Study of the Great Depression Shapes Bernanke's Views: Federal Reserve Chair Ben Bernanke agrees with important monetarist idea

Milton Friedman and Anna Jacobson Schwartz upended that view in 1963 (that the Depression was the inevitable consequence of excess investment, flawed corporate governance and speculation in the 1920s). In "A Monetary History of the United States, 1867-1960," they argued that the Depression was far from inevitable, but brought about by an "inept" Federal Reserve. First, they said, the Fed foolishly raised interest rates in 1928 to end speculation on Wall Street, causing a recession the next year that precipitated the crash. Then, it let thousands of banks fail and the money supply shrink. In part, it thought weak banks should be allowed to fail. It also feared that lower interest rates might lead foreigners to dump dollars, straining the currency's link to gold.

Bernanke read the book as a graduate student at Massachusetts Institute of Technology in the 1970s. "I was hooked, and I have been a student of monetary economics and economic history ever since," he recalled at a 2002 conference honoring Friedman's 90th birthday. Bernanke, by then one of the Fed's seven governors, told Friedman: "Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

Copyright 2005 Charleston Newspapers Charleston Gazette (West Virginia)
December 11, 2005, Sunday SECTION: NEWS; Pg. P8E
BYLINE: Greg Ip, The Wall Street Journal