Milton Friedman: the Great Depression was caused by the Fed. Not tariffs. pic.twitter.com/CTNVzTKM7s
— Insurrection Barbie (@DefiyantlyFree) April 5, 2025
Milton Friedman, one of the most influential economists of the 20th century, believed that the Great Depression wasn’t caused by tariffs, stock market crashes, or any external force. It was caused by the Federal Reserve’s disastrous failure to manage the money supply. In fact, Friedman’s perspective on the origins of the Depression turns traditional economic thinking on its head.
His argument was simple but profound: the U.S. economy was struck by a man-made disaster, and the culprit was the Federal Reserve’s negligence. From 1929 to 1933, the U.S. money supply contracted by a staggering 33%. That’s a catastrophic drop, especially considering how reliant the economy was on monetary stability. But here’s the key point: the Fed had the power to stop this, and it didn’t.
Friedman explained that, at the time, the Fed failed to act as the lender of last resort. When banks failed and panicked depositors rushed to withdraw their savings, the Fed could’ve stepped in to stabilize the system. But it didn’t. Instead of flooding the market with liquidity to prevent a banking panic, the Fed stood by and watched as thousands of banks collapsed. It wasn’t a lack of resources that caused the disaster—it was a failure of will and understanding of how deep the crisis was becoming.
The Fed didn’t just fail to act—it actively worsened the situation. In 1931, at a moment when the economy was already in freefall, the Federal Reserve decided to raise interest rates to defend the gold standard. This move, Friedman argued, was the equivalent of tightening the noose on a strangling economy. The tightening of monetary policy in the middle of a collapse is one of the most glaring failures in modern economic history.
In fact, Friedman believed that the U.S. economy was primed to rebound far sooner if the Fed had just managed the money supply. By allowing the contraction to spiral out of control, the Federal Reserve turned what could have been a short-term recession into the decade-long catastrophe we now call the Great Depression.
Friedman’s analysis draws attention to something even more important: the need for a central bank to understand its role in preserving economic stability and not simply responding to political pressures. This argument resonates today as the Federal Reserve continues to make policy decisions that often seem disconnected from the real-world impacts on people’s lives.
Milton Friedman’s insights are more relevant than ever. With central banks around the world pushing unprecedented monetary policies and facing new economic crises, his warning about the dangers of poorly managed monetary policy remains a crucial lesson.