During the 1930s, Fisher and the Chicago School Were “pre-Keynes Keynesians” Wanting to “Reflate” the Price Level

And now, in his highly touted Monetary History of the United States, Friedman has demonstrated his Fisherine bias in interpreting American economic history. Benjamin Strong, undoubtedly the single most disastrous influence upon the economy of the 1920s, is lionized by Friedman for his inflation and price-level stabilization during that decade. In fact, Friedman attributes the 1929 depression not to the preceding inflation boom but to the failure of the post-Strong Federal Reserve to inflate the money supply enough before and during the depression.

In short, while Milton Friedman has performed a service in bringing back to the notice of the economics profession the overriding influence of money and the money supply on business cycles, we must recognize that this “purely monetarist” approach is almost the exact reverse of the sound—as well as truly free-market—Austrian view. For while the Austrians hold that Strong’s monetary expansion made a later 1929 crash inevitable, Fisher-Friedman believe that all the Fed needed to do was to pump more money in to offset any recession. Believing that there is no causal influence running from boom to bust, believing in the simplistic “Dance of the Dollar” theory, the Chicagoites simply want government to manipulate that dance, specifically to increase the money supply to offset recession.

During the 1930s, therefore, the Fisher-Chicago position was that, in order to cure the depression, the price level needed to be “reflated” back to the levels of the 1920s, and that reflation should be accomplished by:

1. the Fed expanding the money supply, and
2. the Federal government engaging in deficit spending and large-scale public works programs.

In short, during the 1930s, Fisher and the Chicago School were “pre-Keynes Keynesians,” and were, for that reason, considered quite radical and socialistic—and with good reason. Like the later Keynesians, the Chicagoans favored a “compensatory” monetary and fiscal policy, though always with greater stress on the monetary arm.

—Murray N. Rothbard, “Milton Friedman Unraveled,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 906-907.