(FORTUNE Magazine) – Nobel laureate Milton Friedman has almost certainly had a greater effect on the thinking of Americans than any other economist in modern times. When Eamonn Butler began working on Milton Friedman: A Guide to His Economic Thought (Universe, $16.50), he must have viewed his protagonist as broadly victorious in a long war of ideas. In the past year or so, however, the war has been reopened on at least two fronts. Friedman is one of the very few eminences of his profession who know how to communicate effectively with non-economists; and in lectures, debates, a television series, several best-selling books, and a column in Newsweek, he has persuasively argued his case to a sizable audience. An incredibly versatile manufacturer of new ideas, he has had a lot of them to communicate over the years, and a fair number of his ideas have powerfully influenced Washington's policymakers as well as the public. He is probably best known for his espousal of the ''quantity theory of money,'' now generally known as monetarism, but he was also a major intellectual force behind the creation of floating exchange rates. And in endless other arguments -- about school vouchers, for example, and the volunteer army -- he has helped Americans to understand that the free market may offer solutions superior to those imposed by government. Within the economics profession, Friedman's ideas also became dominant in recent decades. His classic work, A Monetary History of the United States, 1867-1960, co-authored with Anna Schwartz of the National Bureau of Economic Research, had a profound influence on the profession. The book's most striking finding: the major cause of the Depression was the Federal Reserve Board's failure to prevent the money supply from shrinking by one-third. The finding reinforced Friedman's contention that changes in the money supply have important short-run effects on real income and employment. This perspective clashed sharply with the Keynesian view, dominant from the Thirties through the Sixties, which held that government fiscal policy held the key to stable economic growth. Today even Paul Samuelson, the best-known Keynesian economist, writes in the latest edition of his best-selling textbook that ''money is the most powerful and useful tool that macroeconomic policymakers have.'' Friedman's views about two major matters -- monetarism and floating exchange rates -- have recently come under attack from new directions. Not being up to date on these controversies, Butler's book seems dated in some respects; on the other hand, the controversies will presumably leave a lot of readers wishing to know more about Friedman's core ideas, which Butler has generally rendered quite faithfully (although with considerably less flair than Friedman himself displays). What is most striking about the recent criticisms is that they come from thinkers who have generally shared Friedman's commitment to the free market. The Wall Street Journal's editors, plainly in this category, last December produced a long editorial entitled ''The Problem of Monetarism,'' which said: ''Now . . . (monetarists) are longtime friends, and we agree with them on practically everything under the sun except floating rates and monetary aggregates.'' Monetarism does have some fairly obvious problems these days. Until fairly recently it seemed to be an idea with tremendous explanatory and predictive power: repeatedly in the late Sixties and all through the Seventies, rapid growth in the monetary aggregates foreshadowed (after a lag of several months) hefty increases in output, followed (after a further lag) by substantial price increases. But in the last few years Friedman and other monetarists have had trouble with their predictions. In September 1983, for example, Friedman looked at the large recent increases in M1 (which roughly equals currency, checkable deposits, and traveler's checks) and forecast a surge of inflation beginning in mid-1984 or soon thereafter. The surge did not take place. Early in 1984, based on the recent slowdown in M1 creation, Friedman told FORTUNE that he expected the economy's growth rate to be only 1% during the first quarter. In fact, the economy roared ahead, with real GNP increasing at a breathtaking rate of 11%. Plainly, something has happened to monetarism's predictive value. MONETARISTS HAVE made several defensive observations about these bad calls. One has been that other schools of economics haven't done too well either in recent years. This is certainly true of the Keynesian model, which implied that the outsize deficits of 1981 and 1982 would prevent a recession in those years. And the Wall Street Journal's nonmonetarist predictions have fared even worse than Friedman's. In an early 1981 editorial entitled ''Money Doesn't Matter,'' the editors pooh-poohed monetarists' warnings that low growth of the money supply would cause a recession in 1981. (''The dangers of monetary policy inducing a recession have been vastly and repeatedly exaggerated.'') Four months later the U.S. began sliding into one of the worst recessions since before World War II. One possible explanation for the monetarists' recent problems might be changes in U.S. financial institutions -- for example, the elimination of regulations that had prevented banks from paying interest on checking accounts. Many monetarists warned in 1983-84 that ending such regulations would cause an increase in M1 (because people would be more willing to let their money sit in checking accounts). Anyone whose forecast depended heavily on the growth of particular monetary aggregates would obviously be in trouble if the aggregates themselves were changing in character. Even some economists generally identified as monetarists, including Phillip Cagan of Columbia, now worry that financial deregulation has decisively changed the meaning of money and made it virtually impossible for central bankers to control the aggregates. This explanation might help to explain where Friedman went wrong, but, of course, it doesn't exactly inspire confidence that he will be right the next time. During his long career, Friedman has always been guided by an empirical spirit, insisting that economic ideas be judged by the evidence for and against them and not by theoretical niceties. Butler puts it this way: ''His work has become popular because it helps in practice to make predictions.'' So his recent problems with predictions are a serious matter, and I would admit to having less confidence in the basic monetarist model than I did only a few years ago. In the argument over floating exchange rates, Friedman has no reason to be embarrassed by the record. Floating rates, once viewed as theoretically attractive but politically impossible, turned out to be politically inevitable in the early Seventies -- a quarter-century after Friedman had first proposed the idea. What made them inevitable was the collapse of fixed rates linked by gold and by a U.S. commitment to support the price of gold at $35 an ounce. Yet today flexible exchange rates have a growing chorus of critics. The Journal's case against them depends heavily on two highly arguable propositions: ''that a common currency improves the efficiency of market pricing, and that a common currency is approximated by a system of fixed exchange rates.'' Some businessmen prone to protectionism have advanced a different argument: that floating rates have enabled other countries -- Japan is usually identified as the villain -- to push their currencies to artificially low levels in relation to the dollar and flood the American market with underpriced foreign goods. This argument always looked weak. In 1984 the Council of Economic Advisers reported of the Japanese that ''their intervention has, if anything, prevented a further decline of the yen relative to the dollar.'' A fascinating omission in the whole argument is an objection to flexible rates that is not being advanced. Back in the days when the idea was still a gleam in Friedman's eye, the main concern of his opponents was that flexible rates would reduce the volume of international trade. In fact, trade now accounts for over 10% of U.S. national income (vs. 5% or 6% in the Sixties). Friedman himself has always acknowledged one shortcoming of the flexible-rate system: it leaves the dollar without an anchor and gives the Federal Reserve unlimited scope to increase the U.S. money supply. However, fixed exchange rates would not really solve this problem. Fixed rates tie the dollar's value to that of other currencies, but if they lose their purchasing power, then the dollar's value will simply slide along with theirs. Many Americans share Friedman's distrust of the Fed, but it is hard to believe that they would welcome a system in which the U.S. became dependent on other countries' central bankers. FRIEDMAN HAS indicated that he is open to ideas for limiting the inflationary potential of the present system. One idea to which he has recently been drawn is a real stunner: eliminating the U.S. Treasury's monopoly on money creation and allowing private firms to issue the stuff. The restraint on inflation would then be each firm's desire to preserve its reputation. Friedman's interest in some such system represents a major shift in his thinking. He used to be quite positive that so-called free banking -- meaning the absence of government intervention in money creation -- would lead to serious financial instability. But recent studies of free banking in 18th- and 19th-century Scotland and in the early U.S. have found that free banking was associated with more stability than previously thought. In a forthcoming article for the Journal of Monetary Economics, Friedman and Anna Schwartz cite these studies and proceed to advocate a system in which banks could issue currency. They argue that private deposit insurance could protect depositors from banks' insolvency. In the same article, they add: ''Leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through governmental involvement.'' Plainly, the barrage of attacks on Friedmanism has not shut down the idea factory.