Monetary Policy as Scapegoat

The Federal Reserve of the 1920s did not mismanage money. Indeed, the Fed could not have mismanaged money even if so motivated. I am fully aware that this claim flies in the face of monetary theories of the onset of the Great Depression that have been famously advanced at various times in the past. On the Austrian side, Friedrich Hayek and, particularly, Murray Rothbard have attributed the onset to excessive money growth during the early and mid-1920s. On the Monetarist side, Milton Friedman, Anna Schwartz, and, particularly, James Hamilton have pointed to undue monetary restriction during the last two years of the 1920s. More recently, the Monetarists have been joined by the “Golden Fetterers”: the thesis that the proximate cause of the onset of the Great Depression was a too tight monetary policy attributed at a fundamental level to a stubborn refusal by nation-states to abandon the gold standard in a timely fashion—they were “fettered” by gold.1 While differing in the details, all camps share the thesis that money matters. That is, the rate at which the money supply grows, as established by central banks, determines the rate at which the price level grows in the long run and influences the rate at which real income grows, or does not grow, in the short run.