Volume 3 - Anatomy of Crisis
Between the Civil War and the Depression, laissez faire was the economic
order of the day. But the Depression reversed public attitudes because
it was viewed as a failure of capitalism. Many people were persuaded
that free market capitalism was fundamentally unstable, that government
must play a more active role, intervening to correct the instability
of the system. This view of history still dominates popular belief
and government policy. The Depression also prompted a dramatic shift
in professional economic opinion -- away from the long-held belief
that monetary policy was a powerful instrument of economic policy
to nearly the opposite view that "money does not matter."
The economics profession embraced the new theories of British economist
John Maynard Keynes, who offered an appealing justification for extensive
government intervention. According to Milton Friedman, the shift of
both public and economic opinion "arose from the misunderstanding
of what actually happened... the Depression reflected a failure of
government, not free enterprise." In particular, it was a failure
of the Federal Reserve System to exercise its powers to halt the slide.
The evidence is clear "that the Depression was produced -- or
at the very least made far worse -- by perverse monetary policies
followed by the U.S. authorities." The irony, as Dr. Friedman
explains, is that this crisis, which resulted from government failure,
led to decades of government expansion.