 Hi, this is Gerald Friedman, Department of Economics at the University of Massachusetts. And we're here today to talk a little more about Sey's Law, the Great Depression of the 1930s, Milton Friedman, and Ben Bernanke. Okay, let's start with Ben Bernanke, head of the Federal Reserve, Bank of the United States. About seven years ago, at Milton Friedman's 90th birthday party, big celebration in Chicago, Ben Bernanke got up to give the major address, and he apologized. On behalf of the Federal Reserve, he apologized to Milton Friedman, to Anna Schwartz, Friedman's co-author, and to the world as a whole for the Great Depression. He explained that Friedman Schwartz had shown that it was all the fault of the Federal Reserve, and the Federal Reserve was sorry, and would never let it happen again. That was 2005. Oh, well, famous last words, whatever. But there's a story here. And this is the story of the rise of economics in 20th century United States, the decline of economics in 20th century United States, and how it led to the economic policies that caused the Great Recession. The story goes back to the 1930s. In the 1930s, during the Great Depression, everybody knew why we had a horrible depression. Everybody thought they knew. It was because in the 1920s, the rich had gotten rich, rich, rich, rich, rich. They had run up the stock market to unheard of levels. There was a bubble in the stock market. When the bubble burst, the banks failed, the investors failed, and workers didn't have enough money to buy the stuff that was being sold because their wages were too low. So everybody lost their jobs because of a shortage of aggregate demand. This approach, this general vision of the economy as suffering from a shortage of aggregate demand was written up by John Maynard Keynes into a formal theory that became known as Keynesian economics, which we'll talk about later. It went into economic policy through programs like the National Labor Relations Act, also called the Wagner Act, which is, you can read the preamble. It's written, the law was enacted on the grounds that we needed to promote higher wages as a way of avoiding another depression. The Social Security Act is also, look at the preamble, meant to maintain purchasing power of the elderly so that we won't have another Great Depression. It was all a problem of demand. Milton Friedman and Anna Schwartz didn't like that because they believe in say's law. Remember, the idea that there's always enough demand. Every act of supply is the act of creating demand. So what would cause something like the Great Depression if it's not demand? Well they wrote a book, A Monetary History in the United States, with 120-page chapter, I think it's chapter 10, entitled The Great Contraction. Look in the index, they never use the phrase Great Depression. There was no depression. Depression would imply a shortage of demand, an excess of supply. No, there's a contraction, a contraction of the money supply. The whole problem with what we call the Great Depression, Friedman Schwartz argued, was caused by a banking failure because the banks relied on the Federal Reserve to act as a lender of last resort when they had problems. There were problems in the banking system. It always happens. People make mistakes. There's always going to be a problem in the banking system. And normally the banks would have taken care of it themselves. But, Friedman Schwartz argued, because we had the Federal Reserve system, the banks didn't feel the need to take care of the problem themselves. They relied on the Federal Reserve, but the Federal Reserve screwed up. Didn't bail out the banks. We had bank failures that rippled through the whole economy, made worse by government policies like the Wagner Act, Social Security Act, et cetera. And everything was a mess until World War II when it all got sorted out, somehow or other. Friedman Schwartz don't quite explain this somehow or other, but that's okay. The point is, for them, there's no depression. There's no violation of Sey's law. It's all because of a banking failure caused by the failure of the Federal Reserve to back up the banks. The failure of the Federal Reserve to bail out the banks. That became the reigning wisdom among economists after the 1960s and certainly after the 1970s. Because economists liked this. Most economists like Sey's law. They believe in it. So this allowed them to believe in Sey's law while recognizing that we had a great depression or a great contraction. Okay, fast forward. After Ben Bernanke gave that speech, Milton Friedman's birthday party, we had a major banking crisis. We had a financial crisis in 2007, 2008. September 15th, 2008, I believe it was the 15th, Lehman Brothers fails. It was very exciting times to live through. Some of you lived through it too. I was getting calls from various radio stations, TV stations for comments and newspapers. Oh, very exciting. What do you think is going to happen? I said, I have no idea. We're in uncharted territories. But I did say that one thing's for sure. We're not going to have a banking crisis like the 1930s. Because Ben Bernanke's head of the Federal Reserve. And yes, indeed, look at the power point for this course. You'll find the graph showing monetary policy and the great depression of the 1930s, what happened to the money supply, and what happened to the money supply in the great recession after 2007. The money supply in the current recession went up. We had bailouts. We had bailouts piled on bailouts. There's also, you can go to the St. Louis Federal Reserve web page. There's a chronology of the crisis. Some of that chronology is put into one of the lecture power points for this course. You can see Federal Reserve kept creating new forms of bailout, new ways to get money to the banks, billions and billions, trillions of dollars to the banks, it's estimated that the $9 trillion of bailouts have gone to the financial sector. So one thing's for sure, we have avoided the mistakes of that Milton Friedman Air Shorts associated with the great contraction of the 1930s. What we have not avoided is a huge economic crisis. High unemployment, a major drop in output, and considerable economic suffering. Could that suffering have been worse? Yes. If we had not had the bailouts, if we had not had the top and all that other stuff, then we would probably be in a 1930s style crisis or even worse. But monetary policy alone, guided by Sey's law, that alone is not enough. We still have a major crisis, even though we've done everything the Milton Friedman Air Shorts would have recommended. So next time, we'll talk about another approach to the crisis, Marxism. Thank you.