theory’ and that monetarism remained too much a ‘black box’.Friedman and Schwartz (1963) presented more persuasive evidenceto support the monetarist belief that changes in the stock of moneyplay a largely independent role in cyclical fluctuations. In their influentialstudy of the Monetary History of the United States, 1867–1960, they foundthat, while the stock of money had tended to rise during both cyclical expansionsand contractions, the rate of growth of the money supply had beenslower during contractions than during expansions in the level of economicactivity. Within the period examined, the only times when there was anappreciable absolute fall in the money stock were also the six periods ofmajor economic contraction identified: 1873–9, 1893–4, 1907–8, 1920–21,1929–33 and 1937–8. Furthermore, from studying the historical circumstancesunderlying the changes that occurred in the money supply duringthese major recessions, Friedman and Schwartz argued that the factors producingmonetary contraction were mainly independent of contemporary orprior changes in money income and prices. In other words, monetary changeswere seen as the cause, rather than the consequence, of major recessions. Friedman and Schwartzargued that the absolute decline in themoney stock which took place during both 1920–21 and 1937–8 was aconsequence of highly restrictive policy actions undertaken by the FederalReserve System: for example, reserve requirements were doubled in 1936and early 1937. These actions were themselves followed by sharp declines inthe money stock, which were in turn followed by a period of severe economiccontraction.Downloaded by Odirile See ([email protected])lOMoARcPSD|4893311
Contraversal study: pag 171 Bank failures producedan increase in both the currency-to-deposit ratio, owing to the public’s loss offaith in the banks’ ability to redeem their deposits, and the reserve-to-depositratio, owing to the banks’ loss of faith in the public’s willingness to maintaintheir deposits with them. In Friedman and Schwartz’s view, the consequentdecline in the money stock was further intensified by the Federal ReserveSystem’s restrictive action of raising the discount rate in October 1931,which in turn led to further bank failures4.2.3 An assessmentAt this point it would be useful to draw together the material presented in thissection and summarize the central tenets that proponents of the quantitytheory of money approach to macroeconomic analysis generally adhered toby the mid-1960s (see Mayer, 1978; Vane and Thompson, 1979; Purvis,1980; Laidler, 1981). The central distinguishing beliefs at that time could belisted as follows:1. Changes in the money stock are the predominant factor explaining changesin money income.2. In the face of a stable demand for money, most of the observed instabilityin the economy could be attributed to fluctuations in the moneysupply induced by the monetary authorities.3. The authorities can control the money supply if they choose to do so andwhen that control is exercised the path of money income will be differentfrom a situation where the money supply is endogenous.
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