Abstract

https://ssrn.com/abstract=2771357
 


 



How Friedman and Schwartz Became Monetarists


James R. Lothian


Gabelli School of Business, Fordham University; National Bureau of Economic Research (NBER)

G. S. Tavlas


Bank of Greece

April 1, 2016

Becker Friedman Institute for Research in Economics Working Paper No. 2016-10
Gabelli School of Business, Fordham University Research Paper No. 2771357

Abstract:     
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” in 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.

Number of Pages in PDF File: 49

Keywords: Milton Friedman, Anna Schwartz, Clark Warburton, Monetary Rules, Quantity Theory of Money, Fiscal Policy, Great Depression

JEL Classification: B22, E52


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Date posted: April 28, 2016  

Suggested Citation

Lothian, James R. and Tavlas, G. S., How Friedman and Schwartz Became Monetarists (April 1, 2016). Becker Friedman Institute for Research in Economics Working Paper No. 2016-10; Gabelli School of Business, Fordham University Research Paper No. 2771357. Available at SSRN: https://ssrn.com/abstract=2771357 or http://dx.doi.org/10.2139/ssrn.2771357

Contact Information

James R. Lothian
Gabelli School of Business, Fordham University ( email )
113 West 60th Street
New York, NY 10023
United States
212-636-6147 (Phone)
212-765-5573 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
George Tavlas (Contact Author)
Bank of Greece ( email )
21 E. Venizelos Avenue
GR-10250 Athens
Greece
+30 10 323 7224 (Phone)
+30 10 323 3025 (Fax)
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