Monday, October 7, 2013

Milton Friedman and the Great Depression

Few events in U.S. history can rival the Great Depression for its impact. The period following the calamity saw many changes in U.S. politics and economics including U.S. going of the gold standard and the founding of Social Security. All these events caused a huge misconception that market economies are unstable and are prone to large macroeconomic fluctuations unless closely managed by the government. Even today years after Milton Friedman and Anna Jacobson Schwartz attacked those ideas and proved that the great depression was not caused by an inherent instability with market economies but instead with the Federal Reserve’s monetary policies.

           The common theory for the cause of the great depression was that it was due to an out of control stock- market based on a credit bubble e.g. a situation caused by the inherent nature of the market system. Friedman and Schwartz found instead that the Federal Reserve was the cause of the crash. In large part this was due to the fact that having a large centralized power is dangerous due to the fact that if it ever fails, many other things fail along with it. Had the Federal Reserve never been established the inherent mistakes taken by people in power would never have happened and caused the crash.  The Federal Reserve worked as a last resort for the banks to borrow. This cause the more influential public banks to take larger risks with the belief that simply borrowing from the reserve could save them from any economic downfall.

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