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In a Bloomberg column, my friend Amity Shlaes ably defends Calvin Coolidge, the subject of her new biography, from the charge of having caused the Great Depression:
… can one assign Coolidge any blame for the Great Depression? Some, especially when it came to tariffs, which Coolidge’s Republican Party supported. But the greater culprits are Coolidge’s successors, Hoover, a more progressive Republican, and Democrat Franklin D. Roosevelt. Hoover raised taxes, signed the Smoot-Hawley Tariff Act and strong-armed businesses into wage increases they could ill afford. In addition, Hoover sent a general signal of government activism, which chilled markets. Roosevelt exacerbated the uncertainty with arbitrary interventions into policy in all areas.
To her credit, she does acknowledge earlier in the piece the work of Milton Friedman and Anna Schwartz whose “A Monetary History of the United States, 1867-1960” put the blame squarely on monetary policy. Here’s a nice summary of the familiar story from Uncle Miltie himself:
What you had was that in 1929 the United States was in a boom. It hit a relative high point. And the stock market crashed in October 1929. But that was not the cause of what caused the Great Depression. It was, in my opinion, a very minor element of it. What happened was that from 1929 to 1933 you had a major contraction which, in my opinion, was caused primarily by the failure of the Federal Reserve System, to follow the course of action for which it was set up. It was set up to prevent exactly what happened from 1929 to 1933. But instead of preventing it, they facilitated it. The Depression, I may say, which started in 1929 was rather mild from 1929 to 1930. And, indeed, in my opinion would have been over in 1931 at the latest had it not been that the Federal Reserve followed a policy which led to bank failures, widespread bank failures, and led to a reduction in the quantity of money.
The Fed was the greatest culprit behind what Friedman and Schwartz called the Great Contraction just as Fed errors in 2008 created the Lesser Contraction, or Great Recession. But I am afraid readers will more likely draw the incomplete conclusion that the problems plaguing the US economy today are strictly fiscal and psychological rather than also monetary. Certainty most of Washington seems unaware of this.
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