Milton, Ben and QE3

Milton Friedman would have turned 100 this past July 31. He was one of the most relevant economists of the 20th century, along with, arguably, John Maynard Keynes and Friedrick von Hayek. ​Friedman's unwavering view of the macro economy - called monetarism - held that changes in an economy's money supply impacted real economic variables, like employment and price inflation. It was large increases - or drops - in the money supply that caused economic booms and busts. He was thus a persistent critic of central bankers who, Friedman believed, were culpable for not maintaining stable money-supply growth.

For example, in his 1963 " A Monetary History of the United States", Friedman argued that the long contraction in the 1930s was at least exacerbated by Federal Reserve policy errors that began as early as 1928, leading to a precipitous drop in the money supply (of about one-third between 1929 and 1933). The current Fed Chairman, Ben Bernanke ( and most economic historians today ) has agreed with this analysis:

"By allowing persistent declines in the money supply and in the price level, The Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy, and through the workings of the gold standard, the economies of many other nations as well." [source]

Today,​ Mr. Bernanke is facing a similar, if less severe, economic environment and policy challenge. Growth in the United States and elsewhere remains stubbornly below the trend of earlier recoveries, and employment is growing only sluggishly, The financial markets are focused (or is it obsessed? ) on when, or if, a third round of quantitative easing ( QE3 ) - the purchase of Treasury bonds by the Fed with newly created money - is likely, or desirable.

Has the Fed already done enough through QE1 and QE2, or would further monetary stimulus accelerate recovery without re-igniting inflation​? One can only imagine how much Mr. Bernanke must wish that Milton was around to advise.