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Milton Friedman on Monetary policy and the Federal Reserve

The results of this natural experiment are clear, at least for major ups and downs: What happens to the quantity of money has a determinative effect on what happens to national income and to stock prices. The results strongly support Anna Schwartz’s and my 1963 conjecture about the role of monetary policy in the Great Contraction. They also support the view that monetary policy deserves much credit for the mildness of the recession that followed the collapse of the U.S. boom in late 2000.

Context. An article adapted from an academic paper he was working on at the age of 94; it appeared in the Wall Street Journal the day after his death. Its closing paragraph, after charts comparing the quantity of money, nominal GDP and stock prices before and after the peaks of the three booms: money fell sharply after 1929, stagnated in Japan after 1992, and rose steadily in the United States after 2001.

Why Money Matters
Column, 2006, The Wall Street Journal, 2006, the day after his death; reprinted in Hoover Digest 2006 No. 4
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Milton Friedman, “Why Money Matters” (The Wall Street Journal, 2006, the day after his death; reprinted in Hoover Digest 2006 No. 4, 2006). https://miltonfriedman.org/quotes/quantity-of-money-determinative-effect-national-income-2006

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  1. The prosperous 1920s in the United States were followed by the most severe economic contraction in its history. In our Monetary History (1963), Anna Schwartz and I attributed the severity of the contraction to a monetary policy that permitted the quantity of money to decline by one-third from 1929 to 1933. Since 1963, two episodes have occurred that are almost mirror images of the U.S. economy in the 1920s: the 1980s in Japan, and the 1990s in the United States. All three episodes were marked by a long period of rapid economic growth, sparked by rapid technological change and the emergence of new industries, and accompanied by a stock market boom that terminated in a crash. Monetary policy played a role in these booms but only a supporting role. Technological change appears to have been the major player.

    Context. An article adapted from an academic paper he was working on at the age of 94; it appeared in the Wall Street Journal the day after his death. Just before, he describes the booms of the 1920s in the United States, the 1980s in Japan and the 1990s in the United States as three episodes of a natural experiment in monetary policy.

    Why Money Matters
    Column, 2006, The Wall Street Journal, 2006, the day after his death; reprinted in Hoover Digest 2006 No. 4
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  2. The only way you could get the inflation down was by having monetary contraction. There was no way you could do that without having a temporary recession. The great error in the earlier period had been that whenever there was a little contraction there was a tendency to expand the money supply rapidly in order to avoid unemployment. That stop-and-go policy was really what bedeviled the Fed during the '60s and '70s.

    Context. On why Reagan's support for Paul Volcker's tight money mattered.

    Commanding Heights: Milton Friedman interview
    Interview, 2000, PBS, “On Ronald Reagan,” interview conducted October 1, 2000
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  3. More frequently, they have moved in the right direction, albeit often too late, but have erred by moving too far. Too late and too much has been the general practice.

    Context. From his presidential address to the American Economic Association, delivered in Washington on December 29, 1967, and printed in the March 1968 American Economic Review. He enclosed it with his 1968 statement to a House subcommittee, which reprinted it.

    The Role of Monetary Policy
    Journal article, 1968, American Economic Review, March 1968 (the reprint’s heading gives the month and year only; the volume, issue and page range are NOT established by this source and remain unverified); reprinted in the Compendium on Monetary Policy Guidelines and Federal Reserve Structure, Subcommittee on Domestic Finance, House Committee on Banking and Currency, December 1968, pp. 214 to 224. The reprint carries his footnote: presidential address delivered at the 80th annual meeting of the American Economic Association, Washington, D.C., December 29, 1967., p. 223 of the 1968 House reprint
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