The death on May 8 of Allan Meltzer, 89, deprives the country of one of its most influential economists in the past half-century. A professor at Carnegie Mellon University in Pittsburgh since 1957, Meltzer played a crucial role in convincing much of the economics profession to abandon policies that led to rising inflation in the late 1960s and 1970s.
Along with Milton Friedman (1912-2006), who later won the Nobel Prize in economics, Meltzer was one of the most prominent “monetarist” economists. The monetarists blamed higher inflation – consumer prices rose 13.5 percent in 1980, up from 1.7 percent in 1960 – on the Federal Reserve for pumping too much money into the economy. Too much money chased too few goods.
At the time, this was a distinctly minority view among economists. Most fashioned themselves as disciples of English economist John Maynard Keynes (1883-1946). They believed they could control the business cycle through tactical shifts in interest rates and government budget deficits and surpluses. The monetarists replied that the Keynesians were fooling themselves.
“The monetarists won that battle,” said economist Charles Calomiris of Columbia University, a friend of Meltzer’s, in an interview. As the money supply rose, so did prices. Between Friedman and Meltzer, there was an unspoken division of labor. Friedman, who wrote a Newsweek column and had several popular books, was Mr. Outside. He concentrated on convincing the public that government, through the Fed, had caused high inflation. Meltzer was Mr. Inside, focusing on his fellow economists.
He did so through the Shadow Open Market Committee, a group of like-minded economists that he founded along with his longtime collaborator, Karl Brunner (1916-1989). The Shadow Open Market Committee, which still exists, issued regular analyses and critiques of Fed policy. (The Federal Open Market Committee, or FOMC, is the Fed’s main decision-making body.)
When the government moved decisively against double-digit inflation in the early 1980s, the intellectual groundwork of Friedman and Meltzer made the policy shift easier. It also ultimately led to Meltzer’s crowning scholarly achievement: a massive history of the Federal Reserve from 1913 to 1986, issued in three volumes from 2003 to 2009.
Meltzer documented that the Fed often didn’t achieve its main goals of preventing inflation and ensuring financial stability. He attributed these failings to two recurrent problems, according to Calomiris.
First, the Fed fell victim to intellectual fads – ideas and policies that didn’t perform as expected. This happened in the Great Depression when the Fed kept credit too tight, because it misinterpreted financial conditions. And second, the Fed succumbed to political pressures, as in the 1960s and ’70s, when it faced constant demands to keep interest rates low.
Although most of Meltzer’s work was technical and beyond the reach of the general public, this was not true of his final book, “Why Capitalism” (2012), which was a staunch defense of the mixed economies of the United States and most advanced democracies. Meltzer, who was also a longtime scholar at the conservative American Enterprise Institute, wrote:
“Capitalist systems are not .?.?. all the same. .?.?. Different societies tend to develop different rules and processes, often reflecting cultural requirements. What all share is ownership of the means of production by individuals who remain relatively free to choose their activities, where they work, what they buy and sell, and at what prices. As an institution for producing goods and services, capitalism’s success rests on a foundation of a rule of law, which protects individual rights to property.”
More pithily, he often said that “capitalism without failure is like religion without sin.” Protecting companies against failure doesn’t work because it “removes the dynamic process that makes stockholders responsible for losses and disciplines managers who make mistakes.”
In his final years, Meltzer argued that the Fed’s easy money policies, adopted in the wake of the 2008-09 financial crisis, would ultimately lead to much higher inflation. Though he was careful not to specify a time when inflation would accelerate, he left the impression that its resurgence would have occurred by now. As yet, it hasn’t.