A Monetary History Of The United States 18671960Edit
A Monetary History of the United States 1867-1960, written by Milton Friedman and Anna Schwartz, stands as one of the most influential treatments of how money and banking shape the course of economic life. It argues that shifts in the country’s monetary stock—the quantity of money available in the economy—have been the primary drivers of major business cycles across nearly a century and a half. The book covers a broad arc from the late 1860s through the dawn of the space-age economy in the 1960s, tracing how crises and recoveries track changes in the money supply, the banking system, and official policy responses. Its central claim—that monetary instability can explain large swings in output and employment—shaped how policymakers think about the credibility and restraint needed in monetary governance, and it remains a common reference point in debates about how best to anchor the value of money in a market-based economy.
From a perspective that emphasizes the primacy of price stability and prudent government action, the authors’ emphasis on money as the key determinant of economic performance resonates with a long-running belief in limited, predictable intervention. A core implication is that governments and central banks should avoid catapulting the money supply around to accommodate every political impulse or short-term demand shock. The work thus serves as a reminder that credible monetary stewardship matters for growth, investment, and the efficient allocation of resources. It also underscores the enduring tension between policy discretion in times of crisis and the discipline of rules that restrain the temptation to inflate or expand credit to chase political objectives.
The following sections summarize the core arguments, outline the historical phases the book treats, and present the principal debates that have surrounded its thesis. The discussion foregrounds federal reserve and monetary policy as instruments of economic stability, while situating the book within a larger dialogue about how best to structure a currency system that promotes growth without inviting excess inflation or deflation.
Core thesis and structure
Friedman and Schwartz advance what they call a monetary interpretation of the major U.S. business cycles from 1867 to 1960. They argue that:
The money stock, rather than real factors alone, correlates with the peaks and troughs of output and employment. Large contractions in the money stock accompany deep downturns; expansions in money supply align with recoveries. This is the central thread through the period. See money supply and monetary policy.
The Great Depression is best understood as largely a monetary phenomenon: a severe and protracted decline in the money stock aggravated by financial panics and bank failures, which spread through the credit system and impaired demand. See Great Depression and Great Contraction.
The institutional framework for money and credit—especially the creation of a central bank in 1913 and the evolution of the banking system—shaped how effectively policy could respond to shocks. See Federal Reserve System and National Banking Era.
The postwar era, culminating in the Bretton Woods system, offered a different arrangement in which a relatively stable anchor and a network of international monetary obligations provided a framework for growth and stability. See Bretton Woods system and Treasury-Federal Reserve Accord.
In presenting these arguments, Friedman and Schwartz rely on extensive data on the stock of money and on banking conditions, placing particular emphasis on the timing and magnitude of monetary changes as the dominant explanatory channel for economic fluctuations. See money stock and banking panic.
The institutional framework and the money supply, 1867-1913
This early stretch lays the groundwork for understanding how money was created, stored, and transmitted through the economy before the modern central banking era fully took shape. Several institutional features mattered:
The post–Civil War financial landscape involved a transition from currency issued by a variety of sources toward a more unified system of bank-issued notes backed by deposits and reserves. The evolution of the National Banking Act and the growth of national banks influenced the availability of money and credit.
The period saw episodes of financial stress, including panics that tested the resilience of the clearing and payment systems. The authors emphasize how these stress episodes affected the money stock and, in turn, economic activity.
The foundation for centralized policy would come with the later establishment of a formal central banking authority, which emerged in actual practice with the early twentieth century reforms. See Federal Reserve Act.
The money stock during this era tended to respond to real factors (production, demand) but also to policy actions and banking innovations that altered the capacity of the financial system to create money. See money stock and banking system.
The argument here is not that policy was perfect, but that the structural relationship between monetary conditions and real outcomes was a persistent feature of the American economy, even before a centralized monetary authority operated with a clear mandate. See Great Deflation and Panic of 1873.
The interwar era: monetary policy, crisis, and the Great Depression
The interwar years are central to the Friedman–Schwartz thesis, because they illustrate how monetary shocks can transform the outlook for households and firms:
The 1920s featured a rapid expansion of credit and an apparent stability in prices, followed by a severe contraction in the late 1920s and early 1930s as the money stock fell and credit tightened. The precipitous drop in liquidity amplified downward pressure on prices, production, and employment. See Great Depression and 1929 stock market crash.
The response of the financial system and policymakers during the crisis—the behavior of the Federal Reserve prior to and during the onset of the Depression—exposed tensions between the desire to maintain liquidity and the risk of deflation and bank runs. The authors argue that mistakes in monetary policy—especially in the handling of credit and reserves—helped propagate and deepen the downturn. See Federal Reserve and Banking panic.
Legislative and administrative actions in the 1930s—most notably reforms aimed at stabilizing the financial system and reorganizing monetary authority—moved the United States toward a more centralized and coordinated framework for money. These reforms, while controversial, were part of a broader attempt to restore confidence and stabilize the price level. See National Industrial Recovery Act and Gold Reserve Act of 1934.
The experience of the era—deflation, collapsing financial institutions, and a sprawling unemployment problem—became a focal point for the debate about how much monetary policy can or should do during deep downturns, and what institutional forms best support monetary stability. See Great Depression and deflation.
From a regime perspective that prizes credible money, the interwar years illustrate both the dangers of monetary instability and the potential for institutional reform to reduce those dangers. See Bretton Woods system for the postwar structural shift.
The wartime and postwar monetary order (through 1960)
The wartime mobilization and the subsequent peacetime settlement reshaped the monetary and international landscape:
War finance and the postwar settlement altered the scale and usage of money. Inflationary tendencies during wartime gave way to stabilization efforts in the immediate postwar period, as policy makers sought to anchor expectations around price stability and stable employment.
The Bretton Woods framework, established in 1944, linked the dollar to gold at a fixed price and created institutions that facilitated international monetary cooperation and exchange rate stability. This arrangement, together with the growing role of the United States in global finance, helped underpin a relatively predictable monetary environment. See Bretton Woods system and IMF.
The 1951 Treasury–Federal Reserve Accord reasserted the Federal Reserve’s independence in managing monetary policy, separating it from the fiscal demands of the Treasury and the wartime financing imperative. This independence was designed to preserve credibility and reduce the risk of inflationary policy. See Treasury-Federal Reserve Accord.
Domestic policy in the 1950s benefited from a balance between growth, employment, and price stability, reflecting a broader consensus about the value of a credible monetary framework to support investment and innovation. See monetary policy and price stability.
In this era, the logic of stable money and predictable policy remained central to the economic order, even as the global monetary system moved toward new forms of international cooperation and exchange.
Controversies and debates
A Monetary History of the United States has inspired extensive debate about the sources of economic fluctuations and the proper role of monetary policy. Key points of contention include:
The primacy of money versus other determinants of output: Critics argue that real factors—such as technology, productivity, demographics, and financial solvency—also explain cycles, and that credit conditions, banking structures, and fiscal policy played crucial roles alongside money stock changes. Supporters of the Friedman–Schwartz view maintain that money stock movements correlate most closely with major downturns and recoveries, especially the Great Depression, and that monetary stability provides the platform on which real factors operate. See Great Depression and money stock.
The interpretation of the Great Depression: The central claim that monetary contraction was the dominant driver has faced challenges from historians and economists who emphasize banking panics, credit crunches, and policy missteps beyond money supply alone. Critics also point to the role of fiscal policy and public works programs that attempted to counteract downturns. Proponents of the monetary interpretation reply that monetary mismanagement precipitated and amplified the downturn, while acknowledging that fiscal measures were not a substitute for sound money. See Great Depression and deflation.
The implications for policy rules versus discretion: The book’s emphasis on the consequences of monetary mismanagement is often cited in favor of rules-based or rules-like policy—central bank credibility, transparent frameworks, and limited inflationary monetization. Critics argue that flexible policy responses can better respond to structural changes and demand shocks. The balance between rules and discretion remains a live policy debate, especially in discussions of how to avoid inflation without stifling growth. See monetary policy and federal reserve.
The legacy for the postwar order: The Bretton Woods system and the era of fixed exchange rates illustrate how monetary governance can stabilize international finance, but also how changes in policy priorities can alter the currency regime. Controversy continues about whether such arrangements are inherently superior or whether flexible, market-based mechanisms might deliver similar outcomes with different trade-offs. See Bretton Woods system and exchange rate regime.
In presenting these debates, the article highlights how the history of U.S. money and banking has intersected with political choices about regulation, currency autonomy, and the appropriate scope of government intervention in the economy. See Federal Reserve System.