A Monetary History of the United States, 1867-1960
The founding work of monetary history; the Depression chapter changed policy.
Summary
Friedman and Schwartz constructed a continuous series of the United States money stock from 1867 to 1960 and used it to argue that changes in the quantity of money have been the dominant proximate cause of changes in nominal income and prices. The book is a work of data construction as much as of argument, and the series they built became the standard.
The famous chapter concerns 1929 to 1933. They document that the money stock fell by about a third, that this contraction was the result of Federal Reserve inaction in the face of successive banking panics rather than an inevitable consequence of the downturn, and that the Fed had both the legal power and the reserves to prevent it. Their argument turns on the Fed's failure to act as lender of last resort after Benjamin Strong's death removed the leadership that had understood the function. They call the period the Great Contraction and argue it was made by policy rather than by the market.
The wider claims are that money is neutral in the long run but not the short, that monetary policy acts with long and variable lags which makes fine-tuning impossible, and that a rule for steady money growth would outperform discretionary management. The book reoriented macroeconomics and its influence on central banking is direct, including on Bernanke's response in 2008.
It has been substantially qualified. Later work established that the gold standard constraint, international transmission and the collapse of banking intermediation carry more of the explanatory weight than Friedman and Schwartz allowed, and the stable money demand relationship their policy rule depends on broke down after financial deregulation. The historical narrative and the data remain standard.
Key takeaways 7
- The United States money stock fell by roughly a third between 1929 and 1933, and this contraction was the primary cause of the Depression's depth.
- The Federal Reserve had both the legal authority and the reserves to prevent the monetary contraction and chose not to use them.
- Changes in the quantity of money are the dominant proximate cause of changes in nominal income and prices over any substantial period.
- Monetary policy operates with long and variable lags, which makes discretionary fine-tuning of the economy impossible in practice.
- Banking panics converted a recession into a depression by destroying deposits, and deposit insurance introduced in 1934 ended that mechanism.
- A rule requiring steady growth in the money stock would produce better outcomes than discretionary policy by competent officials.
- Benjamin Strong's death removed the one person at the Federal Reserve who understood the lender of last resort function, and the institution's structure allowed regional interests to block action afterwards.
Who should read it
Macro investors and anyone who needs the monetarist account of the Depression and the origin of the data series that later work argues with.
About Milton Friedman
Economist at the University of Chicago and the Hoover Institution who led the monetarist school and won the 1976 Nobel prize.
A Monetary History of the United States, written with Anna Schwartz, established that the Federal Reserve's contraction of the money supply turned the 1929 downturn into the Depression, and it set the terms of monetary policy argument ever since. Capitalism and Freedom and Free to Choose make the political case for markets and supply the standard arguments on floating rates, schooling and regulation.
Where it sits in the reference 5
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