Milton Friedman discusses the role of monetary policy in stabilizing the economy. He begins his speech by reflecting on America’s departure from the monetary policy during the Great Depression, adopting Keynesian economics and what he notes as its subsequent failure. The Keynes policy promoted fewer taxes and encouraged increases in government spending to fix the economy. Keynes's economic recovery theory was neither successful in other countries. Monetary authority once again embraced monetary policy and it was reenacted. Freidman's opinion is that monetary policy if used appropriately is effective. Whereas, had the Federal Reserve increased the money supply during the Great Depressing the banking system would have recovered. He felt this proved the complex flexibility of the monetary policy; however, Keynes and his contemporaries believed the opposite.
The supply of money when it is not used or managed efficiently has disastrous effects. Friedman advocates the importance of strategic management of the economics of money supply, and the ability to foresee when adjustments should be made to interest rates and fiscal policy. However, Friedman realizes that monetary policy has its limitations and outlines what he believes it is not capable of. Monetary policy can only keep interest and unemployment rates at specific levels for short periods of time. Increasing the supply of money by lowering interest rates has a trickle-down effect on several economic variables such as raised prices and the decreased value of real money. Not fully understanding the relationship between money and interest rates is what drives monetary authority to make decisions that may not consider all economic variables.
The author refers to monetary policy as the money machine and further instructs that it may need adjustments to help keep it running efficiently, but it can get out of order on its own. However, the impact need not be significant if proactive measures have already been implemented. Monetary policy can work best when wages and price levels are stable and predictable. Prices are not to be increased for the sake of higher prices but should serve to impact the economy positively. Friedman suggested that monetary authority control only what it has influence over, such as indexed price levels, the rates of exchange, and strategic monies. Enact monetary policy to offset other economic disruptions only if how to use it is clear and only if a financial disaster is obvious.
Overall Friedman promotes a conservative approach to monetary authority. He advocates using past mistakes, such as the Great Depression and that if the supply of money were stimulated it could have been avoided or had less of an impact, as instruments on how to move forward in the current economic climate.
Friedman, Milton. “The Role of Monetary Policy.” The American Economic Review (1968): 1-17. Print.