Practice question · Multiple choice
Between 1929 and 1933 the US money supply fell by about a third while the Federal Reserve did little. Friedman and Schwartz built a case on that. What is it?
Hints
- Ask what a central bank is for, and whether the Fed did it between 1930 and 1933.
- A third of the money in an economy disappears. What happens to prices and debts?
Show the answer
A. That the Depression was deepened by monetary policy failure
Why
Bank failures destroyed deposits and the Fed did not act as lender of last resort, so a contraction became a collapse. Bernanke told Friedman at his ninetieth birthday 'we did it, we're very sorry, but thanks to you we won't do it again', and in 2008 the Fed did the opposite of 1931.
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