Remember phone books? No volume was larger. The pages were about twice the normal size of 8½ by 11 inches. One for a major metro like Detroit or Philadelphia might be a thousand pages long. You could stand on one to get things up on a shelf, they were so wide and thick. They couldn’t stop a door. Their pages were light. This was necessary, because otherwise only the inflatables could lift them. The goal of a phone book was to enable sharing, for anyone to look up anyone else’s phone number in an area. In terms of total ink on total pages, they were giants.
To take a great example, you could watch an old movie like All the President’s Men (1976). Or you could look at modern books on the history of the Federal Reserve. Allan H. Meltzer’s official history of the Federal Reserve, in three volumes from the University of Chicago Press completed in 2009, is an excellent approximation of telephone directories of the former size. Meltzer’s three volumes totaled two thousand pages easily, on quality paper that could actually stop a door. Equally good is the three-volume biography of economist Milton Friedman by Federal Reserve economist Edward Nelson, also from U of C Press, the last volume to be released. The total of pages for the three volumes must be up to two thousand. Milton Friedman, the beloved economist who talked incessantly about the money supply and the importance of the Fed getting that money supply right, is the best thing that has ever happened to the Federal Reserve in modern times.
Last month, a very enjoyable and informative biography of Friedman was released by Stanford’s Jennifer Burns. At only 500 pages, we have to put it aside for our purposes here. Does not qualify as a phone book. But it does beg the question – why so much academic press, serious, scholarly, dedicated expression on the story of the Fed and its great watcher and motivator Friedman?
To be clear, Meltzer and Nelson are like the most enjoyable Burns books to read. If anyone has a yen for political economy, it’s beautifully researched candy. But what if the Fed is irrelevant?
Fisher Black, the economist of Black-Scholes option-equation fame, proved mathematically, in the 1970s, the obvious point that the Fed is irrelevant in its primary arena, discretionary monetary policy. Black shown that “active” monetary policy is impossible. If the Fed tries to force people to hold more cash and less bonds or whatever, people will react by holding what they want regardless of the wishes of some unpredictable manipulator. Black said that if the Fed could influence the asset allocation, or if there were “lags” as Friedman taught in the effect of the Fed’s monetary policy actions on the public’s money-holding outcomes, the profit opportunities in arbitrage would be gigantic. The tyrants would attack and the manipulation would cease. The status quo of an irrelevant Fed would hold.
Goldman Sachs took note of this and hired Black out of MIT in the 1980s. If Friedman was right that there are delays in monetary policy and that monetary policy matters, our clients can manage all of this and do embellishmentdollars, the thought went. The white shoe company found, however, that in the late 1980s and 1990s, as it introduced Black in its road shows, its customers were too busy cashing in on all the real businesses that grew in the Reagan-era boom. that there was no attention span to entertain the idea that the Fed might be able to conduct active monetary policy. There was too much action in real business. Everyone forgot about the idea of Fed arbitrage. The black man himself became an ornament.
Enter the Fed/Friedman historians. If smart money confirms that monetary policy is impossible, how do we justify the Fed and attention to it? Phone books are one-way. Thousand-page, university-type, peer-reviewed, gravitas tomes are by their very nature important and relevant. Official intellectual resources devoted at scale to a subject means that the subject must be worthy of such devotion. It is a case of special education. If the Fed were relevant the books would be 250 pages. The books would prioritize rhetorical efficiency, combined with the practicality of relevance, and the case would be clear as a bell.
Friedman, stressing the imperative of getting active monetary policy right, adopted the premise that active monetary policy is one thing. Black presented his views at Friedman’s seminar in Chicago in the 1970s, and apparently things got very contentious at that session. Black would gain his institutional backers, at Goldman Sachs, as Friedman would, the vast staff of the Federal Reserve, and the academic support apparatus in the field of economics sympathetic to the concept of active monetary policy.
Friedman was an unrelenting critic of the Fed, but the core of his argument was that the Fed was relevant and could do better, much better than it does today. He gave the Fed a standing order, namely to cut back and do much better. This has rightly benefited the Fed and its supporters and beneficiaries in economics, including the burgeoning rational expectations literature that dominated the field from the 1970s onward.
If the Fed can always do better, saying so is a mandate to study like crazy and outdo things more and more. The doctorates from the crooks working at the Fed and in the ivory towers studying monetary policy, the thousand-page tomes, the parade of papers, the peer-reviewed seriousness, all took advantage of Friedman’s prompting. Fed to do better. Friedman was so popular with the public that the Fed and its employees by extension in academia saw an opportunity. Use this popular and beloved figure’s support of the idea of active monetary policy to justify working for and at the Fed.
None of this had anything to do with the real economy, about which Black was clear. The Fed has real economic power in regulating banks, sure. But his view that the fact of active monetary policy is an indisputable point is self-serving.