- Paperback: 888 pages
- Publisher: Princeton University Press; New Ed edition (November 1, 1971)
- Language: English
- ISBN-10: 0691003548
- ISBN-13: 978-0691003542
- Product Dimensions: 6 x 1.5 x 9 inches
- Shipping Weight: 2.6 pounds (View shipping rates and policies)
- Average Customer Review: 31 customer reviews
- Amazon Best Sellers Rank: #75,350 in Books (See Top 100 in Books)
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A Monetary History of the United States, 1867-1960 New Ed Edition
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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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Friedman and Schwartz lay out clear, logical arguments to show the importance of monetary policy on the economy, They cover all of the panics and pay substantial attention to the great depression, offering unconventional views with logic demonstrating why the typical views are misguided. They also weave politics into the narrative and demonstrate the significance of not only what the policies are, but who is in charge. They contend the history of the US (and the world) would have been drastically different if Benjamin Strong didn't pass away as early as he did.
The writing is clear and engaging, the passion of the authors shines throughout the entire narrative. While this book would be more preferable to an educated economist, it is still more than worthwhile for anyone interested in the history of America from a unique perspective and the topics covered are still highly relevant today.
The authors note in the Preface to this book (which was originally published in 1963), "This book had its origin in a conversation that one of us had more than a decade ago... (suggesting) the desirability of ... an 'analytical narrative' of the post-Civil War monetary developments in the United States as a background for the statistical work, arguing that such a narrative ... would add a much needed dimension to the numerical evidence... Despite the length to which this volume has grown, we are painfully aware of its restricted scope... A full-scale economic and political history would be required to record at all comprehensively the role of money in the United States in the past century. Needless to say, we have not been so ambitious."
They are admittedly dealing with substantial uncertainty. They admit about the Greenback Period, "The fraction of the maximum issue fluctuated with the profitability of the issue, but the fraction throughout was lower than might have been expected. We have no explanation for this puzzle." (Pg. 23) About their figures for 1873-1878 and 1892-96, they state, "this result probably reflects more on the accuracy of our evidence than on a valid difference between the periods." (Pg. 186)
They make a strong statement about a statement of the "Fundamental Principles of the Federal Reserve Act": "It is hard to escape the conclusion that much of this section is disingenuous, designed to turn aside the criticisms without either meeting them or making explicit misstatements." (Pg. 250) A later section "offers little beyond glittering generalities instructing the men exercising the judgment to do the right thing at the right time with only the vaguest indications of what is the right thing to do." (Pg. 253)
About the Great Depression period, they opine, "The conclusion seems inescapable that a shortage of free gold did not in fact seriously limit the alternatives open to the (Federal Reserve) System. The amount was at all times ample to support large open market purchases... The problem of free gold was largely an ex post facto justification for policies followed, not an ex ante reason for them." (Pg. 406)
They argue, "banking panics have occurred only during severe contractions and have greatly intensified such contractions, if indeed they have not been the primary factor converting what would otherwise have been mild contractions into severe ones. That is why we regard federal deposit insurance as so important a change in our banking structure and as contributing so greatly to monetary stability---in practice far more than the establishment of the Federal Reserve System." (Pg. 441-442)
They admit in the "Summing Up" chapter that "There is one sense ... in which a case can be made for the proposition that the monetary decline was a consequence of the economic decline... The System was operating in a climate of opinion that in the main regarded recessions and depressions as curative episodes, necessary in order to purge the body economic of the aftereffects of its earlier excesses... Given that milieu, it can be argued that the System followed an inevitable policy... and that its failure to act vigorously... reflected the attitude that it was desirable to liquidate 'bad' banks, to let 'nature take its course' rather than to support the financial system 'artifically.'" (Pg. 691-692)
This long, detailed, and complex work is essential reading for anyone interested in contemporary economic theory and history.
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.