Departures from Friedman’s rule occur when markets are incomplete and liquidity injections transfer wealth from rich to poor agents who need insurance. We develop a stylized model where the stochastic evolution of the wealth distribution drives the business cycle and evaluate how to regulate liquidity as a function of aggregate uctuations. Within a class of state contingent policies we nd that the one that maximizes welfare prescribes liquidity expansions in recessions (when insurance is most needed), and liquidity contractions otherwise. Interestingly, in spite of the sporadic liquidity expansions, this policy echoes Friedman’s principle: on average the liquidity supply shrinks.