Download PDF by Milton Friedman: A Program For Monetary Stability

By Milton Friedman

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During the rest of the 1920's, both the stock of money and economic activity were relatively stable. These years produced widespread confidence, both inside and outside the System, that the new monetary arrangements were producing a high degree of stability and could continue to do so. In terms of these years this judgment was largely justified. Yet in retrospect, it is clear that problems were arising even then. The gold sterilization policy of the 1920's and the tight-money policy followed in the later 1920's to counter the stock market boom kept prices in this country stable or declining, and thereby increased the difficulty experienced by Britain in particular and other countries as well in maintaining the gold standard to which they had returned.

Up to late 1918 or early 1919, the experience was the same as in earlier wars and the existence of the System made little difference to the general course of events. But then a difference emerges. In earlier wars, prices reached their peak at the end of the war, when government deficits were sharply reduced or eliminated. They would have again if the System had not been in existence. As it was, the mechanism developed to create money for government use continued to operate even after government deficits came to an end.

In almost every instance, major instability in the United States has been produced or, at the very least, greatly intensified by monetary instability. Monetary instability in its turn has generally arisen either from governmental intervention or from controversy about what governmental monetary policy should be. The failure of government to provide a stable monetary framework has thus been a major if not the major factor accounting for our really severe inflations and depressions. Perhaps the most remarkable feature of the record is the adaptability and flexibility that the private economy has so frequently shown under such extreme provocation.

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