Friedman-Schwartz vs. Tobin: A Modern Reassessment of the Great Depression

We revisit the Friedman-Schwartz vs. Tobin debate about the Federal Reserve’s role in the Great Depression by using modern econometric and quantitative-modeling tools. We calibrate a general equilibrium model with a banking sector and an interbank market, building off Bianchi and Bigio (2022). Our model offers novel contributions to the literature through its banking-focused approach that interconnects money, credit, and output. This framework allows us to leverage aggregate banking data from the era, including interbank rates, to examine the Federal Reserve’s policy pass-through into the aggregate economy. The model allows us to weigh the relative importance of various shocks affecting banks and the economy during the period. It is well-suited for conducting counterfactual analyses of policies proposed in Friedman and Schwartz’s “A Monetary History of the United States, 1867-1960,” particularly an expansion of discount window lending, while accounting for the constraints imposed by the gold standard.