Jennifer Burns: evaluation

Transcript context

…hem 12 years to write the book. They’re releasing their ideas, and they’re arguing, and Friedman is writing papers, giving talks, saying, “Money’s really important,” and nobody’s really believing him. He’s a crank. He’s at Chicago. Chicago is a well-known university, but he’s considered a crank. Then in ’63, he and Anna Schwartz published this book, and it’s 800 pages. It’s a reinterpretation of the history of the United States through money, like the central character is money, whether it’s specie, greenback or the U.S. currency. They have a whole chapter on the Great Depression, and what they’ve literally done, Schwartz has done most of this, they’ve gone… Schwartz has gone to banks, and said, “Show me your books.” Then she’s added up column by column, “How much money is in your vault? How much money is on deposit? How much money is circulating?” So, they literally have graphs. You can see them in the book of how much money has been circulating in the U.S. at various different points in time. When they get to the Great Depression, they find the quantity of money available in the economy goes down by a third. In some ways, this is completely obvious because so many banks have failed, and we don’t have any type of bank insurance at that point. So if your bank goes under, your savings are there, the money essentially vanishes, and it’s fractional reserve banking. So, you’ve put in… They can loan up to 90% on their deposits. So, Friedman and Schwartz present this argument that what really made the Great Depression so bad was this drop in the amount of money, the 30% drop in the money, they called the Great Contraction. Then they go further, and they say, “Well, how did this happen and why?” They pinpoint the Federal Reserve, which is a fairly new institution at that time. They say, “What did the Federal Reserve do? The lender of last resort, what did it do in the face of what they’re depicting as a massive, unprecedented liquidity crisis?” They find it’s not really doing much. They really dig into the details, and they find that the Federal Reserve has gone through a sort of personnel change. Some of the key leaders in the 1920s, Benjamin Strong is one of them. He’s now deceased, and the dominance of the New York Federal Reserve, which in their telling is global, it’s interconnected. It’s seen a lot of financial things come and go. They believe that the New York Fed had the understanding to recognize this is a liquidity crisis. We should be very generous. We should support all the banks. Their influence has diminished for the kind of banks that are more… They don’t say the Rubes and the Hicks, but it basically is. ty crisis. We should be very generous. We should support all the banks. Their influence has diminished for the kind of banks that are more… They don’t say the Rubes and the Hicks, but it basically is. It’s like, “The people in charge don’t know what they’re doing.” So, the Fed pursues this policy of masterly inactivity. They don’t see it as a problem. They don’t do much. There’s an enormous liquidity crisis, and that’s their version of what the Great Depression is all about, that it’s a financial system meltdown. It’s a liquidity crisis, and that it in some ways, well, in many ways, they argue very strong counterfactual argument. The Federal Reserve could have prevented it, and it did not. So, it becomes then an institutional failure and a political failure, not a failure of capitalism as a system. So, this book comes out. It’s a blockbuster. Even those economists who’ve been like, “Friedman is a crank. I don’t buy it,” are like, “Friedman and Schwartz are onto something. Milton Friedman and Anna Schwartz are onto something. ” So, that really changes the game. This is also one of his most influential contributions, because Friedman and Schwartz becomes the playbook for the Federal Reserve. We have lived through this, the financial crisis. The Federal Reserve is ready to loan. Covid, the Federal Reserve does all kinds of new things, because no Federal Reserve chair wants to be in Friedman-Schwartz 2.0 that somebody writes, where they’re the bad guy who let the economy meltdown. So, the specifics of what they say to do have obviously evolved as the system has changed, but this is a playbook for how to deal with economic crisis. It’s Friedman and Schwartz. So, it’s absolutely fundamental, and that is really going to be the place he makes his mark. There’s a lot of things to say here. So first, the book we’re talking about is a monetary history of the United States, in part for which Milton Friedman won the Nobel Prize. You’ve also mentioned the influence of the Great Depression, if you could even just rewind to that.…

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