"A failure of government, not of private enterprise . . ."

In the fall of 1979, fifty years after the Great Crash of October 25, 1929, the Journal of Portfolio Management published a commemorative issue they had been working on since 1977 entitled "The Great Crash: Causes, Consequences, Relevance -- a fifty-year retrospective."

It contained articles by economists such as Paul Samuelson (winner of the 1970 Nobel Prize in Economics), John Kenneth Galbraith, and Milton Friedman (winner of the 1976 Nobel Prize in Economics). There were also articles by economic historian Charles Kindleberger, money managers Arthur Zeikel, David L. Babson and Sidney Homer, Value Line founder Arnold Bernhard, Ibbotson founder Roger Ibbotson, and noted professors James Lorie and Peter Bernstein, among many others.

In that issue of the Journal of Portfolio Management, Milton and Rose Friedman contributed "The anatomy of a crisis . . . and the failure of policy." In it, the authors noted that the Depression directly contributed to the rise of Adolf Hitler, the strengthening of the grip of the military over Japan, and the hyper-inflation in China that allowed the rise of Mao. And in the realm of ideas, the authors noted, the Depression persuaded many that capitalism was fundamentally unstable and subject to ever more serious crises, and that government had to play a more active role to intervene and offset the instability created by private enterprise.

The Friedmans, however, explain very clearly that those conclusions are false. In a sentence they italicize for emphasis (the only italics in the entire article), they state:

"We now know, as a few knew then, that the Depression reflected a failure of government, not of private enterprise."

This fact is vitally important. It is important because schools today continue to teach the opposite, and it is important because the current situation is being framed in the exact same terms.

We believe that it is important to explain that the current situation reflects a failure of government, not of private enterprise.

This past Friday, the Wall Street Journal contained an excellent article by George Mason University professor of economics Russell Roberts. In it, he gives a detailed description of the role played by government in artificially boosting housing demand and encouraging the creation of risky assets derived from the housing boom. The only augmentation of that detailed article which we would offer would be to point out that the Federal Reserve lowered the fed fund target rate all the way to 1.00%, and did not stop at 1.25% in 2003 as it might sound from the wording of the article.

The insights of Professor Roberts, and the insights of Milton and Rose Friedman from 1979, are vitally important right now, and should be explained to the American people from every outlet available. As the Friedmans explained, drawing the wrong conclusions from economic catastrophes led to utterly tragic consequences in the twentieth century.

Please pass these insights on to your friends and family.

For future posts dealing with this same topic, see also:

• "Managing Investments in the New Era," 02/18/2009.

• "Guide the market's invisible hand with a higher principle?" 02/26/2009.

• "Don't despair" 03/17/2009.

• "Milton Friedman, 1912 - 2006" 07/31/2009.

• "What Rube Goldberg could teach us about economics" 12/08/2009.

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