December 6, 2005

LIFESAVER (via Robert Schwartz):

On Milton Friedman's Birthday, We Get the Present: Him (BEN STEIN, 12/04/05, NY Times)

Although he was working in the graduate school, Professor Friedman let me be a pupil. If memory serves, the text we used was the book he had written with Dr. Schwartz (one of the truly great unsung heroes of economics and my late mother's best friend at Barnard), "The Monetary History of the United States." This book was the culmination of their analysis of the connection between the quantity of money and business cycles in the United States economy.

Until "The Monetary History," the prevailing view of economists was that the supply of money affected the price level but not the real level of economic activity. By dint of painstaking research and formulas, Professor Friedman and Dr. Schwartz showed that changes in the money supply greatly affected real levels of output and employment.

The main thesis of the book was that the Great Depression had been caused not by changes in tariff laws (always a questionable notion at best), not by the stock market crash (even more questionable), but by catastrophically wrongheaded decisions by the Federal Reserve Board in the period 1929-33 and again in 1936-37. The Fed - obsessed with fears of inflation even as the economy was collapsing - shrank the money supply drastically and basically choked the life out of the economy. (There was also a fascinating ethnic and racial angle to the story, which Professor Friedman later related to me: certain potentates at the Fed were doing this in part as an anti-Semitic reaction to the views of a Jewish Fed official named Eugene I. Meyer, who was also owner of The Washington Post and father of Katharine Meyer Graham.)

In the world of economics, this was a discovery on a par with the theory of relativity in physics or Copernican astronomy. There is simply no way to exaggerate its importance. The use of the money supply to regulate the economy and to prevent future depressions was largely born of the work by Professor Friedman and Dr. Schwartz. It was, in every way, lifesaving.

The most hopeful thing about the new Fed Chairman is that his field of expertise is the Depression, not the '70s.

Posted by Orrin Judd at December 6, 2005 2:17 PM
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