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Anorak | Why The Eurozone Is Screwed: Blame The European Central Bank

Why The Eurozone Is Screwed: Blame The European Central Bank

by | 11th, November 2011

EVER wonder why the European economy is screwed?

No, it’s not just the euro itself, not just the insane idea that 17 different nations could all share the same currency and the same interest rate. There’s also human agency involved. A large part of it is the fault of the European Central Bank.

Here’s Milton Friedman :

But when Anna Schwartz and I examined the history of that period in detail, we found that the situation was very different. In the United States from 1929 to 1933, the quantity of money declined by a third. Similarly in Britain, it declined till 1931, when Britain went off the gold standard. In France, the reason the contraction kept on until 1936 was because France insisted on staying on the gold standard and kept the money supply declining. To go back to the United States, at all times from 1929 and 1933, the Federal Reserve had the power and ability to have prevented the decline in the quantity of money and to have increased the quantity of money at any desired rate.

So in our opinion, the Great Depression was not a sign of the failure of monetary policy or a result of the failure of the market system as was widely interpreted. It was instead a consequence of a very serious government failure, in particular a failure in the monetary authorities to do what they’d initially been set up to do.

A bit wonkish, agreed, but the basic point being made is that if the amount of money in circulation starts to fall then the economy is going to fall, contract, along with it. So the first thing you have to do as a central bank is make sure that the money supply doesn’t fall.

This doesn’t mean that a not falling money supply will solve all problems: you can still be

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Posted: 11th, November 2011 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink