This PDF is a selection from an out-of-print volume from the National Bureau of Economic The long-awaited monetary history of the United States by Friedman. Editorial Reviews. Review. A monumental scholarly accomplishment [sets] a new standard for the writing of monetary history. A Monetary History of the United States, Series:National Download PDF New Deal Changes in the Banking Structure and Monetary Standard.
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PDF | Eugene N. White and others published Financial and Monetary History of the United States Economics Fall Jeannette P. Nichols; A Monetary History of the United States, – By Milton Journal of American History This content is only available as a PDF. goudzwaard.info January Revised March Anna Schwartz's Monetary History of the United States). I evaluate these .
Later, during the Great Depression, the US bought gold at inflated prices to help silver miners. The result was tragic for the money supplies of China and Mexico. The authors measure the velocity of money. The authors talk about it a lot, but do not make any conclusions about it.
Lastly, a theme is decision making at the Federal Reserve. The authors try to find out the people making the decisions and what information they had. Probably just as important is the decision making process. To a lesser extent, the Secretary of the Treasury's decisions are included.
This section does not cite any sources. September Learn how and when to remove this template message The thesis of Monetary History is that the money supply affects the economy. In the final chapter, they specify 3 occasions where the Federal Reserve acted strongly during relatively calm times and present these as an experiment for the reader to judge their thesis.
The three actions by the Fed were the raising the discount rate in , the raise of it in , and the raise of the reserve requirement in In fact, these were the three sharpest declines they saw in their data.
Other metrics fell at similar rates. These were 3 of the 6 worst month periods for industrial production. The others were the Great Depression and , when the economy switched from wartime to peacetime production.
Having demonstrated their thesis, they can now use it.
They claim that the Great Depression was due to the Fed letting the money supply shrink from to The Great Depression[ edit ] 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 :  In the spring of , 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 This tight monetary policy caused the economy to enter a recession in mid and triggered the stock market crash a few months later.
In the fall of , 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 with positive results, it raised interest rates again in late , causing a further collapse in the U. The Federal Reserve was also to be blamed for a pattern of ongoing neglect of problems in the U. 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.
Influence[ edit ] 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 s turned an otherwise normal recession into the Great Depression of the s. Previously, the consensus of economists was that loss of investor and consumer confidence following the Wall Street Crash of was a primary cause of the Great Depression. Some editions include an appendix  in which the authors got an endorsement from an unlikely source at an event in their honor when Ben Bernanke made this statement: "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve.
We did it. We're very sorry. But thanks to you, we won't do it again. This view became more popular as Keynesian stabilizers failed to ameliorate the stagflation of the s and political winds shifted away from government intervention in the market into the s and s. His detailed and valuable comments on several drafts have importantly affected the final version.
In addition, time and again, as we came to some conclusion that seemed to us novel and original, we found he had been there before. Among the many others to whom we are indebted for valuable criticism are Moses Abramovitz, Gary S. Becker, Arthur F. Burns, Phillip Cagan, Lester V.
Chandler, C. Goodhart, Gottfried Haberler, Earl J.
Hamilton, Bray Hammond, Albert J. Hettinger, Jr. Moore, George R. Morrison, Jay Morrison, Edward S. Shaw, Matthew Simon, and George J. Because the Federal Reserve System since its establishment has played so central a role in the monetary history of the United States, we have of necessity examined its operations in great detail.
We have often had to rely on secondary sources, since much primary source material is not in the public domain. Accordingly, the penultimate version of this book was sent for criticism to the Board of Governors of the Federal Reserve System and to a number of present and former officials of the System. We are grateful to the three individuals who sent comments on the manuscript: The final version of this book has been appreciably altered in consequence.
In addition, Mr. Together with the Diary of Charles S. Hamlin, member of the Federal Reserve Board from to , the Harrison Papers have been our major primary source of information about the operations of the System during a critical part of its history.
A number of scholars have been good enough to furnish unpublished material: Goldsmith, United States net international capital movements from the turn of the century until , the year when Department of Commerce figures become available; Simon Kuznets, annual net national product figures. We owe a special debt to David C. Mearns, chief of the Manuscript Division of the Library of Congress, which controls all rights of publication, for permission to cite and quote from the Charles S.
Hamlin Diary. We are also grateful to Roland Baughman, head of Special Collections at the Columbia University Library, for authorizing us to cite and quote from the writings of George L. Harrison in the Harrison Papers described above. We wish to express our gratitude also to Mrs.
Goldenweiser for permission to cite and quote from the unpublished writings of her late husband, in the Goldenweiser Papers, in the Manuscript Division of the Library of Congress.
This book has required an extremely large amount of statistical computation. Wehle, who also made useful criticisms of the manuscript.
Jones, David Laidler, Esther D. Harry Eisenpress and Millard Hastay contributed valuable advice and assistance in connection with problems of computation. In addition, statistical assistance was provided by the Center for Advanced Study in the Behavioral Sciences, where Milton Friedman was a Fellow during part of the preparation of the earlier draft, and by the Money and Banking Workshop and the Economic Research Center at the University of Chicago.
We are indebted to these institutions, to the late Mary Girschik and her assistants at the Center for Advanced Study, and to Lilly Monheit and her assistants at Chicago. Last but not least, Janet Friedman cheerfully sacrificed parts of a number of summers to run a computing machine for her father. The Center for Advanced Study provided many other facilities in addition to computing assistance during a most fruitful year. Discussion of the earlier draft of the manuscript at a number of seminars with other Fellows was most valuable, as were more informal discussions.
The draft was also discussed at sessions of the Money and Banking Workshop at Chicago, and suggestions made there have left their mark on the final manuscript. The librarians of all these institutions have been most cooperative and helpful. Irving Forman has turned in his usual outstanding performance in drawing the charts.
Margaret T. Edgar has made editorial suggestions for which not only we but also the readers of this book are in her debt. Finally, we cannot forbear saying a word of appreciation to the National Bureau as an institution and to the two successive directors of research, Arthur F.
Burns and Solomon Fabricant, under whom this study has been conducted. True to the spirit of dedication to the pursuit of truth, they have encouraged and assisted us to follow our path where it led, even though that meant repeated postponements of completion and a first major product very different indeed from the one initially contemplated.
It traces changes in the stock of money for nearly a century, from just after the Civil War to , examines the factors that accounted for the changes, and analyzes the reflex influence that the stock of money exerted on the course of events.
We start with because that is the earliest date at which we can begin a continuous series of estimates of the stock of money in the United States. When the National Banking Act was passed during the Civil War, it was believed that state banks would shortly go out of existence.
As a result, organized federal collection of statistics for state banks ceased, though, as it happens, state banks suffered only a temporary and never a complete eclipse.
Accordingly, there is a serious hiatus in statistical data. Better data are available for the period before the Civil War than for the years from to Money played an important role in economic and political developments in the United States during the period we cover—as it so often has in other periods and other places. We have therefore been led to examine some of these developments in considerable detail, so much so that this book may read in part like a general economic history.
We warn the reader that it is not; it is highly selective.
Throughout, we trace one thread, the stock of money, and our concern with that thread explains alike which episodes and events are examined in detail and which are slighted. The estimates of the stock of money we have constructed give for the first time a continuous series covering more than nine decades. The most notable feature of the stock of money is its sharp upward trend.
Our figures do not classify deposits in commercial banks at this early date into demand and time deposits, because this distinction had little meaning, either for banks or their customers. Reserve requirements for banks were levied against deposits, without distinction between demand and time. Demand deposits, like time deposits, frequently paid interest; and time deposits, like demand deposits, were frequently transferable by check.
The distinction became of major importance to banks and so reliable data became available on a continuous basis for the two categories separately only after , when the Federal Reserve Act introduced differential requirements for demand and time deposits. Accordingly, we have no estimate for for a third and narrower possible definition of money, namely, currency plus demand deposits alone.
Albert J. The public held 50 times as many dollars of currency at the end of the 93 years spanned by our figures as at the beginning; times as many dollars of commercial bank deposits; and times as many dollars of mutual savings deposits.
The total we designate as money multiplied fold in the course of these more than nine decades, or at the annual rate of 5. We can break this total into three components: Of course, as Chart 2 shows, these developments did not proceed steadily; and it is with the vicissitudes along the way that this study is mostly concerned. In discussing these vicissitudes, we frequently find it convenient to mark off periods by dates at which business activity reached a cyclical peak or trough.
We use for this purpose the reference cycle chronology established by the National Bureau of Economic Research. Our extensive use of this chronology perhaps justifies an explicit caveat that we do not present a comprehensive history of cyclical movements in economic activity in the United States.
Monetary factors played a major role in these movements, and conversely, nonmonetary developments frequently had a major influence on monetary developments; yet even together the matters that concern the historian of money do not exhaust those that are relevant to the historian of cyclical movements. Money stock, figures in col. The years from to were dominated by the financial aftermath of the Civil War. Early in , 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, the general financial uncertainty arising out of the war, and the borrowing techniques of the Treasury.
From then until resumption of specie payments on January 1, , the United States was legally on a fiduciary standard—the greenback standard as it has come to be called. The dollar was linked with other currencies through exchange rates determined in the market and fluctuating from day to day.
The dollar was inconvertible in the older sense of not being exchangeable at fixed parity for specie; it was not inconvertible in the modern sense of being subject to legal restrictions on its download or sale. For domestic payments, gold was in the main simply a commodity like any other, with a variable market price. For foreign payments, gold was equivalent to foreign exchange, since Great Britain maintained a gold standard throughout the period, and several other important countries did so during the latter part of the period.
Despite support for inconvertible currency by many business groups both during and after the war, and growing farm support after the war, as agricultural prices fell, suspension of payments was generally regarded as temporary.
The major announced aim of financial policy was a resumption of specie payments at the prewar parity. This aim was finally achieved on January 1, The whole episode, discussed in detail in Chapter 2, is clearly reflected in the series in Chart 1. The decline in the stock of money from to —one of the few absolute declines in the whole history of the series and next to the largest—was a necessary prelude to successful resumption.
The extremely sharp rise thereafter was partly a reaction to success. Another aftermath of the Civil War was an extremely rapid growth in banking institutions, which produced a sharp rise in the ratio of deposits to currency. The financial measures of the war included establishment of the National Banking System and, effective July 1, , a prohibitive tax on state bank notes.
Initially, few national banks were created, while the prospective tax measure was a strong deterrent to state banks. The result was that the major effect of the National Banking Act came after the end of the war, and, along with a revival of state hanks, helped to produce the sharp rise in deposits recorded in Chart 1.
The success of resumption did not end uncertainty about the monetary standard. For nearly two decades thereafter, the U. The rapid expansion of output in the Western world during those decades and the adoption of a gold standard over an area far wider than before added substantially to the demand for gold for monetary purposes at any given price level in terms of gold.
That expansion in demand more than offset a contemporary expansion in supply, as a result both of increased production of gold and improvement of financial techniques for erecting a larger superstructure of money on a given base of gold. The result was a slow but rather steady downward tendency in product prices that prolonged and exacerbated the political discontent initiated by the rapid decline in prices after the end of the Civil War.
Greenbackism and free silver became the rallying cries. The silver forces were strong enough to obtain concessions that shook confidence in the maintenance of the gold standard, yet they were not strong enough to obtain the substitution of silver for gold as the monetary standard. The monetary history of this period is therefore one of repeated crises and of legislative backing and filling.
The defeat of William Jennings Bryan in the Presidential election of marks in retrospect the end of the period Chapter 3.
These developments doomed Bryan to political failure, far more than any waning in the effectiveness of his oratory or any shortcomings in his political organization. In the United States, the stock of money was approximately constant from to During those years, uncertainty about the monetary standard and associated banking and international payment difficulties prevented any expansion in the U.
The money stock then rose over the next two decades at a rate decidedly above that from to Chart 1. The accompanying gradual rise in prices rendered the gold standard secure and unquestioned in the United States until World War I. The elimination of controversy about the monetary standard shifted the financial and political spotlight to the banking structure.
Dissatisfaction had been generated by recurrent banking difficulties. The most severe of these occurred in , , , and , when bank failures, runs on banks, and widespread fears of further failures produced banking crises and, on several occasions, most notably , suspension by most banks of convertibility of deposits into currency.
The episode is reflected in Chart 1 in the concomitant rise in currency and decline in deposits, as well as in the decline in total currency and deposits.
The dissatisfaction with the banking structure was brought to a head by the banking panic of That panic was a repetition of earlier episodes, including the suspension of convertibility of deposits into currency. It is marked in Chart 1 by the only decline in the stock of money during the period , accompanied as in by a rise in currency and hence a still sharper decline in deposits. The result was the enactment by Congress of the Aldrich-Vreeland Act in as a temporary measure, a searching examination of the monetary and banking structure by a National Monetary Commission in , the publication by the Commission of some notable scholarly works on money and banking, and the adoption by Congress of the Federal Reserve Act of as a permanent measure Chapter 4.
The Federal Reserve System began operations in This far-reaching internal change in the monetary structure of the United States happened to coincide with an equally significant external change—the loosening of links between external conditions and the internal supply of money which followed the outbreak of World War I—destined to become permanent.
Taken together, the two changes make a major watershed in American monetary history. Important as they were, both changes were changes of degree.
The Treasury had long exercised central banking powers that were no less potent because they were not so labeled, and, as Chapter 4 documents, it had been doing so to an increasing extent. The growing size of the U. Though independent in their inception, the two changes were destined to become closely related.
The weakening of the international gold standard gave the Federal Reserve System both greater freedom of action and wider responsibilities. In turn, the manner in which the Federal Reserve System exercised its powers had an important effect on the fate of the gold standard. One who did not know the subsequent history of money in the United States would very likely conjecture that the two changes reinforced one another in reducing the instability in the stock of money.
The weakening of external links offered the possibility of insulating the domestic stock of money from external shocks. And the Reserve System, established in response to monetary instability, had the power to exercise deliberate control over the stock of money and so could take advantage of this possibility to promote monetary stability.
That conjecture is not in accord with what actually happened. As is clear to the naked eye in Chart 1, the stock of money shows larger fluctuations after than before 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—perhaps because its discipline was impersonal and inescapable—than did deliberate and conscious control exercised within institutional arrangements intended to promote monetary stability.
Here is a striking example of the deceptiveness of appearances, of the frequently dominant importance of forces operating beneath the surface. The rapid rise in the stock of money during World War I, when the Federal Reserve System served as an engine for the inflationary financing of government expenditures, continued for some eighteen months after the end of the war, at first as a continued accompaniment of government expenditures, then as a result of the almost inadvertent financing of private monetary expansion by the System.
The monetary expansion was abruptly reversed in early by Federal Reserve action—the first major deliberate and independent act of monetary policy taken by the System and one for which it was severely criticized Chapter 5. The rest of the twenties were in many ways 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.
Both were widely attributed to the beneficent actions of the System. Within the System, there was much sophisticated and penetrating research on the operation of the financial markets and the role of the System. The result was a deepened understanding of its own operations and tools.
Outside the System, bankers and businessmen at home regarded its powers with awe, and foreign countries sought its assistance in mending their own monetary arrangements. Cooperation with the great central banks of Britain, France, and Germany was close; and the belief arose that, through such cooperation, the central bankers could assure not only domestic but also international economic stability Chapter 6.
That era came to an abrupt end in with the downturn which ushered in the Great Contraction. In its initial stages, the contraction was not unlike earlier ones in its monetary aspects, albeit the money stock did decline slightly.
Severe contractions aside, the money stock rises on the average during contraction and expansion alike, though at a slower rate during contraction. The monetary character of the contraction changed drastically in late , when several large bank failures led to the first of what were to prove a series of liquidity crises involving runs on banks and bank failures on a scale unprecedented in our history.
By early , when the monetary collapse terminated in a banking holiday, the stock of money had fallen by one-third—the largest and longest decline in the entire period covered by our series. The banking holiday was a panic of the genus that the founders of the Federal Reserve System had expected it to render impossible. It was, however, of a different species, being far more severe than any earlier panic. In addition, whereas in earlier panics, restriction of payments came before many banks had failed and served to reduce the number of subsequent failures, the banking holiday occurred only after an unprecedentedly large fraction of the banking system had already failed, and many banks open before the holiday never reopened after it.
One-third of the banks had gone out of existence through failure or merger by Chapter 7. 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 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.
Had it used those powers effectively in late or even in early or mid, the successive liquidity crises that in retrospect are the distinctive feature of the contraction could almost certainly have been prevented and the stock of money kept from declining or, indeed, increased to any desired extent.
Such action would have eased the severity of the contraction and very likely would have brought it to an end at a much earlier date. Such measures were not taken, partly, we conjecture, because of the fortuitous shift of power within the System from New York to other Federal Reserve Banks and the weakness of the Federal Reserve Board in Washington, partly because of the assignment—by the community at large as well as the Reserve System—of higher priority to external than to internal stability Chapter 7.
Major changes in both the banking structure and the monetary system resulted from the Great Contraction. In banking, the major change was the enactment of federal deposit insurance in This probably has succeeded, where the Federal Reserve Act failed, in rendering it impossible for a loss of public confidence in some banks to produce a widespread banking panic involving severe downward pressure on the stock of money; if so, it is of the greatest importance for the subsequent monetary history of the United States.
Since the establishment of the Federal Deposit Insurance Corporation, bank failures have become a rarity. The Federal Reserve System itself was reorganized, greater power being concentrated in the Board and less in the Banks. The System was also given additional powers, of which the power to vary reserve requirements was by far the most important.
In the monetary system, the dollar was devalued in terms of gold, and the character of the gold standard was changed. Gold coinage was discontinued and the holding of gold coin or bullion made illegal.
The Treasury continued to download gold freely at a fixed price at the Mint but sold it freely at a fixed price only for purposes of foreign payment. With the departure from the gold standard of country after country during and after World War II and the widespread introduction of exchange controls by other countries, the United States came to be effectively on a fiduciary standard.
Gold is currently a commodity whose price is legally supported, rather than in any meaningful sense the base of our monetary system Chapter 8. The collapse of the banking system during the contraction and the failure of monetary policy to stem the contraction undermined the faith in the potency of the Federal Reserve System that had developed in the twenties.