Friedman's master work. Probably too dense for the average reader, it is a must for anyone who wants to understand monetary economics.

Insightful!

Good luck to all of you who take this challenge on. It's as dry as dry can be, but very worthwhile if you're interested in how the money supply evolved in the US from the Civil War to post WWII.

The definitive work on the subject. It has influenced policymakers around the world for over 50 years.

Even those who are ideologically opposed to Friedman's views have a hard-time refuting this meticulously documented tome.

Whew - can only read this one in chunks. Good info though.
Finished ch. 4 - Am now past the 1907 financial crisis.
Finished ch. 5 - Creation of the Federal Reserve System and post WWI crisis.

Dry reading but good information.

My brain hurts

This book is not light reading, but given the subject matter, the book is surprisingly concise. Reading the appendices and footnotes is indispensable, since Friedman and Schwartz include summaries of relevant concepts and justifications for their reasoning. Having taken an introductory course in macroeconomics might also make the reading experience less frustrating. Important prerequisite topics: money, supply of and demand for currency, the money multiplier, the balance of payments and the international economy, etc.

A DETAILED HISTORY OF U.S. FISCAL MATTERS BY A PROMINENT ‘MONETARIST’

Milton Friedman and Anna Jacobson Schwartz wrote in the Preface of this 1963 book, “This book had its origin one of us had … with the late Walter W. Stewart… Stewart stressed the desirability of including an ‘analytical narrative’ of post-Civil War monetary developments in the United States as a background for the statistical work, arguing that such a narrative was not currently available and would add a much needed dimension to the numerical evidence. His suggestion led us to include a chapter on the historical background of the money stock in our planned monograph…The one chapter became two… and has now become a separate book.” (Pg. xxi)

They continue, “The years from 1867 to 1879 were dominated by the financial aftermath of the Civil War. Early in 1862, convertibility of Union currency into specie was suspended as a result of money creation in the North to help finance the Civil War, disturbances in foreign trade… and the borrowing techniques of the Treasury... The decline in the stock of money from 1875 to 1878… was a necessary prelude to successful resumption… Another aftermath of the Civil War was an extremely rapid growth in banking institutions, which produced a sharp rise in the ration of deposits to currency.” (Pg. 6-7) They go on, “The Federal Reserve System began operations in 1914. This far-reaching internal change in the monetary structure of the United States happened to coincide with … the loosening of links between eternal conditions and the internal supply of money which followed the outbreak of World War I… Taken together, the two changes make 1914 a major watershed in American monetary history.” (Pg. 9)

They add, “the stock of money shows larger fluctuations after 1914 than before 1914 and this is true even if the large wartime increases in the stock of money are excluded. The blind, undesigned, and quasi-automatic working of the gold standard turned out to produce a greater measure of predictability and regularity… than did deliberate and conscious control exercised within institutional arrangements intended to promote monetary stability.” (Pg. 9-10) They continue, “The rest of the twenties were… the high tide of the Federal Reserve System. The stock of money grew at a highly regular rate, and economic activity showed a high degree of stability… That era came to an abrupt end in 1929 with the downturn which ushered in the Great Contraction… The drastic decline in the stock of money and the occurrence of a banking panic of unprecedented severity did not reflect the absence of power on the part of the Federal Reserve System to prevent them. Throughout the contraction, the System had ample powers to cut short the tragic process of monetary deflation and banking collapse.” (Pg. 10-11)

They go on, “Major changes … resulted from the Great Contraction. In banking, the major change was the enactment of federal deposit insurance in 1934. This probably has succeeded… in rendering it impossible for a loss of public confidence to produce a widespread banking panic involving severe downward pressure on the stock of money; if iso, it is of the greatest importance for the subsequent monetary history of the United States… bank failures have become a rarity.” (Pg. 11)

They state, “The collapse of the banking system … and the failure of monetary policy to stem the contraction undermined the faith in the potency of the Federal Reserve System… these events led … to the relegation of money to a minor role, and to the assignment of major emphasis to governmental fiscal actions and direct interventions… the Federal Reserve was led to adopt a largely passive role… Federal Reserve policy continued to be subordinated to Treasure policy after the outbreak of World War II… The money stock grew at a much reduced rate in the early postwar years, yet indexes of prices rose rapidly… Perhaps the most puzzling feature of postwar monetary developments is the coincidence of a relatively slow rate of rise in the stock of money with a fairly rapid rate of growth of money income.” (Pg. 12-14)

They acknowledge, “the published market prices of government bonds … were apparently always low enough to make not issue profitable except in the years 1884 to 1891. The fraction of the maximum issued fluctuated with the profitability of issue, but the fraction was throughout lower than might have been expected. We have no explanation for this puzzle.” (Pg. 23) The state, “as we hope the rest of the book will demonstrate, this framework of proximate determinants is designed to facilitate analysis of the simultaneous interaction of the various forces determining the money stock, not to separate them into watertight compartments.” (Pg. 53)

From 1879-1882, “the gold inflow provided the basis and stimulus for an expansion in the stock of money and thereby a rise in internal process abroad sufficient to bring an end to the necessity for large gold inflows. It would be hard to find a much neater example in history of the classical gold-standard mechanism in operation.” (Pg. 99) They observe, “the income figures for the [1873-78] period are very rough approximations and almost surely overstate considerably the rate of rise in real income during the contracting period. Hence this result probably reflects more on the accuracy of our evidence than on a valid difference between the periods.” (Pg. 186)

They suggest, “It is interesting to speculate on what the course of events would have been if the Federal Reserve Act had not been passed. Up to our entry into the war, there would have been only a minor difference… gold flows would not have been supplemented by additional fiduciary money… During the active participation of the United States in the war, some substitute would almost certainly have been found for Federal Reserve credit---some equivalent to greenbacks to finance part of government expenditures. But in the absence of the reduction in reserve requirements produced by the act and amendments to it, a given amount of money creation to finance government expenditures would have had a smaller effect on the total money stock. It seems likely, therefore that monetary expansion and the associated price rise would have been less from March 1917 to May 1919 than they were in fact. But, again, the difference would not have been very great. The major difference would have come after the war. Monetary expansion would almost certainly have come to an end when heavy government borrowing ended in … 1919, and prices would almost surely have reached their peak about the same time.” (Pg. 238)

He says of the Tenth Annual Report (1923) of the Federal Reserve, “this section of the report … is [a] most unsatisfactory … guide to credit policy. The requisite ‘judgment’ cannot be based on factual evidence alone. The evidence must be interpreted and the likely effects of alternative courses of action predicted. On all this the 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)

They acknowledge, “Of course this comparison among periods is only suggestive… the policy adopted toward gold flows was by no means the only factor affecting the variability in the stock of money. Yet the comparison may serve to give some idea of the order of magnitude of the effects in question. And it certainly gives the reason for greater confidence in our earlier qualitative reasoning, since the results are in the direction suggested by that reasoning.” (Pg. 287)

They explain of the Great Depression/Contraction period, “Prevention or moderation of the decline in the stock of money, let alone the substitution of monetary expansion, would have reduced the contraction’s severity and almost as certainly its duration. The contraction might still have been relatively severe. But it is hardly conceivable that money income could have declined by over one-half and prices by one-third in the course of four years if there had been no decline in the stock of money.” (Pg. 301)

After the election of Roosevelt, “In the final two months prior to the banking holiday, there was nothing that could be called a System policy. The System was demoralized. Each Bank was operating on its own. All participated in the general atmosphere of panic that was spreading in the financial community and the community at large. The leadership which an independent central banking system was supposed to give the market and the ability to withstand the pressures of politics and of profit alike and to act counter to the market as a whole, these---the justification for establishing a quasi-governmental institution with broad powers---were conspicuous by their absence.’ (Pg. 391) They add, “The conclusion seems inescapable that a shortage of free gold did not in fact seriously limit the alternatives open to the System. The amount was at all times ample to support large open market purchases. A shortage was an additional reason, at most, for measures adopted primarily on other grounds… The problem of free good was largely an ‘ex post’ justification for policies followed, not an ‘ex ante’ reason for them.” (Pg. 406)

They clarify, “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 n 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 summarize, “If this interpretation has any validity, it leads to the somewhat paradoxical conclusion that confidence in the efficacy of monetary policy in the 1950s was inversely related to monetary stability. As that confidence has grown, it has produced a growing instability in the stock of money. Hopefully, the process is not explosive but self-limiting.” (Pg. 638)

They observe in the concluding chapter, “There is one sense---and… only one---in which a case can be made for the proposition that the monetary decline was a consequence of the economic decline. That sense is not relevant to our main task of seeking to understand economic interrelations, since it involves relying primarily on psychological and political factors. 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.” (Pg. 691)

This book will be of great interest to those studying the economic history of the United States (and not just monetarists).

A VERY INTERESTING BOOK.

five books most recommended

3.5