Milton Friedman and U.S. Monetary History: 1961-2006

By Nelson, Edward | Federal Reserve Bank of St. Louis Review, May-June 2007 | Go to article overview

Milton Friedman and U.S. Monetary History: 1961-2006


Nelson, Edward, Federal Reserve Bank of St. Louis Review


This paper, using extensive archival material from several countries, brings together scattered information about Milton Friedman's views and predictions regarding U.S. monetary policy developments after 1960 (i.e., the period beyond that covered by his and Anna Schwartz's Monetary History of the United States). The author evaluates these interpretations and predictions in light of subsequent events. (JEL E31, E51, E52, E58)

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Milton Friedman and Anna J. Schwartz's (1963) A Monetary History of the United States covered a 93-year period: 1867 to 1960. Milton Friedman lived until November 2006--46 years beyond the period covered by the Monetary History and a length of time equal to nearly half that covered in that book. Throughout 1961-2006, Friedman commented publicly on U.S. monetary policy developments. This paper attempts to provide a perspective on Friedman's account of 1961-2006 U.S. monetary history by studying the observations he provided over that period.

Friedman provided no single detailed assessment of post-1960 U.S. monetary developments. Though Paul Samuelson once speculated of a time when "Milton Friedman and Anna Schwartz come to write their history of the crimes of 1974 and 1975" (NYT, 02/26/75), (1) the Monetary History was the single volume of monetary history produced by the two authors; Friedman and Schwartz's subsequent collaborations were not a continuation of their historical analysis. (2) Friedman (1984a) did provide a capsule history of monetary developments from 1960 to 1983; but not only did this study ultimately cover only one half of the post-1960 period through which Friedman lived, but Friedman's own views of 1979-83 developments underwent major revision in the years after 1984. There is thus no single definitive record by Friedman available of his version of events. But major elements of it can be recovered, as there are many forums to which he contributed over this period that contain his observations on contemporary monetary policy. I therefore study Friedman's account of 1961-2006 using a variety of sources: not only Friedman's post-1960 writings on monetary affairs, but other public statements he gave in media interviews, speeches, and congressional testimony. This broad source base includes--over and above Friedman's contributions to books, journals, and media--reporting on Friedman's public statements that appeared in newspapers and magazines in the United States, the United Kingdom, Australia, Canada, Germany, Hong Kong, Ireland, Israel, New Zealand, Singapore, and South Africa. (3)

My discussion moves between material drawn from Friedman's statements in the media and material from his contributions to specialist monetary economics outlets. This approach might be questioned. Friedman's critics have sometimes argued that Friedman's economic analysis was not consistent across his technical and popular writings. In particular, they alleged that Friedman used a harder-line and more mechanical version of monetarism in his journalism. This criticism, first made by Paul Samuelson and James Tobin, has recently been revived by Krugman (2007a). (4) In my view, however, the criticism is without merit. Friedman (1970a, 1972a) provided detailed examples showing that the monetary analysis in his popular writings was consistent with that in his technical work, and this judgment has been affirmed by Gordon (1976) and Nelson (2004). More recently, Schwartz and Nelson (2007) provide a rebuttal to Krugman (2007a) on this issue.

CRITIC OF MONETARY POLICY: 1961-68

The London Financial Times in late 1962 referred to "Americans' surprising addiction to pre-Keynesian economics" (FT, 12/29/62), a remark undoubtedly inspired by the U.S. economic policy record of the 1950s. That period was characterized, in addition to fiscal conservatism, by a monetary policy directed at restraint on aggregate demand, as Romer and Romer (2002) show. Romer and Romer provide evidence, based on documentary material and policy-rule estimates, that U. …

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