Krugman Versus Friedman: Monetary Policy, 1929–1933, A Note

Abstract

In a retrospective on Milton Friedman, Paul Krugman is critical of Friedman's remarks on monetary base changes in the early years of the Great Depression. Krugman emphasizes that the monetary base did increase by about one billion dollars from 1929–1933, thereby implying the Fed was pursuing an expansionary policy. The purpose of this comment is to clarify monetary base analysis in this period. More specifically, two common misconceptions in regard to the monetary base are discussed: first, that changes in the base are a reliable indicator of the stance of Fed policy, and secondly that the Federal Reserve exercises absolute control over changes in the base.