A Monetary History of the United States

"We don't know what would have happened had [Federal Reserve Governor Benjamin] Strong lived; but what we do know is that the central bank of the world's economically most important nation in 1929 was essentially leaderless and lacking in expertise. This situation led to decisions, or nondecisions, which might well not have occurred under either better leadership or a more centralized institutional structure. Associated with these decisions, we observe a massive collapse of money, prices, and output. … Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression, You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

"Milton Friedman and Anna Schwartz’s monumental Monetary History of the United States eventually helped to displace Keynesian interpretations with a monetarist interpretation, especially after the stagflation of the 1970s worked to discredit Keynesian macroeconomics."

"Friedman and Schwartz claimed that the fall in the money supply turned what might have been an ordinary recession into a catastrophic depression, itself an arguable point. But even if we grant that point for the sake of argument, one has to ask whether the Federal Reserve, which after all did increase the monetary base, can be said to have caused the fall in the overall money supply. [...] It would be fair to blame government officials for failing to take appropriate action. But it would be quite a stretch to say that the government caused the epidemic, or to use the CDC’s failure as a demonstration of the superiority of free markets over big government. Yet many economists, and even more lay readers, have taken Friedman and Schwartz’s account to mean that the Federal Reserve actually caused the Great Depression—that the Depression is in some sense a demonstration of the evils of an excessively interventionist government. And in later years, as I’ve said, Friedman’s assertions grew cruder, as if to feed this misperception. In his 1967 presidential address he declared that “the US monetary authorities followed highly deflationary policies,” and that the money supply fell “because the Federal Reserve System forced or permitted a sharp reduction in the monetary base, because it failed to exercise the responsibilities assigned to it”—an odd assertion given that the monetary base, as we’ve seen, actually rose as the money supply was falling."

"We know that monetary changes ought to be irrelevant, because units don't matter. Accepting the Friedman-Schwartz evidence that monetary changes are not only relevant, but the major cause of all these events, it is difficult to talk about a system responding in a very sharp way to something to which it "ought" not to have responded at all. These considerations lead into questions about information of some kind or another. That's a very old view. The particular mistake that people get led into by monetary changes is hard to determine, and the specific examples I've cooked up are dictated a lot by what's technically doable by me, given the methods I've got."

"What Friedman and Schwartz do in their monograph is try to link up these big episodes with large-scale monetary collapses. The idea is that all you have to do is stop the large-scale monetary collapse. The collapses aren't caused by the government–they're all private systems bank failures. Friedman's policy isn't exactly laissez-faire, since he's calling for government intervention in the banking sector to override events in the private sector. I don't think of the Friedman countercyclical policies as stemming from a general dislike for government as much as calling for a very specific, well-defined form of government intervention. That's all it takes. You don't need all of this fine-tuning; it's beside the point and dangerous as well."

"I frequently tell students: If you buy only one economics book, it should be A Monetary History. The book is obviously important for our understanding of the Great Depression, but its impact goes far beyond that. Friedman and Schwartz show us that monetary events and monetary policy have affected real output throughout American history."

"Friedman’s A Theory of the Consumption Function, which appeared in 1957, was a major work by any standards; but monetarism, the doctrine that autonomous change in the supply of money is the main actor in the determination of aggregate nominal income, has not proved to be tenable analytically or empirically. His Monetary History of the United States, 1867–1960 (written with the late Anna Schwartz), while highly interesting, is not a towering intellectual achievement."