[OPE-L] A von Mises scholar comments on what policy makers learnt from the Great Depression

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Tue Oct 31 2006 - 15:11:36 EST

(A clip I find interesting from Gary North commenting on Bernanke, slightly
edited for readability. Intergenerational and historical learning processes
have always fascinated me - how, from a crucial historical experience people
drew certain lessons, and how these lessons are subsequently applied in a
new historical situation, in which - as the case might be - analogies with
the old situation might in fact be quite tenuous. This is not only a
question of what we can really learn from historical experience, but also a
question of old learnings, having been widely transmitted and accepted,
really affecting policy in the present, for better or for worse, as a sort
of "ruling paradigm" or tradition, which shows how things should be
explained, and how problems should be framed - JB).


Investors today believe that Milton Friedman was correct in his 1963 book, A
Monetary History of the United States. They believe that the Federal Reserve
System could have intervened to save the American banking system from a wave
of bankruptcies in 1929-32.

It is not just investors who believe this. Most economists also believe it.
Most important, Ben Bernanke believes it. He said so in his 2002 speech
congratulating Friedman on his 90th birthday. I have never seen any more
laudatory review of Friedman's book. He wrote that "the direct and indirect
influences of the Monetary History on contemporary monetary economics would
be difficult to overstate." He was quite correct in this assessment:

"Today I'd like to honor Milton Friedman by talking about one of his
greatest contributions to economics, made in close collaboration with his
distinguished coauthor, Anna J. Schwartz. This achievement is nothing less
than to provide what has become the leading and most persuasive explanation
of the worst economic disaster in American history, the onset of the Great
Depression - or, as Friedman and Schwartz dubbed it, the Great Contraction
of 1929-33."

Bernanke identified the book's major discovery: "the Great Depression can
reasonably be described as having been caused by monetary forces." (...)

The cause of the depression, as Bernanke described Friedman's conclusion,
was the gold standard:

"Friedman and Schwartz's insight was that, if monetary contraction was in
fact the source of economic depression, then countries tightly constrained
by the gold standard to follow the United States into deflation should have
suffered relatively more severe economic downturns. Although not conducting
a formal statistical analysis, Friedman and Schwartz gave a number of
salient examples to show that the more tightly constrained a country was by
the gold standard (and, by default, the more closely bound to follow U.S.
monetary policies), the more severe were both its monetary contraction and
its declines in prices and output. One can read their discussion as dividing
countries into four categories."

The tragedy, according to Friedman, was that Benjamin Strong, the head of
the New York FED, died in 1928. Strong could have staved off the great
contraction. Bernanke believes this: "Friedman and Schwartz argued in their
book that if Strong had lived, many of the mistakes of the Great Depression
would have been avoided."(...)

Then Bernanke told us in 2002 what he and the world's central bankers have
learned from Friedman:

"For practical central bankers, among which I now count myself, Friedman
and Schwartz's analysis leaves many lessons. What I take from their work is
the idea that monetary forces, particularly if unleashed in a destabilizing
direction, can be extremely powerful. The best thing that central bankers
can do for the world is to avoid such crises by providing the economy with,
in Milton Friedman's words, a "stable monetary background" - for example as
reflected in low and stable inflation. 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

The reigning assumption in this speech is obvious: central banks can offset
systemic risks in a market, thereby transforming them into nonsystemic
risks. Money creation is the ultimate risk-reducing tool.

From: http://www.lewrockwell.com/north/north456.html
Bernanke's speech:

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