A Monetary History of the United States, 1867–1960

A Monetary History of the United States, 1867–1960
Name	A Monetary History of the United States, 1867–1960
Author	Milton Friedman, Anna J. Schwartz
Country	United States
Language	English
Subject	Monetary policy, Economic history of the United States
Publisher	Princeton University Press
Pub date	1963
Media type	Print
Pages	860
Isbn	0-691-00354-8

A Monetary History of the United States, 1867–1960 is a seminal 1963 work of economic history by Milton Friedman and Anna J. Schwartz, published by the Princeton University Press. The book provides a comprehensive, data-driven analysis of the role of money supply in the United States economy over nearly a century, fundamentally challenging prevailing Keynesian views. Its most famous and controversial argument holds that the Federal Reserve System's monetary contraction was the primary cause of the Great Depression, transforming academic and policy debates on monetary policy.

Background and context

The book emerged during a period of intellectual ferment in macroeconomics, where the dominant Keynesian paradigm focused on fiscal policy and downplayed the importance of monetary forces. Friedman, a professor at the University of Chicago and a leading figure of the Chicago school of economics, sought to reassert the quantity theory of money through empirical historical study. He collaborated with Anna J. Schwartz, an economist at the National Bureau of Economic Research (NBER), who possessed exceptional skill in constructing and analyzing long-term financial data series. Their work was supported by the NBER and built upon earlier studies like the Warburton Report.

Major themes and arguments

The central thesis is that changes in the money supply have major, systematic influences on nominal income and price levels over the long run, while affecting real variables significantly in the short run. A core argument is that the Great Contraction from 1929 to 1933 was not an inevitable failure of capitalism but a direct result of the Federal Reserve System's failure to act as a lender of last resort, allowing widespread bank failures to drastically reduce the money stock. The authors also critique the gold standard's constraining effects and analyze the performance of the Federal Reserve since its 1913 founding, contrasting it with earlier periods like the National Banking Era.

Key periods and events

The analysis is structured around critical episodes in American financial history. It examines the post-Civil War deflation and the political struggles of the Free Silver movement. A chapter is devoted to the Panic of 1907, which led to the creation of the Federal Reserve System. The book's most detailed scrutiny covers the Great Depression, including the banking holiday of 1933 and the subsequent changes from the Banking Act of 1935. Later sections assess monetary developments during World War II, the Treasury-Fed Accord of 1951 that restored Federal Reserve independence, and the economic growth of the 1950s.

Data and methodology

A pioneering aspect of the work is its construction and use of new historical estimates of the money supply, meticulously compiled by Anna J. Schwartz. The authors defined money as currency plus all commercial bank deposits, creating continuous series from 1867 onward. Their methodology emphasized long-run evidence and the monetary approach to the balance of payments, using time series analysis to demonstrate consistent relationships between money, income, and prices. This empirical approach, emphasizing the stability of the demand for money, stood in stark contrast to the more theoretical models of contemporary Keynesian economics.

Reception and influence

Upon publication, the book received significant attention and gradually achieved iconic status within the economics profession. It provided the intellectual foundation for the monetarist school of thought, influencing a generation of economists including Allan Meltzer and Phillip Cagan. Its arguments directly informed policy debates, contributing to the Federal Reserve's adoption of monetary targeting in the 1970s under Chairmen like Paul Volcker. Friedman's related work, including his American Economic Association presidential address on the role of monetary policy, extended the book's influence, cementing its place in the curriculum of institutions like the University of Chicago and the MIT.

Criticisms and legacy

Critics, particularly from Post-Keynesian and Austrian School perspectives, have challenged its interpretations. Some argue it underestimates the role of debt deflation and financial instability, as highlighted by Hyman Minsky, or the international causes of the Great Depression emphasized by Barry Eichengreen. Others contend the book overstates the stability of money demand. Despite these debates, its legacy is profound; it revolutionized economic history and macroeconomics, forcing a permanent reevaluation of the Federal Reserve's role. It remains a foundational text, continuously cited in discussions of financial crises, including the Great Recession of 2007–2008 and the policies of the European Central Bank.

Category:1963 non-fiction books Category:Economic history books Category:Monetary policy books