What did the monetarist claim the cause of the Great Depression was?

Second, there are the monetarists, who believe that the Great Depression started as an ordinary recession, but that significant policy mistakes by monetary authorities (especially the Federal Reserve) caused a shrinking of the money supply which greatly exacerbated the economic situation, causing a recession to descend …

What is the monetarist theory?

Monetarist theory views velocity as generally stable, which implies that nominal income is largely a function of the money supply. Variations in nominal income reflect changes in real economic activity (the number of goods and services sold) and inflation (the average price paid for them).

Who was the prominent monetarist?

Milton Friedman was one of the leading economic voices of the latter half of the 20th century and popularized many economic ideas that are still important today. Friedman’s economic theories became what is known as monetarism, which refuted important parts of Keynesian economics.

What was the monetarist theory of the Great Depression?

Those who argue for the monetarist theory base their position on numerous critical works, including the 1963 book “A Monetary History of the United States, 1867-1960” by Milton Friedman and Anna Schwartz. According to them, the Great Depression started as a normal economic recession but the fall of the money supply worsened the economic situation.

Why did Milton Friedman believe in monetarist economics?

Monetarist Economics Made Easy. Monetarist economics founder Milton Friedman believed monetary policy was so incredibly crucial to a healthy economy that he publicly blamed the Federal Reserve for causing the Great Depression. He implied it is up to the Federal Reserve to regulate the economy.

How did the Great Depression affect the money supply?

The effect on the money supply was equally dramatic. From 1929 to 1933 it fell by 27 percent—for every $3 in circulation in 1929 (whether in currency or deposits), only $2 was left in 1933. Such a drastic fall in the money supply inevitably led to a massive decrease in aggregate demand.

What do Monetarists believe about the supply of money?

Monetarists are certain the money supply is what controls the economy, as their name implies. They believe that controlling the supply of money directly influences inflation and that by fighting inflation with the supply of money, they can influence interest rates in the future.