Friedman's 1954 article

James Devine jdevine at
Wed Oct 14 10:20:34 PDT 1998

At 08:23 AM 10/13/98 +0100, you wrote:
>This week's New Statesman has an article by Paul Ormerod cheerfully citing
>an article by Milton Friedman in 1954 entitled "Why the American Economy is
>Depression Proof".
>This considers how to avoid a repeat of the collapse of the early 1930's .
>Ormerod claims Friedman argues that if a major recession seems imminent,
>policy makers should forget their fear of inflation and simply print money.
>Ormerod claims that the paper is not some aberration on Friedman's part
>which he now hopes no one will notice. On the contrary, Ormerod claims
>Friedman refers proudly to it in his memoirs, published earlier this year.

I haven't read this article. But if you read his articles, there are often escape clauses that are ignored by his more dogmatic followers. For example, in his 1968 "role of monetary policy"/natural rate of unemployment article, if I remember correctly, he allows as how it may be good for the Fed to pump up the money supply in big way if there's a depression. But he thinks that such a likelihood is very unlikely.

Ignoring escape clauses, his monetary rule says that the Fed should increase the money supply at a constant rate no matter what. Since he blames the Great Depression on a Great Contraction of the US money supply, if we could put him in a time machine and make him Fed head back in 1928-33, then (in theory) the US Depression wouldn't have happened. Of course, this would have meant that the US would have gone off the gold standard (and would have stopped having fixed exchange rate) earlier than most countries.

(The theory also assumes the the Fed has exact control over the money supply and that the velocity of money is stable, i.e., that the impact of the money supply is really predictable.)

Jim Devine jdevine at &

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