A Monetary History from a policymaker's perspective.

• Author: Poole, William
• Position: Book Review

The introduction to A Monetary History starts with this sentence: "This book is about the stock of money in the United States" (p. 3). Milton Friedman and Anna Schwartz show convincingly that failure to pay attention to money growth was the source of many policy mistakes. I confess to feeling very uneasy that money plays practically no role in policy discussions in the Federal Reserve today. I am one of the few members of the Federal Open Market Committee (FOMC) who ever mentions money during the meetings. Despite this observation, there is no doubt that Friedman and Schwartz have taught everyone to watch for warning signs from money growth; if and when those signs appear, I will not be the only one talking about them.

Fortunately, the book is about a lot more than the stock of money. A Monetary History is an important scholarly contribution about U.S. economic history, monetary policy, and the stock of money. There can be no distinct policymaker view of the book's importance because it bears on the monetary analysis of both academics and policymakers.

The Importance of Ideas in Shaping Monetary Policy

Perhaps the most important message I take away from A Monetary History is the tremendous importance of ideas in shaping monetary policy. Bad economic analysis will almost certainly produce bad monetary policy. The real-bills doctrine had a lot to do with the Federal Reserve's catastrophic mistakes in the early 1930s. Later, beyond the period covered by A Monetary History, the theory of a Phillips curve tradeoff between inflation and unemployment played a similar role in fostering the Fed's inflationary mistakes of the 1960s and 1970s. So also did neglect of the key distinction between real and nominal interest rates.

The nation is asking for trouble if central bankers are not current on the latest developments in monetary theory and macroeconomics. By "current" I certainly do not mean "automatically accepting." Many current developments coming out of the academic world turn out to be wrong. I am not criticizing academics; the essential nature of research is a search for deeper understanding and the effort inevitably yields approaches that sometimes, and even frequently, turn out to be blind alleys.

The Phillips curve tradeoff was an important example of a wrong idea that gained wide acceptance and had a major impact on monetary policy. Although ignorance of economics is a likely recipe for failure, following the advice of mainstream economics...