A Monetary History of the United States
LC Class | HG538.F86 1963 |
A Monetary History of the United States, 1867–1960 is a book written in 1963 by
Authorship
Content
The book discusses the role of the
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. 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. 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 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 that led to a sharp and undesirable decline in the money supply:[7]
- 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 tight monetary policy 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.
Influence
The book was the first to present the then novel argument that excessively tight
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.[8] 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",[9][10] and again in a 2004 speech as "transform[ing] the debate about the Great Depression".[7]
The
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.[12][13]
Monetarist economists used the work of Friedman and Schwartz to justify their positions for using monetary policy as the critical economic stabilizer. This view became more popular as Keynesian stabilizers failed to ameliorate the stagflation of the 1970s and political winds shifted away from government intervention in the market into the 1980s and 1990s.
Criticism
The book lays most of the blame for the
Economic historian Barry Eichengreen, in The Golden Fetters, has argued that because of the then internationally prevailing gold exchange standard, 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.[17]
See also
Notes
- S2CID 154748046.
- S2CID 244299719.
- ISBN 978-0691137940.
- ISBN 9780226065939.
- ISBN 978-0-691-13794-0.
- ^ Feldstein, Martin (April 14, 2000), "Remarks made by Martin Feldstein April 14, 2000 at a dinner honoring Anna Schwartz's 85th birthday", Anna Schwartz at the National Bureau of Economic Research. Retrieved March 15, 2011
- ^ a b c 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.
- ^ "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.
- ISBN 978-0-691-13794-0.
- ISBN 978-0-691-13794-0.
- ^ Ben Bernanke (November 8, 2002), FederalReserve.gov: Conference to Honor Milton Friedman, University of Chicago
- ISBN 978-0-691-13794-0.
- ^ Temin, Peter. "Review: Money, Money Everywhere: A Retrospective Review. Reviewed work(s): A Monetary History of the United States, 1867-1960. By Milton Friedman; Anna Jacobson Schwartz." Reviews in American History, Vol. 5, No. 2 (Jun., 1977), pp. 151-159 (via jstor.org)
- ^ Krugman, Paul (May 1, 2012). "Milton's Paradise Lost". New York Times. Retrieved June 27, 2014.
- ^ Krugman, Paul (August 8, 2013). "Milton Friedman, Unperson". New York Times. Retrieved June 27, 2014.
- ISBN 978-0-19-506431-5.
- JSTOR 1814559.
- ^ Rothbard, 1962, America's Great Depression
External links
A Monetary History of the United States, 1867-1960 at Google Books