Surviving crashes the Friedman way
By Eamonn on Tax & Economy - Adam Smith Blog
It's exactly 75 years since the Wall Street Crash that brought the 'Roaring Twenties' to a close. So they say; but in fact the US stockmarket started to slide in June 1929, and had not bottomed out until many months later.
But, as Milton Friedman (pictured) 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.
It was not helped, says Friedman, by the Federal Reserve Bank actually making credit more difficult during this downturn. Then, the world was only just moving off gold as its standard of value, and monetary management was much misunderstood.
Today, we would know how to deal with a downturn: flood the markets with cheap credit until everyone has the confidence to stop selling and start buying. That is exactly what Alan Greenspan and Nigel (now Lord) Lawson did in 1987, after 'Black Monday', where US and UK stockmarkets plummeted, and it worked. Sure, it's still hardly an exact science. Markets are fickle things, and you cannot predict their wilder ups and downs. But we can at least pick up some of the pieces afterwards.
And that is due, in no small measure, to the modern understanding of monetary policy developed in the '60s and '70s - against the fierce opposition of the prevailing Keynesian movement of the time - by Milton Friedman.
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