Remembering 'The Forgotten Man'.

• Author: Greaves, Bettina Bien
• Position: Letters - Letter to the editor

Amity Shlaes says in her interview ("Remembering 'The Forgotten Man,'" January) a lot that should be said. But she also says some things that shouldn't be said, especially about the Federal Reserve. Shlaes adopts Milton Friedman's thesis that the Fed failed in its duty by contracting the quantity of money between 1929 and 1932. She cites Irving Fisher, whom she admires, as saying, "There must be more money!"

True, there was a shortage of money after the collapse of the stock market in 1929. But the contraction had such a catastrophic effect because of the previous expansion.

The Fed was established in 1913 in the hope of avoiding crises due to a shortage of funds such as banks and their clearinghouses had encountered periodically. The Fed was to create a "flexible" money supply to satisfy the "needs of business" and to serve as the lender of last resort to banks in crisis. Thus its very purpose was inflationary. It fostered "easy money" by making loans available at relatively low interest rates. The new easy money lured businessmen to undertake enterprises they would not have considered profitable at market interest rates. Business boomed. The stock market flourished. If there had been no boom, there would have been no monetary contraction. Thus, the Fed's responsibility for the depression started with the preceding boom.

It is true that the 1929-1932 monetary contractions precipitated the crash and the depression that followed. But the contractions were only the spark that ignited the depression; the kindling had been gathered in the preceding boom. Friedman and Anna Schwartz's massive history of money, today's acknowledged authority on the theory that the quantity of money matters, apparently accepted the...