Friday 23 December 2011
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In Part 10, the interviewer asks Friedman to explain, specifically, if and how the government "caused" the financial crisis of 1929. Friedman admits that he holds the view that they were the cause of this crisis, yet then starts talking about how they failed to prevent it, without going into specifics as to how they created it. The interviewer quickly asks Friedman again, and Friedman gives a very short answer, moving on again to how the fed failed to prevent it. He did not give a thorough explanation, at all. Further, America also experienced crises in 1873 and 1893, too, that perhaps were not on the level of the great depression, but were very grave indeed.
ReplyDelete-Derek-
"In Part 10, the interviewer asks Friedman to explain, specifically, if and how the government "caused" the financial crisis of 1929."
ReplyDeleteNot quite Derek. The moment in the interview you refer to occurs at 35:35. Lawrence Spivak doesn't actually ask Friedman anything, but rather throws him the contrast between what he believes Friedman's opinion is as to the cause of the Great Depression of 1929 through 1933 (note: not "financial crisis of 1929"; but that crisis plus the Depression that followed it) and his claim that "most people" feel that Roosevelt saved the free economy. Friedman then confirms his opinion with the proviso that the Federal Reserve system was largely to blame. Spivak does come back at him a second time - as you say - asking him whether the government (Hoover's) was to blame for what it did do or what it didn't do, to which Friedman responds "by what it did do".
Now throughout that exchange on the subject of the Great Depression, Friedman talks mostly about Roosevelt's government and the long term consequences of what it did - whilst also attaching blame to the Federal Reserve system. However, it's likely that Friedman would also have blamed the Hoover government for the Depression to some extent though this isn't made clear in that exchange, but in any case the decisions of the Roosevelt government were much more far-reaching in their scope and effects than those of the Hoover government.
If you are interested in the Great Depression there is no shortage of history on it, and George Selgin has a paper here (pdf) on Friedman's opinon on central banks.
Had Friedman attempted to give a "thorough explanation", Derek, it would have taken too much time (partly by provoking further questions which would then sidetrack the discussion). Remember, unlike blog comments and emails, Friedman was time-limited in that interview.
"Further, America also experienced crises in 1873 and 1893, too, that perhaps were not on the level of the great depression, but were very grave indeed."
ReplyDeleteYou can go back earlier than that and find bank failures occurring even in the ante-bellum period, e.g. 1857. This will get you into the subject of banking and monetary history if you're not careful!
Some brief notes: the ante-bellum U.S. is sometimes held up as an example of laissez faire banking (there was no central bank and there was the problem of "wild-cat" banks issuing false notes). This is a popular move on the Left, but the problem with it is that branch-banking during this period was illegal and so the banks could not be rationally organized (so people had to travel far to redeem the promissory notes they had received). A better historical example of something closer to laissez faire might be Scotland in the 18th Century (although this is contested) or, curiously enough, Canada during the 19th Century.
The trade cycle ("boom and bust") occurs as a result of malinvestment of capital and this could still occur in a free system, but the malinvestment is exacerbated under political incentives and the promise of bailouts from the central bank.