Money/macro is the area where I am the least in agreement with Tyler Cowen. However I strongly agree with this excellent post on monetarism and the Great Depression. Let me try to quickly summarize the findings of my research on the Great Depression, as contained in my forthcoming book (don’t ask).
1. Would monetarism (M2 targeting) have prevented the Depression, if the US had continued to adhere to the gold standard and had been willing to use some “emergency” gold reserves to do so?
I’d say there is a good chance it might have, but there’s also a decent chance it would not have. Even Friedman admitted (much later) that he and Anna Schwartz should have focused more on the constraints of the international gold standard.
2. Would full blown monetarism circa 1963 have prevented the Great Depression? I.e. a policy of M2 targeting combined with a floating exchange rate.
Very, very likely. Or at least greatly moderated the Depression. And this is the counterfactual to consider when evaluating the usefulness of Friedman’s 1960s monetarism for modern policymaking, where there is no gold constraint.
3. Would the policy favored by Friedman later in his life (inflation targeting) have prevented the Great Depression?
Almost certainly. Prices started rising immediately after FDR devalued the dollar. And by immediately I don’t me “that year,” I mean THAT DAY. Of course the collapse of 1929-33 was a deflationary demand shock.