A Monetary History of the United States 1867-1960

by Milton Friedman, Anna J. Schwartz

Writing in the June 1965 issue of theEconomic Journal, Harry G. Johnson begins with a sentence seemingly calibrated to the scale of the book he set himself to review: The long-awaited monetary history of the United States by Friedman and Schwartz is in every sense of the term a monumental scholarly achievement--monumental in its sheer bulk, monumental in the definitiveness of its treatment of innumerable issues, large and small . . . monumental, above all, in the theoretical and statistical effort and ingenuity that have been brought to bear on the solution of complex and subtle economic issues.



Friedman and Schwartz marshaled massive historical data and sharp analytics to support the claim that monetary policy--steady control of the money supply--matters profoundly in the management of the nation's economy, especially in navigating serious economic fluctuations. In their influential chapter 7, The Great Contraction--which Princeton published in 1965 as a separate paperback--they address the central economic event of the century, the Depression. According to Hugh Rockoff, writing in January 1965: If Great Depressions could be prevented through timely actions by the monetary authority (or by a monetary rule), as Friedman and Schwartz had contended, then the case for market economies was measurably stronger.

Milton Friedman won the Nobel Prize in Economics in 1976 for work related to A Monetary History as well as to his other Princeton University Press book, A Theory of the Consumption Function (1957).

Genres: Economics, History, Nonfiction, Finance, Business, Politics, American History

888 pages, Paperback

First published January 1, 1963

About the author

Milton Friedman was an American economist who became one of the most influential and controversial figures of the twentieth century, widely recognized for his profound contributions to monetary economics, consumption theory, and the defense of classical liberalism. A leading figure of the Chicago School of Economics, Friedman challenged the prevailing Keynesian consensus that dominated mid-century policy and instead placed monetary policy at the center of economic stability, arguing that changes in the money supply were the primary drivers of inflation and fluctuations in output. His groundbreaking permanent income hypothesis reshaped the study of consumer behavior by suggesting that individuals make spending decisions based on long-term expected income rather than current earnings, a theory that profoundly influenced both academic research and practical policymaking. Alongside Anna Schwartz, Friedman coauthored A Monetary History of the United States, 1867–1960, a monumental work that emphasized the role of Federal Reserve mismanagement in deepening the Great Depression, a thesis that redefined historical understanding of the period and helped establish monetarism as a major school of thought. His broader philosophy was articulated in works such as Capitalism and Freedom, where he argued that political and economic liberty are interdependent and advanced ideas like educational vouchers, voluntary military service, deregulation, floating exchange rates, and the negative income tax, each reflecting his conviction that society functions best when individuals are free to choose. Together with his wife Rose Friedman, he later brought these ideas to a global audience through the bestselling book and television series Free to Choose, which made complex economic principles accessible to millions and expanded his influence beyond academia. Awarded the Nobel Prize in Economic Sciences in 1976 for his achievements in consumption analysis, monetary history, and stabilization policy, Friedman became a prominent public intellectual, sought after by policymakers and leaders around the world. His ideas strongly influenced U.S. policy in the late twentieth century, particularly during the administration of Ronald Reagan, and found resonance in the economic reforms of Margaret Thatcher in the United Kingdom, both of whom embraced aspects of his prescriptions for free markets and limited government intervention. Friedman’s policy recommendations consistently opposed measures he regarded as distortions of market efficiency, including rent control, agricultural subsidies, and occupational licensing, while he proposed alternatives such as direct cash transfers through a negative income tax to replace complex welfare bureaucracies. His teaching career at the University of Chicago shaped generations of economists, many of whom extended his research and helped institutionalize the Chicago School as a major force in global economic thought, while his later role at the Hoover Institution at Stanford University provided him with a platform to continue his scholarship and public advocacy. Beyond technical economics, Friedman’s clarity of expression and ability to frame debates in terms of individual freedom versus state control made him one of the most recognizable intellectuals of his era, admired by supporters for his defense of personal liberty and market efficiency, and criticized by detractors who accused him of underestimating inequality, social costs, and the complexities of government responsibility. Despite the controversies, his impact on the development of modern economics was immense, reshaping debates about inflation, unemployment, fiscal policy, and the role of the central bank. His writings, lectures, and media appearances consistently reinforced his belief that competitive markets, voluntary exchange, and limited government intervention offer the most effective means of promoting prosperit

Reviews

[Joshua Concepcion · Rating 5 out of 5]

The research contained in this book has been cited by Ben Bernanke and Christina Romer, two of the most knowledgeable experts on the Great Depression, as some of the best empirical work in economics, yet it's rated 3.97 stars. That makes no sense.

[Brendan · Rating 4 out of 5]

I probably only understood 50-60% of what they were talking about in this book, but since it is considered one of the seminal achievements in economics in the 20th Century, I guess I don't feel I have the right to give it a bad rating.

[Lauren McDonald · Rating 1 out of 5]

FINALLYYYYYY oh my goodness cannot believe Rory took a finance class that rude gal, no way am I giving this higher than 1 star for the sole purpose I want this type of book as far away from my algorithm as it can POSSIBLY be

[Steven H · Rating 5 out of 5]

A DETAILED HISTORY OF U.S. FISCAL MATTERS BY A PROMINENT ‘MONETARIST’

Milton Friedman and Anna Jacobson Schwartz wrote in the Preface of this 1963 book, “This book had its origin one of us had … with the late Walter W. Stewart… Stewart stressed the desirability of including an ‘analytical narrative’ of post-Civil War monetary developments in the United States as a background for the statistical work, arguing that such a narrative was not currently available and would add a much needed dimension to the numerical evidence. His suggestion led us to include a chapter on the historical background of the money stock in our planned monograph…The one chapter became two… and has now become a separate book.” (Pg. xxi)

They continue, “The years from 1867 to 1879 were dominated by the financial aftermath of the Civil War. Early in 1862, 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… and the borrowing techniques of the Treasury... The decline in the stock of money from 1875 to 1878… was a necessary prelude to successful resumption… 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.” (Pg. 6-7) They go on, “The Federal Reserve System began operations in 1914. This far-reaching internal change in the monetary structure of the United States happened to coincide with … the loosening of links between eternal conditions and the internal supply of money which followed the outbreak of World War I… Taken together, the two changes make 1914 a major watershed in American monetary history.” (Pg. 9)

They add, “the stock of money shows larger fluctuations after 1914 than before 1914 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… than did deliberate and conscious control exercised within institutional arrangements intended to promote monetary stability.” (Pg. 9-10) They continue, “The rest of the twenties were… 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… That era came to an abrupt end in 1929 with the downturn which ushered in the Great Contraction… 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 Federal 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.” (Pg. 10-11)

They go on, “Major changes … resulted from the Great Contraction. In banking, the major change was the enactment of federal deposit insurance in 1934. This probably has succeeded… in rendering it impossible for a loss of public confidence 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… bank failures have become a rarity.” (Pg. 11)

They state, “The collapse of the banking system … and the failure of monetary policy to stem the contraction undermined the faith in the potency of the Federal Reserve System… these events led … to the relegation of money to a minor role, and to the assignment of major emphasis to governmental fiscal actions and direct interventions… the Federal Reserve was led to adopt a largely passive role… Federal Reserve policy continued to be subordinated to Treasury policy after the outbreak of World War II… The money stock grew at a much reduced rate in the early postwar years, yet indexes of prices rose rapidly… Perhaps the most puzzling feature of postwar monetary developments is the coincidence of a relatively slow rate of rise in the stock of money with a fairly rapid rate of growth of money income.” (Pg. 12-14)

They acknowledge, “the published market prices of government bonds … were apparently always low enough to make no issue profitable except in the years 1884 to 1891. The fraction of the maximum issued fluctuated with the profitability of issue, but the fraction was throughout lower than might have been expected. We have no explanation for this puzzle.” (Pg. 23) The state, “as we hope the rest of the book will demonstrate, this framework of proximate determinants is designed to facilitate analysis of the simultaneous interaction of the various forces determining the money stock, not to separate them into watertight compartments.” (Pg. 53)

From 1879-1882, “the gold inflow provided the basis and stimulus for an expansion in the stock of money and thereby a rise in internal process abroad sufficient to bring an end to the necessity for large gold inflows. It would be hard to find a much neater example in history of the classical gold-standard mechanism in operation.” (Pg. 99) They observe, “the income figures for the [1873-78] period are very rough approximations and almost surely overstate considerably the rate of rise in real income during the contracting period. Hence this result probably reflects more on the accuracy of our evidence than on a valid difference between the periods.” (Pg. 186)

They suggest, “It is interesting to speculate on what the course of events would have been if the Federal Reserve Act had not been passed. Up to our entry into the war, there would have been only a minor difference… gold flows would not have been supplemented by additional fiduciary money… During the active participation of the United States in the war, some substitute would almost certainly have been found for Federal Reserve credit---some equivalent to greenbacks to finance part of government expenditures. But in the absence of the reduction in reserve requirements produced by the act and amendments to it, a given amount of money creation to finance government expenditures would have had a smaller effect on the total money stock. It seems likely, therefore that monetary expansion and the associated price rise would have been less from March 1917 to May 1919 than they were in fact. But, again, the difference would not have been very great. The major difference would have come after the war. Monetary expansion would almost certainly have come to an end when heavy government borrowing ended in … 1919, and prices would almost surely have reached their peak about the same time.” (Pg. 238)

He says of the Tenth Annual Report (1923) of the Federal Reserve, “this section of the report … is [a] most unsatisfactory … guide to credit policy. The requisite ‘judgment’ cannot be based on factual evidence alone. The evidence must be interpreted and the likely effects of alternative courses of action predicted. On all this the section offers little beyond glittering generalities instructing the men exercising the judgment to do the right thing at the right time with only the vaguest indications of what is the right thing to do.” (Pg. 253)

They acknowledge, “Of course this comparison among periods is only suggestive… the policy adopted toward gold flows was by no means the only factor affecting the variability in the stock of money. Yet the comparison may serve to give some idea of the order of magnitude of the effects in question. And it certainly gives the reason for greater confidence in our earlier qualitative reasoning, since the results are in the direction suggested by that reasoning.” (Pg. 287)

They explain of the Great Depression/Contraction period, “Prevention or moderation of the decline in the stock of money, let alone the substitution of monetary expansion, would have reduced the contraction’s severity and almost as certainly its duration. The contraction might still have been relatively severe. But it is hardly conceivable that money income could have declined by over one-half and prices by one-third in the course of four years if there had been no decline in the stock of money.” (Pg. 301)

After the election of Roosevelt, “In the final two months prior to the banking holiday, there was nothing that could be called a System policy. The System was demoralized. Each Bank was operating on its own. All participated in the general atmosphere of panic that was spreading in the financial community and the community at large. The leadership which an independent central banking system was supposed to give the market and the ability to withstand the pressures of politics and of profit alike and to act counter to the market as a whole, these---the justification for establishing a quasi-governmental institution with broad powers---were conspicuous by their absence.’ (Pg. 391) They add, “The conclusion seems inescapable that a shortage of free gold did not in fact seriously limit the alternatives open to the System. The amount was at all times ample to support large open market purchases. A shortage was an additional reason, at most, for measures adopted primarily on other grounds… The problem of free gold was largely an ‘ex post’ justification for policies followed, not an ‘ex ante’ reason for them.” (Pg. 406)

They clarify, “banking panics have occurred only during severe contractions and have greatly intensified such contractions, if indeed they have not been the primary factor converting what would otherwise have been mild contractions into severe ones. That is why we regard federal deposit insurance as so important a change in our banking structure and as contributing so greatly to monetary stability---in practice far more than the establishment of the Federal Reserve System.” (Pg. 441-442)

They summarize, “If this interpretation has any validity, it leads to the somewhat paradoxical conclusion that confidence in the efficacy of monetary policy in the 1950s was inversely related to monetary stability. As that confidence has grown, it has produced a growing instability in the stock of money. Hopefully, the process is not explosive but self-limiting.” (Pg. 638)

They observe in the concluding chapter, “There is one sense---and… only one---in which a case can be made for the proposition that the monetary decline was a consequence of the economic decline. That sense is not relevant to our main task of seeking to understand economic interrelations, since it involves relying primarily on psychological and political factors. The System was operating in a climate of opinion that in the main regarded recessions and depressions as curative episodes, necessary in order to purge the body economic of the aftereffects of its earlier excesses.” (Pg. 691)

This book will be of great interest to those studying the economic history of the United States (and not just monetarists).

[Donna]

Whew - can only read this one in chunks. Good info though.
Finished ch. 4 - Am now past the 1907 financial crisis.
Finished ch. 5 - Creation of the Federal Reserve System and post WWI crisis.

[Joe · Rating 3 out of 5]

Dry reading but good information.

[Craig Bolton]

"A Monetary History of the United States, 1867-1960 by Milton Friedman (1971)"

[Jordan Greenhall]

The indispensable reference for historical data and commentary on the US monetary system in the context of economic history from the civil war until 1960.

[NDH · Rating 5 out of 5]

Given the number of times I re-read passages to make sure I grasped what Friedman was saying, and given all the underlining and !-ing I did throughout, I’d say I’ve actually read this book three times in the past 30+ days. It’s been work.
Conclusions?
If one wanted to bring down the US banking system, perhaps as a means of paving the way for a socialist takeover of the country, one could not have created a a better tool for doing that than the Federal Reserve System. And that’s kind of what happened. The incompetence of the Fed in the years 1929-32 and even up to 1939 is just about enough to turn me into a conspiracy theorist. Happily, Friedman is much more generous, seeing the perpetrators of the Great Depression as well-intentioned although breathtaking ly wrong-headed. Well, no worry. All that’s behind us and the Fed has only gotten more powerful in the 60 years since this book was written. I’m so relieved.

My only criticism of the book is a totally unfair one. I wish Friedman had included more about the international financial system and its impact on the US as well as the impact of what happened in the US on other countries, particularly in Europe. He does discuss gold inflows and outflows and international capital movements, and their impact on the US stock of money etc, but I feel the book is a bit “light” in that department. Of course, that would make for another 700-page book, so, forget that criticism.

This is truly a masterpiece. I wish other historians were as thorough as Friedman in their own writings, or at least understood enough of this topic to be able to incorporate Friedman’s wisdom and intellectual honesty into their own world view.

[B · Rating 2 out of 5]

Extremely dull and unwilling to explain what it's trying to say.

Friedman believes that money causes economic behavior than the other way around, as explained by every summary of this book ever. Friedman doesn't say that, though. He just keeps pumping out numbers and charts and not explaining anything and asking you to assume conclusions and hypotheticals. The first time you reach a page that has a large pull-out chart, it's kind of fun for its own sake. But he did a terrible job of explaining what he was trying to do.

It perks up a little when it does political history because then there's some narrative at least.

[Apostolos · Rating 5 out of 5]

This book is not light reading, but given the subject matter, the book is surprisingly concise. Reading the appendices and footnotes is indispensable, since Friedman and Schwartz include summaries of relevant concepts and justifications for their reasoning. Having taken an introductory course in macroeconomics might also make the reading experience less frustrating. Important prerequisite topics: money, supply of and demand for currency, the money multiplier, the balance of payments and the international economy, etc.

[Richard Marney · Rating 5 out of 5]

A silver lining to a COVID-19 lockdown is plenty of time to read! This work of F&S is a monument to scholarship and represents an irreplaceable reference source for the study of the role of monetary policy in the economy. Whilst subsequent economists (e.g., Bernanke, Minsky, Gertler, et.al.) have refined or even disputed major conclusions of F&S’, the book remains a classic and a requisite inclusion in the libraries of students of economics.

[baskesh · Rating 3 out of 5]

Comprehensive and broad.

Meticulously researched, but Friedman could’ve left some of the details in the footnotes in favour of brevity and cogent narrative.

His writing is dry.

At times some of his libertarian points come across as silly.

[Nate · Rating 5 out of 5]

Good luck to all of you who take this challenge on. It's as dry as dry can be, but very worthwhile if you're interested in how the money supply evolved in the US from the Civil War to post WWII.

[Doris Raines · Rating 2 out of 5]

A VERY INTERESTING BOOK.

[Cherri]

why was this on the rory gilmore reading list?? that was so tedious to read

[Joshua Black · Rating 3 out of 5]

3.5

[Michael Vanesse · Rating 4 out of 5]

Insightful!

[Melissa]

five books most recommended

[William · Rating 5 out of 5]

Friedman's master work. Probably too dense for the average reader, it is a must for anyone who wants to understand monetary economics.

[Zach Lock · Rating 5 out of 5]

My brain hurts

[Jake Stillwell]

Girl, the tariffs!

[James Smythe · Rating 5 out of 5]

The definitive work on the subject. It has influenced policymakers around the world for over 50 years.

Even those who are ideologically opposed to Friedman's views have a hard-time refuting this meticulously documented tome.

[Frederick Hammill · Rating 1 out of 5]

Friedman is without a doubt one of the most dry authors out there. His writing style leaves much to be desired. Also, when you read his works, you get the impression that he is NOT a man of faith. I don’t know this for certain, but I walk away from his books with a feeling of deep spiritual foreboding. I’d recommend that Bible-believing Christians avoid this book.

[Darinda · Rating 4 out of 5]

A history of economics. Well researched and informative, but a dry read.

[Joshua · Rating 2 out of 5]

meh. Does have some sweet charts.