The Parallels between the Myth of the Laissez-Faire Hoover and the Myth of the Do-Nothing Fed Are Striking

In addition to the myth of the laissez-faire Herbert Hoover, another popular theory of the Great Depression blames the do-nothing Federal Reserve. Ironically, this interpretation comes, not from Big Government critics of the free market, but instead from none other than Milton Friedman and his monetarist followers. Just as modern-day Keynesians urge the government to “avoid the mistakes of Hoover” by running up massive deficits, so too do modern monetarists urge the Fed to “avoid the mistakes of the Depression” by injecting massive amounts of reserves into the banking system. 

The parallels between the myth of the laissez-faire Hoover and the myth of the do-nothing Fed are striking. Just as Hoover engaged in unprecedented “stimulus” through his fiscal policies, so too did the Fed—starting immediately after the stock market crash in 1929—engage in unprecedented “easy money” policies. Because the massive budget deficits eventually forced Hoover to reverse course and raise taxes (in 1932), modern Keynesians say Hoover didn’t borrow-and-spend enough. Similarly, because a gold outflow from the country eventually forced the Fed to reverse course and tighten the money supply (in late 1931), the monetarists say the Fed didn’t inflate enough. But in both cases, the question remains: If budget deficits and cheap money were the right medicine, why was the Depression still getting worse, two years into these unprecedented fiscal and monetary remedies?

—Robert P. Murphy, “Did the Tightwad Fed’s Deflation Cause the Great Depression?” in The Politically Incorrect Guide to the Great Depression and the New Deal (Washington, DC: Regnery Publishing, 2009), 63-64.