A Monetary and Fiscal Framework for Economic Stability: A Friedmanian Approach to Restoring Growth

Abstract

In Milton Friedman's 1948 article, A Monetary and Fiscal Framework for Economic Stability, he put forward what he thought was a new proposal calling for the government to run a balanced budget only at full employment, with deficits in recession and surpluses in economic booms. What was unusual about Friedman's proposal was his call to finance budget deficits through money creation; surpluses would destroy money. He thus proposed to combine monetary policy and fiscal policy, using the budget to control monetary emission in a countercyclical manner.

Monetarism and Market Liberalism are celebrated around the world today, and Friedman is credited for his role in winning the fight against Keynesianism over the last 50 years. With that reputation, one would think that his 1948 proposal would have been a centerpiece of monetarism. Has it been?

This paper traces government spending, surpluses and deficits, and trade balances over the last 50 years to determine whether events have corresponded to Friedman's proposal for creating the monetary and fiscal framework necessary to achieve economic stability. It also makes recommendations, based on that proposal, to halt the current recession and achieve stable economic growth at full employment.

Keywords: Milton Friedman, monetary policy, fiscal policy, economic stability, full employment, monetarism