''A Monetary History of the United States, 1867–1960'' is a book written in 1963 by
Nobel Prize
The Nobel Prizes ( ; sv, Nobelpriset ; no, Nobelprisen ) are five separate prizes that, according to Alfred Nobel's will of 1895, are awarded to "those who, during the preceding year, have conferred the greatest benefit to humankind." Alfr ...
–winning economist
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
and
Anna J. Schwartz
Anna Jacobson Schwartz (pronounced ; November 11, 1915 – June 21, 2012) was an American economist who worked at the National Bureau of Economic Research in New York City and a writer for ''The New York Times''. Paul Krugman has said that Schwar ...
. It uses historical time series and economic analysis to argue the then-novel proposition that changes in the
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...
profoundly influenced the U.S. economy, especially the behavior of
economic fluctuations. The implication they draw is that changes in the money supply had unintended adverse effects, and that sound
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
is necessary for economic stability. Orthodox economic historians see it as one of the most influential economics books of the century. The chapter dealing with the
causes of the Great Depression
The causes of the Great Depression in the early 20th century in the United States have been extensively discussed by economists and remain a matter of active debate. They are part of the larger debate about economic crises and recessions. The sp ...
was published as a stand-alone book titled ''The
Great Contraction
The Great Contraction is the recession, recessionary period from 1929 until 1933, i.e., the early years of the Great Depression, as characterized by economist Milton Friedman. The phrase was the title of a chapter in the landmark 1963 book ''A Mone ...
, 1929–1933''.
Authorship
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
and
Anna Schwartz
Anna Jacobson Schwartz (pronounced ; November 11, 1915 – June 21, 2012) was an American economist who worked at the National Bureau of Economic Research in New York City and a writer for ''The New York Times''. Paul Krugman has said that Schwar ...
were working at the
National Bureau of Economic Research
The National Bureau of Economic Research (NBER) is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic c ...
(NBER) when the future
chairman of the Federal Reserve
The chair of the Board of Governors of the Federal Reserve System is the head of the Federal Reserve, and is the active executive officer of the Federal Reserve Board of Governors, Board of Governors of the Federal Reserve System. The chair shal ...
,
Arthur Burns
Arthur Frank Burns (April 27, 1904 – June 26, 1987) was an American economist and diplomat who served as the 10th chairman of the Federal Reserve from 1970 to 1978. He previously chaired the Council of Economic Advisers under President Dwight ...
, suggested that they collaborate on a project to analyze the effect of the
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...
on the
business cycle
Business cycles are intervals of Economic expansion, expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are ...
. Schwartz was already gathering much of the relevant historical data at that point, while Friedman was already a professor at the
University of Chicago
The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park neighborhood. The University of Chicago is consistently ranked among the b ...
and also at the
NBER
The National Bureau of Economic Research (NBER) is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic ...
. They began work in the late 1940s and eventually published ''A Monetary History'' through
Princeton University Press
Princeton University Press is an independent publisher with close connections to Princeton University. Its mission is to disseminate scholarship within academia and society at large.
The press was founded by Whitney Darrow, with the financial su ...
in 1963. The
Depression-related chapter, "
The Great Contraction
The Great Contraction is the recessionary period from 1929 until 1933, i.e., the early years of the Great Depression, as characterized by economist Milton Friedman. The phrase was the title of a chapter in the landmark 1963 book ''A Monetary Histo ...
," was republished as a separate book in 1965.
Content
The book discusses the role of the
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
in the U.S. economy from the
Civil War
A civil war or intrastate war is a war between organized groups within the same state (or country).
The aim of one side may be to take control of the country or a region, to achieve independence for a region, or to change government policies ...
Reconstruction Era
The Reconstruction era was a period in American history following the American Civil War (1861–1865) and lasting until approximately the Compromise of 1877. During Reconstruction, attempts were made to rebuild the country after the bloo ...
to the middle of the 20th century. It presents what was then a contrarian view of the role of monetary policy in the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. The prevalent view in the early 1960s was that monetary forces played a passive role in the economic contraction of the 1930s. The ''Monetary History'' argues that the bank failures and the massive withdrawals of currency from the financial system that followed significantly shrank the money supply (the total amount of currency and outstanding bank deposits), which greatly exacerbated the economic contraction. The book criticizes the
Federal Reserve Bank
A Federal Reserve Bank is a regional bank of the Federal Reserve System, the central banking system of the United States. There are twelve in total, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve A ...
for not keeping the supply of money steady and not acting as
lender of last resort
A lender of last resort (LOLR) is the institution in a financial system that acts as the provider of liquidity to a financial institution which finds itself unable to obtain sufficient liquidity in the interbank lending market when other facil ...
, instead allowing
commercial banks
A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit.
It can also refer to a bank, or a division of a large bank, which deals with corp ...
to fail and allowing the economic depression to deepen.
Themes
The book's main theme is the ''money supply''. It tracks this through three numbers:
* the ratio of cash that people hold in their checking deposits (when people trust banks, they deposit more of their money)
* the ratio of bank deposits to bank reserves (when banks feel safer, they loan out more of their money)
* high-powered money (that is, anything that serves as cash or reserves)
The money supply (cash + deposits) can be computed from these three numbers. The supply shrinks when people withdraw money from the bank, banks hold more reserves, or high-powered money leaves the country (e.g., gold is exported). During a crisis, all three can happen.
Another theme is ''gold''. For the time period, it was the unit used for international trade with Europe. So even when the US is not on the gold standard, it plays a significant role. The authors are precise about the
gold standard
A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the la ...
. The authors say the US was on the gold standard from 1879 to 1923. That is, paper money could be exchanged for bullion and international trade was settled immediately with gold. From 1923 to 1933, the authors say that international trade was "sterilized" by the Fed inflating the money rather than immediately being settled by gold. Lastly, they term the period from 1934 to 1960 (when the book was published) as a "managed standard". Paper money cannot be exchanged for bullion. The authors compare gold to a subsidized commodity, like grain.
Another theme is ''silver''. China and Mexico used it for their currency and the US used it for smaller coins. From 1879 to 1897, there was a populist push to switch the gold-backed dollar to silver. The US Treasury bought silver, but that didn't help when the country was on gold. Later, during the Great Depression, the US bought gold at inflated prices to help silver miners. The result was tragic for the money supplies of China and Mexico.
The authors measure the
velocity of money
image:M3 Velocity in the US.png, 300px, Similar chart showing the logged velocity (green) of a broader measure of money M3 that covers M2 plus large institutional deposits. The US no longer publishes official M3 measures, so the chart only runs thr ...
. The authors talk about it a lot, but do not make any conclusions about it.
Lastly, a theme is ''decision making at the Federal Reserve''. The authors try to find out the people making the decisions and what information they had. Probably just as important is the decision making process. The NY Fed Bank initially lead the decision making process, but eventually it migrated to the Federal Reserve Board in Washington, DC. To a lesser extent, the Secretary of the Treasury's decisions are included.
Thesis
The thesis of ''Monetary History'' is that the money supply affects the economy. In the final chapter, they specify 3 occasions where the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
acted strongly during relatively calm times and present these as an experiment for the reader to judge their thesis.
The three actions by the Fed were the raising the discount rate in 1920, the raise of it in 1931, and the raise of the reserve requirement in 1937. Each of these actions caused a large contraction of the money supply over the next 12 months (9%, 14%, 3%). In fact, these were the three sharpest declines they saw in their data. In those 12 months, industrial production fell dramatically (30%, 24%, 34%). Other metrics fell at similar rates. These were 3 of the 6 worst 12-month periods for industrial production. The others were 1929-1931 (the Great Depression) and 1945, when the economy switched from wartime to peacetime production.
Having demonstrated their thesis, they can now use it. They claim that the Great Depression was due to the Fed letting the money supply shrink from 1929 to 1933.
Great Depression
Friedman and Schwartz identified four main policy mistakes made by the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
that led to a sharp and undesirable decline in the
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...
:
* In the spring of 1928, the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
began to tighten its monetary policy (resulting in rising interest rates) and continued that same policy until the
stock market crash of October 1929. This tight monetary policy caused the economy to enter a
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
in mid-1929 and triggered the stock market crash a few months later.
* In the fall of 1931, it raised interest rates to defend the dollar in response to
speculative attack In economics, a speculative attack is a precipitous selling of untrustworthy assets by previously inactive speculators and the corresponding acquisition of some valuable assets (currencies, gold). The first model of a speculative attack was contain ...
s, ignoring the difficulties this caused to domestic
commercial banks
A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit.
It can also refer to a bank, or a division of a large bank, which deals with corp ...
.
* After lowering interest rates early in 1932 with positive results, it raised interest rates again in late 1932, causing a further collapse in the U.S. economy.
* The
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
was also to be blamed for a pattern of ongoing neglect of problems in the U.S. banking sector throughout the early 1930s. It failed to create a stable domestic banking environment by supporting the domestic banks and acting as
lender of last resort
A lender of last resort (LOLR) is the institution in a financial system that acts as the provider of liquidity to a financial institution which finds itself unable to obtain sufficient liquidity in the interbank lending market when other facil ...
to domestic banks during banking panics.
Influence
The book was the first to present the then novel argument that excessively tight
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
by the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
following the boom of the 1920s turned an otherwise normal recession into the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
of the 1930s. Previously, the consensus of economists was that loss of investor and consumer confidence following the
Wall Street Crash of 1929
The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange colla ...
was a primary
cause of the Great Depression.
The ''Monetary History'' was lauded as one of the most influential economics books of the twentieth century by the
Cato Institute
The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch Indust ...
book forum in 2003. It was also cited with approval in a 2002 speech by then-
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
board member
Ben Bernanke
Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Durin ...
stating "the direct and indirect influences of the Monetary History on contemporary monetary economics would be difficult to overstate",
and again in a 2004 speech as "transform
ngthe debate about the Great Depression".
The
Depression-related chapter of ''A Monetary History'' was titled "
The Great Contraction
The Great Contraction is the recessionary period from 1929 until 1933, i.e., the early years of the Great Depression, as characterized by economist Milton Friedman. The phrase was the title of a chapter in the landmark 1963 book ''A Monetary Histo ...
" and was republished as a separate book in 1965. Some editions include an appendix in which the authors got an endorsement from an unlikely source at an event in their honor when Ben Bernanke made this statement:
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.
Monetarist economists used the work of Friedman and Schwartz to justify their positions for using
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
as the critical economic
stabilizer. This view became more popular as Keynesian stabilizers failed to ameliorate the
stagflation
In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since action ...
of the 1970s and political winds shifted away from government intervention in the market into the 1980s and 1990s. During this period, the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
was recognized as a critical player in setting interest rates to counter excessive
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
and also to prevent
deflation
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation ...
that could lead to real economic distress.
Criticism
The book lays most of the blame for the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
upon the Federal Reserve, arguing that it did not do enough to prevent the Depression. Economists such as
Peter Temin
Peter Temin (; born 17 December 1937) is an economist and economic historian, currently Gray Professor Emeritus of Economics, MIT and former head of the Economics Department.
Education
Temin graduated from Swarthmore College in 1959 before earnin ...
have raised questions about whether or not most monetary quantity levels were
endogenous
Endogenous substances and processes are those that originate from within a living system such as an organism, tissue, or cell.
In contrast, exogenous substances and processes are those that originate from outside of an organism.
For example, es ...
rather than exogenously determined, as '' A Monetary History'' argues, especially during the Depression.
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...
has argued that the
2008 financial crisis
8 (eight) is the natural number following 7 and preceding 9.
In mathematics
8 is:
* a composite number, its proper divisors being , , and . It is twice 4 or four times 2.
* a power of two, being 2 (two cubed), and is the first number of t ...
has shown that, during a
financial crisis
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
, central banks cannot control broad money, and that money supply bears little relationship to GDP. According to Krugman, the same was true in the 1930s, and the claim that the Federal Reserve could have prevented the Great Depression is highly dubious.
Economic historian
Barry Eichengreen
Barry Julian Eichengreen (born 1952) is an American economist and economic historian who holds the title of George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley, where he ha ...
, in ''The Golden Fetters'', has argued that because of the then internationally prevailing
gold exchange standard
A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the la ...
, the Federal Reserve's hands were tied. According to Eichengreen, in order to maintain the credibility of the gold standard, the Federal Reserve could not undertake actions (such as drastically increasing the money supply) in the manner advocated by Friedman and Schwartz.
James Tobin
James Tobin (March 5, 1918 – March 11, 2002) was an American economist who served on the Council of Economic Advisers and consulted with the Board of Governors of the Federal Reserve System, and taught at Harvard and Yale Universities. He devel ...
, while appreciating the rigor with which Friedman and Schwartz demonstrated the importance of the monetary supply, questions their measures of the
velocity of money
image:M3 Velocity in the US.png, 300px, Similar chart showing the logged velocity (green) of a broader measure of money M3 that covers M2 plus large institutional deposits. The US no longer publishes official M3 measures, so the chart only runs thr ...
and how informative this measure of the frequency of monetary transactions really is to understanding the
macroeconomic
Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole.
For example, using interest rates, taxes, and ...
fluctuations of the early-to-mid 20th century.
Austrian
Austrian may refer to:
* Austrians, someone from Austria or of Austrian descent
** Someone who is considered an Austrian citizen, see Austrian nationality law
* Austrian German dialect
* Something associated with the country Austria, for example: ...
Anarcho-Capitalist
Anarcho-capitalism (or, colloquially, ancap) is an anti-statist, libertarian, and anti-political philosophy and economic theory that seeks to abolish centralized states in favor of stateless societies with systems of private property enforce ...
economist
Murray Rothbard
Murray Newton Rothbard (; March 2, 1926 – January 7, 1995) was an American economist of the Austrian School, economic historian, political theorist, and activist. Rothbard was a central figure in the 20th-century American libertarian m ...
has argued that the
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...
actually increased during the time period where
Friedman
Friedman, Friedmann, and Freedman are surnames of German origin, and from the 17th century were also adopted by Ashkenazi Jews. It is the 9th most common surname in Israel (8th among Jews) and most common exclusively Ashkenazi name.
They may refer ...
claimed the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
contracted the money supply. He uses this argument to say that the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
was a manifestation of the
Austrian Business Cycle Theory. Although Rothbard and Friedman both hold the belief that the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
was a result of the Federal Reserve, the two do not agree on the fundamental question of whether or not a central bank should exist.
[Rothbard, 1962, ''America's Great Depression'']
See also
*
Great Contraction
The Great Contraction is the recession, recessionary period from 1929 until 1933, i.e., the early years of the Great Depression, as characterized by economist Milton Friedman. The phrase was the title of a chapter in the landmark 1963 book ''A Mone ...
*''
Free to Choose''
Notes
External links
{{DEFAULTSORT:Monetary History of the United States, A
1963 non-fiction books
Books about capitalism
Books about economic history
Financial history of the United States
Finance books
Works by Milton Friedman
1963 in economics
Collaborative non-fiction books
Books about the economy of the United States