Why Friedman and Schwartz’s interpretation of the Great Depression still matters: reassessing the thesis of their 1963 Monetary History

The early stages of the Great Recession of 2008–09 had many similarities to the early stages of the USA’s Great Depression of the early 1930s. Despite criticism of Milton Friedman in Paul Krugman’s column in the New York Times, Friedman and Schwartz’s 1963 Monetary History of the United States continues to have important lessons for the conduct of monetary policy today. Indeed, large-scale asset purchases by the Fed – as recommended by Friedman and Schwartz in their 1963 book as an anti-depression antidote – stopped the Great Recession from developing into something much worse. On a large enough scale, increases in the monetary base ought to be accompanied by positive growth of the quantity of money sufficient to counter demand weakness.