A Monetary History of The United States - Thesis

Thesis

The book discusses the role of the monetary policy in the U.S. economy from the Civil War Reconstruction Era to the middle of the 20th century. It presents what was then a contrarian view of the role of monetary policy in the Great Depression. The prevalent view in the early 1960s was that monetary forces played a passive role in the economic contraction of the 1930s. The Monetary History argues that the bank failures and the massive withdrawals of currency from the financial system that followed significantly shrank the money supply (the total amount of currency and outstanding bank deposits), which greatly exacerbated the economic contraction. The book criticizes the Federal Reserve Bank for not keeping the supply of money steady and not acting as lender of last resort, instead allowing commercial banks to fail and allowing the economic depression to deepen.

Friedman and Schwartz identified four main policy mistakes made by the Federal Reserve that led to a sharp and undesirable decline in the money supply:

• In the spring of 1928, the Federal Reserve began to tighten its monetary policy (resulting in rising interest rates) and continued that same policy until the stock market crash of October 1929. This caused the economy to enter a recession in mid-1929 and triggered the stock market crash a few months later.
• In the fall of 1931, it raised interest rates to defend the dollar in response to speculative attacks, ignoring the difficulties this caused to domestic commercial banks.
• After lowering interest rates early in 1932 with positive results, it raised interest rates again in late 1932, causing a further collapse in the US economy.
• The Federal Reserve was also to be blamed for a pattern of ongoing neglect of problems in the U.S. banking sector throughout the early 1930s. It failed to create a stable domestic banking environment by supporting the domestic banks and acting as lender of last resort to domestic banks during banking panics.