This is the Cato Daily Podcast for Thursday, November 15th, 2007.

I'm Caleb Brown.

Cato Institute Senior Fellow Steve Hankey says Milton Friedman is widely misunderstood

as someone who dogmatically advocated

floating exchange rates. The reality he says is far more subtle. Spoke with him at the

Kito Institute's monetary conference yesterday.

In fact, Friedman thought there were three types of exchange rates.

One is the floating exchange rate, which most people think he was solely advocating.

The other classification is what's called a pure fixed rate exchange and a fixed exchange

is one obviously that's fixed. Two currencies have a fixed exchange rate and in that kind of system he saw that as also a free market system.

Now you look at a floating rate and a fixed rate and you say, how in the world could he say both of those things were

were free market mechanisms and they are in the sense that with a floating

exchange rate obviously you've got a supply and demand of the foreign exchange and it fluctuates back and forth and you get an exchange rate that's determined in the market and it's obvious it's some kind of free market for a foreign exchange.

With a fixed rate, it appears that it's some regulated government price.

The price is fixed like a rent control or something like that.

Rent controls are obviously some manipulated government mandated price.

But in the foreign exchange, you have to think of it as you got two currencies that a central bank simply offers to

exchange at a fixed exchange rate.

You can freely convert it at a fixed exchange rate.

So the Central Bank offers, in a minute,

elastic supply of the domestic currency at that fixed exchange rate and what determines the quantity of the money

outstanding is the demand curve fluctuating back and forth along this

...