- Paperback: 888 pages
- Publisher: Princeton University Press; New Ed edition (21 Nov. 1971)
- Language: English
- ISBN-10: 0691003548
- ISBN-13: 978-0691003542
- Product Dimensions: 15.3 x 4 x 23 cm
- Average Customer Review: 4.3 out of 5 stars See all reviews (3 customer reviews)
- Amazon Bestsellers Rank: 91,579 in Books (See Top 100 in Books)
A Monetary History of the United States, 1867-1960 (National Bureau of Economic Research Publications) Paperback – 21 Nov 1971
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"A monumental scholarly accomplishment. . . . [sets] a new standard for the writing of monetary history."--The Economic Journal
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While some counter with the argument that Smoot-Hawley Tarrif Act of 1930 (which took effect in mid-1931) caused the Depression, nations such as Argentina, Australia, Canada, New Zealand, Portugal, the Dutch East Indies, and South Africa all began raising tariffs in 1928-29 against a backdrop of commodities price deflation and a collapse in currencies.
I am sorry, Professor Friedman, the Great Depression was caused by misinvestment, excessive credit expansion, and structural collapse in the international credit system. Sound familiar (October 1998)?
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Austrian Business Cycle Theory had argued that the Great Depression was caused by excessively loose monetary policy that fed an unsustainable economic boom during the 1920s, which eventually collapsed into depression. Friedman and Schwartz argued that instead it was excessively tight monetary policy following the boom of the 1920s that turned a run-of-the-mill recession into a depression. (For the Austrian explanation of the Great Depression, see Sir Lionel Robbins' The Great Depression or Murray Rothbard's America's Great Depression.)
Keynesianism argued that the Great Depression had been caused by insufficient consumer product demand and lack of investor confidence, and that government should compensate for this by increasing its spending and financing it with government debt. Friedman and Schwartz argued instead that the problem and solution were not so much a matter of fiscal policy as they were a matter of monetary policy. Government, particularly the monetary authorities, was the cause of the depression, not the solution. Stimulative fiscal policy as prescribed by Keynes would in the long run not lead to an increase in economic growth and employment, but only to an increase in inflation. (For the Keynesian explanation of the Great Depression, see John M. Keynes's The General Theory of Employment, Interest and Money or John Kenneth Galbraith's The Great Crash, 1929.)
At the time of its publication, A Monetary History was not immediately accepted by the economics profession, which then was still dominated by Keynesian thinking. But when Keynesian theory could not explain the stagflation (recession combined with high inflation) of the 1970s, monetarism came to rule the day, and Friedman would go on to win the 1976 Nobel Prize in Economics.
Friedman and Schwartz's analysis has by now become the standard explanation for the Great Depression. In the very least, the book helped reestablish the importance of monetary over fiscal policy in the stabilization of the business cycle. Money matters, even if it is not the only thing that matters. In addition, the importance of the book was methodological, in that it emphasized the importance of the empirical testing of one's economic propositions. What makes the book so persuasive is the great lengths to which the authors go to sort out the causation behind the correlation-the causation, they found, ran from money to output and prices rather than vice versa or via a fourth variable.
A Monetary History is a classic work in the canon of economic literature. It is on occasion still reviewed in the literature (e.g. Journal of Monetary Economics, August 1994; Cato Journal, Winter 2004). It clearly is an academic work written for trained economists, making it perhaps less accessible to a general audience. But several highly readable summary versions of the book exist, such as chapter 3 of Milton and Rose Friedman's Free to Choose, and even a one-paragraph summary conclusion in Capitalism and Freedom (on p. 45 of the paperback edition), which was published around the same time as A Monetary History. Alternatively, ch. 13 ("A Summing Up", pp. 676-700) is reprinted in The Essence of Friedman.
The most important part of this book is the section on the Great Contraction. Federal Reserve policy did contract the money supply by 1/3 during the early years of the depression. The Federal Reserve did revive the depression by increasing reserve requirements in 1937. The collapse of the banking system collapsed the real economy. The recovery of the banking system was important to the recovery of industry. Money matters.
The style of this book is excellent. Considering the sophistication of its subject matter, it is highly readable. It gets into both statistics and relevant written history. It also has a helpful appendix on the determinants of the money supply.
There are some problems with this book. Money is not all that matters. Government policies that prevented wage deflation contributed greatly to the Great Depression. Of course, this book was meant to focus on monetary history alone, as the title implies. But, readers must keep the limitations of such a narrow focus in mind when considering the explanatory power of this book. Its' authors also have too little appreciation for private banking systems (Friedman latter embraced free banking). Despite its' limitations, this book is important as a empirical source for understanding how money matters to economic conditions.
When reviewing a classic text it is important to test it on two criteria: 1) it's ingenuity; and, 2) it's validity. In regards to ingenuity "Monetary History" paved the way towards a statistically grounded analysis of macroeconomics (in this case monetary theory). While "Monetary History" was groundbreaking it's truly memorable aspect is Ch7's "The Great Contraction". This chapter, which is now known as the money hypothesis, revolutionized the way economists thought about the Great
Deprhttp://www.amazon.com/review/R1C118WNLAM4I/ref=cm_cr_pr_cmt?ie=UTF8&ASIN=0691137943&nodeID=#wasThisHelpfulession. Ultimately, this analysis proved to be incorrect.
Why the work remains a classic, even though flawed, is because the sheer difficulty in producing such a feat. Friedman and Schwartz managed to put together a comprehensive 100 year monetary history in (a short) 700 pages. The amount of research required to take on such a project is hard to grasp. The footnotes in the "Monetary History" give a small glimpse into how much work was required to create this book. They alone are the size of a mid-sized economic text. Throughout the text the authors synthesis a wide range of evidence, often being forced to recalculate the statistics given to them, and somehow come out with a fairly consistent history.
The work is so encompassing it is impossible in an Amazon book review to point out all of the prescient ideas presented in a "Monetary History". Here is a short list off the top of my head: 1) money matters in the short-run; 2) active gov't policy can prevent bank panics if correctly implemented; 3) Consistent misperception regarding economics have OFTEN created bad policy (both in the private and public sphere); 4) the gold standard was never good (and we never had anything near an ACTUAL gold standard); 5) An excellent review of business cycle contractions between 1844-1960; 6)Everything you wanted to know about the composition of banking mechanisms from 1867-1960. There are many, many more...
Friedman's "Monetary History" analysis does occasionally feel awkward (this tends to happen when his quantitative analysis does not account for history and he is forced to make qualitative assumptions). 1) The entire Great Contraction rested on the qualitative factor of not having a 'Great Man' running the Federal Reserve; 2) Deflation existed side by side with rapid economic expansion in the 1880's, which Friedman finds interesting, but no attempt is made to ascertain whether monetary issues had any recessionary effects on potential growth; 3) The entire 48-60' analysis exerts a strong ideological stance that did not seem to exist in the earlier chapters. (many more minor hiccups exist and for the most part Friedman is willing to admit when he cannot reasonably prove causation).
However, two major problems exist in the "Monetary History".
1) The assumption that money does not matter in the long-run is unsupported through their analysis. Friedman and Schwartz fail to find any long lasting effects regarding changes in the price level and money stock to changes in economic activity. This view, which is a very simple look at correlations, is essentially embracing a negation. They fail to find a connection between monetary economics and business cycles so it must not exist. Though this view has little empirical evidence it is made several times throughout the work (and in almost every case the statement seems to be completely out of place). The claim that money is 'neutral' has forever changed economics by being included in the Neoclassical Synthesis.
2) Friedman's chapter on the velocity of money is by far the weakest part of his text. After going on for ~700 pages with precise attention to quantitative analysis Friedman is forced to argue, in a mere 3 pages, that changes in velocity must be due to rational expectations (with little empirical evidence). Friedman's assumption that Velocity exhibits a secular decline with rising income is CRUCIAL when analyzing Monetarism. The Quantity Theory of Money states: Money*Velocity=Price*Output --- M*V=P*Y (this is a rearrangement of Fisher's equation -- See Michael Emmett Bradely's review for a far superior theoretical analysis of this equation). If Velocity can be considered constant then changes in M = changes in P*Y. This means all that is needed to have stable business cycles is an unchanging, or better yet a slightly increasing, money supply. HOWEVER, this flawed assumption is why Monetarism is so difficult to implement into policy. Friedman's tentative assumption in his "Monetary History" became the dogma of Monetarism.
"A Monetary History of the US, 1867-1960" is a revolutionary, albeit flawed, canon in economic literature.
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