit), the consensus forecast was for about the same inflation rate, or lower. Another of Oppenheimer’s consultants, Alan Greenspan, was more pessimistic, predicting “6 percent to 7 percent, perhaps 8 percent.” But Milton thought Alan was wrong, too. “As inflation rises, people adjust by taking their money out of the bank and spending it, as they perceive its value decreasing. As they keep on spending, the nominal economy will grow somewhat faster, and inflation will rise faster, as well. So I expect the CPI to peak at 10 percent to 12 percent.” It peaked at 14.6 percent in March 1980. At that time, Milton said it would decline to around 6 percent by mid-1982—way below consensus expectations. It hit 7.9 percent in June 1982 and 4.9 percent by September 1982, and then went lower to 3.8 percent by December 1982 and to a low of 2.4 percent by mid-1983.
What incredible calls. Not only did he correctly forecast what he called the “rising roller coaster of inflation,” but he was twice as high as the consensus on the peak as well as way below it on the slowdown of inflation. And he held these forecasts with conviction, both times.
His predictions rested on assumptions that were very different from the decades-old prevailing wisdom that there was a trade-off between inflation and unemployment—a view that still persists within a wide swath of the investment community, academe, and the media. In essence, according to the old orthodoxy, if you had a strong economy, you’d get low unemployment but some combination of rising inflation, inflation exceeding expectations, and rising inflation expectations. This view, labeled the Phillips Curve, after Professor Alban Phillips of Cambridge University, was an offshoot of Keynesianism. (John Maynard Keynes, incidentally, was one of four economists with whom Milton always said he would have loved to have had dinner. The others were Adam Smith, Keynes’s mentor Alfred Marshall, and George Stigler, a fellow Nobel laureate with whom he did have dinner, since he became Milton and Rose Friedman’s best friend.)
By contrast, in The Monetary History of the United States, 1867–1960, Milton and his co-author Anna J. Schwartz argued that higher wages don’t cause inflation. “Inflation is always and everywhere a monetary phenomenon,” they contended. As the government increases the rate at which it prints money, the result is too much money chasing too few goods and services. As the Wall Street Journal put it in explaining Milton’s Nobel Prize: “In layman’s terms, the Swedish Academy credited Milton with nothing less than shredding the Keynesian consensus.”
And just as higher wages don’t cause inflation, the whopping oil price increases between 1973 and 1980 didn’t cause the “stagflation”—the stagnant economy with rising inflation—of the 1970s. Rather, the price hikes were the form inflation took.
Not long before Milton died, I was rereading his articles in Newsweek from 1966 to 1984, collected as An Economist’s Protest. I told him how relevant I thought those ideas still were. He replied, “Of course they are.”
A generation ago, at a speech to the New York Society of Security Analysts, Milton said something like, “Significant changes in the growth rate of money supply, even small ones, impact the financial markets first—usually fairly coincidentally. Then, they impact changes in the real economy, usually in six to nine months—but in a range of three to 18 months. Even later, usually in about two years in the U.S., they correlate with—or, more likely, cause—changes in the rate of inflation/disinflation/deflation. The leads are long and variable”—though “the more inflation a society has experienced, history shows, the shorter the time lead will be between a change in money supply growth and the subsequent change in inflation.”
What happened to the Japanese economy in the 1980s is a prime case in point. When the U.S. was printing M2—that is, increasing the money supply—at 12 percent in 1971–72, Japan, under a fixed exchange-rate policy of 360 yen to the dollar, ended up increasing its money supply at 25 percent. After a couple of years, inflation there got up to 25 percent. Then the Bank of Japan shifted from a fixed exchange-rate policy to controlling—and gradually slowing—money growth, down to 6 percent to 8 percent by the early 1980s. With nominal GDP steady at around 5 percent, and with no inflation and no deflation, it was truly a golden era—and it showed that gradualism worked.
Money growth stayed at this rate until then–treasury secretary James B. Baker rolled the dice with the world’s financial markets in order to get the dollar down, so the GOP could win some votes in the Rust Belt and the Farm Belt. In September 1985, he convinced the British, the Germans, and the Japanese to “overstimulate” their economies, while we promised to “understimulate” ours. They did it; we didn’t. The Japanese increased money growth from 7 percent to 12 percent. The “bubble economy” followed, heavily concentrated in the stock market and in real estate, both domestic and international. My friend Charles J. Urstadt was then an advisor to Mitsui-Fudosan in its bid for Rockefeller Center. Its bid, he recounted, was “half again, or maybe even more, above the market value.” Even so, he said, “We were outbid by Mitsubishi, which bid another one-third higher.”
The monetary policy discipline that produced Japan’s golden era had a similar effect when practiced here at home. Five or so years ago, Roger Hertog, then the outstanding chairman of the Manhattan Institute, City Journal’s publisher, asked the executive committee, “Given that Reagan deregulated and lowered marginal income tax rates, I can easily understand why his economic expansion of 92 months was almost twice as long as the prior longest peacetime expansion since 1857. But, since Clinton reversed those policies, why was his expansion even longer, at 102 months?”
My reply was, “We’ve had the best monetary policy—that is, the slowest, steadiest, yet positive broad money supply growth—under Greenspan, since the founding of the Fed in 1913.” Former Citicorp CEO Walt Wriston interjected, “Alan’s been four times better than any prior Fed chairman, but each of you is underestimating the importance of the Information Revolution.” (Incidentally, at a 1981 board meeting, Walt had asked George Gilder, author of Wealth and Poverty—the book Reagan handed out while in the hospital after the March 1981 assassination attempt—what he was going to write about next. “I don’t know,” Gilder responded. “Why don’t you write about the Information Revolution?” Walt suggested. “It’s going to be bigger than the Industrial Revolution.” Remember, this was essentially a decade before the digital era was in full swing.)
It’s almost universally said that Milton flourished in the Chicago school of economics. Certainly, he had some outstanding teachers, including Frank Knight and Jacob Viner. But one of Milton’s first students, James A. Meigs, told me, “There really wasn’t a Chicago school. It was only Milton’s innate graciousness that allowed such an appellation. It should have been called the Milton Friedman school.” My confirmation of Jim’s view came when I sat in the audience in 1980 for six of the ten Q&A tapings for the outstanding and still worthwhile Free to Choose TV series. Whenever one of the numerous left-wing panelists said something in opposition to Milton, the audience of perhaps 25 Chicago faculty members would raucously approve. They wouldn’t boo Milton, but it sure was another affirmation of the opprobrium he experienced not too long ago.
On my visits to Chicago for these tapings, I would go to the bookstore near the “old library” where the tapings had occurred. Not only were Milton’s books on the bottom shelf, but big posters of Lenin and Trotsky were all over the walls. This must be a university-owned bookstore, I thought, as no entrepreneur would downplay a local son like that.
Many years ago, my wife and I spent a weekend at Rose and Milton’s unique octagonal “overthrust” summer home in Ely, Vermont. We arrived the day after their son, David, had received his Ph.D. in physics. On learning that David loved economics, my wife asked Rose, “Why not a Ph.D. in economics?” The sad reply: “Milton’s name is such an anathema in academe, it would be a millstone around David’s neck.” In a similar vein, author Leo Rosten, a classmate and lifelong friend of theirs, told me, “At faculty club lunches, Milton was often by himself; others just didn’t want to argue with him.” Nevertheless, despite social opprobrium for many years, he stuck to his philosophical principles.
At the book launching of Free to Choose in 1980, Bob Chitester, producer of the fabulous TV series that sparked the book, held up a copy of Milton’s earlier book, Capitalism and Freedom, and said, “This was my bible.” Milton, always quick, replied, “That was the old testament; Free to Choose is the new testament.”
Then Milton remarked, “I’ve never had a book of mine reviewed by any major paper, not even the [Republican] New York Herald Tribune.” I was sitting directly behind the head of marketing at Harcourt Brace Jovanovich, the publisher, and on hearing these words, she began to slide off her chair, being stopped only by her knees hitting the too close chair in front of her. Clearly, she was panicked about having to push a book her boss dearly wanted—without a review.
I remember hearing that the Harcourt staff almost universally opposed publishing Free to Choose. It ended up selling about 500,000 copies in hardcover, and nearly 1 million total. It may well have been the precursor to today’s vast market for conservative books, talk radio, and so on.
Milton and Rose took Harcourt chief William Jovanovich and his wife (along with Alan Greenspan and me) to dinner at La Caravelle in New York. “This is the first time any author has ever taken me to any meal,” Jovanovich remarked—“even breakfast.”
Once my wife asked Milton, “What’s been your biggest mistake?” He thought seriously, for a good 45 seconds or more. “I’ve always been too early; I don’t understand why others cannot see what I do.”
I’ve managed Milton and Rose’s personal portfolio for over three decades. The day after Milton received the Presidential Medal of Freedom from Ronald Reagan in 1988, my wife and I visited them at their superb new apartment, with magnificent views of San Francisco. When Milton opened the door, Rose broke out into song and Milton tagged along, à la Rex Harrison, “Welcome to the house that Chuck built . . .” That was a vast, but very gracious, exaggeration, and certainly a highlight of my life.
We also spent a weekend at Rose and Milton’s more recent country retreat, a couple of hours north of San Francisco. It was a charming place overlooking the water, with a magnificent garden, which Rose loved. When we arrived, Milton took my wife up to see their bedroom—where he pointed out the water bed. On the day Milton died, I reminded Rose of this. She chuckled and said, “Well, it didn’t last very long.”
When Milton was driving us back to San Francisco, he idly commented, “I’ve never been in an accident in which anyone was hurt.” Rose interjected, “What about the two times you rolled over?” To which he replied, “What about the time you did?”
On that same drive, Milton told us that during World War II, he was working in the Advanced Mathematics Department of the Statistical Research Group for War Purposes. The U.S. learned that the Germans had developed the jet engine and a plane—the ME 262—that went faster than the manually operated machine guns on our latest Boeing bombers could track them at close range. Milton was asked to determine the best materials with which to make jet-engine blades. “It was a simple statistical problem, concerning how long the blades would last,” he recalled. “Using known properties of various metals, I designed two alloys: one that would last six months and the other nine months. MIT was asked actually to make the alloys: one lasted three weeks, the other six weeks. That certainly lowered my conviction in regression analysis.”
Milton once told me that when another team in the Statistical Research Group came to his team and said, in effect, “We’ve been working on this equation for two weeks without results,” his colleague Dan Judge got up from his seat next to Milton and finished the equation without saying a word—just like a scene in the 1951 science fiction movie The Day the Earth Stood Still.
After I had sent Milton a copy of prominent economist and investment strategist Peter Bernstein’s outstanding book, Against the Gods—about how mathematicians had improved society over the centuries by developing tools of analysis that allowed risk to be measured and split up into various pieces, increasing liquidity in the markets and spreading shocks around—Milton wrote to Peter congratulating him, but complaining that he hadn’t paid enough attention to mathematicians in non-financial areas, such as Dan Judge. “Dan was a true genius,” Milton told me. Peter, for his part, remarked: “I should have included Milton in the book; he was an outstanding mathematician.”
Leo Rosten told me a story that has since become part of Milton’s legend. President Nixon, inaugurated in January 1969 after narrowly beating Vice President Hubert Humphrey, soon established a commission on the volunteer army. Milton testified before that commission, along with General William Westmoreland. The testimony became a debate between the general and the professor. The general said, “Professor, everything you say makes so much sense, but I’m not sure I’d like to command an army of mercenaries.” Milton immediately replied, “Would you rather command an army of slaves?” The general indignantly retorted that he didn’t like to see our patriotic draftees labeled slaves, to which the professor responded he didn’t like to see our patriotic volunteers labeled mercenaries. Further, the professor pointed out that he, the general, and most people they both dealt with were “mercenaries.” The commission broke out in laughter, and the draft was abolished that afternoon.
Milton regarded this as the prime achievement of his life. “I have often said I would gladly trade off a degree of economic freedom for more personal freedom. It turns out, empirically, you don’t have to.”
On Sunday, August 15, 1971, President Nixon announced wage and price controls (and closed the gold window). I called Milton that night and asked what was going to happen. He replied, “We’re going to have more inflation.” I asked how—given that we now had the controls. In order to get reelected in 1972, he explained, Nixon will spend and spend to win voter loyalty, like most incumbents, and then, having created a huge deficit, he will print money to pay for it all. And he’ll print even more imprudently than most presidents, believing that the wage and price controls will mask some of the resulting inflation. And sure enough, in February 1972, the Treasury announced a $28 billion deficit—very big for that time, even as the real economy grew strongly at 7 percent that quarter and even faster during the next one. The ensuing double-digit inflation is legendary.
Recently, I related this conversation to Don Rumsfeld, who said, “As deputy secretary of the treasury under George Shultz, I was put in charge of administering phase two of the controls. ‘Why put me,’ I asked, ‘since I don’t believe in them?’ Shultz replied, ‘That’s exactly why I want you to do it.’ I kept giving exemptions—to small businesses, for food, whatever—because I knew of the distortions the controls caused. I was kind of proud of the job we were doing, because we were doing as little damage as possible. Some time later I received an irate call from Milton saying, ‘Stop giving exemptions. The more you do, the more the public will think controls worked instead of being an absurd idea—just as Nixon knew they were from his experience in the Office of Price Administration in World War II.’ ”
Milton also worked with Ronald Reagan, when he was governor of California, on Proposition One, intended to limit the rate of growth in state spending to the rate of growth in the state’s nominal economy the prior year. The proposition failed, unfortunately (though by a small margin), due to a major ad campaign by state employee and teachers’ unions, bureaucrats and some legislators, and other special interests. Soon thereafter, Milton initiated an amendment to the U.S. Constitution along the same lines, and he campaigned to get it adopted. Thirty-two states passed such bills; 34 were needed for the amendment to pass.
Milton and George Shultz—who served as President Nixon’s labor and treasury secretary and President Reagan’s secretary of state—had a mutual admiration for one another. “George is the most able man in America,” Milton would say. At a June 2005 fund raising dinner for the Milton and Rose D. Friedman Foundation, which advocates for vouchers and charter schools in K–12 education, the secretary was the second speaker, after Alan Greenspan. He said something like: “As secretary, I met a number of kings and queens, more than a few dictators, and innumerable heads of state. Often I’m asked, ‘Who was the most impressive, important individual you ever met?’ Clearly, it was Milton Friedman. He was the first academic economist to state strongly what John Q. Public innately knew: that it’s not just the quality of an economist’s thinking that matters; his forecasts also have to be correct.” George then broke out into song—to a Cole Porter melody—“A fact without a theory is like a boat without a sail, like a kite without a tail. . . . But there’s one thing worse in this universe, that’s a theory without a fact.” He brought the house down. Incidentally, in the hour long Q&A, hosted by the very able John Stossel of ABC News, I didn’t see anyone leave the room, even though we closed at 10 PM, quite late for Manhattan on a weeknight.
Milton had proposed floating exchange rates some five decades ago. George Shultz told me, in effect, “I stayed in as secretary of treasury nine months longer than I wanted to, just to get Milton’s idea in.”
Milton once told me: “Anti-Semitism may have been a factor in causing the depression of the 1930s, especially the 1929–1932 part, when the money supply declined over one-third. One of the governors of the Fed kept a very gossipy diary,” Milton explained. “In it, he noted he had had lunch with J. P. Morgan, Jr. in the fall of 1930.” At that time, Milton continued, there were only two prominent Jewish banks in the country: Manufacturers, which catered to the rag trade around Seventh Avenue in New York; and the Bank of the United States, many of whose depositors were Jewish immigrants. With no deposit insurance, and with deflation approximating 10 percent per year, one could have made a very respectable real return during those times of adversity by pulling out of the bank and putting currency in the mattress. So there was a classic “run” on the Bank of the United States. The Fed governor asked Morgan, “Are you going to provide liquidity to the Bank of the United States, as you have done for some two dozen other banks in the past few years?” Morgan replied, “No, I’m going to get those Jewish b------s for what they did to my late father.”
The son reputedly believed in the power of the so-called “Jewish press,” and his anger probably stemmed from how embarrassed his father and family had been during the Pecora Investigation of 1911, a follow-on to the money panic of 1907–08. J. P. Morgan, Sr. had a bad case of rosacea, an inflammation of the face, which resulted in a particularly large red nose in his case. One of the papers had dressed a dwarf in a young girl’s dress; J. P. picked “her” up and put “her” on his lap. Whereupon “she” reached up and twisted his nose. Flashbulbs went off all over the place, and it was front-page news the next day.
In the absence of help from the younger Morgan, the Bank of the United States failed, the first major bank to do so. In a chain reaction, depositors in other banks began to withdraw their money, banks failed across the land, the money supply contracted by a third, and GDP shrank by the same proportion.
By contrast—and a very dramatic contrast, at that—at the end of the 1907–08 money panic, J. P. Morgan, Sr., who reputedly had the ability to stay awake for two or three days straight, had locked up 24 or so major money men and investors on a Sunday night in his magnificent library on 36th Street, off Madison Avenue. He said, in effect, “I’m putting up some money on the opening tomorrow morning, and none of you is getting out of here until you promise to do the same.” (When I moved into my current home in Bronxville, New York in 1968, my next-door neighbor—Jackson Chambers, then in his 80s—told me, “I was a banking examiner for New York State during that crisis. As I recall, J. P. Morgan said, ‘I’m putting up 100 percent of my net worth on the opening, and none of you is getting out until you pledge to do the same.’” Clearly, investing 100 percent is a world of difference from “putting up some money.”) That buying caused a bottom to the market and ended the panic. But because they were buying when the Dow was down over 50 percent in a bit more than a year, they were pilloried for “making money during adversity.” Hence (among many other reasons) the Pecora Investigation, which led to the creation of the Federal Reserve System, the imposition of a federal income tax, and the passage of the Sherman Anti-Trust Act.
In 1947, Friedrich von Hayek assembled some 39 classically liberal scholars, including Milton, at Mont Pelerin, Switzerland, for a week-long seminar. Its rationale was: The world’s going socialist or communist, and perhaps fascism will resurface. Each of us believes in limited government and economic and political freedom. Why don’t we get together every couple of years, exchange ideas, have some drinks, and so on?
One day there was a long discussion among seven or eight of them. Near the end, Ludwig von Mises stood up, declared in a huff, “You’re all a bunch of socialists,” and stormed out. Milton said he learned from that experience that “It’s not enough to have sound, rational ideas—one has to get along with people as well.”
Once when Milton was in New York visiting some of Oppenheimer’s clients, we had a cocktail party after a long day. A young man asked him a question in an exceedingly rude manner—again and again. Milton’s response was very gracious. The next morning Milton was debating James Tobin, another Nobel laureate, at the Institutional Investor conference, with perhaps 1,000 attendees. Tobin asked almost the exact same question as had the young man the prior evening, but he did it very politely. Milton went at him hammer and tongs. Later, I asked Milton why he was so polite to the young man and so aggressive with Tobin. He replied, “The young chap didn’t know what he was talking about. Conversely, James did—it was an ambush question, and I wasn’t going to let him get away with it.”
Let me close with a few of Milton’s choicest epigrams.
- “Yes, it’s true consumer spending accounts for about 70 percent of nominal GDP. But that doesn’t cause anything. It’s 2 percent or 3 percent or 5 percent of the population who are the risk-takers, the entrepreneurs, the innovators, who cause the growth.”
- Milton liked to quote his good friend, UCLA professor Armen Alchian: “The one thing you can be most sure of in this life is that everyone will spend someone else’s money more liberally than they will spend their own.”
- “I’ve often wondered whether the difference between mankind and animals is not so much the ability to reason as it is the ability to rationalize.”
Mr. Brunie spent almost four decades at Oppenheimer, has been on the board of the Manhattan Institute almost since its founding, and is a member of City Journal’s publication committee.