Revolutionary, albeit flawed, Monetary Analysis | A Monetary History of the United States, 1867-1960 |...

study / interested in econ / political economy ? -- must read ! | A Monetary History of the United States, 1867-1960 | Milton Friedman, Anna Jacobson Schwartz

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	• A Monetary History of the United States, 1867-1960 Milton Friedman, Anna Jacobson Schwartz Princeton University Press, 1971 - 888 pages average customer review:based on 13 reviews view larger image
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highly recommended

An Eye-Opening Revelation

Myths, misconceptions, and wishful thinking pervade the study of US history. Economic history has been especially prone to revisionists who twist and distort facts, or who fabricate lies outright. This is perhaps most evident in the Great Depression, as many blame the "do nothing" policies of Herbert Hoover and champion FDR's New Deal. These individuals would be truly enlightened by Friedman's Monetary History, which sheds light on the true nature of the Great Depression. Friedman convincingly argues that both Hoover and Roosevelt prolonged the Depression with inflationary policies. A useful text for anyone interested in reason, truth, and economics.

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Revolutionary, albeit flawed, Monetary Analysis

"A Monetary History of the United States, 1867-1960" by Milton Friedman and Anna Schwartz is an epic in economic literature. The authors concisely analyze nearly 100 years of monetary history and prove why monetary economics matter. Their work, originally published in 1963, offers immaculate insight into endogenous and exogenous economic variables that shaped US history.

When reviewing a classic text it is important to test it on two criteria: 1) it's ingenuity; and, 2) it's validity. In regards to ingenuity "Monetary History" paved the way towards a statistically grounded analysis of macroeconomics (in this case monetary theory). While "Monetary History" was groundbreaking it's truly memorable aspect is Ch7's "The Great Contraction". This chapter, which is now known as the money hypothesis, revolutionized the way economists thought about the Great

Deprhttp://www.amazon.com/review/R1C118WNLAM4I/ref=cm_cr_pr_cmt?ie=UTF8&ASIN=0691137943&nodeID=#wasThisHelpfulession. Ultimately, this analysis proved to be incorrect.

Why the work remains a classic, even though flawed, is because the sheer difficulty in producing such a feat. Friedman and Schwartz managed to put together a comprehensive 100 year monetary history in (a short) 700 pages. The amount of research required to take on such a project is hard to grasp. The footnotes in the "Monetary History" give a small glimpse into how much work was required to create this book. They alone are the size of a mid-sized economic text. Throughout the text the authors synthesis a wide range of evidence, often being forced to recalculate the statistics given to them, and somehow come out with a fairly consistent history.

The work is so encompassing it is impossible in an Amazon book review to point out all of the prescient ideas presented in a "Monetary History". Here is a short list off the top of my head: 1) money matters in the short-run; 2) active gov't policy can prevent bank panics if correctly implemented; 3) Consistent misperception regarding economics have OFTEN created bad policy (both in the private and public sphere); 4) the gold standard was never good (and we never had anything near an ACTUAL gold standard); 5) An excellent review of business cycle contractions between 1844-1960; 6)Everything you wanted to know about the composition of banking mechanisms from 1867-1960. There are many, many more...

Friedman's "Monetary History" analysis does occasionally feel awkward (this tends to happen when his quantitative analysis does not account for history and he is forced to make qualitative assumptions). 1) The entire Great Contraction rested on the qualitative factor of not having a 'Great Man' running the Federal Reserve; 2) Deflation existed side by side with rapid economic expansion in the 1880's, which Friedman finds interesting, but no attempt is made to ascertain whether monetary issues had any recessionary effects on potential growth; 3) The entire 48-60' analysis exerts a strong ideological stance that did not seem to exist in the earlier chapters. (many more minor hiccups exist and for the most part Friedman is willing to admit when he cannot reasonably prove causation).

However, two major problems exist in the "Monetary History".

1) The assumption that money does not matter in the long-run is unsupported through their analysis. Friedman and Schwartz fail to find any long lasting effects regarding changes in the price level and money stock to changes in economic activity. This view, which is a very simple look at correlations, is essentially embracing a negation. They fail to find a connection between monetary economics and business cycles so it must not exist. Though this view has little empirical evidence it is made several times throughout the work (and in almost every case the statement seems to be completely out of place). The claim that money is 'neutral' has forever changed economics by being included in the Neoclassical Synthesis.

2) Friedman's chapter on the velocity of money is by far the weakest part of his text. After going on for ~700 pages with precise attention to quantitative analysis Friedman is forced to argue, in a mere 3 pages, that changes in velocity must be due to rational expectations (with little empirical evidence). Friedman's assumption that Velocity exhibits a secular decline with rising income is CRUCIAL when analyzing Monetarism. The Quantity Theory of Money states: Money*Velocity=Price*Output --- M*V=P*Y (this is a rearrangement of Fisher's equation -- See Michael Emmett Bradely's review for a far superior theoretical analysis of this equation). If Velocity can be considered constant then changes in M = changes in P*Y. This means all that is needed to have stable business cycles is an unchanging, or better yet a slightly increasing, money supply. HOWEVER, this flawed assumption is why Monetarism is so difficult to implement into policy. Friedman's tentative assumption in his "Monetary History" became the dogma of Monetarism.

"A Monetary History of the US, 1867-1960" is a revolutionary, albeit flawed, canon in economic literature.

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study / interested in econ / political economy ? -- must read !

do not have more to say than the header ..... basically :-) (it's more of "working oneself through" than "reading over", or while doing something else at the same time but it is very much worth it and it sets the record straight on many fallacies still heard/told about the great depression)

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Mad Dogs and Historians....

.... rush in where even fools and Englishmen fear to tread. Friedman's "Monetary History" is monumental in research and in influence, and it would be mad indeed to attempt to refute it or "review" it in a few hundred words. I read it in an earlier edition, and even then I certainly made no scholarly effort to check or re-evaluate the data. I'm writing now only to offer a few thoughts stimulated by the current turmoil in financial markets, which is widely being compared to the onset of Great Depression of the 1930s.

Friedman wields the word "History" in his title, and devotees of Friedman's libertarian economics have taken this book as scripture, using it for revisionist purposes to "debunk" the older histories of the New Deal. As a social/political history, however, Friedman's work is meretricious, limited by his economic tunnel-vision to a kind of through-the-mirror inverse-Marxist determinism. Friedman is never at his best when human nature is in question; his basic notion that contraction of the money supply "caused" the onset of the Great Depression (yes of course I'm simplifying) ignores the role of historically contingent cultural "memes" that preestablished societal responses to events. He and his followers assert vociferously that FDR's Keynsian "fiscal" interventions postponed recovery, and that therfore the New Deal was a failure. What he seems utterly unable to consider is that the long-term effects of the New Deal were not, and were not intended to be, mere recovery and stability, but rather a paradigmatic change in the legal relationships of employers and employees, from the age-old master/servant suppositions to the impersonal corporation/ labor-union norms of the modern world.

Friedman was notorious for dismissing historiography, especially economic history, as non-mathematical. Instead, he always argued the economic theory should be evaluated entirely on the accuracy of its predictions for the future. The time has come, I think, to take stock of Friedman's monetarism precisely in terms of its predictive success, and by that measure it does no better than Keynsian notions of imbalance of savings and consumption at predicting the current crisis. I question whether the entire Friedmanite establishment has any more to say in explanation of the credit and stock market debacle than what Friedman himself would have called a "naive" prediction based on commonsensical prudence and honest bookkeeping. [PostScript: I'm delighted by the news today that Alan Greenspan admits to being dumbfounded by the current economic crisis. He was always dumbfounded, but didn't know it.]

Friedman got one thing right: seemingly small errors of "fiscal" policy by the government can indeed have huge consequences. The problem is that the US government has been Friedmanite to the marrow since the "floating" of the dollar under Nixon. It stands to reason that it's Friedman's own contributions to public policy that have gotten us where we are. Particularly, if I may hazard a historian's guess, the effects of huge recruitments of "savings" from the middle class into the stock market, in the Ponzi-like form of tax-sheltered annuities and 403(b)s, has locked in a potential disaster, with inflexible and unreclaimable "wealth" evaporating just as the biggest wave of claimants for that wealth are reaching retirement age. Privatizing Social Security might be seen, in this light, as a stealth measure to shore up the stock market in the face of the enormous withdrawals form 403(b)s and 401(k)s scheduled to begin in the next decade. The "fixing" of tax policy is America will have to be something more subtle than simple "progressive" redistribution, unless of course we want to take up the anarcho-capitalist attitude of "devil take the hindmost."

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Break from the norm.

This is perhaps the best work if you are simply looking for examples of how government intervention can cause harm instead of good. Additionally, this has been the work that pushed the recognition of monetarism into the heat of the economic mindset.

This being said, it is important to note that the theory underlying this endeavor is not an ample explanation of the Great Depression as it is conventionally used. The bottom line is that there are simply far too many exogenous and endogenous factors that operate regardless of what or what not government policy may influence. Additionally, the compilation of data and analyses from financial markets over the years shows with clarity that Friedman's general framework is a very special exception, not a rule. Read Michael Emmett Brady's review, as he seems to touch on this more.

Ultimately, the conclusion, in my opinion, is not worth the effort. Everyone long understood, if perhaps not the extent, the potential for intervention through misguided fiscal or monetary policy to cause harm. Friedman's methodology is far too ideologically tempered to continue to be taken seriously. However, the compilation of statistical data alone make this a necessary purchase for anyone serious about (ironically) economic history in the United States. It is (Edit - was) also a highly original analysis of depression economics, for those interested. Even with the truckload of ideology and faulty, sometimes absurd, assumptions taken to build a logical framework, this book is worth reading simply because of its influence on economics as a discipline. The main question is its relevance.

Conclusion - Buy this for compiled data and statistics, and to understand the thinking that has had huge effect, if not for quite a while dominated, mainstream economics. Leave the ideology at the door.

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Writing in the June 1965 issue of theEconomic Journal, Harry G. Johnson begins with a sentence seemingly calibrated to the scale of the book he set himself to review: "The long-awaited monetary history of the United States by Friedman and Schwartz is in every sense of the term a monumental scholarly achievement--monumental in its sheer bulk, monumental in the definitiveness of its treatment of innumerable issues, large and small . . . monumental, above all, in the theoretical and statistical effort and ingenuity that have been brought to bear on the solution of complex and subtle economic issues."

Friedman and Schwartz marshaled massive historical data and sharp analytics to support the claim that monetary policy--steady control of the money supply--matters profoundly in the management of the nation's economy, especially in navigating serious economic fluctuations. In their influential chapter 7, The Great Contraction--which Princeton published in 1965 as a separate paperback--they address the central economic event of the century, the Depression. According to Hugh Rockoff, writing in January 1965: "If Great Depressions could be prevented through timely actions by the monetary authority (or by a monetary rule), as Friedman and Schwartz had contended, then the case for market economies was measurably stronger."

Milton Friedman won the Nobel Prize in Economics in 2000 for work related to A Monetary History as well as to his other Princeton University Press book, A Theory of the Consumption Function (1957).

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