I know that both Friedman and Bernanke wrote papers (or books, in Friedman's case) about the cause of the Great Depression. How do their points of view compare and contrast?


Bernanke has sort of answered this question himself, in his Remarks On Milton Friedman's Ninetieth Birthday.

Friedman argued that the depression was basically caused by the Fed's contractionary monetary policy, and Bernanke seems to be in broad agreement with him, going so far as to say:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

There seems to be some disagreement between the two on the relevance of the non-monetary effects of bank failures. Bernanke argued that

the effective closing down of the banking system might have had an adverse impact by creating impediments to the normal intermediation of credit, as well as by reducing the quantity of transactions media.

Friedman dismissed this, pointing to Canada as an example of a country that had no significant bank failures, but had a depression as severe as the US, due to the fact that their monetary policy was tied to that of the US.

However, Bernanke qualified this disagreement:

my argument for nonmonetary influences of bank failures is simply an embellishment of the Friedman-Schwartz story; it in no way contradicts the basic logic of their analysis.

  • So, wait, both agree that the U.S. inadvertently becoming a net gold positive country (whereas the U.K, the hegemon at the time, became gold negative? That is, that the US became a net gold intaker whereas the UK became a net gold expeller? – Aarthi Oct 13 '11 at 16:04

There is a third person that should be considered here, Paul Volcker. Of the three, Volcker is the conservative, Friedman, a self-styled "liberal" is the moderate, and Bernanke is the liberal.

Volcker preached, and practiced a very "orthodox" economic policy. Specifically, he pushed for, and got, the Monetary Control Act of March 1980,, which forced financial institutions to report to the Federal Reserve all changes in their liquidity such as those caused by incoming deposits. This allowed him to pursue a "tight" monetary policy that was practiced with bad results for the deflationary 1930s, but was the ideal laxative for the inflationary 1980s.

Friedman preached an "agnostic" posture toward the money supply: Don't try to manage it, just keep it growing at a constant rate. His "target" was 4%, which was mildly inflationary, because it exceeded average GDP growth of 3%, but better to error in the side of "looseness." But more than "loose" or "tight," it was the constancy of money supply growth that was key in his view. This represents a "middle course" between the views of Volcker and Bernanke.

Bernanke was a student of the 1930s. After 2008, he adopted a policy of "quantitative easing" that would have been crazy at any other time, but was exactly right for the"modern 1930s," and would have been right for the original 1930s. (The danger is that our children will remember this around 2050-2060 and pursue similar policies at a time when inflation, not deflation, is the greater danger.) He and Friedman both agree that monetary tightness aggravated the 1930s depression, but Bernanke produced a "cure," while Friedman preached "prevention."

Disclosure: I am the author of "A Modern Approach to Graham and Dodd Investing" (Wiley, 2004) that called for a 1929 style crash, and the modern 1930s. We got our "modern 1929" in 2008, but fortunately avoided a 1930s Depression because of Bernanke.

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