A Monetary History of the United States

A Monetary History of the United States

A Monetary History of the United States, 1867–1960
Dust jacket of 1st Edition, 3rd printing
Author Milton Friedman, Anna Schwartz
Country USA
Language English
Subject Economic history
Genre History
Publisher Princeton University Press
Publication date
Media type Print (hardcover)
Pages 860 pp (first edition)

A Monetary History of the United States, 1867–1960 is a book written in 1963 by Nobel Prize–winning economist Milton Friedman and Anna J. Schwartz. It uses historical time series and economic analysis to argue the then novel proposition that changes in monetary policy (changes in the rate of growth of the money supply) profoundly influenced the US economy, especially the behavior of economic fluctuations. Economic historians see it as one of the most influential economics books of the century.[1]


Milton Friedman and Anna Schwartz were working at the National Bureau of Economic Research (NBER) when the future chairman of the Federal Reserve, Arthur Burns, suggested that they collaborate on a project to analyze the effect of the money supply on the business cycle. Schwartz was already gathering much of the relevant historical data at that point, while Friedman was already a professor at the University of Chicago and also at the NBER. They began work in the late 1940s and eventually published A Monetary History through Princeton University Press in 1963. The Depression-related chapter "The Great Contraction" was republished as a separate section in 1965[2]


The book discusses the role of the monetary policy in the U.S. economy from the Civil War Reconstruction Era to the middle of the 20th century. It presents what was then a contrarian view of the role of monetary policy in the Great Depression. The prevalent view in the early 1960s was that monetary forces played a passive role in the economic contraction of the 1930s. The Monetary History argues that the bank failures and the massive withdrawals of currency from the financial system that followed significantly shrank the money supply (the total amount of currency and outstanding bank deposits), which greatly exacerbated the economic contraction. The book criticizes the Federal Reserve Bank for not keeping the supply of money steady and not acting as lender of last resort, instead allowing commercial banks to fail and allowing the economic depression to deepen.[3]

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:[3]

  • 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 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.


The book was the first to present the then novel argument that excessively tight monetary policy by the Federal Reserve following the boom of the 1920s turned an otherwise normal recession into the Great Depression of the 1930s. Previously, the consensus of economists was that loss of investor and consumer confidence following the Wall Street Crash of 1929 was the primary cause of the Great Depression.

The chapter on the Great Depression, entitled "The Great Contraction, 1929–33", was published as a stand-alone paperback in 1965.[4]

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.[5] 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",[6] and again in a 2004 speech as "transform[ing] the debate about the Great Depression".[3]

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. During this period, the Federal Reserve was recognized as a critical player in setting interest rates to counter excessive inflation and also to prevent deflation that could lead to real economic distress.


The book lays most of the blame for the Great Depression upon the Federal Reserve, arguing that it did not do enough to prevent the Depression. Economists such as Peter Temin have raised questions about whether or not most monetary quantity levels were endogenous rather than exogenously determined, as A Monetary History argues, especially during the Depression.[7] Paul Krugman has argued that the 2008 financial crisis has shown that, during a financial crisis, central banks cannot control broad money, and that money supply bears little relationship to GDP. According to Krugman, the same was true in the 1930s, and the claim that the Federal Reserve could have prevented the Great Depression is highly dubious.[8][9]

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.[10]

James Tobin, while appreciating the rigor with which Friedman and Schwartz demonstrated the importance of the monetary supply, questions their measures of the velocity of money and how informative this measure of the frequency of monetary transactions really is to understanding the macroeconomic fluctuations of the early-to-mid 20th century.[11]

See also


  1. ^ Michael D. Bordo, and Hugh Rockoff, "Not Just the Great Contraction: Friedman and Schwartz's A Monetary History of the United States 1867 to 1960," American Economic Review (May 2013), 103#3 pp 61-65.
  2. ^ Feldstein, Martin. "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 http://www.nber.org/feldstein.schwartz.html
  3. ^ 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. 
  4. ^ "The Great Contraction, 1929–1933: (New Edition)".  
  5. ^ "A Monetary History of the United States, 1867–1960". Archived Events, Book Forum. Cato Institute website. Retrieved August 6, 2013. 
  6. ^ 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. 
  7. ^ 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)
  8. ^ Krugman, Paul (May 1, 2012). "Milton’s Paradise Lost". New York Times. Retrieved 27 June 2014. 
  9. ^ Krugman, Paul (August 8, 2013). "Milton Friedman, Unperson". New York Times. Retrieved 27 June 2014. 
  10. ^ Eichengreen, Barry J. Golden Fetters: the Gold Standard and the Great Depression, 1919-1939. New York: Oxford UP, 1992. Print.
  11. ^ Tobin, James. "The Monetary Interpretation of History."

External links

A Monetary History of the United States, 1867-1960 at Google Books