It is, however, disappointing when National Review joins the fray and publishes opinion claiming that Friedman "would likely have supported a much more aggressive monetary response to our economic downturn."Professor Ivan Pongracic of Hillsdale College explains that Friedman's insight was that the Fed's inaction in the Great Depression was in the context of a banking system in which the central bank had monopolized the position of lender of last resort.
Friedman and Schwartz claimed that the depression would not have been a Great Depression if there had been no Federal Reserve in the first place: "[I]f the pre-1914 banking system rather than the Federal Reserve System had been in existence in 1929, the money stock almost certainly would not have undergone a decline comparable to the one that occurred."
That point was effectively elaborated by Milton and Rose Friedman in Free to Choose:
Had the Federal Reserve System never been established, and had a similar series of runs started, there is little doubt that the same measures would have been taken as in 1907 — a restriction of payments. That would have been more drastic than what actually occurred in the final months of 1930.
The existence of the Reserve System prevented the drastic therapeutic measure: directly, by reducing the concern of the stronger banks, who, mistakenly as it turned out, were confident that borrowing from the System offered them a reliable escape mechanism in case of difficulty; indirectly, by lulling the community as a whole, and the banking system in particular, into the belief that such drastic measures were no longer necessary now that the System was there to take care of such matters.
Monday, August 12, 2013
Does Rand Paul Understand Milton Friedman?
There has been a bit of a kerfuffle over Rand Paul mentioning Milton Friedman as a potential candidate for Federal Reserve Chair (were he still alive and Rand Paul President). People from both the left and the right seem to have criticized Senator Paul for "not understanding Milton Friedman". To counter that, Rand Paul wrote this response in the National Review which seems to indicate he does understand some of what Milton Friedman was saying and at this point anyone criticizing the Senator is really just nitpicking and will likely not convince many Americans of anything. (people don't really have the patience to listen to arguments on whether a politician understand the work of dead economists as they don't either):
I would also like to point out that Anna Schwartz, Friedman's co-author in his seminal piece of work on the Great Depression had this to say about the Federal Reserve's actions: