Laffer and Fischer Black take on Friedman and Monetarism


Following the economics of his Stanford professors John Gurley and Edward Shaw, Arthur Laffer endorsed the view that the economy, not an outside agency such as the government, creates money. Economic opportunities call forth the extension of credit, and that credit functions monetarily in the economy. Variously this has been known as the “banking school” or “endogenous” theory of money.

Milton Friedman captained the alternative view, such as referenced in his 1948 American Economic Review article, that the government must create money, that the private economy cannot do so on its own. Money was “exogenous” to the system. Laffer and Friedman, colleagues at the University of Chicago from 1967-76, got along famously as they had tilting arguments over this topic for a decade.

From 1971-75 at the University of Chicago School of Business, Fischer Black, of Black-Scholes equation fame, became Laffer’s closest friend and fellow exponent of the endogenous money argument.

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