Newspaper article The Christian Science Monitor

Milton Friedman's Monetary Mantle

Newspaper article The Christian Science Monitor

Milton Friedman's Monetary Mantle

Article excerpt

In the early postwar era, the cause of the Great Depression of the 1930s was something of a mystery. Analysts often assumed it was the 1929 stock market crash. Or perhaps it was widespread commercial bank failures, or the Smoot-Hawley Tariff Act that steeply raised trade barriers. Whatever. By 1932, 1 of every 4 Americans was jobless.

Then, in 1963, like detectives who'd solved a crime, economists Milton Friedman and Anna Schwartz charged that it was the Fed who dunnit. In a statistics-heavy tome, "A Monetary History of the United States, 1867-1960," the two scholars fingered the Federal Reserve System. The central bank had shrunk the nation's money stock by one-third between 1929 and 1933. There wasn't enough money left to maintain reasonable prosperity.

Professor Friedman, who died Nov. 16, is regarded as one of the most influential economists of the 20th century. The Nobel Prize winner revived recognition of the role of the nation's money supply in economic growth and inflation. With his libertarian views of government, he moved the thinking of economists and policymakers to the right in other areas.

"His influence has been profound," says Mrs. Schwartz, still laboring at the midtown New York offices of the National Bureau of Economic Research (NBER).

But it took more than a decade and "Milton's tireless insistence on the importance of the money supply" to persuade the economics fraternity that the quantity of money mattered, she adds.

Reporting for the Monitor in New York, I attended the press conference on the publication of the Friedman-Schwartz book. The conference had been called by then-NBER president Arthur Burns, later Nixon's Fed chairman.

Fed economists in New York tried to shoot down the book's conclusions. They were influenced by famed British economist John Maynard Keynes, who saw interest rates and fiscal policy as more important than money in controlling inflation and the business cycle. Nor did they like hearing the Fed charged with the misery of the Great Depression.

My own economics training, at Carleton College in Ottawa, was by a Keynesian. Over time, though, it became clear that money was an excellent predictor of the business cycle and inflation. Research by such economists as Beryl Sprinkel, then chief economist for Harris Trust & Savings Bank in Chicago (later Reagan's chief economist) and Allan Meltzer of Carnegie Mellon University, Pittsburgh (now writing a second volume of "A History of the Federal Reserve"), found a close correlation between changes in the money supply and, after a delay, the nation's output of goods and services. …

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