Tuesday, August 15, 2006

Friedman did what?

Sure, Milton Friedman is an influential economist. But I'm frequently catching myself saying, “Friedman did THAT?” Perhaps I just need to join the club and read his biography.
Apparently Friedman is responsible for the Bank of Canada's (BoC) decision to adopt a flexible exchange rate in 1950. My surprise is that it took a genius (easy enough to say in 2006). Although, it only took him 30 minutes of radio time with Bank of Canada Deputy Governor Donald Gordon and W.A. Mackintosh, a professor of economics at Queen's University.

From the BoC:

During the debate, Friedman argued that Canada's direct controls on imports should be replaced by a flexible exchange regime because "that is the most effective way of . . . making [import] goods more expensive to Canadians and your export goods cheaper to other people." . . . and "is it not better to let every individual decide for himself what items he wants to curtail in [the] face of higher prices than to have a government official do it in some ...across-the-board, rough manner?" (Friedman, Gordon, and Mackintosh 1948, 6).

Less than 18 months after the radio debate, on 30 September 1950, Douglas Abbott, Canada's Minister of Finance, announced that "today the Government ... canceled the official rates of exchange. . . . Instead, rates of exchange will be determined by conditions of supply and demand for foreign currencies in Canada." Friedman could not have written it any better.

It wouldn't be surprising if he had a finger in Japan, too. The next time he would speak to an official of the BoC would be in November 2000. He was the keynote speaker on a conference about exchange rates. When asked for his opinion on Japan's economic situation, he had this to say:

They can buy long-term government securities, and they can keep buying them and
providing high-powered money until the high-powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary

Of course in March 2001 the Bank of Japan began with quantitative easing. The BoJ purchased “trillions of yen of financial securities, including about $120 billion per year of Japanese government bonds in an operation known as “Rinban.””
Perhaps the BoJ had quantitative easing in the cards before Friedman proposed it. After all, Japan lacked alternatives.
Either way, surely no other economist's words have such global influence when it comes to central banking.

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