Quotes from A Monetary History of the United States, 1867-1960

By Milton Friedman & Anna Schwartz (1963)

• The difficulties giving rise to financial panics in earlier periods resulted much less from the absence of elasticity in the total stock of money than from the absence of interconvertibility of deposits and currency.#
  EconomicsMoneyHistory
• Before 1914 a rise in interest rates could raise the stock of money only through a rise in the deposit-reserve ratio or through the attraction of capital and thereby gold from abroad. After 1914, a rise in interest rates could also raise the stock of money by inducing banks to borrow more heavily from the Federal Reserve System.#
  EconomicsHistory
• There is a long lag between the occurrence of substantial price rises and the development of widespread expectations of further price rises.#
  EconomicsExpectations
• Failure has marked every attempt we know of to find a systematic relation between the quantity of money demanded in the United States and either the current rate of change in commodity prices or a weighted average of the past rates of change in prices, taken as an estimate of the rate of change expected to prevail in the future. Yet Cagan has found a close relation for other countries for periods marked by substantial price movements. The most plausible reason for the difference, in our view, is the small size of price changes in the United States except in wartime periods. . . . The looked-for effect may have been too small in magnitude to be revealed by such blunt tools as multiple correlation analysis and the simple expectational model involved in taking a weighted average of past occurrences as an indicator of the future.#
  EconomicsMoney
• A rise in prices can have diametrically opposite effects on desired money balances depending on its effect on expectations. If it is interpreted as the harbinger of further rises, it raises the anticipated cost of holding money and leads people to desire lower balances relative to income than they otherwise would. In our view, that was the effect of price rises in 1950 and again in 1955 to 1957. On the other hand, if a rise in prices is interpreted as a temporary rise due to be reversed, as a harbinger of a likely subsequent decline, it lowers the anticipated cost of holding money and leads people to desire higher balances relative to income than they otherwise would. In our view, that was the effect of the price rises in 1946 to 1948. #
  EconomicsExpectations
• The tax on money balances implicit in inflationary money creation was a much more productive tax in World War II than in World War I, because of the lower velocity prevailing during World War II than during World War I (Table 24, line 3). Money balances averaged 45 per cent of one year’s national income in 1914-20, 69 per cent in 1939-48. A 1 per cent tax on money balances—if we ignore the reflex influence of the tax on the amount of money balances held—therefore yielded 0.45 per cent of a year’s national income in World War I, 0.69 per cent, or about 1 times as much, in World War II.#
  EconomicsHistoryMoney
• It is an elementary economic truism, applicable to the money market as elsewhere, that one cannot simultaneously control both the price and the quantity of a good without some explicit rationing mechanism. If the price is fixed, the quantity must be permitted to be whatever is consistent with that price, and conversely.#
  Economics
• The difference [in government finance between the two World Wars] was largely formal. Perhaps half the World War I increase in loans to customers was secured by government obligations; in World War II, the banks purchased the securities directly.#
  EconomicsHistory
• It seems likely that any direct effect of price control [on the velocity of money] was less important than the unavailability to consumers of automobiles and other consumer durable goods, after wartime cessation of their production in 1942, and than the restrictions imposed on construction and on private capital formation. Both consumers and business enterprises were prevented from using their funds to purchase kinds of goods they regard as increasing their wealth, which ordinarily absorb a large fraction of increases in income and an especially large fraction of transitory increases. The blocking of these channels of spending induced consumers and business enterprises to increase the stock of other assets—in particular, as it turned out, money and government securities—to a much higher level than otherwise, relative to income. #
  HistoryEconomics
• it takes some seven months for banks to adjust to an unanticipated discrepancy between their actual and desired reserve positions produced by a change in their actual position, and some three years for banks to carry through a thoroughgoing revision of their actual reserve position as a result of a change in the desired position. #
  EconomicsHistory
• Perhaps the best description of the role of gold in the United States since 1934 is that, rather than being the basis of the monetary system, it is a commodity whose price is officially supported in the same way as the price of wheat, for example, has been under various agricultural programs. The major differences are that the support price for agricultural products is paid only to domestic producers, the gold-support price to foreign as well as domestic; the agricultural products accumulated are freely sold at the support prices to anyone, the gold only to certain foreign purchasers and not to any domestic ones. In consequence, the gold program has set a floor under the world price of gold in terms of dollars.#
  EconomicsHistoryMoney
• The use of the gold-exchange standard did mean, however, that there was less leeway in the adjustments among countries—the rough equilibrium could not be quite so rough as under the full gold standard. The gold-exchange standard rendered the international financial system more vulnerable to disturbances for the same reason that the rise in the deposit-reserve ratio rendered the domestic monetary system more vulnerable: because it raised the ratio of claims on the relevant high-powered money—in this case, ultimately, gold—to the amount of high-powered money available to meet those claims. #
  EconomicsHistory
• Because there was an active market for bonds and continuous quotation of their prices, a bank’s capital was more likely to be impaired, in the judgment of bank examiners, when it held bonds that were expected to be and were honored in full when due than when it held bonds for which there was no good market and few quotations. So long as the latter did not come due, they were likely to be carried on the books at face value; only actual defaults or postponements of payment would reduce the examiners’ evaluation. Paradoxically, therefore, assets regarded by the banks as particularly liquid and as providing them with a secondary reserve turned out to offer the most serious threat to their solvency.#
  EconomicsHistory
• The impairment in the market value of assets held by banks [during the Great Depression], particularly in their bond portfolios, was the most important source of impairment of capital leading to bank suspensions, rather than the default of specific loans or of specific bond issues.#
  EconomicsHistory
• Velocity tends to rise during the expansion phase of a cycle and to fall during the contraction phase#
  EconomicsBusiness cycle
• The distinction [between demand deposits and time deposits] became of major importance to banks (and so reliable data became available on a continuous basis for the two categories separately) only after 1914, when the Federal Reserve Act introduced differential requirements for demand and time deposits.#
  MoneyHistoryEconomics
• In retrospect, it probably would have been better either to have permitted the gold-standard rules to operate fully, once something like an international gold standard was adopted, or to have replaced them completely by an alternative criterion. The compromise of disregarding minor movements but reacting to major ones may have promoted stability during the twenties but, if so, only at the cost of great instability at either end of the decade. The result was that the policy, as carried out, achieved neither the internal objective of domestic stability nor· the external objective of a stable international gold standard.#
  EconomicsMoneyHistory
• The composition of Federal Reserve assets matters only as it may affect the attitudes of banks or other participants in the money market.#
  Economics
• Cyclical fluctuations in credit quality, arising out of fluctuations in the standards used by lenders to assess risk and by borrowers to assess the prospects of ventures, may well play a part in the cyclical process. But it is the fluctuations, not the level of credit quality, that play a part; and it is fluctuations in the standards, not in the ex post outcome, that alone are a separate contribution of the credit mechanism toward the amplification of disturbances. Fluctuations in the ex post outcome without a change in standards are a consequence of other forces, and will have their impacts in turn elsewhere; they involve simply the transmission of impulses through the credit mechanism. In the 1929-33 episode, changes in the ex post outcome were far more dramatic than in the standards adopted.#
  BankingBusiness cycleEconomics
• There seems to be no necessary relation between the direction of movement of prices over a period covering several business cycles and the corresponding secular rate of growth of real output. Apparently the steadiness of the price movement is far more important than its direction.#
  Economics
• For every dollar created by the government, several dollars can be created by the banking system, since only part of the extra dollars of high-powered money go into circulation, and part go into bank reserves. In effect, as it were, the government engages in a sharing arrangement with the banking system whereby the two divide between them the amount the public is willing to lend at zero interest rate (or in the case of deposits bearing interest, at an interest rate below that on other types of loans) and also the proceeds of the implicit tax on money balances involved in a price rise. The sharing formula, Le., the number of dollars the banking system can create per dollar created by the government, depends on the banks’ reserve ratio (in terms of high-powered money) and the public’s deposit-currency ratio. The public’s shift to currency reduces the share of the banking system and increases the share of the government, which thereby acquires resources with less of an increase in the money stock.#
  EconomicsMoney
• The Federal Reserve System therefore began operations with no effective legislative criterion for determining the total stock of money.#
  HistoryMoneyEconomics
• Until the establishment of federal deposit insurance in 1934, there was no more sensitive indicator of the state of public confidence in the banks than the deposit-currency ratio.#
  EconomicsHistory
• Silver agitation had its major economic impact through this effect on expectations rather than through the direct contribution that silver purchases made to the expansion of the money stock.#
  EconomicsMoneyHistoryExpectations
• The forces making for economic growth over the course of several business cycles are largely independent of the secular trend in prices.#
  Economics
• The sharp rise in the stock of money from 1868 to 1872 was primarily a consequence of the spread of deposit banking#
  EconomicsHistoryMoney
• The existence of two kinds of money would presumably increase, other things being the same, the money balances people would want to hold, i.e., would tend to make the velocity of the combined money total lower than if all elements of the money stock were perfect substitutes. #
  MoneyEconomics
• Though national bank notes were nominally liabilities of the banks that issued them, in effect they were indirect liabilities of the federal government thanks to both the required government bond security and the conditions for their redemption.#
  MoneyHistoryEconomics

Clark Warburton, “Co-ordination of Monetary, Bank Supervisory, and Loan Agencies of the Federal Government” (1950)

• Flexibility (elasticity) in currency—not in total bank credit—was the aim of the founders of the Federal Reserve System, and this flexibility was desired as a means of producing stability in total bank credit by providing stability in bank reserves.#
  MoneyEconomics