Categories
Chicago Exam Questions Suggested Reading Syllabus

Chicago. Readings and Exam Questions for Graduate Money. Friedman, 1963

 

 

The reading list for Milton Friedman’s graduate money course, Economics 331, for the Winter Quarter of 1970 at the University of Chicago has been posted earlier. Here I have transcribed the (shorter) reading list from late 1963 along with the final exam questions and the take-home essay to be handed in on the day of the exam.

____________________

ECONOMICS 331—MONEY
Autumn Quarter, 1963

READING LIST

Milton Friedman

[NOTE: Readings marked with an asterisk (*) cover the essential substantive material.]

  1. Introductory Material

Milton Friedman*, The Quantity Theory, (forthcoming Encyclopaedia article)
D. H. Robertson, Money
David Hume, “Of Money,” “Of Interest,” in Essays and Treatises

  1. The Quantity Equation

Irving Fisher*, The Purchasing Power of Money (Macmillan, 1913), chaps. 1, 2, 3, 4, 8
A. C. Pigou*, “The Value of Money” in Readings in Monetary Theory [, Lutz, F. A., and Mints, L. W. (eds.)]
J. M. Keynes*, Tract on Monetary Reform (1924), chap. II; chap. III, Sec. I
Wesley C. Mitchell*, Business Cycles, The Problem and Its Setting (New York, 1927), pp. 128-39
Henry Thornton, An Enquiry into the Nature and Effect of the Paper Credit of Great Britain (1802), Library of Economics edition (Allen and Irwin, 1939), chaps. III and XI
Jacob Viner, Studies in the Theory of International Trade (Harpers, 1937), pp. 119-289
Alfred Marshall, Official Papers, “Evidence before the Indian Currency Committee (1889),” questions 11758-62 (pp. 267-69); “Evidence before the Gold and Silver Commission (1887-88).” questions 9629-86 (pp. 34-53); testimony to Royal Commission on The Depression of Trade and Industry (1886), answers to question 8(i), pp. 7-15

  1. The Demand for Money

Milton Friedman*, “The Quantity Theory of Money: A Restatement” in Studies in the Quantity Theory of Money, ed., M. Friedman
______________ “The Demand for Money: Some Theoretical and Empirical Results,” Journal of Political Economy (August, 1959), pp. 327-51
H. G. Johnson*, “Monetary Theory and Policy,” American Economic Review (June, 1962), Part II
W. J. Baumol, “The Transactions Demand for Cash: An Inventory Theoretic Approach,” Quarterly Journal of Economics (November, 1952)
James Tobin, “The Interest Elasticity of Transactions Demand for Cash,” Review of Economics and Statistics (August, 1956)
__________, “Liquidity Preference as Behavior Toward Risk,” Review of Economic Studies (August, 1956), pp. 241-47
J. M. Keynes*, The General Theory of Employment, Interest and Money, chaps. 13 and 15
J. R. Hicks*, “A Suggestion for Simplifying the Theory of Money,” Readings in Monetary Theory
Joan Robinson, “The Rate of Interest,” Econometrica, Vol. 19 (1951), reprinted as chap 1 of The Rate of Interest and Other Essays
Allan H. Meltzer, “The Demand for Money: The Evidence from the Time Series,” Journal of Political Economy (June, 1963)
[handwritten marginal note:
(Allan H. Meltzer, ) “The D. for M: A Cross Section Study of Bus Firms” Q.J.E., Aug. 1963]
Phillip Cagan*, “The Monetary Dynamics of Hyperinflation,” in Studies in the Quantity Theory of Money, esp. pp. 25-35 and 86-91
H. A. Latane, “Cash Balances and the Interest Rate—A Pragmatic Approach,” Review of Economics and Statistics (November, 1954) and (November, 1960)
James Tobin, “Liquidity Preference and Monetary Policy,” Review of Economics and Statistics, Vol. 19 (May, 1947), 130-31
Clark Warburton, “Monetary Velocity and Monetary Policy,” and Tobin’s rejoinder, Review of Economic Statistics, XXX (November, 1948), 310-17
John V. Deaver, “The Chilean Inflation and the Demand for Money,” unpublished Ph.D. dissertation (The University of Chicago, Department of Economics, Winter, 1961)
Edgar Feige, “The Demand for Liquid Assets: A Temporal Cross-Section Analysis,” unpublished Ph.D. dissertation (The University of Chicago, Department of Economics, Spring, 1963)
George R. Morrison, “Liquidity Preferences of Commercial Banks,” unpublished Ph.D. dissertation (The University of Chicago, Department of Economics, Winter, 1963)

  1. The Supply of Money

Milton Friedman and Anna J. Schwartz*, “Appendix B: Proximate Determinants of the Nominal Stock of Money,” from A Monetary History of the United States, 1867-1960 [copies on reserve]
H. G. Johnson*, “Monetary Theory and Policy,” Section III
Phillip Cagan, “The Demand for Currency Relative to the Total Money Supply,” Journal of Political Economy (August, 1958)
A. J. Meigs, Free Reserves and the Money Supply (University of Chicago Press, 1962)
William Dewald, “Free Reserves, Total Reserves, and Monetary Control,” Journal of Political Economy (April, 1963)
Lloyd W. Mints, A History of Banking Theory, pp. 9-12, 29-35, 217-22, 236-40, 247-57, 265-87
Milton Friedman, A Program for Monetary Stability, chapter 2
Knut Wicksell, “The Influence of the Rate of Interest on Prices,” Economic Journal, 171 (June, 1907), 213-20
Federal Reserve System: Purposes and Function
A. G. Hart, “The ‘Chicago’ Plan of Banking Reform,” Readings in Monetary Theory
George Tolley, “Providing for Growth of the Money Supply,” Journal of Political Economy (December, 1957), pp. 465-85

  1. Liquidity and Financial Intermediaries

Edward Simmons, “The Relative Liquidity of Money and Other Things,” Readings in Monetary Theory
Roland N. McKean*, “Liquidity and a National Balance Sheet,” Readings in Monetary Theory
Phillip Cagan*, “Why Do We Use Money in Open Market Operations,” Journal of Political Economy (February, 1958)
J. G. Gurley, “Liquidity and Financial Institutions in the Postwar Period,” Study Paper No. 14, Joint Economic Committee, January, 1960
H. Makower and J. Marschak, “Assets, Prices, and Monetary Theory,” Readings in Price Theory
J. G. Gurley and E. S. Shaw, Money in a Theory of Finance
Alvin Marty, “Gurley and Shaw on Money in a Theory of Finance,” Journal of Political Economy (February, 1961)

  1. The Monetary Standard and International Monetary Arrangements

Lloyd Mints*, Monetary Policy for a Competitive Society, chaps. 4 and 5
Milton Friedman*, “Commodity Reserve Currency” and “The Case for Flexible Exchange Rates,” Essays in Positive Economics
H. G. Johnson, International Trade and Economic Growth, chaps. 6 and 7
J. M. Keynes, Tract on Monetary Reform, chap. III, secs. 2, 3, 4; chaps. IV and V (*especially chap. III, sec. 2; chap. IV, sec. 2)
J. M. Keynes, “Economic Consequences of Mr. Churchill,” in Essays in Persuasion
Egon Sohmen, Flexible Exchange Rates (University of Chicago Press, 1961)
“Conditions of International Monetary Equilibrium.”* Session at 1962 meeting of American Economic Association, with papers by H. G. Johnson, Richard E. Caves, and Peter B. Kenen, and Discussion by J. Marcus Fleming, Harry C. Eastman, and J. Herbert Furth, American Economic Review (May, 1963), pp. 112-46

  1. The Process of Adjustment: Inflation, Business Cycles

Milton Friedman and Anna J. Schwartz*, “Money and Business Cycles,” Supplement to Review of Economics and Statistics (Feb., 1963), containing proceedings of Conference on Monetary Economics. Also, comments by H. Minsky, A. Okun, and C. Warburton
Clark Warburton, “The Misplaced Emphasis in Contemporary Business-Fluctuation Theory,” Readings in Monetary Theory
Friedman, “The Inflationary Gap,” in Essays in Positive Economics
Phillip Cagan, “The Monetary Dynamics of Hyperinflation,” Studies in the Quantity Theory of Money
Eugene M. Lerner, “Inflation in the Confederacy, 1861-65,” Studies in the Quantity Theory of Money
Arnold C. Harberger, “The Dynamics of Inflation in Chile,” in C. Christ, et al., Measurement in Economics (Stanford University Press, 1963)

[Handwritten note at the end of the section:
Reuben A. Kessel and Armen A. Alchian, “Effects of Inflation”, J.P.E., Dec. 1962]

____________________

ECONOMICS 331 – Autumn, 1963
M. Friedman

Problem for Reading Period

[Due on Final Exam 1:30 P.M., December 13, 1963.]]

In recent years, commercial banks have frequently complained about competition from other financial intermediaries, notably savings and loan associations, and have pressed the Reserve System to raise the maximum rate member banks are permitted to pay on time deposits.

At least one representative of savings and loan associations has argued that commercial banks are being extremely short-sighted, that they are not in any way harmed by the expansion of savings and loan associations, and are only hurting themselves by competing vigorously for time deposits and offering higher interest rates to get them. Indeed, the argument goes, the commercial banks would be wise to get out of the time deposit business altogether.

The fundamental constraint on the commercial banks, it is argued, is the total volume of reserves made available to them by the Federal Reserve System. True because of lower reserve requirements on time than on demand deposits, commercial banks can have larger total deposits if they expand the fraction which are in the form of time deposits. However, competition from financial intermediaries forces commercial banks to pay a rate of interest on time deposits that roughly matches earnings from them. And time deposits do absorb some reserves. Hence, with a given volume of reserves made available by the Fed, the expansion of time deposits reduces the aggregate amount of demand deposits, on which banks pay no interest and with respect to which they have no competitors. Each bank thinks it gets time deposits at the expense of financial intermediaries or other banks, but all banks together get them only at the expense of demand deposits.

Analyze this argument. Do so, first, on the assumption that the volume of reserves made available to commercial banks would be precisely the same whether the commercial banks did or did not offer time deposit facilities. Next, indicate whether this assumption is or is not plausible; if so, why; if not, why not and in what direction it is wrong.

____________________

ECONOMICS 331
Final Examination – Autumn 1963

M. Friedman
December 12, 1963

  1. Indicate briefly but specifically the key idea you got out of each of the following readings on the reading list.
    1. W. C. Mitchell, Business Cycles
    2. J. R. Hicks, “A Suggestion for Simplifying the Theory of Money”
    3. Phillip Cagan, “Why Do We Use Money in Open Market Operations”
    4. J. M. Keynes, Tract on Monetary Reform.
  2. “In the early history of our country there was a dearth of currency and specie. It was difficult to have cash on hand, especially when most of the specie was used to pay for imports.” (E. R. Taus, Central Banking Functions of the United States Treasury, 1789-1941, p. 22.)
    Discuss the economic meaning of these sentences. Do they make sense as they stand? If so explain. If not, can you suggest any interpretation of them that does make sense? In your answer, emphasize analysis, not economic history.
  3. In class, it was pointed out that (a) it is widely believed that “easy” money tends to make for low interest rates and “tight” money for high interest rates yet (b) in fact interest rates generally tend to be rising or high when the stock of money is expanding rapidly and to be falling or low when the stock of money is expanding slowly or declining, whether the comparison is made among countries at one point in time [e.g., currently, Brazil or Chile vs. the U.S.; Japan vs. Switzerland], or over time for one country [e.g., 20’s vs. 1929-33 in U.S.].
    1. Give the theoretical analysis underlying (a).
    2. Give a theoretical analysis to rationalize (b). Indicate whether this analysis is consistent with that given in (1.).
  4. Suppose U.S. Federal taxes are cut next year by an amount equal to $11 billion a year. Along strictly monetary theory lines, using as your framework the equation of exchange, analyze the effect on money income, prices, and interest rates under three alternative sets of circumstances:
    1. The cut in taxes is accompanied by an equal increase in the deficit, which is financed by increasing the stock of money at a rate of $11 billion a year more than it would otherwise have been increased.
    2. The cut in taxes is accompanied by an equal increase in the deficit, which is financed by borrowing from the general public with no effect on the stock of money.
    3. The cut in taxes is accompanied by an equal cut in expenditures, so there is no change in the deficit.

You are, of course, not expected to give quantitative answers but to indicate direction of effect and the economic parameters on which the magnitude of effect depends.

  1. Indicate the effect each of the following would have on the U.S. money supply under two alternative suppositions: A. The U.S. is on a gold standard; B. The U.S. is on a fiduciary standard with freely floating exchange rates.
    1. Increase in U.S. tariffs
    2. Increase in foreign tariffs
    3. Decline in legally required reserve ratio of commercial banks
    4. Rise in yield on productive investment and hence increase in demand for loanable funds.

 

Source:  Hoover Institution Archives. Papers of Milton Friedman. Box 77, Folder 8 “University of Chicago, Econ 331”.

Image Source:  Milton Friedman (undated) from University of Chicago Photographic Archive, apf1-06231, Special Collections Research Center, University of Chicago Library.