In some ways I agree with you. But there are certain things one cannot write in a family newspaper. A depression is to `rich’, so I had to dance around it.

I blame Friedman & Schwartz for the near universally accepted view that monetary stimulus could have prevented the Depression. (That quote you sent was not the “Friedman view”, it was him summing up a view he disagreed with). Recent scholarship has rather debunked the Friedman line, and he even began to recant before his death.

It was the Freidman theory that beguiled Greenspan into thinking that asset booms could be allowed to run their course.

Still, I think Bernanke will blitz the money supply. We get 70s stagflation for a while, then real trouble.

"Money supply itself actually never contracted in Japan. Instead, it grew very slowly for quite some time. However, bank credit outstanding contracted for 60 months in a row. Clearly there was a credit contraction. How did money supply still manage to grow? Fiscal deficits were ramped up immensely, roads to nowhere were built, and the Bank of Japan monetized all of it..." (Michael Shedlock, Inflation Monster Captured, globaleconomicanalysis.blogspot.com, December 19, 2005).

"It is often remarked that Japan is a rich country, whose citizens have greater wealth than any other. At first sight this is entirely true. Japanese households have a wealth to income ratio which is 100% greater than that of any other G5 economy. Unfortunately this wealth largely represents the debts of the corporate and government sectors and is thus largely illusory.

"A country is not wealthy when one half owes debts to the other half that it can never repay" (Andrew Smithers, Japan's Past Decade - Bad Luck or Policy, smithers.co.uk, December 22, 2003).

“Economically, Roosevelt's massive government borrowing/spending scheme - the same sort of 'solution' that many people are advocating today - was a total flop, for the reasons that anyone with even a basic understanding of economics would appreciate. For example, during Roosevelt's first 6 years in office the Federal Government's debt ballooned astronomically in response to government spending on an unprecedented scale, and yet the number of unemployed in America was higher in 1938 than it had been when Roosevelt was first elected President in 1932. The grandiose spending was, however, a political success, and thus fulfilled its primary objective” (Steve Saville, “The difference between good money and bad money”, 321gold.com, July 29, 2008).

"Federal Reserve cut the short-term nominal interest rate from 5 percent in 1929 to ½ percent in late 1932. However, inflation fell even faster. Consequently, the real interest rate - the difference between the nominal interest rate and the inflation rate - actually increased, rising from 3½ percent in the spring of 1929 to a peak of 15 percent in late 1931 and early 1932. Monetary policy was, effectively, becoming tighter and tighter in the early 1930s, rather than easier and easier.

"As a result, industrial output fell by a whopping 50 percent relative to trend..." (Evan F. Koenig & Jim Dolmas, "Monetary Policy in a Zero-Interest Rate Economy", dallasfed.org).

http://www.futurewatch.info

You have compiled an impressive selection of quotes that hangs well together. One that I find in part unimpressive is the Economist's statement regarding Japan and "negative interest rates". Japan did in fact have negative "real rates" for a long period and that is all that is fundamental in carrying the overall argument and your contention.

"... the flawed view of the Fed's role in the Great Depression: If only the Fed had created $5bn and recapitalized the banking system. More money, so they believe, would have provided a ("mopping up") remedy for disastrous boom-time excesses. It wouldn't have worked.

"The issue then, as it is today, is not some finite amount of liquidity to keep the banks solvent and markets liquid, but instead the enormous ongoing Credit Creation and Intermediation necessary to sustain levitated asset prices, incomes, corporate earnings and government receipts" (Doug Noland, Money Market Issues, prudentbear.com, August 24, 2007).

"... debt deflation is a particularly malign economic beast, which emerges when people curb their spending in an effort to pay off their debts. Those very spending cuts cause prices to drop, and force up the real value of debts, creating a vicious spiral. As the experience of America in the 1930s and Japan in the 1990s shows, central banks can do little about this, because they cannot set interest rates lower than zero" (The Economist, Inflated expectations, July 3, 2004, p.68).

""The Federal Reserve policy of cheapening credit through the purchase of government bonds has been unable to make a dent in the conservatism of borrower or bank lender, in short, every anti-deflationary effort has yet to provide positive results"" (Editorial, Barron's, July 11, 1932, quoted by Bob Hoye, How a currency can fight the Fed, prudentbear.com, March 31, 2004).

"Cheap money made no difference - the Federal discount rate was never more than 1.5 percent after 1935 - but they kept on hoping that "confidence" would return" (Harold Evans, "The American Century", p.225).

The contraction [1929-1933] shattered the long-held belief, which had been strengthened during the 1920s, that monetary forces were important elements in the cyclical process and that monetary policy was a potent instrument for promoting economic stability. Opinion shifted almost to the opposite extreme, that "money does not matter"; that it is a passive force which chiefly reflects the effects of other forces; and that monetary policy is of extremely limited value in promoting stability" (Milton Friedman & Anna Jacobson Schwartz, A Monetary History of the United States (Princeton: Princeton University Press, 1963), p.300).

Friedman was summing up a view that he disagreed with; Friedman was wrong and his disciple Ben Bernanke, the present Federal Reserve Board Chairman, will soon find this out for himself).

"In spite of what Bernanke says, the Fed does not "print" money. It must loan it into existence, but this requires willing borrowers" (Michael Nystrom, The Specter of Deflation, bullnotbull.com, December 28, 2006).

"Personally, I was never a spender. I guess it's because I come from a different world, the world of the Great Depression - this was the world in which a dollar was hard to come by and a good dinner cost 75 hard-earned cents. It's difficult to break old habits, and I'm talking about habits like turning off leaky faucets or making sure all the lights are out before you go to bed. I never could get used to spending more than I was earning or taking out loans on a car or buying a house with a mortgage attached" (Richard Russell, The creature from another world, 321gold.com, July 12, 2006).