Milton Friedman (1912 – 2006) is possibly the most influential economist of all time. His ideas have been woven into the DNA of American economic and political life by the likes of Barry Goldwater, Ronald Reagan and Alan Greenspan. In a nutshell, Friedman is among the great advocates of free markets, deregulation and arguably his influence has been very beneficial.
In 1963, Friedman co-authored a book titled the Monetary History of the United States:1867-1960. In this book, he laid out his argument that the Great Depression began as a typical business cycle recession and mutated into major depression because the Federal Reserve Bank contracted the money supply between 1928 and 1933.
In an interview in 2000, Friedman said:
“We have to distinguish between the recession of 1929, the early stages, and the conversion of that recession into a major catastrophe…. What happened is that [the Federal Reserve] followed policies which led to a decline in the quantity of money by a third….And that extraordinary collapse in the banking system, with about a third of the banks failing from beginning to end, with millions of people having their savings essentially washed out, that decline was utterly unnecessary. At all times, the Federal Reserve had the power and the knowledge to have stopped that. And there were people at the time who were all the time urging them to do that. So it was, in my opinion, clearly a mistake of policy that led to the Great Depression.”^
In the late 1920s, the Federal Reserve believed that speculative excesses of the ‘Roaring Twenties’ needed to be purged. Any government intervention to the contrary would only slow a necessary and natural process. In terms of the banking system, weak banks needed to close and the strong would survive. That was the policy prescription that carried the day. But in retrospect, allowing the banking system to fail caused the economy to collapse. By 1933, roughly 1 in 3 Americans were unemployed. In some places it was 1 in 2.
Friedman strongly believed that the government should tinker as little as possible in the private sector except for controlling the supply of money. When asked if he supported the policies of Franklin Roosevelt and the New Deal, he answered:
“Because it was a very exceptional circumstance. We'd gotten into an extraordinarily difficult situation, unprecedented in the nation's history. You had millions of people out of work. Something had to be done; it was intolerable. And it was a case in which, unlike most cases, the short run deserved to dominate.” ^
On nearly a daily basis I am told that government should let the banks fail and the government’s stimulus plan is a waste of money. People ask why should we (the taxpayers) borrow massive amounts of money to bailout irresponsible investors, bankers and borrowers? That answer may lay in the thoughts of Milton Freidman. We can go the route of Great Depression II or we inject the billions, probably trillions needed to stabilize the banking system. I hope that the powers that be in Washington do what needs to be done.
^ Source: www.pbs.org, Commanding Heights, 10/01/00.
Written by Jason McMillen, Chief Investment Strategist, PPWM
Posts
