The Zero-Rate Framework: Fulfilling Friedman's Monetary Vision
By Jordan MacLeod
Published as a Cornerstone Global Associates White Paper | April 4, 2025
"We should design a monetary system at the global level that eliminates the need for government intervention and provides stability."
— Milton Friedman
Executive Summary
This paper examines how the Zero-Rate Framework (ZRF) represents the realization of Milton Friedman's vision for monetary policy. While Friedman advocated for a global monetary system "that eliminates the need for government intervention and provides stability," his proposed implementation mechanisms proved inadequate to fully achieve this goal.
The ZRF, through wealth taxation with financial claim exemptions, delivers Friedman's optimal monetary policy (zero nominal interest rates) without requiring deflation, while simultaneously resolving the tensions between domestic monetary sovereignty and international coordination that dominated his debate with Robert Mundell.
What makes the framework truly revolutionary is its dual transformation: it not only achieves superior economic outcomes (zero nominal rates, price stability, efficient resource allocation), but fundamentally changes how these outcomes are achieved—through automated mechanisms that eliminate discretionary intervention. This represents the ultimate fulfillment of Friedman's vision to "replace the Fed with a computer" while delivering his optimal monetary policy.
By creating rule-based monetary stability with minimal discretionary intervention, the framework transcends the false dichotomy between fixed and flexible exchange rates while addressing contemporary challenges of reserve currency dynamics, manufacturing concentration, and trade imbalances.
This paper argues that the ZRF does not reject Friedman's insights but evolves them to fulfill his deeper monetary ambitions through mechanisms better suited to contemporary economic realities.
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The Friedman Rule: Original Formulation and Limitations
In his seminal 1969 work, "The Optimum Quantity of Money," Friedman proposed what would become known as the "Friedman rule" – a policy setting nominal interest rates to zero. This proposal stemmed from his recognition that positive interest rates create an opportunity cost for holding money, leading economic actors to economize on cash balances below the socially optimal level.
Despite its theoretical elegance, Friedman's implementation mechanism faced significant practical challenges. Engineering steady deflation proved extremely difficult without creating economic disruption. Furthermore, instability in monetary velocity undermined his k-percent rule for money growth.
Upgrading the Friedman Rule: The Zero-Rate Framework
The Zero-Rate Framework represents a fundamental evolution of Friedman's monetary vision. Rather than engineering deflation to achieve zero nominal interest rates, it employs two complementary mechanisms:
- A modest wealth tax (1-2%) applied to real assets like property, equities, and passive investments
- An exemption from this tax for productive financial claims (bonds, loans, active investments)
When combined with a personal consumption tax (VAT), these mechanisms create a dynamic system that can automate fiscal neutrality. The wealth tax targets monetary stability through zero rates on benchmarks, while the VAT adjusts to ensure government expenditures are fully funded.
Most significantly, the ZRF achieves what Friedman couldn't: both zero nominal rates AND near-zero real rates with price stability. Friedman carefully distinguished between general inflation (a monetary phenomenon) and relative price changes (real economic signals). The ZRF maintains this crucial distinction by creating monetary stability while allowing relative prices to adjust freely to economic conditions.
The framework directly addresses the velocity instability that undermined Friedman's k-percent rule by creating predictable effects on monetary circulation, resolving one of the fundamental challenges that prevented full implementation of his original approach.
What makes this approach transformative is how it shifts from discretionary human judgment to automated, rule-based governance. Unlike conventional monetary policy that requires constant intervention by central banks, the ZRF embeds stability directly into the system's architecture. This represents a genuine evolution from Friedman's "rules over discretion" to a framework where rules eliminate the need for discretion altogether.
Transcending the Exchange Rate Debate
The Zero-Rate Framework preserves the monetary sovereignty that Friedman valued while eliminating the need for the exchange rate volatility he reluctantly accepted. It simultaneously delivers the reduced transaction costs and stability that Mundell sought in his advocacy for fixed exchange rates and a world currency.
The framework effectively resolves the "Impossible Trinity" or "Trilemma" that has constrained international monetary arrangements. Nations have traditionally been unable to simultaneously maintain free capital movement, exchange rate stability, and independent monetary policy, being forced to sacrifice one objective.
By creating international monetary coordination through aligned incentives rather than formal arrangements or central authority, the ZRF addresses both Friedman's concerns about concentrated power and Mundell's desire for international stability.
Automated Solutions to Contemporary Challenges
The current international monetary system forces reserve currency issuers (primarily the United States) into a painful dilemma: maintaining currency primacy requires capital inflows that generate persistent trade deficits, eroding the domestic manufacturing base and creating strategic vulnerabilities.
The ZRF resolves this through automated mechanisms that transform a zero-sum game into a positive-sum arrangement:
- Funding security directly through wealth taxation rather than requiring trade deficits
- Creating equivalent benchmark securities across economies through algorithmic processes
- Eliminating the need for a single dominant reserve currency
- Addressing approximately $32 trillion in offshore wealth through systematic approaches
This approach shares philosophical kinship with currency board arrangements that have proven effective in low-trust environments by establishing clear, credible rules instead of relying on discretionary judgment. The potential for blockchain implementation further enhances this property by making the rules transparent and tamper-resistant.
Conclusion: The Automated, Practical Realization of Friedman's Vision
Friedman's statement that he would "rather replace the Fed with a computer" reflected his deep skepticism of human judgment in monetary policy. The ZRF realizes this vision by embedding monetary rules directly into the financial infrastructure through automated mechanisms.
By transcending the Mundell-Friedman debate on exchange rate regimes, the framework demonstrates that the apparent trade-offs between national sovereignty and international coordination stem from limitations in conventional monetary approaches rather than representing inevitable choices.
Most importantly, the framework shows how technology enables the practical implementation of theoretical insights that were ahead of their time. Friedman's optimal monetary policy becomes achievable through automated mechanisms that would have been impractical in his era.
The Zero-Rate Framework offers a way to fulfill his vision of monetary stability in an era he did not live to see, but whose technological possibilities he would likely have embraced in service of his enduring goal: an automated monetary environment where economic actors can make decisions without needing to anticipate capricious policy shifts.
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