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Milton Friedman on The Great Depression

The prosperous 1920s in the United States were followed by the most severe economic contraction in its history. In our Monetary History (1963), Anna Schwartz and I attributed the severity of the contraction to a monetary policy that permitted the quantity of money to decline by one-third from 1929 to 1933. Since 1963, two episodes have occurred that are almost mirror images of the U.S. economy in the 1920s: the 1980s in Japan, and the 1990s in the United States. All three episodes were marked by a long period of rapid economic growth, sparked by rapid technological change and the emergence of new industries, and accompanied by a stock market boom that terminated in a crash. Monetary policy played a role in these booms but only a supporting role. Technological change appears to have been the major player.

Context. An article adapted from an academic paper he was working on at the age of 94; it appeared in the Wall Street Journal the day after his death. Just before, he describes the booms of the 1920s in the United States, the 1980s in Japan and the 1990s in the United States as three episodes of a natural experiment in monetary policy.

Why Money Matters
Column, 2006, The Wall Street Journal, 2006, the day after his death; reprinted in Hoover Digest 2006 No. 4
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Milton Friedman, “Why Money Matters” (The Wall Street Journal, 2006, the day after his death; reprinted in Hoover Digest 2006 No. 4, 2006). https://miltonfriedman.org/quotes/monetary-history-quantity-money-declined-one-third-2006

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He also said

  1. The results of this natural experiment are clear, at least for major ups and downs: What happens to the quantity of money has a determinative effect on what happens to national income and to stock prices. The results strongly support Anna Schwartz’s and my 1963 conjecture about the role of monetary policy in the Great Contraction. They also support the view that monetary policy deserves much credit for the mildness of the recession that followed the collapse of the U.S. boom in late 2000.

    Context. An article adapted from an academic paper he was working on at the age of 94; it appeared in the Wall Street Journal the day after his death. Its closing paragraph, after charts comparing the quantity of money, nominal GDP and stock prices before and after the peaks of the three booms: money fell sharply after 1929, stagnated in Japan after 1992, and rose steadily in the United States after 2001.

    Why Money Matters
    Column, 2006, The Wall Street Journal, 2006, the day after his death; reprinted in Hoover Digest 2006 No. 4
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  2. The contraction from 1929 to 1933 was by far the most severe business-cycle contraction during the near-century of U.S. history we cover and it may well have been the most severe in the whole of U.S. history.
    A Monetary History of the United States
    Book, 1963, Princeton University Press for the National Bureau of Economic Research, Ch. 7 “The Great Contraction, 1929–33”, p. 299 (with Anna J. Schwartz)
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  3. It follows from the propositions I have so far stated that inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. … A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.
    The Counter-Revolution in Monetary Theory
    Lecture, 1970, Institute of Economic Affairs, Occasional Paper 33 (the first Wincott Memorial Lecture), Reprinted in Monetarist Economics (Basil Blackwell for the IEA, 1991), pp. 16, 19
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