Historical Response #26: Ellen Brown Says That She Can See No Difference Between a Failure to Act and Active Causation.

Gary North

Ellen Brown said in her book that Milton Friedman taught that the Federal Reserve definitively caused the Great Depression by contracting the money supply. I said he didn't.

Here is what she wrote. I cited her words.

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]

//www.garynorth.com/public/6954.cfm

I pointed out that she offered no footnote to show where he said this. Then I quoted him directly. He said that the Federal Reserve made a policy mistake. He did not say that the FED actively contracted the money supply.

Here is her response. She begins with her version of what I supposedly wrote.

26. Milton Friedman said that the Federal Reserve caused the Depression.

You challenge my quote as unsupported, then give this supported quote, which so far as I can see says the same thing:

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.

Then you show a chart of the money supply from 1929 to 1939 and quote me as saying:

Yet on page 151, she writes: "In the Great Depression, labor again rusted into nonproductivity, due to a lack of available money to oil the wheels of production." Give me a break! Look at the chart!

I have looked at the chart. It shows that the money supply did not get back up to 1929 levels until 1938. So where is the error there? The money supply had collapsed, and it took all that time to get back to where it was earlier.

http://webofdebt.wordpress.com/response-to-gary-north-2

Notice that she fails to cite what she actually wrote, which I quoted verbatim. She wrote this: "The Federal Reserve definitely caused the Great Depression by contracting the amount of currency in circulation by one-third from 1929 to 1933." So, how did the FED cause the Great Depression, according to Brown's version of Friedman? "By contracting the amount of currency in circulation by one-third from 1929 to 1933." The words by contracting imply an active decision. The FED contracted the money supply.

The FED did not contract the money supply. In 1932, it actually increased the monetary base. I presented a chart that proves this.

This increase did no good. Why not? Because bank depositors kept making runs on the banks. The public's money supply declined, 1930-33, because 9,000 banks went bankrupt. This contracted the money supply by breaking the relationship between what the Federal Reserve did control -- the monetary base -- and what the bankers did with the money.

Note: the same thing has happened in the United States since October 2008. The FED has more than doubled the monetary base, but the M1 money multiplier collapsed. The Federal Reserve did not cause this. Bankers' decisions not to lend the money they were allowed to lend has caused this. Instead of lending it, they keep the money as excess reserves at the FED. So, consumer prices were flat, mid-2009 to late 2010.

As soon as the FDIC was created by the government in 1934, the bank runs ceased, and the money supply went back to where it had been in 1929. Again, the chart shows this.

Milton Friedman understood that it was bank depositors who contracted the money supply. He believed that the FED could have offset this contraction by increasing the monetary base, and that it should have. He became world-famous for this argument. But this is not the same as saying the the FED contracted the money supply. Ellen Brown responds by saying that she does understand the difference: ". . . which so far as I can see says the same thing."

Let me put it in language she can understand. It is the difference between a lawyer who loses a case because she argued poorly and a lawyer who deliberately presented a case that loses.

One more time, so that lawyer Brown may possibly grasp it. I quoted Friedman verbatim, who said the FED made a policy mistake. Brown said that he taught that the FED "definitively caused" the Great Depression "by contracting the money supply." It didn't, and Friedman did not say that it did. The FED failed to respond to the contraction imposed by bank runs, he said. The FED made a mistake. How? By not inflating the monetary base, 1930-31, and not inflating it enough in 1932 and 1933.

For as long as banks kept failing, the money supply shrank. When the FDIC was created in 1934, the runs ended, banks stopped failing, and the money supply increased. The FED then expanded the monetary base. This was deliberate policy.

Ellen Brown is an inflationist. All Greenbackers are. They want ever-larger quantities of money issued by the Congress. She agrees with the Keynesians and the Friedmanites. She hates the gold coin standard. So do they. Their debate is over this: (1) who gets to issue the counterfeit money -- banks or Congress -- and (2) in which form: digits or pieces of paper.