The Case for Flexible Exchange Rates in 1953 and 1969: Friedman versus Johnson

This paper sets Milton Friedman’s 1953 essay “The Case for Flexible Exchange Rates” side by side with Harry Johnson’s near-identically titled 1969 essay, argument by argument, and concludes that Friedman’s essay presaged all of the major arguments made in Johnson’s while excluding several of Johnson’s major misses — chiefly the belief in a long-run Phillips curve trade-off and the prediction that floating would cost central bankers their prestige. It then asks why Johnson’s essay nonetheless came to be treated by some economists as the more influential of the two, and answers with pragmatic rather than intellectual reasons. The comparison is a documentary one, not an empirical test: the paper’s own observation is that neither Friedman nor Johnson offered any empirical evidence, original or cited, in support of their arguments, and its method is to take the list of arguments Obstfeld (2020) attributed to Johnson’s essay and check, item by item, what Friedman had written on the same issue. Two scope conditions are stated at the outset and carried throughout: the paper looks only at what the two men wrote in these two essays, not at their other work on exchange-rate regimes; and the view that Johnson’s essay superseded Friedman’s is attributed to some — “certainly not all” — international economists, and located during and shortly after Johnson’s lifetime, with the author noting that references to Johnson’s essay have diminished since the 1980s while Friedman’s continues to be called a classic. Where the two genuinely differed, the differences run in both directions: Johnson expected exchange rates to adjust smoothly and predictably to changes in fundamentals, whereas Friedman expected repeated overshooting and undershooting of the final position; Johnson correctly foresaw a continuing central role for the International Monetary Fund under floating, which the paper records as Friedman’s own major miss; and neither foresaw that floating rates could themselves be a source of shocks.

George S. Tavlas | Macro Paper Warehouse

The Case for Flexible Exchange Rates in 1953 and 1969: Friedman versus Johnson