Capitalism and Freedom: Part VI

John Butler of the John Butler Trio continues his meditation on economic theory...

Through my work here at the ShadowLands, I have built a strong reputation as a follower – and let’s face it – a shameless copier and paster of the work of the late-great champion of free markets, Milton Friedman.

So, everywhere I go these days, it seems someone wants my opinion on the economic crisis.

“Hey Butts, Friedman will be spinning in his grave, hey what?” is the typical question being yelled at me by punters from mosh-pits around the nation.

Well, yes and no.

Those with only a passing acquaintance of economic theory may be surprised to know that while Milton Friedman was no fan of bail-outs, he might not be one to oppose the proposed action to save US lending institutions.

As Friedman once told the ABC:

“...at all times from 1929 and 1933, the Federal Reserve had the power and ability to have prevented the decline in the quantity of money and to have increased the quantity of money at any desired rate.

So in our opinion, the Great Depression was not a sign of the failure of monetary policy or a result of the failure of the market system as was widely interpreted. It was instead a consequence of a very serious government failure, in particular a failure in the monetary authorities to do what they'd initially been set up to do.

When the Federal Reserve Act was passed in 1913, its major purpose was to prevent 'banking panics' as they were called, temporary crises that had occurred in the United States in 1907 and during earlier periods. What it did was to preside over the worst banking panic in the history of the United States. Not only did the quantity of money go down by a third, but about a third of the banks failed and in the Spring of 1933, the Federal Reserve System, which had been set up to prevent banking panics, closed its doors itself and stopped operating.”

So in fact Friedman (and co-researcher Anna Schwartz) believed that the Great Depression was largely caused by a failure of the Reserve Bank to prevent the collapse of banks, and the subsequent disappearance of money from the system. The problem was then compounded by further government interference, including huge increases in taxation, tariffs and the like.

Nobody is likely to be more aware of this than the current chair of the Reserve Bank's Board of Governors, Ben Bernanke. In 2002 ,then a Federal Reserve Governor, he made a startling admission in a speech given in honor of Friedman’s 90th birthday: “I would like to say to Milton and Anna: Regarding the Great Depression, you’re right. We did it. We’re very sorry.”