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How Friedman and Schwartz became monetarists

Listed author(s):
  • James R. Lothian

    (Fordham University)

  • George S. Tavlas

    ()

    (Bank of Greece and University of Leicester)

During the late-1940s and the early-1950s Milton Friedman favored a rule under which fiscal policy would be used to generate changes in the money supply with the aim of stabilizing output at full employment. He believed that the economy is inherently unstable because of endogenous movements in money supply under a fractional-reserve banking system. In her work, Anna Schwartz downplayed the role of monetary factors in business cycles and the role of monetary policy as a stabilization tool. We show how the joint work of Friedman and Schwartz from 1948 to 1958 led Friedman to view money as the “primary mover” of the business cycle and underpinned his shift to a rule based on money growth so that discretionary monetary policy would not act as a source of destabilizing shocks. The decisive factor in the evolution of Friedman’s thinking was the empirical confirmation that the Great Depression had been both initiated and deepened by the Fed. The largely neglected influence of Clark Warburton on the evolution of Friedman’s thinking provides a missing -- but crucial -- link in explaining Friedman’s recognition of the role of monetary factors in the Great Depression and of the Fed’s ability to offset the destabilizing effects produced by shifts from deposits into currency under a fractional-reserve banking system.

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File URL: http://www.bankofgreece.gr/BogEkdoseis/Paper2016207.pdf
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Paper provided by Bank of Greece in its series Working Papers with number 207.

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Length: 40
Date of creation: May 2016
Handle: RePEc:bog:wpaper:207
Contact details of provider: Web page: http://www.bankofgreece.gr

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  1. Michael D. Bordo & Anna J. Schwartz, 1987. "Clark Warburton: Pioneer Monetarist," NBER Chapters,in: Money in Historical Perspective, pages 234-254 National Bureau of Economic Research, Inc.
  2. Clark Warburton, 1949. "The Secular Trend in Monetary Velocity," The Quarterly Journal of Economics, Oxford University Press, vol. 63(1), pages 68-91.
  3. David Mitch, 2016. "A Year of Transition: Faculty Recruiting at Chicago in 1946," Journal of Political Economy, University of Chicago Press, vol. 124(6), pages 1714-1734.
  4. repec:ucp:bkecon:9780226264141 is not listed on IDEAS
  5. Michael D. Bordo & Hugh Rockoff, 2013. "Not Just the Great Contraction: Friedman and Schwartz's A Monetary History of the United States 1867 to 1960," American Economic Review, American Economic Association, vol. 103(3), pages 61-65, May.
  6. Nelson, Edward, 2004. "An Interview With Anna J. Schwartz," Macroeconomic Dynamics, Cambridge University Press, vol. 8(03), pages 395-417, June.
  7. Lothian, James R., 2009. "Milton Friedman's monetary economics and the quantity-theory tradition," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1086-1096, November.
  8. Hugh Rockoff, 2006. "On the Origins of "A Monetary History"," NBER Working Papers 12666, National Bureau of Economic Research, Inc.
  9. Pelloni, Gianluigi, 1987. "A Note on Friedman and the Neo-Bayesian Approach," The Manchester School of Economic & Social Studies, University of Manchester, vol. 55(4), pages 407-418, December.
  10. Pelloni, Gianluigi, 1996. "De Finetti, Friedman, and the methodology of positive economics," Journal of Econometrics, Elsevier, vol. 75(1), pages 33-50, November.
  11. Lucas, Robert Jr., 1994. "Review of Milton Friedman and Anna J. Schwartz's 'a monetary history of the United States, 1867-1960'," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 5-16, August.
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