Reflections on A Monetary History.

• Author: Friedman, Milton

It is a source of real gratification that Anna Schwartz's and my book should be deemed worthy of a retrospective after 40 years. The extensive research of the past 40 years plus the additional 40 years of history certainly require many modifications in detail in the story as we told it. However, I believe that our major themes have held up remarkably well. The most controversial of those--our attribution to the Federal Reserve of a major share of the responsibility for the 1929-33 contraction--has become almost conventional wisdom. Money does matter.

The Fed's Performance

In an April 15, 1988, Wall Street Journal op-ed, I wrote, "No major institution in the U.S. has so poor a record of performance over so long a period as the Federal Reserve, yet so high a public recognition." That conclusion was, I believe, amply justified by our book and experience in the quarter century after its publication. Fortunately, as I wrote in a Wall Street Journal op-ed of August 19, 2003 ("The Fed's Thermostat"), it no longer is.

Since the mid-1980s, central banks around the world have reacted to the mounting evidence of monetary research by accepting the view that their basic responsibility is to produce price stability. More important, they have succeeded to a remarkable extent as they have discovered that, far from there being a tradeoff between price stability and economic stability, they are mutually supporting. The variability of prices is less by an order of magnitude since the mid-1980s than it was before, not only in the United States, but also in New Zealand (the first country to adopt an explicit inflation target), Great Britain, Euroland, Japan, and elsewhere.

Their success in controlling inflation has altered the empirical relation between short-term movements in money and in nominal income. Achieving price stability requires offsetting changes in velocity by opposite changes in the quantity of money, which reduces sharply the correlation between short-term movements in money and short-term movements in nominal income. To put it differently, short-term changes in the quantity of money can no longer be regarded as largely exogenous. They have become largely endogenous. If the central banks continue to be successful in curbing price fluctuations, they will have converted the quantity of money from an unruly master to an obedient servant.

The generalization that long-term changes in the quantity of money are reflected primarily in prices and little...