From Tragedy to Farce

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Hegel remarks somewhere that all great world-historic facts and personages appear, so to speak, twice. He forgot to add: the first time as tragedy, the second time as farce.

So wrote Karl Marx in the opening lines of The 18th Brumaire of Louis Bonaparte (1852).

In modern economic theory, the tragedy was the tag-team of John Maynard Keynes and his interpreter, Paul Samuelson. The farce is the tag team of Ben Bernanke and his interpreter, Paul Krugman – Princeton University’s two most famous economists.

Ben Bernanke is the first classroom economist to be Chairman of the Board of Governors of the Federal Reserve since the pipe-smoking Arthur Burns. There have been no others.


Burns took over at the FED in early 1970. He held the position until early 1978. It was under him that Nixon experienced the 1969-70 recession and then killed the last remains of the 1922 gold exchange standard on August 15, 1971.

Burns had begun his years in Washington in early 1953, when he took over as the third Chairman of the Council of Economic Advisers. In that capacity, he oversaw the 1953 recession, the first recession since 1937. He held that position until 1956.

In 1975, he oversaw Ford’s recession.

So, he was a major adviser in three recessions, a feat unmatched by any other academic figure. Burns was the president of the National Bureau of Economic Research from 1957 to 1967. This non-profit research organization is the agency that officially decides when a recession began and ended. It got to do this three times when Burns was a senior economic adviser to the Presidents involved.

Wikipedia describes his academic career.

The academic part of Burns’s career focused on the measurement of business cycles, including questions such as the duration of economic expansions, and what economic variables rise during expansions and fall during recessions. He often collaborated with Wesley Clair Mitchell and set the academic tradition continued by the NBER’s business cycle dating committee, which is generally considered authoritative in dating recessions. Burns’s detailed macroeconomic analysis influenced Milton Friedman and Anna Schwartz’s classic work A Monetary History of the United States, 1867-1960.

It was one of life’s great ironies that Burns went off to Washington in 1953. He never returned to Columbia full-time until after 1956. This enabled Murray Rothbard to be awarded his Ph.D. in the spring of 1956. Burns had blocked him for a decade. Rothbard’s Ph.D. dissertation was published in 1962 by Columbia University Press: The Panic of 1819.


Ben Bernanke took over the FED with great fanfare on February 1, 2006. He even got his own music video, courtesy of graduate students at the Columbia Business School (CBS).

It was clear to me in 2006 what was coming. I had read The 18th Brumaire carefully when I wrote my 1968 book on Marx. Marx provided the interpretative framework to understand Bernanke.

The tradition of all dead generations weighs like a nightmare on the brains of the living. And just as they seem to be occupied with revolutionizing themselves and things, creating something that did not exist before, precisely in such epochs of revolutionary crisis they anxiously conjure up the spirits of the past to their service, borrowing from them names, battle slogans, and costumes in order to present this new scene in world history in time-honored disguise and borrowed language.

Like Burns, Bernanke had made his reputation as a lifelong student of the business cycle – specifically, the Great Depression. Burns had influenced Friedman’s book on money, which offered a conclusion: the Great Depression was caused by the Federal Reserve, which had not inflated enough. Bernanke took this lesson to heart. In a revealing 2004 speech, while he was a member of the Board of Governors, he asked this question:

What caused the Depression? This question is a difficult one, but answering it is important if we are to draw the right lessons from the experience for economic policy. Solving the puzzle of the Depression is also crucial to the field of economics itself because of the light the solution would shed on our basic understanding of how the economy works.

To answer that question, he could have gone to Rothbard’s 1962 book, The Panic of 1819. He could also have gone to Rothbard’s follow-up book, America’s Great Depression (Princeton: Van Nostrand, 1963). But he didn’t. He went to Friedman’s book, published across town by Princeton University Press that same year.

However, in 1963, Milton Friedman and Anna J. Schwartz transformed the debate about the Great Depression. That year saw the publication of their now-classic book, A Monetary History of the United States, 1867-1960. The Monetary History, the name by which the book is instantly recognized by any macroeconomist, examined in great detail the relationship between changes in the national money stock – whether determined by conscious policy or by more impersonal forces such as changes in the banking system – and changes in national income and prices. The broader objective of the book was to understand how monetary forces had influenced the U.S. economy over a nearly a century. In the process of pursuing this general objective, however, Friedman and Schwartz offered important new evidence and arguments about the role of monetary factors in the Great Depression. In contradiction to the prevalent view of the time, that money and monetary policy played at most a purely passive role in the Depression, Friedman and Schwartz argued that “the [economic] contraction is in fact a tragic testimonial to the importance of monetary forces” (Friedman and Schwartz, 1963, p. 300).

To support their view that monetary forces caused the Great Depression, Friedman and Schwartz revisited the historical record and identified a series of errors – errors of both commission and omission – made by the Federal Reserve in the late 1920s and early 1930s. According to Friedman and Schwartz, each of these policy mistakes led to an undesirable tightening of monetary policy, as reflected in sharp declines in the money supply. Drawing on their historical evidence about the effects of money on the economy, Friedman and Schwartz argued that the declines in the money stock generated by Fed actions – or inactions – could account for the drops in prices and output that subsequently occurred.

I had read America’s Great Depression in the summer of 1963. I therefore recognized in 2006 what Bernanke would soon face: a major recession. Why? Because of Greenspan’s legacy after 2001: the expansion of the money supply. Bernanke took over in February of 2006. Greenspan had already tightened money. The Federal Funds rate rose. In late November, 2005, I wrote that this would soon create a crisis in the housing market. Bernanke denied that any such thing was going on.

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August 8, 2011

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North