A Monetary History of the United States
by Milton Friedman and Anna Schwartz
A Monetary History of the United States
by Milton Friedman and Anna Schwartz
Friedman and Schwartz fall into the trap of letting numbers lead their writing. While they have some amazing charts ( The stock of money and its proximate determinants is one, unfortunately, I can't find an online copy of it ), they don't use text to tell the story with charts to elucidate numeric points.
The total we designate as money multiplied 157-fold in the couse of these more than nine decades, or at the annual rate of 5.4 per cent. Since the population of the United States nearly quintupled over the same period, the stock of money per capita multiplied some 32-fold, or at teh annual rate of 3.7 per cent. We can break this total into three components: 1.9 percentage points, which is the rate of rise in output pe capita; 0.9 pecentage points, whihc is the rate of rise in prices; and a residual of 0.9 percentage points, which is the rate of rise in the amount of money balances, expressed as a fraction of income, that the public chose to hold. So great is the power of compound interest that this residual small rate of growth coresponds to a rise in the public's holdings of money from a sum equal to less than 3 months' income in 1869 to a sum equal to moe than 7 months' income in 1960.
Finally, the price level fell to half its initial level in the course of less than fifteen years, and at the same time, economic growth proceeded at a rapid rate. The one phenomenon was teh seedbed of controvesey about monetary arrangements that was destined to plague the following decades; the other was a vigorous stage in the continued economic expansion that was destined to raise the United States to the first rank among the nations of the world. And their coincidence casts serious doubts on the validity of the now widely held view that secular price deflation and rapid economic growth are incompatible.
This entire silver episode is a fascinating example of how important what peoople think about money can sometimes be. The fear that silver would produce an inflation sufficient to force the United States off the gold standard made it necessary to have a severe deflation in order to stay on the gold standard.
In our view, that episode, like the gold sterilization policy, exemplifies the difficulties raised by seeking to make policy serve two masters. Had the Reserve System directed its polcy single-mindedly to breaking the stock market boom, it would have refrained from its easing actions in 1927. Instead, it would have started its restraining actions then rather than in 1928. There seems little doubt that, had it been willing to take such measures, it could have succeeded in breaking the bull market. On the other hand, if it had single-mindedly pursued the objective implicit in its 1923 policy statement of promoting stable economic growth, it would have been less retrictive in 1928 than it was and would have permitted both high-powered money and the stock of money to grow at something like their usual secular rates. In the event, it followed a policy which was too easy to break the speculative boom, yet too tight to promote healthy economic growth.
In our view, the (Federal Reserve) Board should not have made itself an "arbiter of security speculation or values" and should have paid no direct attention to the stock market boom, any more than it did to the earlier Florida land boom.
Paradoxically, therefore, the bank failures, by their effect on the demand for money, offset some of the harm they did by their effect on the supply of money. That is why we say that, if the same reduction in the stock of money had been produced in some other way, it would probably have involved an even larger fall in income than the catastrophic fall that did occur.
Federal deposit in surance has been accompanied by a dramatic change in commercial bank failures and in losses bone by depositors in banks that fail. ...
For the thirteen-year period 1921 to 1933, losses bone by depositors averaged $146 millions a year or 45 cents per $100 of adjusted deposits in all comercial banks. For the twenty-seven years since, losses have averaged $706,000 a year, or less than two-tenths of 1 cent per $100 of adjusted deposits in all commercial banks; moreover, over half the total losses during the twenty-seven years occurred in the very first year of the period and were mostly a heritage of the pre-FDIC period.
To mark the close of that phase (political non-involvement with economic interests) and the active involvement of the United States in the war, the month when lend-lease began, March 1941, is probably a better date than early December when war was declared agains Germany and Japan. Before lend-lease, Britain paid for war purchases by transfering over $2 billion in gold, drawing down British dollar balances by $235 million, and seeling $335 million in US securities -- the last two requisitioned in large part by the British government from British subjects.