How Keynesians Hijacked Milton Friedman’s Helicopter

Recently by Gary North: Government Promises Are Hallucinatory Drugs


Milton Friedman was very smart and a great debater. I knew him. I liked him. But he was no different from other very clever fellows. When he got something conceptually wrong, he was dangerous.

My professor of apologetics at seminary was Cornelius Van Til. Apologetics is the philosophical defense of the Christian faith. Van Til was every bit as smart as Friedman. He had a bunch of great metaphors in his arsenal of rhetoric. My favorite was the buzz saw metaphor. He said this: “You can sharpen a buzz saw all you want, but if it is set at the wrong angle, it will never cut straight.”

Milton Friedman’s “buzz saw” on monetary theory was always set at a crooked angle. It never cut straight.

He described the distribution of fiat money in terms of a metaphor: a helicopter full of paper money. It drops this money on the population below. He used this metaphor in a chapter titled “The Mystery of Money.” It is chapter 2 in his 1994 book, Money Mischief. His goal for the chapter was to show that this free money from the sky, if it continues, will raise prices. He introduced the metaphor on page 29. (For the moment, you can read the chapter here. But Web pages come and go.)

What the metaphor does not show is what Austrian School monetary theory emphasizes: the new money is introduced at specific points in the economy. It is spent into circulation by the national government, which sells its IOUs to the official counterfeiter: the central bank. The national government gets first access to this money. It then spends it. The recipients of this government spending get access to the newly created money earlier than other citizens do. So, prices in general do not rise uniformly. They may not rise at all if overall economic production increases. What always rises is government spending. This fact, not the general price effects of counterfeit money, is the heart of any accurate analysis of central bank money. It is discussed in detail only by Austrian School economists.

Friedman never admitted that this process of sequential spending is relevant. He, like his intellectual mentor Irving Fisher, self-consciously rejected the Austrians’ analytical approach. What is this approach? The approach of the script of All the Presidents’ Men: “Follow the money.”

Ludwig von Mises refuted Fisher’s 1911 book on monetary theory in Mises’ 1912 book, The Theory of Money and Credit. Fisher never responded explicitly to Mises. Their respective disciples did battle. Murray Rothbard repeatedly critiqued Friedman on this same point. Friedman never responded explicitly to Rothbard.

His helicopter metaphor became a powerful rhetorical tool to persuade others of his arguments against free-market pricing. He always said he preferred free-market pricing. But there was always this glaring exception: the pricing of money. He spent his career trying to undermine the legitimacy of the idea of free market money (gold coins) and a price system based on it. He became a public figure with his 1961 book, Capitalism and Freedom. Chapter 3 is on money. It begins with a rejection of the gold coin standard.


From the beginning, Keynesians loved his metaphor of the helicopter full of paper money. Why? Because that metaphor portrayed the central bank as a supplier of free goods. They understood what the Austrian School economists understand: The national government gets to sell its IOUs at a lower rate of interest to the central bank than the private investors who cannot legally create money out of nothing. This lets the government spend more money than it collects from taxes and loans from the private sector. Here is the law of economics: When the price of something is reduced, more of it is demanded. Fiat money issued by a central bank therefore allows the government to buy more power and influence in the overall economy. Central bank fiat money subsidizes the national government.

Keynesians believe that government can and should increase its purchase of goods and services. Friedman always said that the government shouldn’t be allowed to do this very often, and only on an efficient basis (e.g., school vouchers). But he ignored the obvious: fiat money lowers the government’s cost of issuing IOUs. This means that the central bank provides lower-cost power and influence for the government. The government demands more of this money at artificially low interest rates, because it expands the range of government operations.

This was the heart of his analytical error all his life. This error has played well among Keynesians. They see the greatest benefit of the central bank as providing “free extra money” for government spending.

Friedman de-emphasized this aspect of the arrangement. He promoted the idea of a required 3% to 5% monetary inflation as a way to keep the “engine” of the economy moving smoothly. Friedman’s necessary economic lubricant – my metaphor, not his – was money. He really did believe that it can be supplied by the central bank free of charge.

He made his reputation with his jointly authored book, A Monetary History of the United States (1963). In it, he and Anna Schwartz blamed the Federal Reserve for the Great Depression. Why? Because it did not inflate enough to save 9,000 banks and thereby stop the contraction of M1. This was ideological manna from heaven for Keynesians. This was Friedman’s “helicopter drop” of free anti-capitalist ideology: blaming central banking for insufficient price inflation and insufficient monetary stimulus by way of increased government spending.

Friedman therefore believed in a free lunch in this one area of the economy. It colored his entire economic analysis. It also got him a Nobel Prize.

It was dead wrong.


Its dead-wrongness was why Keynesian Ben Bernanke invoked the metaphor in his November 21, 2002 speech against price deflation.

Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.

Yes and no. Friedman did not discuss government and taxation in the section on the helicopter drop. But Bernanke had it right. Ultimately, because central banks buy the IOUs of the national government, central bank monetary expansion results in increased government spending apart from added taxation. This really is the implication of Friedman’s position.

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January 15, 2013

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 31-volume series, An Economic Commentary on the Bible.

Copyright © 2013 Gary North