The Great Contraction, 1929-1933

The Great Contraction, 1929-1933: (New Edition)

Milton Friedman
Anna Jacobson Schwartz
With a New Preface by Anna Jacobson Schwartz
a New Introduction by Peter L. Bernstein
Copyright Date: 1965
Pages: 320
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  • Book Info
    The Great Contraction, 1929-1933
    Book Description:

    Friedman and Schwartz'sA Monetary History of the United States, 1867-1960, published in 1963, stands as one of the most influential economics books of the twentieth century. A landmark achievement, the book marshaled massive historical data and sharp analytics to support the claim that monetary policy--steady control of the money supply--matters profoundly in the management of the nation's economy, especially in navigating serious economic fluctuations. The chapter entitled "The Great Contraction, 1929-33" addressed the central economic event of the century, the Great Depression. Published as a stand-alone paperback in 1965,The Great Contraction, 1929-1933argued that the Federal Reserve could have stemmed the severity of the Depression, but failed to exercise its role of managing the monetary system and ameliorating banking panics. The book served as a clarion call to the monetarist school of thought by emphasizing the importance of the money supply in the functioning of the economy--a concept that has come to inform the actions of central banks worldwide.

    This edition of the original text includes a new preface by Anna Jacobson Schwartz, as well as a new introduction by the economist Peter Bernstein. It also reprints comments from the current Federal Reserve chairman, Ben Bernanke, originally made on the occasion of Milton Friedman's 90th birthday, on the enduring influence of Friedman and Schwartz's work and vision.

    eISBN: 978-1-4008-4685-6
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
    (pp. ix-xii)
    Anna Jacobson Schwartz
  4. INTRODUCTION: The Great Contraction, Seen from the Perspective of 2007
    (pp. xiii-xxxii)
    Peter L. Bernstein

    My first job out of college in the summer of 1940 was in the Research Department at the Federal Reserve Bank of New York, that massive Florentine palace running from Liberty Street to Maiden Lane. On the morning of December 8, 1941, I arrived for work to find a large crew painting all the Bank’s windows black. To the best of my memory, the Fed was the only building in the financial district, up to my departure in September 1942, to be so risk-averse in terms of possible air raids. New York was not exactly London. I have always been...

  5. The Great Contraction, 1929–1933
    • [Contents to Original Edition]
      (pp. 1-6)
      (pp. 7-10)
      M. F. and A. J. S.
    • [Introduction]
      (pp. 11-14)

      The contraction from 1929 to 1933 was by far the most severe business-cycle contraction during the near-century of U.S. history we cover and it may well have been the most severe in the whole of U.S. history. Though sharper and more prolonged in the United States than in most other countries, it was worldwide in scope and ranks as the most severe and widely diffused international contraction of modern times. U.S. net national product in current prices fell by more than one-half from 1929 to 1933; net national product in constant prices, by more than one-third; implicit prices, by more...

    • 1. The Course of Money, Income, Prices, Velocity, and Interest Rates
      (pp. 14-64)

      Figure 1, which covers the two decades from 1914 to 1933, shows the magnitude of the contraction in the perspective of a longer period. Money income declined by 15 per cent from 1929 to 1930, 20 per cent the next year, and 27 per cent in the next, and then by a further 5 per cent from 1932 to 1933, even though the cyclical trough is dated in March 1933. The rapid decline in prices made the declines in real income considerably smaller but, even so, real income fell by 11 per cent, 9 per cent, 18 per cent, and...

    • 2. Factors Accounting for Changes in the Stock of Money
      (pp. 64-92)

      The factors accounting for changes in the stock of money during the four years from 1929 to 1933 are strikingly different from those in the other periods we have examined. Generally, the pattern for high-powered money has impressed itself most strongly on the total stock of money, the behavior of the two deposit ratios serving mainly to alter the tilt of the money stock relative to the tilt of high-powered money. That relation holds in Figure 6 only for the period up to October 1930, the onset of the first banking crisis. Thereafter, the two deposit ratios take command. High-powered...

    • 3. Bank Failures
      (pp. 92-106)

      The preceding account gives a prominent place in the sequence of events during the contraction to the successive waves of bank failures. Three questions about those failures deserve further attention: Why were the bank failures important? What was the origin of the bank failures? What was the attitude of the Federal Reserve System toward the bank failures?

      The bank failures had two different aspects. First, they involved capital losses to both their owners and their depositors, just as the failure of any other group of business enterprises involved losses to their owners and creditors. Second, given the policy followed by...

    • 4. International Character of the Contraction
      (pp. 106-112)

      In 1929, most countries of the Western world had returned to a monetary standard involving fixed exchange rates between different national currencies. The standard was widely known as the gold-exchange standard because many countries kept their monetary reserves in the form of balances of other currencies convertible into gold at fixed prices, notably sterling and dollars, rather than in the form of gold itself. Official agencies in such countries, usually the central banks, often fixed exchange rates directly by standing ready to buy or sell the national currency at fixed rates in terms of other currencies, rather than indirectly by...

    • 5. Development of Monetary Policy
      (pp. 112-160)

      The course of monetary policy in the difficult and critical years of the contraction was greatly influenced by the struggle for power within the Federal Reserve System, the beginnings of which were described in the preceding chapter. At the time of the stock market crash, the New York Reserve Bank acted in the tradition of its earlier dominance, moving rapidly, decisively, and on its own. The adverse reaction of the Board greatly inhibited further independent measures by New York.

      In 1930, New York strongly favored expansionary open market operations, but after the middle of the year was unable to persuade...

    • 6. Alternative Policies
      (pp. 160-186)

      It is clear that the monetary policies followed from 1929 to 1933 were not the inevitable result of external pressure. At all times, alternative policies were available and were being seriously proposed for adoption by leading figures in the System. At all times, the System was technically in a position to adopt the alternative policies.

      To give a clearer idea of the consequences of the policies actually followed, we consider explicitly the alternatives available at three critical periods and what their effects might have been. The periods are: (1) the first ten months of 1930; (2) the first eight months...

    • 7. Why Was Monetary Policy So Inept?
      (pp. 186-208)

      We trust that, in light of the preceding sections of this chapter, the adjective used in the heading of this one to characterize monetary policy during the critical period from 1929 to 1933 strikes our readers, as it does us, as a plain description of fact. The monetary system collapsed, but it clearly need not have done so.

      The actions required to prevent monetary collapse did not call for a level of knowledge of the operation of the banking system or of the workings of monetary forces or of economic fluctuations which was developed only later and was not available...

      (pp. 209-218)
      Albert J. Hettinger Jr.

      The National Bureau affords its directors the privilege of submitting a “memorandum of dissent or reservation” to a manuscript accepted for publication. What I am submitting are neither dissents nor reservations, but a questioning comment. I have read the manuscript twice, in original draft and in final galley proof. I eagerly await the more pleasant reading afforded by a published volume, where tables appear in context and charts, by their presence, remove that need for faith, defined by St. Paul as “the substance of things hoped for, the evidence of things not seen.” This volume, if my judgment is sound,...

      (pp. 219-222)
      (pp. 223-224)
      (pp. 225-226)
    (pp. 227-250)
    Ben S. Bernanke

    I can think of no greater honor than being invited to speak on the occasion of Milton Friedman’s ninetieth birthday. Among economic scholars, Friedman has no peer. His seminal contributions to economics are legion, including his development of the permanent-income theory of consumer spending, his paradigm-shifting research in monetary economics, and his stimulating and original essays on economic history and methodology. Generations of graduate students, at the University of Chicago and elsewhere, have benefited from his insight; and many of these intellectual children and grandchildren continue to this day to extend the sway of Friedman’s ideas in economics. What is...

    (pp. 251-252)
    (pp. 253-266)