On Monetary Economics: Fischer Black v. Milton Friedman

Tyler Cowen discusses a view put forth by Fischer Black that challenged part of Milton Friedman’s monetarist view:

why did both Milton Friedman and Bob Solow scorn him as a macroeconomist? Well, Fischer pushed two (actually more) controversial claims. First, the Fed cannot influence real or nominal variables, unless traders allow it to … Black’s economic thought is centered around the view that all profit opportunities will be exploited. So what happens if the central bank decides to add zeros to the accounts held at the Fed? … In Black’s view banks were already holding all the dollars they wished to. One reaction is for banks to borrow less money at the discount window, or perhaps borrow less from each other. Money will leave the system as quickly as it entered.

Tyler links to a textbook discussion of the old-fashion money multiplier model and sides with Friedman. I wish I could link to the old James Tobin lecture notes where he noted that this model presumed some sort of government imposed quantity restriction on the amount of money banks could supply. Imagine if reserve requirements were repealed – or even lowered such that the money multiplier model would predict a constraint well about the market-clearing demand = supply of money level. Black’s claim would then not be so controversial.