Friedman's 1968 AEA Presidential Address

Delivered at the AEA’s December 1967 meeting in Washington and published in the American Economic Review in March 1968, Friedman’s address is the most consequential single lecture in postwar monetary economics. It does three things in sequence. It marks out what monetary policy cannot do — peg interest rates or unemployment for more than very limited periods. It introduces the natural rate of unemployment as a real, structural quantity that monetary policy cannot durably move. And it draws the constructive conclusion: a central bank should abandon fine-tuning in favour of a steady, pre-announced money-growth rule.

The substantive heart is the natural-rate hypothesis: any attempt to hold unemployment below its natural rate through monetary stimulus produces only accelerating inflation, not a permanent gain in employment, because the Phillips Curve read as a stable trade-off shifts upward as expectations of inflation adjust. The most-quoted line — there is no permanent trade-off — was delivered with US unemployment at 3.6 percent and the postwar trade-off apparently intact.

Phelps had made a related argument in 1967 on independent, search-theoretic grounds. Stagflation in the 1970s did not refute the address; on its terms, it confirmed it. Old Keynesian readings of the Phillips Curve as a policy menu did not survive the decade intact.