IN NOVEMBER 2002, THE U.S. Federal Reserve held a special conference to honour Milton Friedman on the occasion of his 90th birthday. Among those delivering tributes was Ben Bernanke, who had recently moved to the Fed from Princeton University and would later become the Fed’s chairman. In his tribute, Bernanke surveyed Friedman’s intellectual contributions, with particular focus on the argument made by Friedman and his collaborator Anna Schwartz that the Great Depression of the 1930s could have been avoided if only the Fed had done its job properly.

At the close of his talk, Bernanke directly addressed Friedman and Schwartz, who were sitting in the audience: “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

Today, in the aftermath of a devastating financial crisis that continues to inflict high unemployment in the United States, those words ring somewhat hollow to Americans. Avoiding severe economic downturns, it turned out, wasn’t as easy as Friedman, Schwartz, and Bernanke had believed. Yet, as bad as they were, the U.S. financial crisis of 2008 and its aftermath were less devastating than the Great Depression.

Canada, like the United States, has also benefitted from the work of Friedman and Schwartz. As was the case with many other nations, Canada suffered greatly from the Great Depression. But we learned a lot from it, as the actions of policy-makers showed during the recession of 2008–2009. When this recession hit, Canadian policy-makers responded quickly and aggressively by rolling out a mix of expansionary fiscal and monetary policies. It was impossible to avoid the economic downturn completely; but, thankfully, perhaps due to the policy intervention, the effects of the recession were less harmful than the Great Depression. Our economy recovered at a faster pace, too. It can be reasonably argued that part of the reason was that macroeconomics had evolved in the 78 years from 1930 to 2008. As a result, policy-makers knew more about the causes of depressions and how to fight them than they did during the Great Depression.

In this chapter we’ll trace the development of macroeconomic ideas over the past 80 years. As we’ll see, this development has been strongly influenced by economic events, from the Great Depression of the 1930s, to the stagflation of the 1970s, to the surprising periods of economic stability achieved during the mid-1980s and between the early 1990s and 2007. And as we’ll also see, the process continues, as the economic difficulties since 2008 have spurred many macroeconomists to rethink what they thought they knew.