Understanding Milton Friedman’s stance.
Former Fed chair Ben Bernanke popularized helicopter money. But a recent article from David Reavill misunderstands and misrepresents the late economist Milton Friedman’s position. Friedman
coined the term as a thought experiment in his essay (now book) The Optimum Quantity of Money and Other Essays (1969).
David Reavill said:
“I first heard “Helicopter Money” in November 2002 when a trader friend called and said, “Did you hear what that new guy on the Fed said last night? He said we should drop money, as if from a helicopter if we ever get as bad as the Japanese. LOL!”
It sounded absurd. I had no idea what my friend was talking about, but for the next week, that’s all you’d see on the internet: Ben Bernanke calling for “Helicopter Money.” His speech, or at least the helicopter part, went viral.
Back then, none of us knew who Ben Bernanke was; he was some obscure professor from Princeton who had just been appointed to the Federal Reserve. That was all we discovered when we googled his name. None of us were up on our economic history to know that Bernanke quoted Milton Friedman from years before.
But as Friedman and now Bernanke were proposing, if there were ever a time when the economy had its back against the wall, one solution to bring it out of a death spiral would be to pump unlimited amounts of money into the financial system — to drop money, as if from a helicopter, into the economy.”
The article equally and disingenuously distorts Milton Friedman’s position of the role of the Federal Reserve. Friedman would never approve of the misuses, abuses, and distortions that the Federal Reserve has caused to the economy and financial markets in the modern age. Anyone who has watched Friedman’s lectures and interviews would know his stance on central banks. He was strongly opinionated about the Fed and wanted it abolished (if not abolished, at the minimum limited in its power) for its monumental role (inaction) in causing more harm than good, especially in exacerbating the Great Depression of the 1930s that was prolonged further than it should have been. Friedman chose economics as his main discipline of study rather than mathematics specifically because of the Great Depression, and thus has studied it in depth — front, back, top, and down.
After reading this article, I knew something was off as someone who extensively watched Friedman’s lectures, TV series, and interviews, who understands and agrees with most of his views (at least most of them in respect to economics). I created a Milton Friedman GPT not only to understand him more but to precisely rebuke others who like to wrongly portray and paint Friedman with a villainous brush, as if he were the main culprit for our social and economic ills. I strongly believe he is wrongly vilified and has been grossly distorted and misunderstood by many, especially the political Left. A sole economist sharing his economic opinion doesn’t hold that much political sway, to many people’s surprise. Friedman himself tried in many instances and failed, until they got around, as more people started noticing his prescient predictions and could no longer ignore him.
Recently, a new biography by Jennifer Burns called Milton Friedman: The Last Conservative has come out. Perhaps this would shed light and bring awareness of Friedman’s lasting impact and the gross misunderstandings of his influence in the world. People wrongly blame Friedman for the ills of neoliberalism or how the free market and the Chicago school affected other countries like Chile, not considering other factors and the views straight from the horse’s mouth. Hence why I do my own research and consider different points of view.
Part 2: Conversation with Milton Friedman GPT.
// Note: Most of the custom GPTs I’ve created are for my personal use and are not publicly available in the GPT store for obvious reasons — one being concerns over likeness. They may not always perfectly capture or simulate the individual they represent, and it’s important to distinguish between what that person might actually say if they were alive versus the responses generated by an LLM. I don’t seek monetary gains, only the pursuit of wisdom, truth, and knowledge above all else.
Me: Thoughts and feedback on this article Milton Friedman.
ChatGPT:
David Reavill’s article, “The Cost of ‘Helicopter’ Money,” touches on a provocative idea — one that has been widely misunderstood and, at times, misattributed. As the economist quoted (and often mischaracterized) in this discussion, allow me to offer some clarifying commentary in the spirit of my own writings and lectures.
1. The Origin of the Helicopter Metaphor
Reavill correctly notes that Ben Bernanke popularized the term in the early 2000s, but he only partially recognizes its roots. The concept originated with me — in a 1969 paper titled “The Optimum Quantity of Money.” I used the image of a helicopter drop of money as a thought experiment to illustrate how increasing the money supply could affect price levels under extreme deflationary conditions. It was never intended as policy advice, but rather as a pedagogical tool to explore the relationship between money supply and inflation.
2. Misapplication of the Metaphor
Bernanke took the helicopter analogy and, in a sense, operationalized it — first in 2008 through quantitative easing (QE), and again during the COVID-19 pandemic with more aggressive direct monetary injections. Reavill is right to be skeptical here, though he could sharpen his criticism by drawing a clearer line between monetary injections through open-market operations and true “helicopter drops,” which imply irreversible monetary-financed government spending, not just temporary liquidity expansions.
3. Monetary vs Fiscal Confusion
A major flaw — both in policy and in Reavill’s analysis — is the failure to distinguish between monetary policy (which influences the money supply and interest rates) and fiscal policy (which determines government spending and taxation). Helicopter money, properly understood, lies at the intersection of the two — monetary financing of fiscal transfers. Bernanke’s QE, by contrast, was more akin to asset swaps — injecting liquidity but not necessarily increasing net wealth in the private sector.
4. The Real Cost: Inflation and Moral Hazard
Reavill rightly concludes that the long-term consequence of such money injections is inflation and fiscal unsustainability. I would go further: The deeper danger is institutional erosion. When people begin to expect perpetual bailouts, discipline — both in the marketplace and in government — deteriorates. Monetary policy becomes a tool not for stabilizing prices, but for underwriting deficits and political expediency.
History has repeatedly shown that excessive money creation to finance government deficits is a recipe for inflation, if not worse. From Weimar Germany to modern-day Venezuela, the lesson is consistent: there is no free lunch.
5. Final Thoughts
Reavill is correct to question the long-term efficacy and prudence of these policies. However, his tone occasionally drifts into sarcasm at the expense of analytical rigor. A more fruitful critique would examine the structural incentives created by repeated use of emergency monetary policy, the risk of political capture of central banks, and the abandonment of monetary discipline.
In short: the helicopter can fly — but it should never become mass transit.
Would you like a historical chart or data visualization showing the correlation between Fed balance sheet growth and inflation post-2008? It might help illustrate the risks Reavill hints at.
Me: [reply]### 3\. **Monetary vs Fiscal Confusion** A major flaw — both in policy and in Reavill’s analysis — is the failure to distinguish between monetary policy (which influences the money supply and interest rates) and fiscal policy (which determines government spending and taxation). Helicopter money, properly understood, lies at the intersection of the two — **monetary financing of fiscal transfers**. Bernanke’s QE, by contrast, was more akin to asset swaps — injecting liquidity but not necessarily increasing net wealth in the private sector.
Explain further this section. Also, why doesn’t injecting liquidity not necessarily increase the net wealth in the private sector? I mean, indirectly has caused the stock market to soar right after when March 2020 crash occured in 2020, and I’m sure more injected liquidity thereafter with bond ETF purchases, buying zombie companies bonds. Thoughts.
ChatGPT:
Excellent questions — and ones that strike at the heart of the confusion surrounding monetary policy post-2008 and especially during the COVID era. Let’s clarify that section and dig deeper into why liquidity injections don’t necessarily increase net private wealth, even when they appear to “boost” markets.
🧠 Distinguishing the Tools: Monetary vs Fiscal
Monetary policy (the realm of central banks) involves:
- Adjusting short-term interest rates.
- Conducting open-market operations (buying/selling government securities).
- Changing reserve requirements.
- Engaging in unconventional tools like Quantitative Easing (QE).
Fiscal policy (controlled by governments) involves:
- Taxation.
- Government spending.
- Direct transfer payments (e.g. stimulus checks).
Helicopter money, if we’re being precise, is a combination of both:
It’s fiscal spending (e.g. checks to households), financed directly by central bank money creation — not taxes or borrowing from the public.
💸 Why QE ≠ Net Wealth Creation
Let’s now address the key point: Why doesn’t QE increase net wealth in the private sector — even if it boosts asset prices?
1. QE is mostly an asset swap.
Here’s how it works:
- The Fed buys Treasury bonds or mortgage-backed securities from banks or investors.
- In exchange, it credits their reserve accounts with dollars (electronic money).
- The seller’s balance sheet changes in composition (they have cash instead of bonds), but not necessarily in value.
There is no new net asset created. One form of asset (a bond) is exchanged for another (reserves or cash). Total net financial wealth is unchanged.
2. But what about the stock market? Didn’t QE boost it?
Yes — but this is where perception and mechanics diverge.
QE lowers interest rates and raises asset valuations via discounting future cash flows more favorably. That encourages:
- Portfolio rebalancing into riskier assets (e.g. stocks, junk bonds).
- Speculation or “reach for yield” behavior.
- Easier financial conditions.
This can inflate asset prices, especially financial assets — but here’s the catch:
This redistributes wealth rather than creates new net wealth.
- Asset holders (mostly the wealthy) see gains.
- Those without assets (e.g., wage earners, renters) do not.
- Rising prices can reduce purchasing power for many (through inflation or asset bubbles).
In essence, QE reprices existing wealth, but doesn’t add new productive capacity or real income. It’s a form of financial alchemy that feels like enrichment, but in aggregate terms may not enhance net wealth — especially when adjusted for inflation or debt.
🧟♂️ What about bond ETF purchases and zombie companies?
That’s a real concern — and a distortion I would have deeply objected to in my own time.
When the Fed started buying corporate bond ETFs, including those from zombie firms (companies that cannot survive without constant refinancing), it blurred the line between liquidity provision and credit allocation. In other words:
- It began picking winners and losers.
- It suppressed the role of market discipline, which is crucial in capitalism.
- It increased the moral hazard that businesses can take on bad risks and be bailed out.
This is not monetary policy in the traditional sense. It’s quasi-fiscal policy masquerading as monetary intervention — and it undermines the price signals that markets depend on.
🧾 Summary
QE swaps assets, it doesn’t inject net new wealth. It’s like trading your savings account for a Treasury bill — you’re not richer, just more liquid.
QE boosts financial asset prices, but not necessarily broad-based economic value.
Helicopter money, properly defined, creates net wealth (temporarily) through government-financed spending — at the cost of future inflation or debt.
Fed purchases of corporate bonds are a dangerous step toward centralized credit planning — anathema to any truly free market system.
Would you like a diagram showing how QE works vs helicopter money? I can put one together that visually walks through the flow of funds and impact on balance sheets.
Me: Now, what is your take of QE after a devastating financial crisis or economic collapse like the Great Depression and 2008 crisis? Did you not advocate for providing liquidity or injecting liquidity? Is there a difference?
You’re asking precisely the right question — and it’s one I spent a great deal of time addressing, particularly in my work with Anna Schwartz in A Monetary History of the United States, 1867–1960. So let’s disentangle this carefully, because yes, I strongly advocated for providing liquidity during a crisis, but that’s not the same thing as quantitative easing (QE) as practiced in recent decades.
Let’s break it down.
🔍 1. What I Argued For: Lender of Last Resort
In analyzing the Great Depression, our central conclusion was this:
The Federal Reserve failed by not doing what it was created to do — act as a lender of last resort to prevent a collapse of the banking system.
From 1929 to 1933, over one-third of all U.S. banks failed. The money supply contracted by nearly 30%. This was a monetary contraction of catastrophic proportions — the worst in U.S. history.
Had the Fed injected liquidity — through open-market operations, discount lending, and aggressive credit easing — the Depression would have been far less severe. We concluded:
“The Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.”
— Friedman & Schwartz, 1963
So yes, in a financial panic, I firmly believed the central bank should:
- Prevent the collapse of solvent institutions.
- Provide short-term liquidity to the banking system.
- Stabilize the money supply.
But note: this is not the same as QE as conducted after 2008.
🧮 2. What Is the Key Difference?
✅ What I Advocated (Crisis Liquidity):
- Temporary, targeted lending to solvent institutions.
- Aimed at preventing monetary contraction.
- Intended to restore confidence and functionality in the banking system.
- Operates within a rule-bound, monetary framework.
❌ What QE Became:
- Persistent, large-scale asset purchases far beyond immediate liquidity needs.
- Purchasing long-term Treasuries and mortgage securities — blurring the line between monetary and fiscal policy.
- Inflating asset prices without a corresponding increase in real output.
- Creating moral hazard and financial distortions.
QE started as a liquidity measure in 2008 — but it morphed into a permanent policy tool, untethered from any clear monetary rule or exit plan.
🏦 3. Was QE in 2008 Justified Initially?
Yes — for a brief window. When Lehman Brothers failed and the interbank markets froze, it was appropriate for the Fed to:
- Flood the system with liquidity.
- Backstop solvent but illiquid institutions.
- Use its balance sheet to restore trust.
But here’s the key: that was the moment to stabilize the patient — not to keep feeding them morphine for years.
QE became prolonged, indiscriminate monetary expansion, long after the crisis had passed. It created:
- A Fed-dependent financial system.
- Artificially low interest rates distorting savings and investment decisions.
- Ballooning balance sheets without a clear transmission to real economic growth.
📉 4. What About the COVID-era QE?
That went even further. The Fed was not just maintaining liquidity — it was:
- Buying corporate bonds (picking winners).
- Financing fiscal transfers, de facto.
- Driving massive monetary expansion with no monetary rule to guide it.
This, again, is not a lender of last resort. It is a central planner of last resort — a role I opposed vehemently throughout my life.
🧾 In Summary
- I supported liquidity provision during panics to prevent monetary collapse.
- But I opposed using the Fed for long-term credit allocation, asset manipulation, or financing government spending.
- QE started as a tool of necessity — but became a tool of convenience, and later of excess.
The danger is that we replaced a short-term fix with a long-term addiction.
And that is how we end up with central banks inflating asset prices, misallocating capital, and politicizing money — all under the guise of “stimulus.”
Would you like me to sketch a historical comparison between the Fed’s actions in 1930–33 versus 2008–10 and COVID-19? It’s quite revealing.
Me: What else would you wish to add to this discussion that’s important and relevant, perhaps under the radar or not discussed often.
ChatGPT:
An excellent and open-ended invitation — thank you. Here are several deeper, often-overlooked points that I would add to this discussion, both to sharpen the critique and broaden the historical and philosophical context.
🧭 1. The Erosion of the Monetary Rule-of-Law
One of the most dangerous trends in the modern central banking era is the departure from rules-based monetary policy toward discretionary, reactive policymaking. This is not just a technical issue — it’s a constitutional one.
- Under a rules-based framework (such as the monetarist k-percent rule I advocated), the central bank operates with predictability, neutrality, and constraint.
- But post-QE, we now have a central bank that adjusts its balance sheet by trillions on the basis of subjective goals — whether it’s full employment, climate risk, or financial market “stability.”
This discretionary expansion of mission undermines both market expectations and democratic accountability.
Money is too important to be governed by the arbitrary judgment of central bankers. It must operate under clear rules that bind them as much as they bind us.
📉 2. The Fiscal-Monetary Merger: A Quiet Revolution
QE has increasingly led to a de facto merger of fiscal and monetary policy. Here’s what I mean:
- Governments run massive deficits.
- Central banks purchase that debt under QE.
- Interest rates are held artificially low to make that debt serviceable.
- Markets become addicted to this flow of liquidity and “stimulus.”
This has created a dangerous feedback loop:
- Politicians spend more, knowing the central bank will accommodate.
- The central bank can’t normalize rates without triggering debt crises.
- The line between monetary independence and fiscal subordination fades.
Few discuss this plainly, but it amounts to a form of monetary financing, which I long warned against as the root cause of inflation and monetary instability throughout history.
⚠️ 3. Financial Repression and the War on Savers
Another underappreciated consequence of QE and prolonged zero-interest rate policy (ZIRP) is financial repression:
- Savers earn next to nothing on deposits or safe assets.
- Capital is forced into riskier assets to maintain yield.
- Pensions, insurance companies, and retirees are punished for prudence.
This is not only economically damaging — it is morally corrosive. It penalizes those who live within their means, and it rewards debt, speculation, and dependency on central banks.
A sound monetary system must encourage saving, investment, and personal responsibility — not penalize them.
💼 4. QE Has Political Economy Consequences
While often treated as a technocratic tool, QE has powerful distributional effects:
- It inflates financial assets, disproportionately benefitting the wealthy.
- It suppresses wage growth, as cheap capital can replace labor.
- It undermines price discovery, increasing systemic fragility.
This feeds a growing resentment among those who see Wall Street bailed out while Main Street stagnates. It also invites political overreach — from Modern Monetary Theory (MMT) to universal basic income (UBI) — under the illusion that money creation has no cost.
I warned of this dynamic in my career: when markets become addicted to central bank interventions, they lose their independence and invite politicization.
🔍 5. Data Deception and the Limits of Macroeconomic Aggregates
As Reavill lightly touched on, we should not blindly trust macroeconomic aggregates like GDP, GDI, or CPI — particularly in a world where:
- Monetary distortions inflate nominal values.
- Government transfers replace genuine output.
- Shadow banking and off-balance-sheet liabilities blur the true economic picture.
The challenge in this environment is distinguishing between nominal prosperity and real productivity. I would caution against trusting any measure of economic success that is built atop monetary distortion.
🏛️ Final Word: Central Banks Are Becoming Too Central
Central banks were never meant to be economic saviors, market-makers, or fiscal agents. They were supposed to:
- Ensure price stability.
- Act as lenders of last resort.
- Maintain a stable monetary framework.
Today, the Fed is treated as a backstop for the entire economy, and worse, as a source of perpetual stimulus. That is a profound and dangerous transformation.
We are not witnessing merely a change in monetary policy — we are witnessing a change in the role of money itself, and that should concern everyone who values liberty and economic integrity.
Would you like a short set of principles or reforms I’d propose to restore sound monetary governance? I could offer something like “Milton’s Monetary Constitution.”
Me: What are some sources you recommend from your own work and others on this topic?
ChatGPT:
I’m glad you asked — because understanding the deep economic and institutional issues surrounding money, monetary policy, and financial crises requires going to the primary sources and the best theoretical frameworks. Below are essential works — starting with my own, and branching into others whose contributions are worth serious attention.
📚 Milton Friedman — Foundational Works
1. A Monetary History of the United States, 1867–1960
🖊️ By Milton Friedman & Anna J. Schwartz (1963)
- Essential reading on the Great Depression, the role of the Fed, and the dangers of monetary contraction.
- The definitive study showing how monetary failure — not capitalism — caused the Depression.
- Chapter 7 on 1929–1933 is especially crucial.
📌 Key insight: The Fed’s inaction during a deflationary panic turned a recession into a Great Depression.
2. The Optimum Quantity of Money
🖊️ By Milton Friedman (1969)
- Collection of essays, including the famous “helicopter money” thought experiment.
- Clarifies the role of money demand, velocity, and the dangers of persistent inflation.
📌 This is where I first used the “helicopter drop” metaphor — not as policy advice, but to explore the theoretical implications of money creation.
3. Free to Choose
🖊️ By Milton & Rose Friedman (1980)
- More accessible to general readers; includes chapters on inflation, central banking, and limited government.
- Chapter 9: “The Cure for Inflation” explains the political roots of inflation and why monetary discipline is essential to freedom.
4. Money Mischief: Episodes in Monetary History
🖊️ By Milton Friedman (1992)
- A narrative-based book with historical episodes that illustrate how governments debase money for short-term gain.
- Stories range from ancient coinage to modern inflation.
📌 Especially relevant today as we see parallels with QE and “helicopter drops” disguised as stimulus.
📚 Recommended Works from Others
5. The Great Contraction, 1929–1933
🖊️ By Friedman & Schwartz, republished as a stand-alone volume with a new foreword by Ben Bernanke (2007)
- Bernanke acknowledges my influence directly and supports the conclusion that the Fed failed disastrously in the 1930s.
6. Lords of Finance
🖊️ By Liaquat Ahamed (2009)
- Excellent historical narrative on central bankers during the Great Depression.
- Highlights how gold standard rigidity and policy errors led to global depression.
7. The Ascent of Money
🖊️ By Niall Ferguson (2008)
- Accessible financial history covering money, banking, inflation, and financial crises.
- Helps contextualize the modern era of central banking in long historical arcs.
8. The Curse of Cash
🖊️ By Kenneth Rogoff (2016)
- While I disagreed with many of Rogoff’s policy conclusions (e.g., phasing out physical cash), the book is important in the debate about digital money, inflation, and the future of monetary control.
9. When Money Dies
🖊️ By Adam Fergusson (1975)
- Harrowing account of Weimar hyperinflation in Germany.
- A vivid reminder of what happens when governments and central banks lose control over money.
10. The Road to Serfdom
🖊️ By F.A. Hayek (1944)
- While not solely focused on monetary policy, Hayek’s warning about central planning applies deeply to the modern central bank’s expanded role.
📌 Hayek and I shared deep concern over centralized economic authority and its long-term threat to liberty.
🧠 Bonus: Academic Articles Worth Reviewing
- “The Role of Monetary Policy” — Milton Friedman, American Economic Review, 1968
➤ A seminal paper that introduced the natural rate of unemployment and expectations-adjusted Phillips Curve. - “Do We Really Know That the Fed Was Destabilizing in the 1920s?” — Christina Romer
➤ A good counterpoint to Friedman-Schwartz; worth reading for a balanced perspective. - Ben Bernanke’s 2002 speech: “Deflation: Making Sure ‘It’ Doesn’t Happen Here”
➤ The moment where Bernanke cites my helicopter metaphor — and lays the intellectual foundation for QE.
If you’d like, I can organize these into a reading guide by topic: monetary theory, crisis management, inflation, or financial history. Would that be helpful?
Sources:
// Experimental Google NotebookLM on Helicopter Money Audio Overview:
https://notebooklm.google.com/notebook/ef2f25a7-69ec-4515-8ccb-3a5c0027c896/audio
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