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Classic in the canon of economic theory
on March 7, 2005
Milton Friedman and Anna J. Schwartz' A Monetary History of the United States, 1867-1960 is an analysis and explanation of the Great Depression of the 1930s. Its conclusion, first published in the early 1960s, differs from the two main explanations that existed at the time.
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.