Milton Friedman saw the euro crisis coming: the libertarian economist predicted Europe's current problems 17 years ago.

• Author: Sumner, Scott

AMONG THE general public, Milton Friedman is mostly remembered for the libertarian views outlined on his PBS show Free to Choose. Among economists, he is best known for his monetarist position on Fed policy. What's less well known is that he was also a soothsayer, accurately predicting the euro crisis that now has the global economy in upheaval.

The Nobel laureate believed the boom-and-bust business cycle was mostly caused by central banking errors that allowed a country's money supply to fluctuate. Thus, he advocated for a policy rule under which the Federal Reserve would engineer a steady 4 percent increase in the money supply each year to help prevent recessions.

Friedman came to that view by collaborating in the 1960s with National Bureau of Economic Research economist Anna Schwartz on a major history of U.S. monetary policy. Perhaps their most important finding was that Federal Reserve policy errors had allowed the money supply to drop sharply in the early 1930s, dramaticallyworsening the Great Depression.

At the time, the Depression was widely seen as a failure of capitalism. The work of Friedman and Schwartz opened the door to the neoliberal revolution of the 1970s and '80s by showing that bad monetary policy had destabilized an otherwise well-functioning economy. By the 1990s even many liberal economists had concluded that market economies work, so long as monetary policy makers provide a stable backdrop.

Ironically, the political right would become increasingly skeptical of efforts by central banks to alter the money supply even as the political left was coming to embrace some of Friedman's ideas. Conservatives began to worry about the potential for abuse of a discretionary Fed. Some even called for constraining monetary policy makers, for example by establishing a single currency to be used across multiple countries.

The most important such currency is, of course, the euro. That project, which began in 1999 with 12 members, has since expanded to 19 countries, including much of continental Europe and Ireland. The year before it launched, however, Friedman offered a strikingly prescient observation about the coming eurozone experiment.

In a 1998 interview, Friedman was asked whether he believed the European Monetary Union would be a success. The economist responded that he was dubious.

"There are some cases where a single currency is desirable and some where it is not," Friedman said. "It is most desirable where you have countries...