A Monetary History of the United States
|A Monetary History of the United States, 1867–1960|
Dust jacket of 1st Edition, 3rd printing
|Author||Milton Friedman, Anna Schwartz|
|Publisher||Princeton University Press|
|Media type||Print (hardcover)|
|Pages||860 pp (first edition)|
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 uses historical time series 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. Economic historians see it as one of the most influential economics books of the century.
The book discusses the role of the monetary policy in the U.S. economy from the Civil War 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 allowing commercial banks to fail and allowing the economic depression to deepen.
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:
- In the spring of 1928, the Federal Reserve 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 caused the economy to enter a recession 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 attacks, ignoring the difficulties this caused to domestic commercial banks.
- 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 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 to domestic banks during banking panics.
The book was the first to present the then novel argument that excessively tight monetary policy 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 was the primary cause 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. It was also cited with approval in a 2002 speech by then-Federal Reserve board member Ben Bernanke 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[ing] the debate about the Great Depression".
- Michael D. Bordo, and Hugh Rockoff, "Not Just the Great Contraction: Friedman and Schwartz's A Monetary History of the United States 1867 to 1960," American Economic Review (May 2013), 103#3 pp 61-65.
- Bernanke, Ben (March 2, 2004). "Money, Gold, and the Great Depression". Remarks by Governor Ben S. Bernanke at the H. Parker Willis Lecture in Economic Policy. Federal Reserve Board website. Archived from the original on August 30, 2009. Retrieved August 19, 2009.
- "The Great Contraction, 1929–1933: (New Edition)". Princeton University Press. Retrieved 2011-10-28.
- "A Monetary History of the United States, 1867–1960". Archived Events, Book Forum. Cato Institute website. Retrieved August 6, 2013.
- Bernanke, Ben (November 8, 2002). "On Milton Friedman's Ninetieth Birthday". Remarks by Governor Ben S. Bernanke at the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois. Federal Reserve Board website. Retrieved January 17, 2013.