He will be replaced at the head of Wall Street's most successful partnership by John Corzine, a 20- year Goldman veteran and head of the firm's fixed-income group.
Mr Friedman, 56, was named co-chairman of Goldman along with Robert Rubin - now the chairman of President Bill Clinton's National Economic Council - only four years ago, although the pair had run its day-to-day operations for several years before. With Mr Rubin's resignation in December 1992, Goldman abandoned a long tradition of shared management leadership.
With the promotion of Mr Corzine, a former commercial banker, Goldman will revert to a more typical Wall Street hierarchy, adding a chief operating officer, Hank Paulson, who will also serve as vice-chairman. Mr Paulson, a one-time aide to Richard Nixon, is currently joint head of Goldman's investment banking department.
The news was released in a memorandum by Mr Friedman to Goldman's partners and 6,500 employees yesterday. Mr Friedman - who joined Goldman in 1966, was made partner in 1973 and has served on its management committee for 14 years - said the job had become 'more than a little tiring'.
Goldman - which rivals the much larger, publicly traded Merrill Lynch as Wall Street's most profitable firm - is 'in all fundamental ways' stronger than it has ever been, Mr Friedman said, having rung up dollars 2.7bn in pre- tax profits last year.
'Having said that, 1994 has been a frustrating year for all of us,' he wrote. Goldman's huge trading operation suffered big losses in the derivatives markets when the Federal Reserve reversed the trend in US interest rates last winter; in February alone, the firm lost dollars 150m.