 Okay, this is Beowulf, Professor Friedman's dog, and I am Professor Gerald Friedman, Department of Economics, University of Massachusetts, owner of Beowulf, co-owner, my wife owns them too, and the kids. We're here today to talk about the Great Depression, 1929 to 1940, and responses to it. Now at the time, there are very few incidents in American history where there is such a gap between what people thought at the time and what economists think today, and so much the worse for today's economists. At the time, people thought they knew exactly what had gone wrong. The 1920s was a period of flamboyant wealth. The gap between the rich and poor hit an all-time high in 1929. Actually, the share of income in the United States going to the wealthiest one-tenth of one percent of the population was at a level in 1929 that was not seen again until, guess what, 2007. It went down sharply for a while, leveled off, and since the 1970s it's been going up again until recently it returned to its pre-Great Depression peak. Isn't that interesting? 1929, 2007, they've got a lot in common. So that was the context that people saw the Great Depression at the time. So they saw this great increase in wealth. They saw workers' wages were stagnant while their productivity was rising. Workers' incomes were at a very low level in the late 1920s. And they put these together and said, okay, there was a failure of effective demand. Wages and farm incomes were too low to allow actual producers to buy the stuff that they were producing. And the capitalists were earning all this money, but they weren't spending it on consumption and they didn't see any reason to invest because after all, nobody was buying the stuff that they were producing already because wages and farm incomes were too low. Result, capitalists started to lay off workers, close factories, investments slowed down even more, then the stock market crashed and even the capitalists were losing out and couldn't afford to buy stuff. So the economy crashed because of this inconsistency between rising output and the earnings for the great mass of the population. The solution that the New Deal people proposed that Franklin Roosevelt and his administration carried out was to try to raise wages and raise farm income, raise purchasing power so that people would be able to buy the stuff that they were producing. This was to be done through direct intervention in labor markets, through the National Recovery Administration and later through government sponsorship of labor unions, through the Wagner Act and through raising the minimum wage, through the Fair Labor Standards Act of 1938, by raising farm prices through the Agricultural Adjustment Administration and through government spending on relief later on war and by devaluing the dollar to encourage exports. The New Deal resulted in one of the fastest and strongest economic booms in American history. This is something that people forget because what they often talk about is, oh, by 1936, 1937, 1938, we still had a depression. Well, yeah, we did, but between 1933 and 37, we had one of the fastest and strongest booms in American history with economic growth rates of over 10% a year. Such that by 1937, we had passed or reached the 1929 level of output. It was eight years later, the economy was a lot bigger, there were more people, there was still a lot of unemployment. But the reason there was still a lot of unemployment late in the New Deal was because the New Deal started with the economy so bad off, 25%, it takes a long time and a lot of economic growth to work your way down from 25% unemployment. That's actually a lesson for today because in 2011, the U.S. economy is growing, not as fast as it did in the New Deal era, but the economy is growing, but we're not making much progress on unemployment because we have so much unemployment that it will take a long time at the rate we're going to work down that high level of unemployment. Personally, I think we should be doing more to address that, but that's another issue. Okay, that's the context of the New Deal, what people saw at the time. It was taken as a great example of the failure of capitalism. Unbridled capitalism, deregulated capitalism in the 1920s led to disaster, led to great gulfs between rich and poor, leading to an economic collapse, and it needed active government policy to address it. Okay, that's what people were thinking in the 30s and the 40s, even in the 50s. And then in what 1963 appeared an answer, Milton Friedman and Anna Schwartz published a monetary history of the United States. They had a chapter on the Great Depression. Mind you, in their book, which is a thousand-page book, they never use the word depression. They never refer to the Great Depression, no depression of any type. What they call the 1929 to 1933 events is the Great Contraction. They have a chapter, which was later published as an independent book, called the Great Contraction. That's meaningful because they're not talking about unemployment, they're not talking about economic downturns, they're not talking about the real economy. They're in say's law. The real economy's fine. All that happened was a failure of the monetary system, they argue, caused by a mistake made by people at the Federal Reserve. The problem was there was a little bit of a panic in the banking system. People rushed into the banks to get their money, the banks didn't have the money because banks don't have the money. And so banks had to go to people they had lent the money to demanding the money back. That caused a contraction in the economy. What should have happened, Friedman and Schwartz argued, is the Federal Reserve should have stepped in, provided more liquidity, given money to the banks. And if they had done that, the banks would have been fine, everybody would have been fine and nobody would have noticed and everything would have just kind of gone on. And we would have had more steady economic growth. No problem except people at the Federal Reserve screwed up. This became received wisdom. You go to most economists, this is what they think happened. Friedman and Schwartz's explanation. Nothing in the real economy, it's not distribution of income, it's not falling farm prices, it's not stagnant wages, none of the real stuff. It's just monetary. And the monetary problem that caused the economic collapse of the 30s was just due to mistakes. And if we had had better people at the Fed, there would have been no mistakes. So when Milton Friedman celebrated his 85th birthday at a hotel in Chicago, Ben Bernanke, who was then a governor of the Federal Reserve and by 2007 was head of the Federal Reserve in the United States. Ben Bernanke was there and he gave a talk, which he apologized on behalf of the Federal Reserve. He said, you showed us that we caused, we made a mistake, we caused the problem, we're not going to do it again. Presumably, Bernanke was promising there will never be another economic collapse, there will never be another crisis, we'll never have another depression. Well we see how well that worked out. As it is, well very few people noticed, Friedman Schwartz's book is not a very good book. You look at the book, when I read it I was expecting all sorts of great things because people are so, this explains everything. It's like, where's the evidence? It's well written, Friedman is a very good writer, there's lots of data there and Schwartz is a very good data collector, as is Milton Friedman. It's great rhetoric, nice anecdotes, clever interpretations, but there's no hard, causal testing. That type of testing was this associated with that in any consistent way. That was done by Peter Temen, an economic historian at MIT, in a book published a decade after monetary history called Did Monetary Forces Cause the Great Depression? No Temen uses the phrase Great Depression, he doesn't just refer to great contraction. Temen carefully and systematically tests Friedman Schwartz's implied causal relationships. Did the bank panic lead to a collapse in the money supply? Did the Federal Reserve fail to intervene? Everybody finds consistently that they're wrong. That the bank panic was not the cause of the contraction of the money supply. The money supply began contracting before the bank panics because the economy had turned down already. What first happened was a collapse of consumption and investment. That caused problems with the banks, which caused people to take their money out of the bank. At that point, the Federal Reserve did intervene. If you look at the track of Federal Reserve open market purchases, whether putting money into the banking system, look at their interest rate policy, they acted very aggressively to redress the problems in the banking system. Not aggressively enough to redress the problems in the economy because even before 40 years before Friedman Schwartz, they were already thinking the way Friedman Schwartz said they should have been thinking. They acted that way, and it didn't help. The fundamental problem with the economy that Teman explores, the fundamental problem of the economy in 1929, Great Depression, was kind of what people thought at the time, a collapse of effective demand, which probably is related to the rising profit rates coming with deregulated free enterprise capitalism in the 1920s. They probably had it right all along, so Ben Bernanke can stop apologizing. This is Gerald Friedman, not related to Milton. Thank you very much. Have a good day. Bye-bye.