Nobelist Franco Modigliani heard of this, and invited me to MIT for a presentation. He talked like Gepetto in Disney’s “Pinocchio”. There were a few other top brains, including Ruddiger Dornbusch and2Julio Rotemburg, in the small classroom where | spoke. Sometimes Modigliani interrupted. “Getty, you don’ta consider this.” “You
forgeta that.” I guess I thought I wasn’t doing so well.
My talk ended, and he and I were standing by a window. To lighten the mood, | said something about the Red Sox. He said “Getty, I getta papers on banka reform every
week. Yours isa the best.”
Milton Friedman, another nobelist, had a different take. We had given talks ata Cato Foundation symposium in San Francisco. He hated my idea. No great surprise. He had written that money ought to earn nothing so that we wouldn’t own too much. Any attempt to back money with anything, he told me, would meet John Law's fate in the Mississippi bubble. The backing commodity would become inflated and then
crash. So Nobelists can disagree.
My version of the same idea today looks first to ETFs (exchange traded funds), which are more liquid and money-like than mutual funds. ETFs are usually index funds, which replicate index holdings with no active management and so charge very small expense ratios. But mutual funds might become money too. My idea, dead opposite from Friedman’s, is that both money supply and money yield should be
held as high as possible.
What would happen to banks? Major angst, but not much damage. They would devolve into their separate deposit and lending specialties, with separate stockholders and only incidental interaction. Deposits would be invested in ETFs or mutual funds. Federal deposit insurance would wither away as unneeded. There are no runs on ETFs. Lending banks would have to raise funds to lend from investors
expecting a return.
Is there a downside? There is certainly a risk of one. The devil we don’t know is
what would happen to lending rates and what the consequences might be. That had
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