Feb 3, 2008

Alvaro Vargas Llosa on Fed mistakes in the 1920s and 1930s

As economist Murray Rothbard showed in his book America's Great Depression, in the 1920s the Federal Reserve pumped up the money supply, expanding credit by more than 60 percent. Because the economy was very productive, this monetary expansion did not show up in the regular inflation figures. But, as is always the case with inflation, many resources went to the wrong kind of investments--until the crisis hit. The late Milton Friedman showed how the Fed made things worse by not providing the system with enough liquidity once the Depression was obvious.

~ Alvaro Vargas Llosa, "Fed Up," The New Republic, November 28, 2007

(editor's note: As Frank Shostak shows, the Fed expanded its balance sheet rapidly during the early 1930s, despite Friedman's claim. However, overall money supply contracted due to falling bank lending.)

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