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History of Political Economy 36.3 (2004) 521-531

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Friedman and Money in the 1930s

There is a veritable industry concerned with the nature of monetary analysis at the University of Chicago in the 1930s. To a large extent, discussion of that analysis parades under the rubric of "oral tradition," due to the opening, largely incidental, comments of Milton Friedman (1956) in his essay, "The Quantity Theory of Money: A Restatement."1 Rather than retrace the steps of that disputatious odyssey, it is sufficient to acknowledge the collection assembled by Robert Leeson (2003) titled Keynes, Chicago, and Friedman, and in particular Leeson's own summary essay in that work. It is there that Leeson reports his findings of an "oral tradition" of a quantity theory of money link. Leeson refers to notes taken by Friedman in Lloyd Mints's graduate lectures in the course Money and Banking in the fall quarter of 1932, in which Mints systematically [End Page 521] explored Keynes's then recently published Treatise on Money (1930) and secondarily Keynes's Tract on Monetary Reform (1923).

Discussions of the oral tradition are heavily tilted to exhuming narrative contributions as they related to monetary understandings at Chicago. There is little in the way of empirical forays. Given the methodological predilection of empirical testing as the crucible for assessing a theory, this article looks into Friedman's prewar use of the money stock as a vehicle to interpret movements of the economy in the thirties.2 The intent is to assess the extent to which a distinctive University of Chicago monetary influence carried over into empirical work. Did the quantity theory approach, of which the oral tradition made much, show up as a way of understanding the economy in the 1930s—the dramatic decline in prices and output in 1929–33, their subsequent recovery to 1937, the sharp, yearlong depression beginning in mid-1937, and the subsequent vigorous revival?

Milton Friedman's Economics 176

One piece of evidence bearing directly on the issue is Friedman's surviving handwritten lecture notes (Friedman 1940) for Economics 176, a business cycles course Friedman taught at the University of Wisconsin in the fall semester of 1940.3 The handwritten notes consist largely of one-line entries on a topic, sometimes supplemented by a few comments.

The key text for the course was Wesley C. Mitchell's Business Cycles: The Problem and Its Setting (1927), with particular emphasis on the 127-page second chapter, "Economic Organization and Business Cycles."4 The lecture notes dealing with that book consisted solely of section and subsection titles of that chapter. There were no additional comments, examples, or elaborations. The folder containing the lecture notes also contained extensive typewritten notes, apparently made by a student, covering the first two weeks' lectures. From these typewritten notes one gets [End Page 522] a satisfactory idea of the class lecture material. In the opening lecture, Friedman expressed skepticism that the 1930s represented a structural change in the economy. The notes indicate that in fact it was "best to assume, at least for study purposes, that no structural changes in the economy have occurred . . . . Last 10 years not exception period in history of country" (Friedman 1940).

Since the lecture notes are predominately cryptic, one-line topical entries, an obvious caveat is that details that may have been covered formally and in some depth in the actual lectures cannot be unearthed. An example is the lectures dealing with underconsumption theories. Six periods are devoted to the topic, with three dealing with "s[a]v[in]gs present," under which is the subtheme "undistributed profits by corporations." The importance Friedman placed on the material on underconsumption can clearly be seen not only because of the amount of time devoted to it, but also because one of the midterm examination questions deals with it. What did he say in class? Did he simply expand on the several pages of material in Mitchell 1927 or did he use the "underconsumption—oversaving" idea as a vehicle to examine Keynes?5 Evidently there was...


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