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Current Federal Reserve Policy under the Lens of Economic History: Essays to Commemorate the Federal Reserve System’s Centennial

Editor(s):Humpage, Owen F.
Reviewer(s):Hausman, Joshua K.

Published by EH.Net (September 2016)

Owen F. Humpage, editor, Current Federal Reserve Policy under the Lens of Economic History: Essays to Commemorate the Federal Reserve System’s Centennial. New York: Cambridge University Press, 2015. xxi + 386 pp. $110 (hardback), ISBN: 978-1-107-09909-8.

Reviewed for EH.Net by Joshua K. Hausman, School of Public Policy, University of Michigan.

This volume is a festschrift for Michael Bordo; it contains sixteen papers presented in December 2012 at the Federal Reserve Bank of Cleveland. The conference, organized with the help of Barry Eichengreen, Hugh Rockoff, and Eugene N. White, celebrated both Michael Bordo’s work and the Federal Reserve System’s centennial. It brought together leading economic historians and macroeconomists, and they produced a collection of fascinating papers.

The volume is made more than a collection of papers by the introduction, the first chapter, and the last two chapters. The substantial introduction by Owen F. Humpage (the book’s editor and senior economic advisor in the research department at the Federal Reserve Bank of Cleveland) summarizes each of the papers in the volume and draws out their common themes. (For further summary of the work in this volume, see Williamson 2016.) The first chapter by Barry Eichengreen, “The Uses and Misuses of Economic History,” argues for both the usefulness and potential limitations of historical analogies for informing public policy. It is an ideal first chapter, since the relevance of history to current macroeconomic policy is a more or less explicit theme of all the papers in this collection.

The second-to-last chapter, “Monetary Regimes and Policy on a Global Scale: The Oeuvre of Michael D. Bordo,” by Hugh Rockoff and Eugene N. White summarizes Michael Bordo’s lifetime of work. It is a testament to Bordo’s work that this summary doubles as a review of the causes of the Great Depression, the proper role(s) of a central bank, the operation of the Gold Standard and Bretton Woods system, and the changing frequency of financial crises. Rockoff and White do a particularly nice job of reminding readers of Bordo’s work on the history of economic thought. They make a persuasive argument that Bordo’s attention to past generations of economists was often fruitful; for instance, Bordo’s important 1980 Journal of Political Economy paper on the determinants of price responses to monetary policy shocks grew out of earlier work on the thinking of John Elliot Cairnes (Bordo 1975).

The book fittingly concludes with a short essay by Bordo, “Reflections on the History and Future of Central Banking.” Bordo argues that central banks should confine the use of monetary policy tools to targeting the traditional, pre-2008, goals of low inflation and short-run macroeconomic stability. In the event of a financial crisis, central banks should act as a lender-of-last resort, but should not engage in bailouts of insolvent institutions. Other financial stability concerns, in particular asset prices, are best addressed with different tools. This argument is grounded in history: Bordo argues that macroeconomic outcomes have been best when central banks have acted in this way.

The body of the book contains twelve academic papers. The first, by Marvin Goodfriend (“Federal Reserve Policy Today in Historical Perspective”) traces both the development of transparency in Federal Reserve communication and the Federal Reserve’s focus on inflation. Relatedly, the second paper, by Allan H. Meltzer (“How and Why the Fed Must Change in Its Second Century”), marshals history to argue in favor of rules-based monetary policy.

The next two papers consider the lender-of-last-resort aspect of monetary policy. Mark A. Carlson and David C. Wheelock (“The Lender of Last Resort: Lessons from the Fed’s First 100 Years”) review the history of the Fed as a lender of a last resort; most novel may be the discussion of Fed actions between 1970 and 2000, and the ways in which these foreshadowed those during the 2008 financial crisis. Jon Moen and Ellis Tallman (“Close but Not a Central Bank: The New York Clearing House and Issues of Clearing House Loan Certificates”) reevaluate the effectiveness of clearing house loan certificates for liquidity provision during the pre-Fed National Banking Era (1863-1913). They argue that the New York Clearing House and its clearing house loan certificates were unable to provide the liquidity necessary to effectively address banking crises.

Forrest Capie and Geoffrey Wood (“Central Bank Independence: Can It Survive a Crisis?”) consider how the inevitable strains of a crisis affect central bank independence. Their conclusion is pessimistic. In reviewing the recent history of the Bank of England and the Federal Reserve, they conclude that the 2008 crisis has reduced monetary policy independence.

The next two papers by Peter L. Rousseau (“Politics on the Road to the U.S. Monetary Union”) and Harold James (“U.S. Precedents for Europe”) consider the long and often messy process through which the U.S. achieved political, fiscal, and monetary union. Rousseau draws an optimistic lesson from this history for Europe today, arguing that forces like those that brought about union in the U.S. are at work in Europe. By contrast, James is pessimistic, concluding that “American history shows how difficult and obstacle-filled is the path to federalism” (p. 192).

Christopher M. Meissner in his paper “The Limits of Bimetallism” is also interested in historical parallels to Europe’s current problems. He makes the intriguing — and convincing — argument that France’s transition from bimetallism to the Gold Standard was an example of policymakers’ mistaken belief in the sustainability of the status quo. He concludes that for analogous reasons “European Monetary Union as established in 1999 is very likely to face the fate of bimetallism” (p. 214).

In their essay “The Reserve Pyramid and Interbank Contagion during the Great Depression,” Kris James Mitchener and Gary Richardson consider an often-ignored aspect of the early 1930s financial crisis: interbank deposit flows. Using a remarkable new dataset, they show that in the early 1930s these deposit flows transmitted shocks to financial centers.

John Landon-Lane in his paper “Would Large-Scale Asset Purchases Have Helped in the 1930s? An Investigation of the Responsiveness of Bond Yields from the 1930s to Changes in Debt Levels” considers a counterfactual question: suppose that the Fed had undertaken quantitative easing in the 1930s; what would the effects have been? To answer this question, Landon-Lane examines the relationship between interest rates and large changes in outstanding debt. He concludes that the effect on interest rates of quantitative easing in the 1930s would have been similar to the effect of quantitative easing in recent years.

The final two academic papers relate to an important strand of Michael Bordo’s work: comparison of the U.S. and Canada. Ehsan U. Choudhri and Lawrence L. Schembri’s contribution (“A Tale of Two Countries and Two Booms, Canada and the United States in the 1920s and 2000s: The Roles of Monetary and Financial Stability Policies”) compares U.S. and Canadian monetary policy in the 1920s and 2000s. The description of Canadian monetary policy in the 1920s before there was a central bank will be useful for many. Angela Redish (“It Is History but It’s No Accident: Differences in Residential Mortgage Markets in Canada and the United States”) traces the current large differences between the U.S. and Canadian mortgage markets to differing institutional responses to the Great Depression.

This very brief review of the papers in this volume illustrates the diversity of topics considered. The diversity of methods is also noteworthy, ranging from a formal monetary model to cross-sectional econometrics and narrative evidence. This volume thus serves not only as a superb review of current lessons from monetary history, but also as an introduction to methods used by macroeconomic historians. This will be useful to students and practitioners alike.


Bordo, Michael David. 1975. “John E. Cairnes on the Effects of the Australian Gold Discoveries, 1851-73: An Early Application of the Methodology of Positive Economics,” History of Political Economy, 7:3, pp. 337-359.

Bordo, Michael David. 1980. “The Effects of Monetary Change on Relative Commodity Prices and the Role of Long-Term Contracts,” Journal of Political Economy, 88:6, pp. 1088-1109.

Williamson, Stephen D. 2016. “Current Federal Reserve Policy under the Lens of Economic History: A Review Essay,” Journal of Economic Literature, 54:3, pp. 922-934.

Joshua K. Hausman is assistant professor of public policy and economics at the University of Michigan. He is currently working on understanding the role of agriculture in the initial recovery from the Great Depression.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII