Friedman and Schwartz 1963 presented more persuasive evidence to support the

Friedman and schwartz 1963 presented more persuasive

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theory’ and that monetarism remained too much a ‘black box’. Friedman and Schwartz (1963) presented more persuasive evidence to support the monetarist belief that changes in the stock of money play a largely independent role in cyclical fluctuations. In their influential study of the Monetary History of the United States, 1867–1960 , they found that, while the stock of money had tended to rise during both cyclical expansions and contractions, the rate of growth of the money supply had been slower during contractions than during expansions in the level of economic activity. Within the period examined, the only times when there was an appreciable absolute fall in the money stock were also the six periods of major economic contraction identified: 1873–9, 1893–4, 1907–8, 1920–21, 1929–33 and 1937–8. Furthermore, from studying the historical circumstances underlying the changes that occurred in the money supply during these major recessions, Friedman and Schwartz argued that the factors producing monetary contraction were mainly independent of contemporary or prior changes in money income and prices. In other words, monetary changes were seen as the cause, rather than the consequence, of major recessions. Friedman and Schwartz argued that the absolute decline in the money stock which took place during both 1920–21 and 1937–8 was a consequence of highly restrictive policy actions undertaken by the Federal Reserve System: for example, reserve requirements were doubled in 1936 and early 1937. These actions were themselves followed by sharp declines in the money stock, which were in turn followed by a period of severe economic contraction. Downloaded by Odirile See ([email protected]) lOMoARcPSD|4893311
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Contraversal study: pag 171 Bank failures produced an increase in both the currency-to-deposit ratio, owing to the public’s loss of faith in the banks’ ability to redeem their deposits, and the reserve-to-deposit ratio, owing to the banks’ loss of faith in the public’s willingness to maintain their deposits with them. In Friedman and Schwartz’s view, the consequent decline in the money stock was further intensified by the Federal Reserve System’s restrictive action of raising the discount rate in October 1931, which in turn led to further bank failures 4.2.3 An assessment At this point it would be useful to draw together the material presented in this section and summarize the central tenets that proponents of the quantity theory of money approach to macroeconomic analysis generally adhered to by the mid-1960s (see Mayer, 1978; Vane and Thompson, 1979; Purvis, 1980; Laidler, 1981). The central distinguishing beliefs at that time could be listed as follows: 1. Changes in the money stock are the predominant factor explaining c hanges in money income. 2. In the face of a stable demand for money, most of the observed i nstability in the economy could be attributed to fluctuations in the money supply induced by the monetary authorities. 3. The authorities can control the money supply if they choose to do so and when that control is exercised the path of money income will be different from a situation where the money supply is endogenous.
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