A Monetary History of the United States, 1867-1960

Friedman and Schwartz argue that changes in the money stock have been a major, often independent, cause of economic fluctuations in U.S. history, and that the Federal Reserve's failure to counter banking panics and the collapse of the money supply from 1929 to 1933 turned a severe recession into the Great Depression. They reject the Keynesian view that the money supply was largely stable during the early 1930s and that monetary policy was impotent. Their evidence showed the money stock fell by roughly one-third, largely due to bank failures the Fed could have prevented .

The book provided the empirical foundation for monetarism by demonstrating that the demand for money is stable and predictable over long periods, contrary to Keynesian assumptions. It established the quantity theory of money as a robust framework for analyzing U.S. history, showing that changes in nominal money supply closely track changes in nominal income . The book also introduced the concept of long and variable lags in monetary policy, arguing that discretionary fine-tuning is ineffective because its effects arrive too late .

Keynesians, including Keynes himself, believed the money supply had been largely stable during the 1930s and cited this as evidence that monetary policy was powerless against depression. Friedman and Schwartz demonstrated this was false: the money supply fell dramatically, largely because bank failures destroyed deposits and the Fed failed to offset the decline . They argued the Depression was not an inherent failure of capitalism but a failure of monetary institutions. This directly challenged the Keynesian consensus that fiscal policy, not monetary policy, was the appropriate tool for fighting depressions.

Schwartz was a full intellectual partner, not a research assistant. Arthur Burns, then NBER research director, paired them for a study of cyclical monetary change . Friedman said he could not have written the book without her, and she said the same of him . They exchanged manuscripts by mail, with Schwartz doing much of the statistical work in New York. Their collaboration lasted decades and produced multiple books. Schwartz's contributions to monetary history and banking were substantial in her own right; she was a Distinguished Fellow of the American Economic Association .

The empirical findings came as an earthquake to the Keynesian belief structure that dominated the economics profession at the time . The book showed that the demand for money was not erratic as Keynesians assumed, that monetary changes did affect prices and output with predictable lags, and that the Fed's failures caused the Depression. Harry Johnson called it a new standard for economic history, requiring explanation of historical developments through monetary theory and quantitative analysis . It played a decisive role in the 1960s debates between Keynesians and monetarists .

A common misconception is that Friedman and Schwartz claimed monetary policy is the only thing that matters. In fact, they argued money is a major and often independent cause of fluctuations, not the sole cause. They also did not claim the Fed could have prevented the Depression entirely, only that it could have greatly reduced its severity. Another misreading is that the book is a simple polemic; it is a meticulously documented historical study that won praise even from critics like James Tobin, who called it a monumental scholarly accomplishment .