17 Jul 2014

Has Tabarrok Too Been Seduced by the Sumner Side?

Scott Sumner 4 Comments

In an otherwise exemplary post, Alex writes:

Milton Friedman argued that the Great Depression was caused by a banking collapse that reduced the money stock and decreased velocity leading to a massive failure of aggregate demand that was not countered by the Federal Reserve…Ben Bernanke also put the banking crisis at the center of his story of the Great Depression but the propagation mechanism was quite different…

In an excellent paper from Boom and Bust Banking, Jeff Hummel shows that these two stories have different implications for policy…In Friedman’s story what is required is monetary policy, an increase in the money stock to keep nominal GDP from falling. In Bernanke’s story what is required is actually fiscal policy (albeit fiscal policy performed by the Fed), namely emergency lending to banks to keep credit flowing. [Bold added.]

Uno momento, por favor. Did Milton Friedman actually call for the Fed to increase the stock of money “to keep nominal GDP from falling”? I don’t remember him writing that.

I remember him saying the Fed caused the Great Depression by allowing the money stock to fall by a third in the early 1930s. I remember him saying the Fed should commit to a constant percentage growth in the money stock, no matter what, to take monetary fluctuations off the table.

But I don’t remember even knowing what “nominal GDP” was until Scott Sumner started blogging. Here we have David Beckworth speculating that Milton Friedman, were he alive today, “might have liked a nominal GDP level target.”

4 Responses to “Has Tabarrok Too Been Seduced by the Sumner Side?”

  1. Major.Freedom says:

    On the bright side, we can be somewhat thankful that they haven’t read Mises or Rothbard. One less unnecessary mess to clean up.


  2. tesc says:

    M2 falling is a proxy to falling NGDP and viceversa. For what I have read. Friedman was concerned with the FED off setting the fall in velocity. Off setting V can only be done by increasing or decreasing M, stabilizing MV= NGDP = PY.

    Friedman just never thought of the relation in terms of NGDP, he saw M2 fall in the 30th and assumed that one was the key variable. Hayek was the one getting it right. It was the money stream the key variable or in Fisherman terms MV (White.)

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