- Person
- Milton Friedman
- Lived
- 1912–2006
- Field
- Economics
- From
- American
The story
After the Second World War the world's main currencies were tied together under the Bretton Woods system, agreed in 1944. Each country fixed its exchange rate against the US dollar, and the dollar was convertible into gold. The negotiators had lived through the currency chaos of the 1930s and believed that floating rates would disrupt trade. For years afterwards most commentators regarded floating exchange rates as an unrealistic policy proposal.
Milton Friedman came to the opposite view through practical work. In the autumn of 1950 he spent a quarter in Paris as a consultant to the US agency administering the Marshall Plan, which was helping to rebuild Western Europe. His main assignment was to study the Schuman Plan, the forerunner of the European common market. He concluded that a common market would inevitably flounder unless exchange rates between currencies were allowed to float.
That conclusion was the origin of his essay The Case for Flexible Exchange Rates, published in 1953 in his collection Essays in Positive Economics. He argued that flexible rates would let countries adjust to economic changes and avoid balance of payments crises, and that fixed rates were an undesirable form of government intervention. He backed the theory with empirical studies of how a floating system could be made to work.
Friedman advocated floating rates throughout the Bretton Woods period. When the Nobel committee honoured him in 1976 it noted that he had been a pioneer, from the early 1950s, in recommending a reorganisation of the international monetary system based on free exchange rates, and that he was among the first to realise, and explain, why Bretton Woods was bound to break down sooner or later.
Events proved him right. On 15 August 1971 the United States ended the convertibility of the dollar into gold, and a patched-up agreement that December soon failed. In early 1973 Japan and the European Community countries let their currencies float, and the change was formally ratified by the Jamaica Accords of 1976. By the early 1980s all the industrialised countries were using floating currencies.
Today most major currencies, including the dollar, euro, yen and pound, float against one another, leaving each country freer to set its own monetary policy. An idea once dismissed as impractical has become the ordinary way the world's money works.
Why it matters
Floating exchange rates, once seen as impractical, became the norm for most major currencies after the Bretton Woods system ended.
About Milton Friedman
Chicago economist and 1976 Nobel laureate whose monetarism and free-market advocacy reshaped central banking, ended the US draft and influenced governments worldwide.
More about Milton Friedman
- Milton Friedman showed what caused the Great DepressionIn their 1963 Monetary History of the United States, Milton Friedman and Anna Schwartz argued that a collapse in the money supply turned a downturn into the Great Depression.
- Milton Friedman foresaw the problem of stagflationIn 1968 Milton Friedman argued that inflation cannot permanently reduce unemployment, a theory that anticipated the stagflation of the 1970s.
- Milton Friedman explained how families plan their spendingIn his 1957 book A Theory of the Consumption Function, Milton Friedman introduced the permanent income hypothesis, which he considered his best scientific work.
- Milton Friedman helped invent sequential samplingDuring the Second World War, Milton Friedman and colleagues at Columbia developed sequential sampling, which became the standard method of quality control inspection.
Sources
- Milton Friedman: Biographical NobelPrize.org
- Milton Friedman Wikipedia
- Press release: The Prize in Economic Sciences 1976 NobelPrize.org
- Bretton Woods system Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.