Money
For Nothing
Ben Bernanke Thinks He Can Print Us Out of a Depression
by
David Gordon
by David Gordon
 People
who want to find out what Federal Reserve Board Chairman Ben
Bernanke has in mind for the economy need to read some history.
Bernanke declares himself a “Great Depression buff,” and
while a professor at Princeton, he published an entire book devoted
to the subject. The work in question, Essays
on the Great Depression, which was published by Princeton
University Press in 2000, offers vital clues to his thinking. From
his interpretation of this prior disaster, he draws a key conclusion:
policymakers must at all costs prevent deflation. Unfortunately
for the economy, Austrian business cycle theory gives us strong
reason to reject both Bernanke’s historical analysis and his
policy recommendations.
To understand
Bernanke’s argument, though, we need to go back to an earlier
book by an economist even more famous than Bernanke. Milton Friedman,
the leading economist of the Chicago School, launched in the 1960s
an all-out effort to defend the free market against its detractors.
(Austrian School economists like Murray Rothbard contend that Friedman’s
support for the market did not go far enough.) In a major battle
in his campaign, Friedman challenged the prevailing Keynesian account
of the Great Depression. As Keynes and his many followers saw matters,
a free market might fail to generate full employment. Investors,
in the grip of arbitrary “animal spirits,” can become
skittish and reluctant to invest. If they do so, aggregate demand
will not suffice to sustain full employment. Keynesians argued that
the government must then step in to take up the slack. The ideal,
if ideal it was, of laissez-faire, must be banished to the dust
heap; government plays an indispensable role in keeping the economy
stable.
Not so, said
Friedman. In a famous book that he co-authored with Anna J. Schwartz
in 1963 (also published by Princeton), A
Monetary History of the United States, 1867–1970, Freidman
argued that the Great Depression did not stem from a fundamental
flaw in capitalism. Quite the contrary, the blame rested on the
government. Specifically, the Federal Reserve System began to deflate
in 1928, in an effort to curb stock market speculation. The effort
succeeded only too well, when the market crashed in October 1929.
Even worse, the Fed, faced with bank panics in 1930 and 1931, contracted
the money supply even further, beginning in March 1931. Here precisely
lay the cause of the Depression: had the Fed instead expanded the
money supply, the economy could readily have surmounted the stock
market crash and the ensuing downturn. We could avoid Keynesian
intervention, which in any case Freidman argued could not be timed
to have the right effects.
Copyright ©
2009 Taki's Magazine
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