Tuesday, April 15, 2008


Below is an excerpt from the book I'm working on, The Roots of Markets & Wealth. The topic is the Milton Friedman fed (or led) myth that the Federal Reserve created the conditions for the Great Depression in 1929.

... In Free to Choose: A Personal Statement, Milton Friedman took care to review the causes of the Great Depression. With characteristic bravado he declared that “the independent Federal Reserve System was to blame for the mistaken monetary policy that converted a recession into a catastrophic depression.” He also claimed “[w]e now know that the depression was not produced by a failure of private enterprise, but rather by a failure of government.”

Speaking of failures, Friedman failed to say anything about the well documented market schemes, market myopia, speculative euphoria, and structural weaknesses in the overall economy. Perhaps Friedman’s greatest overstatement is falsely suggesting – with his “We now know …” claim – that there is some kind of scholarly unanimity behind the causes of the Great Depression. Nothing could be further from the truth.

Nobel Laureate Paul Samuelson, for example, argued that there could be “dozens” of explanations for “cycle theories” that explain business slumps and economic depression. Indeed, looking at the claim that the Federal Reserve encouraged speculation early on John Kenneth Galbraith researches and then dismisses the position as ‘formidable nonsense.’

Another Nobel Laureate, Kenneth Arrow, questioned Friedman’s focus on monetary policy, warning that “the sole emphasis on incompetent monetary policy as the cause of the Great Depression is disputed by serious scholars.” He adds that “really bad turns in monetary policy did not come until the end of 1930” when the recession was already “severe.”

Friedman also ignores that before the creation of the Federal Reserve System capitalist history is rife with market failures on a grand scale, suggesting “instability” is “endemic in the free enterprise system.” Indeed, standard history texts of the American economy point to easy lending by industry (margin purchases, easy credit, shady loans, etc.), structural weaknesses in the banking industry, and slowdowns in agriculture and housing markets, among other problems in the overall economy.

In sum, it is clear the causes behind the Great Depression are far from decided, and the manias that lead to destructive herd mentalities in markets may be more common than we want to believe. More importantly, it tells us that Milton Friedman was prone to making broad statements that aren’t supported by the facts ...

- Mark

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