In an interview on The Lessons of the Great Depression

So we shouldn't take books with titles like FDR's Folly, claiming Roosevelt prolonged rather than alleviated the Great Depression, too seriously?

It’s clear that a lot of the policies that were put into place were negative, but as to sorting out how important they were, that’s a much more challenging question. And I think Roosevelt at the time recognized ex-post that some of the things he tried were failures and then his attitude was, “OK, it’s a failure. I’ll stop doing it.” Which is actually pretty positive.

For example, some of the things he did was try to organize labour unions and also businesses essentially promoting monopoly – I don’t think that was a plus. He was trying really hard to keep wages and prices from falling with direct influence and that was a negative. The effect of the expenditure programs is less clear. In the mid-1930s with the New Deal there was an unusual amount of infrastructure-type of expenditures. But it’s not actually big enough to sort out in a statistical sense – to figure out how much it mattered in terms of the recovery after the trough in 1932-33. I don’t think we know that that was a mistake, but it’s not clear that it was all that important.

In an interview on Pioneering Conservatism

I love this list of books: between Friedman and Schwartz at the beginning and de Soto at the end, it pretty much demolishes every liberal shibboleth for a generation or two. Let’s start with Milton Friedman. Why A Monetary History of the United States and not one of his more popular books?

The idea behind my list is that these are five conservative books that changed the way we think about fundamental problems – and changed them so powerfully that there was no going back. The highly intrusive regulatory redistributionist state that was built in the 1930s was founded on an analysis of what went wrong in the horrific trauma of 1929 to 1941 in the United States. There was an accepted understanding of why it was that the economy went into this searing experience for a generation of Americans and what it was that got the US out again. That legitimated a quarter century of public policy afterwards. Friedman and Schwartz did many things in this book but the most powerful lesson for its readers is they debunked all the previous explanations of what had caused the Great Depression and showed that it was the product of a failure of monetary policy. So when the US had severe economic problems in the 1970s, it opened the way for Friedman to win that argument about how to stop the great inflation – just as he had argued that better monetary policy could have stopped the Great Depression.

How does monetary policy tie back into the conservative political movement?

Capitalist economies go through cycles, good times and bad. Democratic capitalist societies will not take the same amount of pain from those cycles that pre-democratic capitalist societies did, so we are going to have to do something about these cycles. If the cycles are caused by government taxing and spending, then the answer is that in order to avert cycles, or mitigate them, the government is going to have to have a direct active response in the economy. What Friedman showed is that government can have an impact on these cycles in a much less intrusive way, through the regulation of banking and credit. By the way, this is not a call for classic laissez-faire, for doing nothing, because one of the lessons of the Friedman book is that the federal government did exactly the right thing in 2008 when it intervened to save the banking system. All these people today who say, ‘Well, the conservative thing to do would be to let the banks go under,’ will have to argue with Milton Friedman, because that is what turned the ordinary recession of 1929-1930, which was nasty but ordinary, into the extreme crisis of 1931, 32 and 33.

Government is a part of the solution but it shouldn’t be a knee-jerk Keynesianism.

The book is an answer to Keynes, but Friedman doesn’t refute Keynes’s book, he absorbs Keynes. That’s what great minds do with their predecessors – just as Keynes did not refute Alfred Marshall’s ideas, he absorbed them.

One other lesson from Friedman is that it’s a good idea for governments to run a deficit. The people who in 1929 said the answer to the Depression was to balance the budget, Friedman thinks are just as wrong as Keynes does. According to Friedman, the reason you want the government to run a deficit is not because you want government adding to demand, but because the deficit creates money. The government is able to finance the gap between what it takes in and what it spends by creating various forms of money – whether it is cash or whether it’s bonds. It’s that addition to the money supply that stimulates the economy and not the government’s purchases as such. As often happens with policy arguments, people can converge on the same answer for radically different reasons.

It’s hard to imagine Reagan without this book. People remember Reagan as a supply-side, low-tax guy but that period was actually more about inflation than any other single issue.

One way to think about what Reagan’s great contribution was in 81 and 82 is that he stood unflinchingly by the Federal Reserve as it imposed some very painful measures to squeeze inflation, not only in the US economy but in the world economy. A lot of other people would have flinched from that and his tax cuts helped to soothe the pain of the monetary policy. But it was the monetary policy that stopped inflation.

In an interview on Learning from the Great Depression

Let’s get to your books. The first three are about what caused the Great Depression, and the last two are about what ended it. Your first choice is A Monetary History of the United States by Milton Friedman and Anna Schwartz. Please give us a précis of the book and explain how it changed the debate about the causes of the Great Depression.

I frequently tell students: If you buy only one economics book, it should be A Monetary History. The book is obviously important for our understanding of the Great Depression, but its impact goes far beyond that. Friedman and Schwartz show us that monetary events and monetary policy have affected real output throughout American history.

That's a fundamentally important finding. It tells us that a monetary development that affects aggregate demand has an impact on the things we care about, like employment, unemployment and how much we produce in the economy. The other thing that Friedman and Schwartz do is show us how to use historical evidence on policymakers’ motivation and thinking to help establish a causal relationship between money and output.

When you asked me for my list of books, I debated about whether to put The General Theory by John Maynard Keynes on the list. The General Theory is an incredibly important book, but it's basically a theoretical explanation of how aggregate demand could affect output. It was Friedman and Schwartz who provided the empirical evidence that supported the theory. That's why A Monetary History went to the top of my list.

With regard specifically to the Great Depression, Friedman and Schwartz show that there were large declines in the money supply associated with repeated waves of banking panics. They also provide compelling evidence that bad economic ideas and a dysfunctional organisational structure were key reasons why the Federal Reserve did so little to stop the panics.

The book was published nearly 50 years ago. Do its explanations still hold up or has other research superseded it?

One of the reasons why A Monetary History is still such a classic is that it has held up to a remarkable degree.

The essence of the Friedman and Schwartz approach was very different from what modern economists do. Modern economists get data. They run regressions. It's all statistical work. Friedman and Schwartz understood that even if you have all the data you could want on the money supply and output, it's still going to be very hard to identify the causal relationship between the two because money changes for lots of reasons. Sometimes it changes because output is changing, and changes in output affect how much banks lend and the money multiplier. Other times, the money supply changes because the Federal Reserve makes a mistake or there's a deliberate policy action unrelated to the state of the economy.

The brilliance of this book is that Friedman and Schwartz use a lot of non-statistical or narrative evidence. They read the diaries of people running the Federal Reserve in the 1930s and they went through the records of the policymaking process. They were able to identify times when the money supply moved for relatively independent or exogenous reasons – not in anticipation of what was going to happen to output or because of other things going on in the economy. What they found was that after these relatively exogenous movements in the money supply, output moved strongly in the same direction.

A Monetary History very much affected the kind of research that I've done in my career. There have been many times when I've needed to go back and read the same primary documents that Friedman and Schwartz read. What almost always strikes me is just how right they were. This book is an example of exceptional scholarship. They looked at documentary evidence carefully and honestly, and came up with an interpretation that has stood the test of time. That's why it remains such an important book for our understanding of the macroeconomy and the Great Depression.

Nobel-prize winning economist Robert Solow famously quipped: “Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper.” What point was Solow making?

Milton Friedman believed deeply that monetary forces had an important impact on the economy, and he never missed an opportunity to remind people of that fact.

In the 1960s there was a fight between monetarists like Friedman and Schwartz, who thought that monetary forces were very important, and Keynesians like [Paul Anthony] Samuelson and Solow, who tended to focus on the impact of changes in government spending and taxes. Modern economists tend to see monetarists and Keynesians as being on the same side. They both believe, based on strong empirical evidence, that changes that affect the demand side of the economy – taxes, monetary changes or government purchases – affect output and employment.