Monetary History of the United States
Encyclopedia
A Monetary History of the United States, 1867-1960 is a book written in 1963 by Nobel prize
winning economist Milton Friedman
and Anna J. Schwartz. It collects together historical data and economic analysis to argue the then novel proposition that changes in monetary policy
(changes in the rate of growth of the money supply
) profoundly influenced the US economy, especially the behavior of economic fluctuations.
Reconstruction Era 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 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
for not keeping the supply of money steady, and not acting as lender of last resort – instead they allowed commercial banks to fail and allowed the economic depression to deepen.
According to Bernanke, (now Chairman of the Federal Reserve
), Friedman and Schwartz identified four main policy mistakes made by the Federal Reserve that led to a sharp and undesirable decline in the money supply:
by the Federal Reserve following the boom of the 1920s turned an otherwise normal recession into the Great Depression
of the 1930s. Previously, the consensus of economists was that loss of investor and consumer confidence following the Wall Street Crash of 1929
were the primary causes of the Great Depression
.
The chapter on the Great Depression, entitled "The Great Contraction, 1929-33", was published as a stand-alone paperback
in 1965.
The Monetary History was lauded as one of the most influential economics books of the twentieth century by the Cato Institute
book forum in 2003. and was cited with approval in a 2004 speech by then-Federal Reserve board member Ben Bernanke
, as "transform[ing] the debate about the Great Depression".
Nobel Prize
The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...
winning economist Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
and Anna J. Schwartz. It collects together historical data and economic analysis to argue the then novel proposition that changes in monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
(changes in the rate of growth of the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
) profoundly influenced the US economy, especially the behavior of economic fluctuations.
Thesis
The book discusses the role of the monetary policy in the U.S. economy from the Civil WarAmerican Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
Reconstruction Era 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
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. 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
Federal Reserve Bank
The twelve Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The twelve federal reserve banks together divide the nation into twelve Federal Reserve Districts, the twelve banking districts created by the Federal Reserve Act of...
for not keeping the supply of money steady, and not acting as lender of last resort – instead they allowed commercial banks to fail and allowed the economic depression to deepen.
According to Bernanke, (now Chairman of the Federal Reserve
Chairman of the Federal Reserve
The Chairman of the Board of Governors of the Federal Reserve System is the head of the central banking system of the United States. Known colloquially as "Chairman of the Fed," or in market circles "Fed Chairman" or "Fed Chief"...
), Friedman and Schwartz identified four main policy mistakes made by the Federal Reserve that led to a sharp and undesirable decline in the money supply:
- Tightening monetary policy (resulting in increasing interest rates) beginning in the spring of 1928 and continuing until the stock market crash of October 1929. This caused the economy to enter a recession in mid-1929, and triggered the stock market crash in October.
- Raising interest rates to defend the dollar in response to speculative attackSpeculative attackA speculative attack is a term used by economists to denote a precipitous acquisition of something by previously inactive speculators. The first model of a speculative attack was contained in a 1975 discussion paper on the gold market by Stephen Salant and Dale Henderson at the Federal Reserve Board...
s in September and October 1931, while ignoring the difficulties this caused to domestic commercial banks. - Despite lowering interest rates early in 1932 with positive results, raising interest rates again in late 1932, causing a further collapse in the US economy.
- Ongoing neglect of problems in the U.S. banking sector throughout the early 1930s. The Federal Reserve failed to create a stable domestic banking environment by supporting the domestic banks and acting as lender of last resort to domestic banks during banking panics.
Influence
The book was the first to present the then-novel argument that excessively tight monetary policyMonetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
by the Federal Reserve following the boom of the 1920s turned an otherwise normal recession into the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
of the 1930s. Previously, the consensus of economists was that loss of investor and consumer confidence following the Wall Street Crash of 1929
Wall Street Crash of 1929
The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...
were the primary causes of the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
.
The chapter on the Great Depression, entitled "The Great Contraction, 1929-33", was published as a stand-alone paperback
Paperback
Paperback, softback or softcover describe and refer to a book by the nature of its binding. The covers of such books are usually made of paper or paperboard, and are usually held together with glue rather than stitches or staples...
in 1965.
The Monetary History was lauded as one of the most influential economics books of the twentieth century by the Cato Institute
Cato Institute
The Cato Institute is a libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Edward H. Crane, who remains president and CEO, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries, Inc., the largest privately held...
book forum in 2003. and was cited with approval in a 2004 speech by then-Federal Reserve board member Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
, as "transform[ing] the debate about the Great Depression".
See also
- Great ContractionGreat ContractionThe Great Contraction is Milton Friedman's term for the recession which led to the Great Depression.The term served as the title for the relevant chapter in Friedman and Schwartz's 1963 work A Monetary History of the United States...
- Free to ChooseFree to ChooseFree to Choose is a book and a ten-part television series broadcast on public television by economists Milton and Rose D...