- Person
- Milton Friedman
- Lived
- 1912–2006
- Field
- Economics
- From
- American
The story
In the early 1960s the prevailing view among economists was that money had played only a passive role in the Great Depression. The collapse of the 1930s, in which many banks failed, was widely seen as a failure of the free-enterprise system itself.
Milton Friedman set out to test that view. In 1946 Arthur Burns, director of research at the National Bureau of Economic Research and later chairman of the Federal Reserve, asked him to take charge of a study of the role of money in the business cycle. Friedman began working with the economic historian Anna J. Schwartz, who was already gathering much of the historical data and whom he praised for her incredible capacity for painstaking attention to detail.
Their collaboration produced A Monetary History of the United States, 1867 to 1960, published by Princeton University Press in 1963. Using long historical series, it traced how changes in the money supply had shaped the American economy from the Civil War era to the mid-20th century. Its most famous chapter, republished separately in 1965 as The Great Contraction, argued that the Great Depression was caused by a severe monetary contraction due to banking crises and poor policy. As waves of banks failed and people withdrew their cash, the quantity of money fell by one-third from 1929 to 1933.
Friedman and Schwartz concluded that the Federal Reserve should have acted as lender of last resort and expanded the money supply. Instead it allowed what might have been a severe recession to become a catastrophe. When the Nobel committee honoured Friedman in 1976, it called the book one of his most profound and most distinguished achievements, and noted that critics agreed it was a monumental scientific work.
The book's influence reached the Federal Reserve itself. In 2002, at a University of Chicago event honouring Friedman, the Federal Reserve governor Ben Bernanke told the two authors that regarding the Great Depression, they were right, and that thanks to them the Fed would not repeat the mistake. Friedman's monetary theory went on to influence the Federal Reserve's response to the 2008 financial crisis, when Bernanke was its chairman.
Both books remain in print, and economic historians regard A Monetary History as one of the most influential economics books of the 20th century. Its lesson, that central banks must keep the banking system and the money supply from collapsing in a panic, guides crisis policy to this day.
Why it matters
The book changed how economists understand the Great Depression and the vital role of the money supply in financial crises.
About Milton Friedman
Chicago economist and 1976 Nobel laureate whose monetarism and free-market advocacy reshaped central banking, ended the US draft and influenced governments worldwide.
More about Milton Friedman
- Milton Friedman made the case for floating exchange ratesMilton Friedman's 1953 essay The Case for Flexible Exchange Rates argued for floating currencies at a time when most experts thought the idea unrealistic.
- Milton Friedman foresaw the problem of stagflationIn 1968 Milton Friedman argued that inflation cannot permanently reduce unemployment, a theory that anticipated the stagflation of the 1970s.
- Milton Friedman explained how families plan their spendingIn his 1957 book A Theory of the Consumption Function, Milton Friedman introduced the permanent income hypothesis, which he considered his best scientific work.
- Milton Friedman helped invent sequential samplingDuring the Second World War, Milton Friedman and colleagues at Columbia developed sequential sampling, which became the standard method of quality control inspection.
Sources
- Milton Friedman Wikipedia
- Milton Friedman: Biographical NobelPrize.org
- A Monetary History of the United States Wikipedia
- Press release: The Prize in Economic Sciences 1976 NobelPrize.org
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.