Book Review, A Monetary History of the United States, 1867-1960


A Classic in Economics

Milton Friedman along with Anna Schwartz published an almost 900 page book in 1963 titled A Monetary History of the United States, 1867-1960 which along with other works of Friedman’s got him a Nobel Prize in Economics in 1976. Friedman and Schwartz showed in Chapter 7 The Great Contraction 1929-33 (pages 299 to 419) how the Great Depression was caused by the actions, or more properly the inaction’s, of the Federal Reserve, first in allowing the credit bubble that lead to the stock market collapse in 1929 (excusable with the knowledge of the times) and then in their collapsing the U.S. banking system (not excusable under any circumstances) by not following the methods that were then known for preventing this very thing from happening. Keep in mind that preventing a monetary contraction and/or a series of banking failures was the stated main purpose for creating the Federal Reserve in 1913. This work of theirs was the first explanation of what actually caused the Great Depression and this solved the issue which had puzzled economists for almost 30 years. This work of Friedman and later works by others, as well, showed how Keynes was wrong about savings and deficit spending. This is a very critical finding as Keynes views on economics and FDR’s policies were accepted as gospel and those policies have now taken us to the very edge of word wide economic collapse.

A side note with relevance here is that when the Federal Reserve (FED) was formed by an act of congress (HR 7837) and signed into law as Pub. L. 63-43 on December 23, 1913 a banker named Benjamin Strong Jr. one of those that developed the concept of the FED was appointed as the Governor of the New York Federal Reserve bank at that time. From its inception and until his untimely death in October 1928 he ran the New York FED which had the lead in monetary policies since most major transactions especially international were conducted in New York City where all the main U.S. banks were located. According to Friedman’s work Strong did everything by the book and discounting minor ups and downs up until his death the economy ran as smoothly as could be expected as a result.

Strong besides being a very knowledgeable man had a dynamic personality and others ended up in his shadow, so after his death the FED was reorganized to prevent one person from having the power that Strong had. His successor George L. Harrison although knowledgeable did not have the personality of Strong and with the FED operating rules being changed in March 1930 he was not able to do what he knew needed to be done, so in 1930, 1931 and 1933 there were three waves of banking failures that swept across the country each worse than the preceding one. The result was the almost total destruction of the United States banking system and the Great Depression.

In Section 6 (Alternative Polices) of Chapter 7 on page 391 Friedman did more than state that as his opinion he showed in detail how the polices of the FED and the tools they had available to them were more than sufficient to accomplish the task of preventing the banking collapses which were the real cause of the Great Depression not the stock market collapse in 1929. Then in Section 7 (Why was Monetary Policy So Inept) of Chapter 7 on page 407 Friedman states that if Strong had lived only a few more years, he died at 55, and if he had done what he had been doing while he was the Governor of the New York Federal Reserve that the Great Depression and all it destroyed would probably never have happened.

But the biggest kicker was that before the FED was established to prevent banking collapses the New York banks had come up with a method to stop these contractions on their own, and that it was used on one occasion in particular a market contraction in 1907,. Although the method wasn’t handled perfectly the logic within it was sound. The creation of the FED stopped banks individually from doing what needed to be done and established the FED as the only agency responsible for preventing banking contractions. The policies that should have been used were well known and had been used before so there was really no excuse for the FED to not allow Governor Harrison to do what he wanted to do. It was only the FED boards’ members not wanting Harrison to follow in Strong’s footsteps that created the Great Depression. Sadly this is what big government always gets you ‘politics’ not what really needs to be done.

There is a lot more in this book which would take another book to describe; unfortunately it is technical and unless one had more than first year economics much of it would probably make no sense. I would however state there should be not one economist in the country that hasn’t read this book from cover to cover.

This book should be mandatory reading and maybe even a mandatory full class for any university giving degrees in economics. Sadly it isn’t so what happens is that economists today have no clue what works and what doesn’t for example.

After the 2008 election in late 2008 and early 2009 when Obama’s transition team was developing what would be the American Recovery and Reinvestment Act of 2009 (ARRA) more commonly known as the “Stimulus” they were only interested in politics not a recovery. Therefore the ARRA was a strictly partisan bill (almost no republicans voted for it) that was criticized by the democrats as being not enough, republicans by being to political and independents claiming its focus was on the wrong things. On its surface the ARRA did seem to be more a “pork” bill than one to actually help the economy. One interesting comment made by Christina Romer was that it (the ARRA) was designed to duplicate the successful programs of FDR.

Romer, whose expertise includes the Great Depression and the economic recovery that followed, is a professor of economics at the University of California, Berkeley. She is also co-director of the monetary economics program and a member of the business cycle dating committee at the National Bureau of Economic Research (NBER), the group that officially determines when U.S. recessions begin and end. Obviously she never read “The Monetary History of the United States, 1867 – 1960” by Friedman and Schwartz. She should have because as of the end of 2013 (5 full years later) the U.S. economy is still short from pre-collapse 1.49 million jobs by the BLS figures and 2.05 million jobs if we consider all jobs including self employed, agriculture & forestry and the military. This is the worst recovery ever since in addition to creating so few jobs the Federal government owes $9.28 trillion more dollars today than it did at the end of 2007. That equates to $1,278,286 borrowed and spent to create each job (there are 7.26 million more than at the bottom); but this is not a very good return on the money and we are still not back to where we were in 2007.