Historical Error #26: A Bogus Quotation from Milton Friedman on the Federal Reserve Deliberately Causing the Great Depression

Gary North

Ellen Brown argues that Benjamin Strong, who died in 1929, in 1929 conspired with the head of the Bank of England to cause the stock market crash of 1929. To help prove her point, she offers this quotation.

Who was to blame for this decade-long cyclone of debt and devastation? Milton Friedman, professor of economics at the University of Chicago and winner of a Nobel Prize in economics, stated:

The Federal Reserve definitely caused the Great Depression by contracting the amount of currency in circulation by one-third from 1929 to 1933. [Web of Debt, p. 146]

She offers no footnote.

Milton Friedman established his reputation with a co-authored book, A Monetary History of the United States (1963). In that book, and in articles after, he argued that the Federal Reserve did not take strong action to counter the effects of monetary contraction being caused by the bankruptcy of 9,000 banks. He believed that the decision-makers at the FED did not understand what they were facing. But he never said that the Federal Reserve deliberately caused the Great Depression.

When I searched for the source of this quotation, I found it all over the Web. Its source was supposedly a January 1996 interview on National Public Radio. This is a yellow flag for a bogus quotation. First, no day is listed. Second, no show is listed. Third -- and most important -- no verbatim transcript of the interview is cited: exact page number.

It is easy to forget what someone said. The person who was interviewed can't even be sure. So, for a direct quotation to be validated, there has to be either an official written transcript or else an audio file of the interview. In this case, there is not even a reference to the show.

Here is an interview that he gave to PBS in 2000. There is a transcript.

At all times, the Federal Reserve had the power and the knowledge to have stopped that. And there were people at the time who were all the time urging them to do that. So it was, in my opinion, clearly a mistake of policy that led to the Great Depression.

On the previous page of Web of Debt, we read about the Federal Deposit Insurance Corporation (FDIC), which was set up in 1934. She argues that it was set up to protect bankers. She does not mention this crucial fact: After the FDIC went into operation, bank failures ceased, the money supply rose dramatically, and the Great Depression still did not go away.

You can see the evidence here. Look at the chart. The FED did not shrink the monetary base in 1930-31. It kept it flat. The FED increased it in 1932. In 1933, it rose even faster. The money supply fell, 1929-33, because of bankrupted banks. This ended in 1934, because of the FDIC. The money supply then rose. This chart is from an article by the Vice President of the Federal Reserve Bank of St. Louis.

For my reply to her response, click here:

http://www.garynorth.com/public/7242.cfm

For a detailed critique of Ellen Brown's economics, go here:

http://www.garynorth.com/public/department141.cfm