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.Both developments produced the contraction in economic activity.The close association of banking panics with severe economic declines was also impor-tant to Friedman and Schwartz.In the concluding chapter to the Monetary History theynoted that there had been six severe economic contractions in the period they examined:1873 79, 1893 94, 1907 08, 1920 21, 1929 1933 and 1937 38.Each was marked by adecline in the stock of money, and four 1873 79, 1893 94, 1907 08 and 1929 33 bymajor banking and monetary disturbances (Friedman and Schwartz 1963a, pp.677 8).3.History provides persuasive evidence that the direction of causation can run frommoney to economic activity: History proves that money matters.This conclusionfollows from proposition (1), that some monetary changes are independent of currentor future changes in the economy, and proposition (2) that significant changes in eco-nomic activity are associated in a predictable way with changes in money.Mitchell, as far as I am aware, never developed this point explicitly.However, it isimplicit in his description of the business cycle.His treatment of the supply of goldin the 1890s is a good example.As we saw above, Mitchell (1913 [1959], pp.138 9)concluded that an increase in the world s production of gold as has been going on inrecent years tends to cut short and to mitigate depressions as well as to prolong andto intensify prosperity.Mitchell also noted that the increase in the gold supply wasindependent of the increase in prosperity.Mitchell (ibid., pp.50 51) listed a numberof ways that an economic expansion would decrease gold production, for example byraising costs of production while the final product price remained fixed, and a number 90 The Elgar companion to the Chicago School of Economicsof ways that an expansion would increase gold production, for example by encouragingpeople to buy risky stocks in gold mines.He concluded, however, that in recent timesthe net effect of cycle-related factors had certainly been overshadowed by the influenceof other factors not directly dependent upon the condition of business the progressof the mining and metallurgical technique, the discovery of new gold deposits, and themaintenance of order in the chief producing districts.Clearly it followed that causa-tion had run from the independent increase in the supply of gold to the mitigation ofdepressions.Mitchell s contrast between the United States in 1907 and Britain in 1907 also pointsto a causative role for money.The United States suffered a severe banking panic and asevere contraction in economic activity.Britain suffered a milder monetary stringencyand a milder decline in economic activity, mainly because of timely actions by the Bankof England.The Bank owed its commanding presence to a long historical process thatwas largely independent of business conditions in 1907.It followed that monetary policywas an independent influence on the economy.In his concluding chapter Mitchell gave forceful expression to the importance of alender of last resort, and the need for one in the United States:That occasionally crises still degenerate into panics in America, but not in Great Britain,France, or Germany, arises primarily from differences in banking organization and practice.In each of the three European countries the prevalence of branch banking and existence of acentral bank so organizes the banking system as a whole that reserves can be applied when andwhere needed although they constitute only a small percentage of aggregate demand liabilitiesof all the branches.In marked contrast to the policy of American banks, the central bank notonly carries a reserve far in excess of immediate requirements in ordinary times, but also uses itboldly in times of stress.15 (Ibid., p.159)Friedman and Schwartz further developed the argument that historical details aboutmonetary institutions and the origin of monetary changes would illuminate the directionof causation between money and economic activity.What is needed to show persua-sively that money matters are natural experiments, crucial experiments as Friedman andSchwartz style them, occasions when the stock of money changed for reasons that wereclearly independent of contemporaneous or future economic changes in real income orprices.The gold-based inflation from 1897 to 1914, stressed by Mitchell, also appears as amajor case study in the Monetary History.In fact, Friedman and Schwartz argue thatthis episode provides the best evidence from their array of episodes on the direction ofcausation:The clearest example [that the direction of causation may run from money to income; empha-sis added] is perhaps the monetary expansion from 1897 to 1914, which was worldwide andreflected an increased output of gold [ Pobierz całość w formacie PDF ]
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.Both developments produced the contraction in economic activity.The close association of banking panics with severe economic declines was also impor-tant to Friedman and Schwartz.In the concluding chapter to the Monetary History theynoted that there had been six severe economic contractions in the period they examined:1873 79, 1893 94, 1907 08, 1920 21, 1929 1933 and 1937 38.Each was marked by adecline in the stock of money, and four 1873 79, 1893 94, 1907 08 and 1929 33 bymajor banking and monetary disturbances (Friedman and Schwartz 1963a, pp.677 8).3.History provides persuasive evidence that the direction of causation can run frommoney to economic activity: History proves that money matters.This conclusionfollows from proposition (1), that some monetary changes are independent of currentor future changes in the economy, and proposition (2) that significant changes in eco-nomic activity are associated in a predictable way with changes in money.Mitchell, as far as I am aware, never developed this point explicitly.However, it isimplicit in his description of the business cycle.His treatment of the supply of goldin the 1890s is a good example.As we saw above, Mitchell (1913 [1959], pp.138 9)concluded that an increase in the world s production of gold as has been going on inrecent years tends to cut short and to mitigate depressions as well as to prolong andto intensify prosperity.Mitchell also noted that the increase in the gold supply wasindependent of the increase in prosperity.Mitchell (ibid., pp.50 51) listed a numberof ways that an economic expansion would decrease gold production, for example byraising costs of production while the final product price remained fixed, and a number 90 The Elgar companion to the Chicago School of Economicsof ways that an expansion would increase gold production, for example by encouragingpeople to buy risky stocks in gold mines.He concluded, however, that in recent timesthe net effect of cycle-related factors had certainly been overshadowed by the influenceof other factors not directly dependent upon the condition of business the progressof the mining and metallurgical technique, the discovery of new gold deposits, and themaintenance of order in the chief producing districts.Clearly it followed that causa-tion had run from the independent increase in the supply of gold to the mitigation ofdepressions.Mitchell s contrast between the United States in 1907 and Britain in 1907 also pointsto a causative role for money.The United States suffered a severe banking panic and asevere contraction in economic activity.Britain suffered a milder monetary stringencyand a milder decline in economic activity, mainly because of timely actions by the Bankof England.The Bank owed its commanding presence to a long historical process thatwas largely independent of business conditions in 1907.It followed that monetary policywas an independent influence on the economy.In his concluding chapter Mitchell gave forceful expression to the importance of alender of last resort, and the need for one in the United States:That occasionally crises still degenerate into panics in America, but not in Great Britain,France, or Germany, arises primarily from differences in banking organization and practice.In each of the three European countries the prevalence of branch banking and existence of acentral bank so organizes the banking system as a whole that reserves can be applied when andwhere needed although they constitute only a small percentage of aggregate demand liabilitiesof all the branches.In marked contrast to the policy of American banks, the central bank notonly carries a reserve far in excess of immediate requirements in ordinary times, but also uses itboldly in times of stress.15 (Ibid., p.159)Friedman and Schwartz further developed the argument that historical details aboutmonetary institutions and the origin of monetary changes would illuminate the directionof causation between money and economic activity.What is needed to show persua-sively that money matters are natural experiments, crucial experiments as Friedman andSchwartz style them, occasions when the stock of money changed for reasons that wereclearly independent of contemporaneous or future economic changes in real income orprices.The gold-based inflation from 1897 to 1914, stressed by Mitchell, also appears as amajor case study in the Monetary History.In fact, Friedman and Schwartz argue thatthis episode provides the best evidence from their array of episodes on the direction ofcausation:The clearest example [that the direction of causation may run from money to income; empha-sis added] is perhaps the monetary expansion from 1897 to 1914, which was worldwide andreflected an increased output of gold [ Pobierz całość w formacie PDF ]