A Program for Monetary Stability
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A Program for Monetary Stability is a book by the US 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 ...
. It has been published by
Fordham University Press The Fordham University Press is a publishing house, a division of Fordham University, that publishes primarily in the humanities and the social sciences. Fordham University Press was established in 1907 and is headquartered at the university's Li ...
in 1960 with consecutive re-prints appearing in 1961, 1963, 1965, 1969, 1970, 1975, and 1980.Milton Friedman, ''A Program for Monetary Stability''. New York: Fordham University Press, 1960. In the Prefatory Note Friedman states that the book is a revised and expanded version of the third of the Moorhouse I. X. Millar Lecture Series, which he gave at Fordham University in October 1959. At the same time, he claims that the book has resulted from the joint research with
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 ...
under 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 c ...
project.


Contents

The book comprises four chapters: # ''The Background of Monetary Policy'': In this chapter, Friedman first explains why
government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is ...
should intervene in monetary and banking questions. Although he proclaims himself a
liberal Liberal or liberalism may refer to: Politics * a supporter of liberalism ** Liberalism by country * an adherent of a Liberal Party * Liberalism (international relations) * Sexually liberal feminism * Social liberalism Arts, entertainment and m ...
, he thinks there are good reasons for not leaving monetary issues entirely to the
market Market is a term used to describe concepts such as: *Market (economics), system in which parties engage in transactions according to supply and demand *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an ...
forces because with fiduciary money the government should prevent fraud and enforce contracts. Furthermore, he argues that “some external limit must be placed on the volume of fiduciary
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general ...
in order to maintain its value”. Also, issuing fiduciary money is a technical
monopoly A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a speci ...
and this activity produces
externalities In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
, so all this serves as additional arguments for the role of government, which should provide stable monetary framework on a par with the stable legal framework. As a result, he claims that “there is probably no other area of economic activity with respect to which government intervention has been so uniformly accepted.” He reviews the major depressions before the establishment of 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 ...
: the 1837-1843 period, 1873-1879, 1890s, and 1907-1908, concluding that almost all of them were associated with monetary developments, except for the last episode. He reviews the record after the establishment of FED claiming that after 1913 there was larger monetaryinstability. He states that every major economic disturbance,
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 reduct ...
and contraction, has been accompanied by a significant monetary disturbance. He states “the central problem is not to construct a highly sensitive instrument that can continuously offset instability introduced by other factors, but rather to prevent monetary arrangements from themselves becoming a primary source of instability.” # ''The Tools of the Federal Reserve System'': Here, Friedman discuss the Fed's tools of credit policy and criticizes the controls over margin requirements on security
loans In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
, opposes the direct controls on
consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
installment credit, and refutes the controls on interest rates on
demand In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item ...
and time deposits. He discusses the tools of
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 ...
arguing that “
open market operations In macroeconomics, an open market operation (OMO) is an activity by a central bank to give (or take) liquidity in its currency to (or from) a bank or a group of banks. The central bank can either buy or sell government bonds (or other financial a ...
alone are a sufficient and efficient tool for monetary policy. Variations in reserve requirements... share with rediscounting the property of being a technically poor instrument for controlling the stock of money. Both should be eliminated or greatly altered.” He explains how open market operations alone can ensure smoother and more precise control of the high-powered money not withstanding whether monetary policy is implemented via the money stock or the interest rate. He argues that the discount rate introduces confusion between the effects of Fed on monetary policy and its effects on the credit markets. In this way, the discount rate diverges the attention from the main task of Fed – the control of the stock of money. Friedman discusses variations of reserve requirements as a monetary policy tool. He claims that variable required reserves should be eliminated or should be set and kept at fixed level. According to him, the main defect of this tool is that it changes infrequently, which means it has drastic effects on the
bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...
s; it is difficult to reverse its changes; it needs to be offset by the open market operations with uncertain effects on the stock of money; and it affects the composition between earning and non-earning bank assets, thus, affecting bank
profitability In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs. It i ...
. He concludes that open market operations should be ''the'' monetary policy instrument for several reasons: they are impersonal, they can be used continuously on a day-to-day basis, the operations can be reversed within a day, their amount can be varied, they need not be announced publicly so they do not cause any speculation about their future course, they do not affect bank profitability, they enable Fed to determine the amount of high-powered money more precisely, and the link between Fed's actions and the stock of money is more direct and predictable. # ''Debt Management and Banking Reform'': Friedman states that debt management by the
Treasury A treasury is either *A government department related to finance and taxation, a finance ministry. *A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or i ...
and open market operations by the FED have the same effects on the money stock. He proposes that the Treasury use one kind of accounts – either with the banks or with the FED. He criticizes the legal limitation on the interest rate paid on long-term government securities. He proposes a deep reform that would provide a coordination of the Treasury's debt management operations with the FED's open market operations – FED should be responsible for all transactions with treasury securities. He criticizes the Treasury's
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
issuing practice as the one that creates monetary instability. He proposes within the present institutional and administrative structure, issue short-term bills for seasonal needs and moderately long-term bonds; both issues should be made regularly (weekly or bi-weekly); sell them only at auctions; shift from auctions with a single bid to
auctions An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition ex ...
with multiple bids and maximum price for some specified amounts. Friedman states that the fractional reserve system has two defects: the excessive government intervention in the banks’ lending and investment decisions associated with the deposit insurance; and its inherent instability in the sense that the amount of reserves depends on the public's decisions about the form of holding money (currency versus deposits) and the banks’ decisions about the structure of their assets. Friedman proposes that banks hold 100% reserves for deposits, which means that the stock of money would be equal to the high-powered money. This reform implies that banks would be divided in two different institutions:
depository institutions Colloquially, a depository institution is a financial institution in the United States (such as a savings bank, commercial bank, savings and loan associations, or credit unions) that is legally allowed to accept monetary deposits from consumers. ...
, which would receive demand deposits covered by 100% reserves; and investment trust or brokerage firms, which would be able to issue shares and bonds and to lend money and to invest in securities. He proposes that FED would pay interest on the banks’ reserves. # ''The Goals and Criteria of Monetary Policy'': Friedman reviews the US experience with 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 l ...
during the 19 and 20th century, criticizes the US gold policy and the role of gold in the US monetary system, and proposes abandoning the system of fixed exchange rates along with the fixed official price of
gold Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile me ...
. He claims that relying on discretion in
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 ...
has produced unfortunate monetary consequences, i.e. continuous shifts in monetary policy caused by the political pressures on the
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central b ...
or the changes in the personal beliefs and opinions. He refutes
price stability Price stability is a goal of monetary and fiscal policy aiming to support sustainable rates of economic activity. Policy is set to maintain a very low rate of inflation or deflation. For example, the European Central Bank (ECB) describes price s ...
as a relevant goal of monetary policy because, in the short-term, the link between money and price changes is loose and imperfectly known. Another problem refers to the long and variable time-lags. Price stability would be a good guide to monetary policy if we knew the effects of non-monetary factors on prices, the exact time lag of present monetary actions, and the size of the effects of present monetary actions. Therefore, he proposes monetary aggregates as a guide of monetary policy, because they are under direct control by the
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central b ...
. Specifically, he proposes the fixed growth of the money stock suggesting an annual growth between 3 and 5%. At the end of the book Friedman lists his recommendations as follows:Milton Friedman, ''A Program for Monetary Stability''. New York: Fordham University Press, 1960, pp. 100-101. * With respect to FED: Fed should use its open market operations to provide a steady rate of 4% growth in the stock of money; to repel its obligation to keep 25% gold reserve; it should pay market interest rate on bank's deposits; repeal interest rate controls on bank deposits; repeal control over margin requirements for securities; repeal its loans and discount rate; repeal variable reserve requirements; enable Fed to issue its own securities; * With respect to Treasury: eliminate public debt management by the Treasury and give this function to the Fed; alternatively, issue only short-term bills and long-term bonds at regular auctions with the same price paid by the buyers, and rely either on deposits in commercial banks or deposits in Fed banks; eliminate the official gold price and move to flexible exchange rates; retire US notes and permit only Fed to issue notes; * With respect to commercial banks: 100% reserve requirement for deposit banks with free entry in the deposit taking business; alternatively, make reserve requirements the same for all banks and deposits; repeal the prohibition to pay interest on demand deposits and the control of interest rates on time deposits.


Reviews

In its review, ''
The Journal of Finance ''The Journal of Finance'' is a peer-reviewed academic journal published by Wiley-Blackwell on behalf of the American Finance Association. It was established in 1946 and is considered to be one of the premier finance journals. The editor-in-chief i ...
'' describes the book as "simple and logical, the style extremely lucid and readable... This book... bristles with suggestions, brilliant analysis, and numerous recommendations - some old, some new, some deserving wide support, others that are provocative, radical, even brash. One would have to look far to find so much controversial material in such small compass... Everyone who reads this book will admire the ingenuity and mental acuteness displayed by a very competent
economist An economist is a professional and practitioner in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are ...
." ''
The American Economic Review The ''American Economic Review'' is a monthly peer-reviewed academic journal published by the American Economic Association. First published in 1911, it is considered one of the most prestigious and highly distinguished journals in the field of eco ...
'' describes the book as "provocative" whereas ''
Review of Social Economy A review is an evaluation of a publication, product, service, or company or a critical take on current affairs in literature, politics or culture. In addition to a critical evaluation, the review's author may assign the work a rating to indic ...
'' claims that "this excellent, though provoking book... makes us better aware of the fundamental problems... of a modern economic world". According to ''
The Christian Science Monitor ''The Christian Science Monitor'' (''CSM''), commonly known as ''The Monitor'', is a nonprofit news organization that publishes daily articles in electronic format as well as a weekly print edition. It was founded in 1908 as a daily newspaper ...
'' Friedman "offers sweeping suggestions for reforming the
monetary Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are ...
and
banking system A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Becaus ...
s of the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
" and "introduces interesting proposals for altering the monetary instruments currently employed by the
Federal Reserve Board The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the m ...
". Similarly, ''
The Wall Street Journal ''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
'' calls the book "penetrating" arguing that "it can be recommended for a good look at the real roots of inflation - the look that thus far has not been widespread enough, among enough people."


Notes

{{DEFAULTSORT:Program For Monetary Stability Works by Milton Friedman Classical liberalism 1960 non-fiction books Fordham University Press books