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Pricing Theory, Financing of International Organisations and Monetary History

Author(s):Officer, Lawrence H.
Reviewer(s):Sylla, Richard

Published by EH.NET (November 2007)

Lawrence H. Officer, Pricing Theory, Financing of International Organisations and Monetary History. London: Routledge, 2007. xii + 324 pp. $135 (cloth), ISBN: 978-0-415-77065-1.

Reviewed for EH.NET by Richard Sylla, Department of Economics, Stern School of Business, New York University.

“As they contemplate mortality and immortality,” the late Charles Kindleberger (1985, 1) once wrote, “many economists … think it useful to gather their scattered academic detritus into packages, organized either chronologically or by subject.” Kindleberger was a master of the genre, producing several such packages, which he described as exercises in tidying up things for one’s literary executor. In case you hadn’t guessed from the title of Lawrence Officer’s new book, it is a recent addition to the genre.

Officer, Professor of Economics at the University of Illinois at Chicago, is probably best known to economic historians for his work on purchasing power parity, the operation of the gold standard, and dollar-sterling exchange rates, all of which are treated in an earlier book (Officer, 1996). The current collection, written over the forty years 1966 to 2005, deals mostly with different but sometimes related topics, the three mentioned in the book’s title, and a final brief one entitled “Gold.” Each of the four parts ends with an afterword reflecting on and extending the papers collected under that topic. The first section, “Pricing Theory,” contains four papers, all written more than three decades ago, dealing with “firm and market behavior under conditions of joint supply” and developing “a multidimensional approach to pricing.” These are contributions to microeconomics, but probably will be of limited interest to economic historians.

“Financing of International Organizations,” part II, contains three papers on how the IMF sets its quotas of contributions and drawing rights for member nations, how the UN assessed member states to cover its expenses, and how both organizations might have done a better job of allocating their costs and benefits. Officer’s focus is on the tensions between developed and developing countries over the costs and benefits. Both international organizations tended to base their charges on members’ relative GDPs, made comparable by exchange-rate conversions. Such conversions tend to make developing countries appear smaller, economically, relative to developed countries than would purchasing-power-parity (PPP) comparisons. In the case of the UN, the developing countries liked this method because it resulted in lower assessments. But as regards the IMF, the method reduced the drawing rights of the developing countries compared to alternative methods of determining quotas, so it was less acceptable to them. Such is the stuff of political economy. Officer’s discussion is remindful of the debates over slavery at the U.S. constitutional convention, in which the northern-state delegates argued that slaves ought to be counted for purposes of taxation but not representation, and the southern delegates argued for just the opposite ? or of the debates between Britain and its colonies in the heyday of the empire, in which the British wanted the colonies to be economically independent but politically dependent, whereas the colonies wanted just the opposite. Officer’s treatment of the IMF and UN financing issues is as thorough as one is likely to find anywhere.

Economic historians, or at least financial historians, are likely to gravitate toward part III on “Monetary History,” which contains three fine papers published between 2000 and 2005. One is on the long British episode of sterling inconvertibility ? the paper pound of 1797-1821 ? and the related, so-called bullionist controversy. In that debate, which Officer terms “the most famous monetary debate in the history of economic thought,” the bullionists, forerunners of later monetarists, argued that excessive note issues by the Bank of England led to price-level inflation, a deteriorating exchange rate, and a premium on gold. On the other side, the anti-bullionists argued for a balance-of-payments theory of the exchange rate, in which Napoleonic-War trade interferences, British military spending outside of Britain, and poor wheat harvests led to a deteriorating exchange rate and the gold premium, higher import prices, and general price inflation, whereupon the Bank of England rather passively printed more notes to accommodate supplies of and demands for bills of exchange at the 5 percent usury limit. Officer models and tests both theories with improved data he painstakingly constructed (not included in the original paper, but included in the book in the afterword to part III), using up-to-date econometric techniques. The results are fairly decisively in favor of the anti-bullionist position. Officer ends the chapter on a thoughtful note worth quoting:

Monetarism sees its origin in the bullionist model; and the antibullionist approach to the exchange rate (a flow theory) and monetary policy (passive, and accommodating to the price level) has gone out of fashion. It may be humbling to the macroeconomist that these theoretical developments are contravened by the preponderance of empirical results for the Bank Restriction Period (178).

Chapter 11, “The U.S. Specie Standard, 1792-1932: Some Monetarist Arithmetic,” is one that intrigued me when it first appeared in 2002, and it still does. Among other things, careful data work ? a mark of all of Officer’s scholarship ? produces “a monetary base series that is consistent, complete in coverage, and continuous over a long period of time” (185). One intriguing argument of the chapter is that the two Banks of the United States (BUS) in early U.S. history were indeed central banks; Officer points to substantial evidence that BUS note and deposit liabilities were held as reserves by state and other banks. This is in contrast with analyses by Temin (1969) and others, which view the monetary base as specie (gold and silver) and the BUSs as very large banks but in other respects just like all the other banks in the system. Whether the two BUSs were central banks adding to the monetary base or ordinary banks operating on a specie base obviously bears on how one might model the U.S. money supply and its proximate determinants. It is safe to say that future work in this area will have to build on, or at least contend with, Officer’s data and insights. Officer himself uses the data to study eight different regimes during the 140 years covered in the study, and concludes that the classical gold standard regime (1879-1913) was superior to the others in most respects. One oddity of Officer’s monetary base series is that it grows by 64 percent in 1874, the first of several consecutive years of price deflation. Perhaps this is another triumph of non-monetarists over monetarists.

But wait. In Chapter 12, “The Quantity Theory in New England, 1703-1749: New Data to Analyze an Old Question,” Officer demonstrates that both the classical quantity theory of money and Milton Friedman’s modern version of the quantity theory test out quite well. For Officer, various economic theories are tools to be applied, not articles of faith, and that is rather refreshing. The afterword to part III is full of substance, extensions, and wise commentary on the three provocative papers preceding it.

The short part IV on Gold contains a guide to various documentary collections relating to that subject, and study of reserve-asset preferences of countries when the Bretton Woods System was moving into its crisis period of 1958-1967. In the latter, Officer develops a political-power approach to the proportions of reserve assets consisting of dollars and gold various countries maintained. The United States wanted countries to hold dollars, of course, and used its clout in attempts to achieve that objective. Officer’s political-power model works to his satisfaction, and perhaps even better than standard alternative approaches based on portfolio-management concepts. Bretton Woods was a different world from our current one with market-determined exchange rates for the principal countries. But it seems the United States still has problems getting others to hold all the dollars out there at a non-depreciating exchange rate. Officer’s essay, written a third of century ago and republished here, indirectly sheds some light on a problem that has not gone away.

As one who has been stimulated by Officer’s work and who has relied on some of it in my own, I welcome this collection of articles from a researcher who richly deserves the accolade, “a scholar’s scholar.”

References:

Kindleberger, Charles P. 1985. Keynesianism vs. Monetarism, and Other Essays in Financial History. London: George Allen & Unwin.

Officer, Lawrence H. 1996. Between the Dollar-Sterling Gold Points. Cambridge: Cambridge University Press.

Temin, Peter. 1969. The Jacksonian Economy. New York: Norton.

Richard Sylla is Henry Kaufman Professor of the History of Financial Institutions and Markets and Professor of Economics, Stern School of Business, New York University. His article, “Integration of Trans-Atlantic Capital Markets, 1790-1845,” co-authored with Jack W. Wilson and Robert E. Wright, was published in Review of Finance 10 (2006).

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII