The Great Contraction, Seen from the Perspective of 2007
by Peter L. Bernstein
MY FIRST JOB out of college in the summer of 1940 was in the Research Department at the Federal Reserve Bank of New York, that massive Florentine palace running from Liberty Street to Maiden Lane. On the morning of December 8, 1941, I arrived for work to find a large crew painting all the Bank’s windows black. To the best of my memory, the Fed was the only building in the financial district, up to my departure in September 1942, to be so risk-averse in terms of possible air raids. New York was not exactly London. I have always been amused by the thought that the only blacked-out windows in the area made the Bank a perfect target for bombers, if any.
But then the Federal Reserve System has always had a tendency to believe it is the center of the universe. After all, it is banker to most of the U.S. commercial banking system as well as the U.S. government. In addition, the Federal Reserve Bank of New York is the depository where other central banks can store their gold.
At the time I worked at the New York Bank, over $2 billion of earmarked gold was packed away in a huge vault situated five stories underground, with an entrance protected by enormous airtight and watertight doors.1 The doors locked automatically at the end of each working day and remained shut until they automatically unlocked early the following morning, or the following Monday morning if it was a Friday. Each country’s gold stock was in a separate little room, also securely gated. Seeing those great gleaming piles of gold bricks—over 140,000 of them—piled on top of one another was literally a breathtaking experience. As a nice touch, fresh sandwiches were delivered to that deep dungeon at the end of every working day on the odd chance some absent-minded employee might be caught inside overnight with nothing else to eat until the automatic unlocking took place.
The blacking out of the windows on the morning after Pearl Harbor, the precious gold in the underground vault, and the remarkable bureaucratic rigidity (which persisted right up to the days of Paul Volcker, who became president in the late 1970s) revealed the Bank’s sense of enduring importance and power. But this view was all the more surprising because the Federal Reserve System in 1941 was little more than a clearinghouse for its member banks, its influence on the banking system and the economy at a nadir. Friedman and Schwartz comment on this condition:
The collapse of the banking system during the contraction undermined faith in the potency of the Federal Reserve System that had developed in the twenties…. One result of these changes was that the Reserve System was led to adopt a largely passive role, adapting itself in an orderly manner to changes as they occurred rather than serving as an independent center of control…. [T]he Treasury rather than the Reserve System originated and executed such monetary policy decisions as were taken.2
Reading this paragraph reminds me of an event in my two-year stint in the Research Department at the Federal Reserve Bank of New York. My boss at the time was John H. Williams, who was vice president in charge of research and also dean of the newly created Littauer Center at Harvard.3 He had been my professor in money and banking while I was an undergraduate. In the spring of 1942, Williams told me he was inviting a brilliant graduate student to come down to the Bank for the summer and join me in preparing a study of the future of the Federal Reserve System. The student was named Robert Rosa, and Williams arranged for us to work in a luxurious private suite in the tower of the building, where we would be undisturbed as we contemplated the future.4
What Friedman and Schwartz would recognize about the Federal Reserve some twenty years later was already clear to Rosa and me in 1942. Our final report to Williams carried the title “The Lebensraum of the Federal Reserve System,” unfortunately drawing on a Nazi phrase but concluding that the Lebensraum was strictly limited. The system was impotent and had no firm future. Our primary recommendation was to simply incorporate the Fed into the Treasury Department as a separate section. To his credit, Williams did not blow his cool when we delivered our volume to him, but, to my knowledge, our study was never heard of again.
There is one other delicious Federal Reserve anecdote worth telling here. Robert Rouse, longtime manager of the System’s open-market operations, was testifying one day in 1955 before a congressional committee. Asked how he would describe the current stance of monetary policy, Rouse replied, “Tight, but not too tight.” One of the members of the committee then asked him, “Couldn’t you just as well say policy is easy, but not too easy?”
Each time I read through The Great Contraction, Friedman and Schwartz’s sparkling story of tragedy, I am shocked afresh at its account of confusion, uncertainty, and raw ignorance. Infighting among members of the Federal Reserve Board and the presidents of the Banks became a routine pastime. I admit the Fed had been in existence for only sixteen years when tragedy struck in October 1929, and nothing of this order of magnitude, in either the financial markets or the real economy, had taken place during those sixteen years. Yet the monetary authorities insisted on pursuing policies with a bias toward deflation at a moment when banks were failing and the price level was sinking.
You can sense Friedman and Schwartz’s own sense of astonishment—and frequently anger as well—as their story unfolds. They have so much to say that they have relegated many of their most potent observations to voluminous footnotes immediately visible on a quick skim through this volume. Much of what they report in those footnotes belongs in the main text, not just because of the content of the notes but also because of the clearly revealed anger of the authors. While some footnotes are side comments or digressions, the best of them enhance and deepen the narrative in the main text.
Friedman’s core view of economics and matters of economic policy was fully developed by the time he undertook the massive task of his monetary history of the United States. Nevertheless, the events recounted in a key part of that work, this horror story of the Great Contraction, strengthened his convictions and formed much of the theme song he sang for the rest of his life. His viewpoint was remarkably simple, especially for an economist.
Freedom of decision, Friedman believed, was the necessary condition for the economic system to deliver the highest standard of living to the largest number of people. He was convinced that individuals as a group would make consistently better choices for themselves than bureaucrats who aimed to make decisions for those individuals. The Federal Reserve was just one government agency out of many he would have preferred to see go out of existence, or at least be relegated to just maintaining the money supply at a steady level.
A brief example from my own contacts with Friedman illustrates the spirit of his thinking. In November 1997 I sent him a copy of a short paper I had just written under the title “Pegs Lay Eggs,” in which I argued that freely fluctuating foreign exchange rates were always preferable to fixed exchange rates. Fixed exchange rates require the authorities to buy and sell foreign exchange in order to hold the rate steady (or, under the gold standard, to lower and raise interest rates to discourage or encourage inflows of gold as the situation required). As an inevitable result of these arrangements, the authorities would lose control over the money supply and interest rates. In fact, fixed exchange rates create so many distortions in the system that they are doomed to bring about their own destruction. Accordingly, Friedman’s approving response to me was, “Yes, pegs lay eggs, and eggheads create pegs.”
Money and monetary policy ran a close second to freedom in Friedman’s worldview. As he declares in an important passage on page 300 of the original (1963) text reproduced in this volume,
The monetary collapse was not the inescapable consequence of other forces, but rather a largely independent factor which exerted a powerful influence on the course of events. The failure of the Federal Reserve System to prevent the collapse reflected not the impotence of monetary policy but rather the particular policies followed by the monetary authorities…. The contraction is, in fact, a tragic testimonial to the importance of monetary forces. [italics added]
The experience Friedman is discussing here was a horrendous period of deflation, accompanied—or, in Friedman’s lights, caused—by a shrinking money supply. But his most immortal words on the subject of money related to inflation: “Inflation is always and everywhere a monetary phenomenon.” This simple concept led Friedman to make some remarkably accurate forecasts. I offer two related examples.
Even before World War II had come to an end, a number of distinguished economists were predicting that the Great Depression would reappear once the backlogs of demand accumulated during World War II had been satisfied. The most notable of these long-term bears was Alvin Hansen at Harvard, who had built an elaborate case based on the purported demise of the great growth dynamic that had powered U.S. economic growth for over a century. As Hansen perceived the situation, the frontier had disappeared as Americans spread westward across the continent, the technological revolution of the 1920s was exhausted with nothing in view to take its place, and population growth was slowing dramatically.
The persistence of this view as late as 1968 is astonishing in the face of the continued movement of Americans from one location to another, the fascination with technology spurred by rearmament during World War II, and the stunning baby boom in the first fifteen years after the end of World War II. Nevertheless, in 1968, when Friedman was invited by Oppenheimer & Co.—then one of the outstanding research-oriented brokerage houses—to express his judgment about the outlook for a return of the Great Depression, he said something like, “You’re completely wrong. Politicians always try to avoid their last big mistake—which was clearly the 1930s. So every time there’s a contraction, they ‘overstimulate’ the economy, including printing too much money. The result will be a rising roller coaster of inflation, with each high and low being higher than the preceding one.”5 Thank goodness, this prediction was valid only for the decade of the 1970s, but its basic message continues to haunt and to influence monetary policy decisions to this day.
In October 1978, near the peak of the inflation of the 1970s, Alan Greenspan declared inflation would be “6% to 7%, perhaps 8%.” Friedman was more pessimistic, pointing out: “As inflation rises, people adjust by taking their money out of the bank and spending it as they perceive its value decreasing.”6 The result would be an accelerating rather than a level rate of inflation. Friedman called for a peak between 10% and 12%. The actual peak was 14.6% in March 1980, nine months after Paul Volcker, a disciple of Friedman at that point, had become chairman of the Federal Reserve System. Immediately after his appointment, Volcker jammed on the brakes to slow the growth of the money supply. Year-over-year growth in M2, which had been running in low double-digit rates, fell to 7% to 8%, and Volcker kept on pressing. Thirty months after he took over, the inflation rate was down to less than 5%.
“The Great Contraction,” reproduced in this book, appears as chapter 7 of Friedman and Schwartz’s Monetary History. But chapter 6, “The High Tide of the Reserve System, 1921–1929,” includes a pivotal section titled “Development of Monetary Policy,” a prelude to the disasters of the Great Crash and its black sequel.
One of the most insightful observations in the book appears in a footnote in this section, in the course of a discussion of how the Federal Reserve authorities attempted to distance themselves, after the fact, from the abrupt and violent deflation of 1921:
It is a natural human tendency to take credit for good outcomes and seek to avoid the blame for the bad. One amusing dividend from reading through the annual reports of the Federal Reserve Board seriatim is the sharpness of the cyclical pattern in the potency attributed to the System. In years of prosperity, monetary policy is said to be a potent instrument, the skillful handling of which deserves credit for the favorable course of events; in years of adversity, monetary policy is said to have little leeway but is largely the consequence of other forces, and it was only the skillful handling of the exceedingly limited powers available that prevented matters from becoming even worse.7
Throughout the book, the reader is constantly challenged to choose the most rewarding passages among a plethora of candidates, but few readers would omit the discussion in chapter 6 about the Board’s tenth annual report, issued in 1923. The report was devoted to a thoughtful analysis of the principles of monetary policy and provoked an equally thoughtful analysis by Friedman and Schwartz.
The 1923 report included what, in hindsight, is one of the more amusing passages in the history of the Fed. But the report also provided a lengthy discussion of what turned out to be, without doubt, one of the most intense debates of the period, which also carries major significance for Federal Reserve policies in our own time.
Let us turn to the amusing passage first. When the System was first organized in 1913, the twelve regional Federal Reserve Banks considered themselves more or less independent entities, each responsible for its own geographical area but without much interest in the influence of the Federal Reserve System on the economy as a whole. Based on this parochial viewpoint, the regional Reserve Banks proceeded to buy and sell government securities as indicated by their own needs. The objective was to maximize the rate of return to the Bank from this activity. Any secondary effects were ignored. The officers of the Banks apparently paid little or no heed to the consequences of their activities in the bond market or on the general economy, even though their sales and purchases of government securities affected the supply of money, the lending and investing capacities of the member banks, and the national level of interest rates.
Ten years into the game, reality dawned, and none too soon. When the individual Reserve Banks bought government securities, they issued a check to the seller or transferred the purchase amount to the seller’s bank account. Either way, the transaction resulted in an increase in the reserves of the seller’s bank without any reduction in reserves in any other bank. Thus, the total reserves available in the commercial banking system had increased, which meant a net increase in the banks’ capacity to lend or to reduce any borrowings they may have had at their Reserve Bank’s discount window. And vice versa if the Reserve Banks sold securities. As the other side of the transaction was often located in another Federal Reserve district, the consequences of these trades spread rapidly throughout the country.
Friedman and Schwartz describe what happened when the authorities finally woke up to what was going on. From October 1921 to May 1922, the Reserve Banks acting individually had bought $400 million in government securities without paying any attention to the influence of these transactions on the money market. In May 1922, the Reserve Banks finally organized a committee of the five governors (now known as presidents) of the eastern Reserve Banks to execute joint purchases and sales in the open market and to avoid conflict with Treasury operations in the money market. According to Friedman and Schwartz, “This was the first explicit recognition of the coordinate importance of open market operations and rediscounting for general credit policy….”8 In the spring of 1923, this committee was superseded by the Open Market Investment Committee for the Federal Reserve System, appointed by the Board with the same five members. Six months later, the Board established a System account, which allocated transactions pro rata to the individual Banks. Many years passed, however, before that committee was given primary responsibility for all open-market operations by Federal Reserve Banks.
According to Friedman and Schwartz, the most significant part of the tenth annual report was a section titled “Guide to Credit Policy,” which they describe as “a highly subtle and sophisticated analysis of the problem of devising criteria to replace the gold-reserve ratio…. [The section] has an indefiniteness befitting its main thesis: that there is no simple test such as the reserve ratio, the exchange rate, or a price-index number that can serve as an adequate guide for policy; that ‘policy is and must be a matter of judgment,’ based on the fullest possible range of evidence about changes in production, trade, employment, prices and commodity stocks.”9
For many years, the modern Fed has been attempting to develop rules to explain, justify, and define its decision-making process. Some of these rules are quantitative, such as the Taylor Rule, which proposes changes in the rate on Fed funds based on the spread between real and potential GDP and between the actual rate of inflation and the target rate of inflation. In the end, however, although the minutes of today’s meetings of the Federal Open Market Committee pay close attention to signals from mechanical guidelines like Taylor’s, in the end the committee also arrives at decisions for which “policy is and must be a matter of judgment.”
Today, the Fed sees itself primarily as the guardian against a rising rate of inflation, although on occasion the rate of economic growth also becomes a consideration in policy decisions. This view bears no relation to the Fed’s perception of its objectives in the 1920s. Back then, the obsession was with the possibility that credit in the economic system might be used to finance speculative accumulations of commodities. In the words of the 1923 report, “[T]here will be little danger that the credit created and contributed by the Federal reserve banks will be in excessive volume if restricted to productive uses.” One can only wonder what today’s Open Market Committee would have to say to that happy observation.
This viewpoint, subsequently known as the real bills doctrine, focused on what the Fed described as “the needs of trade.” Economic growth, the foreign exchange rate of the dollar, and the expected rate of inflation—or deflation—did not appear to be anywhere near as important as differentiating between the needs of trade and the activities of speculators. Friedman and Schwartz are apoplectic about the viewpoints expressed by these passages in the 1923 report:
Despite the skill and acuity with which this section of the report is written, it is yet most unsatisfactory as a guide to credit policy. The requisite “judgment” cannot be based on factual evidence alone. The evidence must be interpreted and the likely effects of alternative courses of action predicted. On all this, the section offers little beyond glittering generalities instructing the men exercising the judgment to do the right thing at the right time with only the vaguest indications of what is the right thing to do.10
In defense of their flat-out criticism of these simplistic attitudes at the Federal Reserve, Friedman and Schwartz cite the scathing viewpoint of Charles O. Hardy, who wrote an important book on the Fed published in 1932: “This line of analysis points to the conclusion that it is not the business of the Reserve system to stimulate business by making money artificially cheap in periods of depression or dear in periods of boom, but merely to adapt itself to conditions as it finds them.”11
When the Federal Reserve authorities drafted their concerns about commodity speculation and the needs of trade in the 1923 report, they had no idea they would soon be confronted with a different kind of speculation. Deciding whether and how to manage the great stock market speculation of the late 1920s would involve more controversial and dangerous decisions.
The issue of controlling stock market speculation came to a head during 1928–29, when the Board in Washington and Governor Benjamin Strong of the New York Bank went head-to-head over whether to use “direct pressure” to contain the boiling speculation under way on Wall Street. The issue of “direct pressure”—in contrast to the usual procedure of raising the discount rate to discourage member bank borrowings—arose originally during the intense speculation in commodities in 1919, when the Federal Reserve Board refused to act on the Treasury’s request to sanction increases in the discount rate but, instead, urged the Reserve Banks to use “direct pressure” to prevent what they deemed excessive borrowing by the commercial banks that were members of the System.
In October 1925, when Wall Street was just beginning to enjoy the speculation that climaxed with the Great Crash in October 1929, Walter W. Stewart, director of research at the Board, proposed that the Reserve Banks could tame the boom in the stock market by putting direct pressure on member banks to reduce their financing of margin credit. Benjamin Strong, the head of the Federal Reserve Bank of New York, disagreed. Strong had had long experience as a commercial banker and had a personality to match his name. He argued that scolding denizens of Wall Street would carry little authority unless, at the same time, the New York Bank would be authorized to refuse loans at the discount window for banks carrying credits that were financing speculation. Nothing happened at that moment, but the matter popped up again in 1928 when Adolph Miller, the Board’s economist, called for the New York Reserve Bank to call together the presidents of the large New York banks and command an end to their financing of speculation on Wall Street.
A deeper matter was involved here, beyond the immediate problem of how to cool stock market speculation. To Stewart and Miller, suppressing speculation had high importance, but only if it was accomplished by imposing direct pressure rather than raising the discount rate. That step, they believed, would stifle the “needs of trade,” or the uses of credit for productive purposes—a view based on the debatable proposition that the authorities could control the flow of credit into speculative activities without in any way curtailing the flow of credit to productive uses. Or, to put it the other way, if credit flowed freely to productive uses, could not some of the liquidity come back and finance speculation in the stock market? How, in short, could the Fed stifle speculation without having any other impact on the economy? As a matter of fact, as Friedman and Schwartz point out, the 1923 report “had emphasized the impossibility of controlling the ultimate use of Reserve credit, and other reports had repeatedly noted the same point.”12
The dispute raged on as the stock market boom roared ahead. After Strong’s untimely death from tuberculosis in October 1928, his successor, George Harrison, met with the Board on February 5, 1929, to complain that the growth of credit in the banking system was far too great relative to the growth in the volume of business activity.13 At the same time, Harrison declared that interest rates were so high they threatened the continuation of prosperity. He proposed raising the discount rate “by sharp, incisive, action [which] would quickly control the continued expansion in the total volume of credit so that we might then adopt a System policy of easing rates.”14 No kidding!
This remarkable suggestion was just one step in a seemingly endless back-and-forth between the New York Reserve Bank and the Board on whether to raise the discount rate to stifle speculative credit, with the Bank arguing for an increase in the discount rate and the Board arguing just as stubbornly for direct pressure in the form of a refusal to discount paper from member banks that were financing stock market transactions. At one point, the New York Bank enlisted Treasury Secretary Andrew Mellon to support its viewpoint, and, on May 10, Mellon wrote the Board to point out that a Reserve Bank had no right to deny accommodation to a member bank on the grounds that it had made loans on securities, if the member bank offered eligible paper (primarily promissory notes related to commercial loans) as collateral for the discount loan.
The rest of this story plays out in the pages ahead, so I will resist the temptation to tell you how it ends. But the controversy over the role of the Federal Reserve in the face of what appears to be speculation in asset prices has had a second incarnation in our own time. Chairman Greenspan and then Chairman Bernanke have been of one mind on this subject—the Fed should not attempt to control speculation in asset prices—but the argument has been intense among participants in the world of finance.
As the high-tech boom of the 1990s led to an increasingly speculative stock market in the second half of the decade, pressure built up on the Greenspan Fed to burst the bubble by tightening money.15 But Greenspan expressed firm opposition to basing Federal Reserve policy on asset price bubbles about whose existence he was uncertain. “To spot a bubble in advance,” he observed, “requires a judgment that hundreds of thousands of investors had it all wrong.”16 This statement is consistent with Greenspan’s deepest philosophical views that markets know best and that interference in free markets will lead to suboptimal results. Milton Friedman would agree: the Fed was responsible for monetary policy, and nothing else.
Quite aside from considerations of “the needs of trade,” Greenspan clearly had no use for the view of his predecessors from the 1920s, who were convinced they should control the bubble they identified in the stock market. They were equally convinced their efforts would have no impact on business activity, because they saw the stream of speculative finance and the stream of finance for the economy as discrete entities. The only uncertainty they could identify was in the most effective method for accomplishing their assault on speculation. As this volume on the Great Contraction makes only too clear, they ended up pursuing that bubble until the whole economy cried “Uncle!”
Greenspan, on the other hand, insisted that the responsibility of the Fed, as defined by Congress, has nothing to do with making judgments about asset prices. Instead, the Federal Reserve should be aiming for a stable, low rate of inflation in the CPI and stable economic growth. Principles aside, he was reluctant to take any steps to interrupt the extraordinary rate of technological change and impressive productivity growth that characterized the expansion of the 1990s. It was only in mid-1999, as the CPI climbed steadily and rapidly from 1.5% to around 3.5%, that Greenspan agreed to take the punch bowl off the table and push the fed funds rate from 4.75% to 6.5%. These steps were associated with an abrupt and steep decline in the stock market, accompanied by a mild recession in the real economy.17
This recession, mild as it may have been, brought the economy perilously close to slipping into deflation. In early 2002, the CPI was crawling along at annual rates close to 1%, compared with more than 3% a year earlier. Greenspan and the Open Market Committee agreed that deflation would be the worst possible outcome, as Japan’s disastrous experience in the 1980s had demonstrated so dramatically. Once consumers and business managers begin to anticipate lower prices, they postpone their purchases as long as they can—a decision that only makes the price declines even steeper and more difficult to reverse.
In what Greenspan and his associates referred to as “risk management,” they took the risk of subsequent inflation, which they were convinced they could control, by making every effort to increase the money supply as rapidly as possible before price changes turned from positive to negative. Bernanke, then a governor on the Board, became known as Helicopter Ben for his allusion in 2002 to Milton Friedman’s suggestion in 1969 of a “helicopter drop” of currency in order to stimulate spending that would counter deflationary forces.18
More recently, the Greenspan Fed was blamed for creating so much liquidity while fighting deflation that it led to the bubble in housing and all the subsequent credit troubles spawned by that bubble. And once again, pressure on the Fed built up to prick the housing bubble before it ran to extremes. And once again Greenspan dug in his heels. He and his successor, Ben Bernanke, held the same view: bubbles are impossible to identify until after the fact, and the Fed’s target is the CPI, not asset prices. As Bernanke defined the position in September 2004, “For the Fed to interfere with security speculation is neither desirable nor feasible…. [I]f a sudden correction in asset prices does occur, the Fed’s first responsibility is … to provide ample liquidity until the crisis has passed.”
The debate rages on. On October 18, 2007, Stephen Roach, a managing director and economist at Morgan Stanley with a large following on Wall Street, summed up the opposite case in favor of Fed intervention in developing bubbles:
It is high time for monetary authorities to adopt new procedures—namely, taking the state of asset markets into explicit consideration when framing policy options. Like it or not, we now live in an asset-dependent world. As the increasing prevalence of bubbles indicates, a failure to recognize the interplay between the state of asset markets and the real economy is an egregious policy error.19
Shortly after Roach expressed himself on this matter, Fed governor Frederic Mishkin took up the cudgels for the other side:
The point is that, although the Federal Reserve can and should offset macroeconomic risk with monetary policy decisions, investors remain responsible for dealing with valuation risk. Indeed, monetary policy is and should be powerless in that respect. It is solely the responsibility of market participants to do the hard work of price discovery and to ascertain and manage the risks involved in their investments.20
Controversies like these over decisions by the Federal Reserve will probably continue into the future ad infinitum. But the chapters of Friedman and Schwartz’s monetary history that relate the nightmares of the Great Contraction provide important guidelines for today’s authorities and their successors. Indeed, we cannot find a better way to comprehend today’s problems and proposed solutions than to turn to the invaluable legacy Friedman and Schwartz have left us.
Before proceeding, keep in mind this revealing statement in the Wall Street Journal by Milton Friedman on August 19, 2003, a little more than three years before he died: “Fifteen years ago … I wrote ‘no major institution in the U.S. has so poor a record of performance over so long a period as the Federal Reserve, yet so high a public recognition.’ As I believe I demonstrated at the time, that judgment is amply justified for the first seven decades or so of the Fed’s existence. I am glad to report that it is not valid for the period since.”21
Would Friedman hold the same viewpoint today?
1 Two billion dollars was real money in those days, when total Federal Reserve holdings of government securities and loans to member banks totaled only a little over $2 billion.
2 Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton: Princeton University Press, 1963) p. 12.
3 Williams, in an earlier incarnation, had invented the double-entry bookkeeping system for the balance of payments of Argentina. His methodology was soon adopted around the world. He was a wonderful person to work for, not at all like the rest of his management colleagues. He was broad-minded, tolerant, intellectually curious, and impervious to the anti-Semitic, antifemale policies prevalent in all the other departments of the Bank.
4 Rosa was of Swedish descent, not Italian. His grandfather’s name had been Roosa, but, on arrival in the United States, the grandfather got tired of hearing the name pronounced as it was written. He changed his name to Rosa, which gave it the proper pronunciation. Bob, who subsequently became undersecretary of the Treasury for financial affairs under John Kennedy, reversed his grandfather’s choice shortly after World War II and became Robert Roosa.
5 Charles H. Brunie, “My Friend, Milton Friedman: Reminiscences of a Great Man,” City Journal, April 11, 2007. Brunie managed Milton and Rose Friedman’s investment portfolio at Oppenheimer & Co.
6 Ibid.
7 Friedman and Schwartz, pp. 250–251, footnote 13.
8 Ibid., p. 251.
9 Ibid., p. 252.
10 Ibid., p. 253.
11 Ibid. The quotation is from Charles O. Hardy, Credit Policies of the Federal Reserve System (Washington, D.C.: Brookings, 1932). Friedman and Schwartz comment in the footnote reference to this work that Hardy was an “economist outside the System.”
12 Friedman and Schwartz, p. 254.
13 Harrison was married to Woodrow Wilson’s widow. I knew him slightly during the stint at the New York Bank and found him pleasant enough but always pompous and self-important.
14 Friedman and Schwartz, p. 257, footnotes 27 and 28.
15 Stock prices rose at an annual rate of 25.7% from January 1995 to January 1999, for a total rise of 265%.
16 Testimony before U.S. Congress Joint Economic Committee, June 1999.
17 Stock prices fell at an annual rate of 20% from September 2000 to March 2003, for a total decline of 42.5%.
18 See Bernanke’s November 21, 2002, speech in Washington, D.C., “Deflation: Making Sure ‘It’ Doesn’t Happen Here”; he refers to Milton Friedman, The Optimum Supply of Money and Other Essays, Chicago: Aldine, 1969.
19 Morgan Stanley.
20 Risk USA 2007 Conference, New York, November 5, 2007.
21 Brunie.