Milton Friedman’s Theory of the Depression

In his Monetary History of the US, Friedman says Depression was government’s fault – specifically the Federal Reserve’s. The Fed supposedly failed to pursue the proper monetary policy. This links up with another claim I have heard from the Right: that the New Deal did not end the Depression but prolonged it.

Even if both above statements are true, the New Deal has its historical justification:

1.      Its purpose was not only to reactivate the economy, but also to improve income distribution, which nobody denies was undesirably skewed. Even if it failed to reactivate the economy, it certainly did improve income distribution. Thanks to the New Deal, the subsequent reactivation of the economy – regardless of its cause – was characterized by equitable income distribution; this undoubtedly not only promoted the goals of social justice but also made the recovery (1946-1968) broad-based and consequently more lasting than it would otherwise have been. Thus the New Deal eventually did further the cause of economic growth.

2.     The rightist statements above can be construed as an argument that goes like this: the New Deal was a mistake; it would have been sufficient to adopt suitable monetary measures as outlined by M Friedman. In reply I would say: 1. the aforesaid distribution situation; and 2. Eschewing the New Deal or something similar was not an option. The candidates against whom FDR won election as president advocated far more radical measures. To a great extent Roosevelt can be seen as a factor moderating demands for radical change, rather than as an initiator of change.

3.     The characterization of the Fed as “the government” is only partially correct. The Fed was and is an independent agency that does not take orders from the Executive. No critique of the Fed's shortcomings can be generalized to encompass, nor attributed to, economic policies pursued by the executive or legislative branches.

C Stoll, May 2008

Addition. Sept 2009.

Currently the Phed is the creature of American finance oligarchy (see Ellen Brown's book). How can it have been otherwise in the 1930s? Same goes for Treasury. How come the misdeeds committed by the tools of the banks are proof of too much government? I think it much more reasonable to say that they are proof that the banks are too powerful. Verify.