Today, Eamonn Butler on the Adam Smith Institute Blog says, in case of recession, “flood the markets with cheap credit until everyone has the confidence to stop selling and start buying”. He characterizes this position as the hard-won historico-economic insights of Friedman, and, strangely, claims that it stands in stark opposition to Keynesian countercyclical policy. But with Butler’s implicit acceptance of the fiction of aggregate demand and the necessity of boosting it to pull an economy from recession, one wonders how Butler/Friedman differ from Keynes!
Butler interprets Friedman’s history thusly:
“the US stockmarket started to slide in June 1929, and had not bottomed out until many months later.
“But, as Milton Friedman…shows in his Monetary History of the United States (written in collaboration with Anna Schwartz), the real catastrophe did not arrive until 1933, when a run on the banks precipitated a major banking crisis that ruined many businesses and families.”
Murray Rothbard, in his book America’s Great Depression (online, real life) similarly summarized the history, but understood it in the framework of Austrian boom-bust theory. The problem is to explain a cluster of entrepreneurial error. By the time that Keynes’s aggregate demand is insufferably low, the damage is already done. Keynes’s (and Friedman’s and Butler’s) to not allow the liquidation of unprofitable enterprises is to persist in errors that will continue to erode the wealth of the nation.
What caused the depression was a buildup of unbacked currency in the 1920′s, made possible by the Federal Reserve. What made the depression great is that when the time for liquidation came, the anti-liberal policies of the era stood in the way of liquidation at every turn.
Since this post is from the Adam Smith Institute, I feel compelled to point out that while Adam Smith was largely silent on the question of the business cycle, he surely perceived, following Hume, that increasing the money supply does not change the natural rate of interest (see his discussion here). And this is the first step in understanding the Austrian theory of the business cycle.