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Remembering Anna Schwartz

e21 | June 25, 2012

On Thursday, monetary policy legend Anna Schwartz passed away at the age of 96. Given the sad news, we’d like to highlight some of her work.

Schwartz was a long time member of the Shadow Open Market Committee. Her most recent paper for them, from March 2009, is on the boundary between the Treasury Department and the Federal Reserve, which was called into question by the aggressive monetary actions undertaken in response to the financial crisis. She outlined an argument made by her frequent collaborator Milton Friedman that the Fed should be much less independent that it traditionally has been.

It may be of some surprise that Milton Friedman, a believer in limited government, proposed subordinating the Fed to the Treasury department not as an ideal but as an improvement of existing arrangements. He contended that it would result in a single locus of power on monetary and fiscal policies, and would establish accountability for mistakes in policy that otherwise leave each institution free to blame the other for policy errors. According to Friedman, even if there were a central bank that had independence to the furthest extent, it would still be independent only if it had no conflict with the rest of government. If there were a conflict, the bank would unquestionably give way to the fiscal authorities. He goes further, stating that even if a fully independent bank could be established, it would not be desirable to do so for political and technical reasons.

Of course, her most famous work is A Monetary History of The United States: 1867-1960 co-authored with Milton Friedman in 1963. Here’s an excerpt from a 2004 speech from Fed Chairman Ben Bernanke praising the insights from the book.

However, in 1963, Milton Friedman and Anna J. Schwartz transformed the debate about the Great Depression. That year saw the publication of their now-classic book, A Monetary History of the United States, 1867-1960. The Monetary History, the name by which the book is instantly recognized by any macroeconomist, examined in great detail the relationship between changes in the national money stock--whether determined by conscious policy or by more impersonal forces such as changes in the banking system--and changes in national income and prices. The broader objective of the book was to understand how monetary forces had influenced the U.S. economy over a nearly a century. In the process of pursuing this general objective, however, Friedman and Schwartz offered important new evidence and arguments about the role of monetary factors in the Great Depression. In contradiction to the prevalent view of the time, that money and monetary policy played at most a purely passive role in the Depression, Friedman and Schwartz argued that "the [economic] contraction is in fact a tragic testimonial to the importance of monetary forces" (Friedman and Schwartz, 1963, p. 300).

Friedman and Schwartz emphasized at least four major errors by U.S. monetary policymakers. The Fed's first grave mistake, in their view, was the tightening of monetary policy that began in the spring of 1928 and continued until the stock market crash of October 1929 (see Hamilton, 1987, or Bernanke, 2002a, for further discussion). This tightening of monetary policy in 1928 did not seem particularly justified by the macroeconomic environment: The economy was only just emerging from a recession, commodity prices were declining sharply, and there was little hint of inflation. Why then did the Federal Reserve raise interest rates in 1928? The principal reason was the Fed's ongoing concern about speculation on Wall Street. Fed policymakers drew a sharp distinction between "productive" (that is, good) and "speculative" (bad) uses of credit, and they were concerned that bank lending to brokers and investors was fueling a speculative wave in the stock market. When the Fed's attempts to persuade banks not to lend for speculative purposes proved ineffective, Fed officials decided to dissuade lending directly by raising the policy interest rate.

Many economists have written very warm remembrances of Schwartz, including her fellow SOMC member Michael Bordo and Allan Meltzer.