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History and Financial Crises: Lessons from the 20th Century

Reviewer(s):Moen, Jon

Published by EH.Net (August 2013)

Christopher Kobrak and Mira Wilkins, editors, History and Financial Crises: Lessons from the 20th Century.? New York: Routledge, 2013. x + 138 pp. $140 (cloth), ISBN: 978-0-415-62297-4.

Reviewed for EH.Net by Jon Moen, Department of Economics, University of Mississippi.

This book is a collection of six papers that were originally published as a special issue of Business History (Volume 53, Issue 2, April 2011).? It includes a new summary chapter on the use of history in understanding modern financial crises.? Two themes tied the original collection together: the roles of globalization and regulation in financial crises.? Because of the five papers chosen, the collection focuses on the 1920s and 30s.? The papers cover the experiences of the German, Swedish, British, Canadian, and U.S. financial and banking sectors just before and during the Great Depression.? Individually, the five papers draw useful lessons from historical episodes of financial crises, and I enjoyed reading them.? Because they were subject to careful peer-review, I will not review them individually.? Instead, I will review the effectiveness of the collection as a whole.

The original introductory essay and the new concluding essay distract from the five papers; they do not clearly make a case for why I should read them as a collection.? The introductory essay by Christopher Kobrak and Mira Wilkins starts with an extended discussion on the definition of a financial crisis.? It acknowledges Charles Kindleberger?s (2011) self-confessed inability to define a crisis and notes attempts to define a crisis on the basis of sudden movements in interest rates or the money supply.? Yet it ends quite unsatisfyingly with ?no absolute definition of either financial or economic crisis? (p. 5).? Later the essay apologizes for ultimately choosing a set of papers that are limited to the twentieth century, with an emphasis on the Great Depression (p. 10).? That is not bad, but the apology diminishes what the five essays do offer, as noted carefully in the next few pages.? One important point that the essay points out, however, is that not all crises covered in the special issue resulted in a collapse in demand and prices (p. 15).? Why crises do not inevitably lead to recessions or worse could be examined more.

The new, concluding essay by Christopher Kobrak is problematic.? As a stand-alone essay, I found it to be a potentially compelling survey of the relationship between financial and banking panics and the perils of making casual historical comparisons.? In particular, highlighting the relevance of the banking crises of the early 1930s rather than the spectacular stock market crash of 1929 helps in making historical comparisons with the crisis that started in 2008.? But then the essay veers off into topics that are again distracting, like musing on the loss of governmental discipline from the collapse of the Bretton Woods Agreement (p. 119).? This is odd, as the introductory essay indicates that the paper by Mark Billings and Forrest Capie emphasizes the benefits of flexible exchange rates.? The author then regrets not having an essay or more discussion of the Bank Panic of 1907, stating that it gets ?little press in financial histories? (p. 120) and then proceeds to write several pages on the Panic.? I have found quite a bit about 1907 in financial histories by Milton Friedman and Anna Schwartz (1963), Gary Gorton (2010), Richard Timberlake (1993), and Elmus Wicker (2000), just to name a few.? I may have contributed something myself.? The section on regulation (p. 123) starts out well, noting how historically regulation has always been trying to play catch-up to financial innovation.? But the subsequent discussion of the breakdown in Bretton Woods again doesn?t seem closely related to the papers of the special issue.? The discussion of ?Good Financial Crises? argues that crises that were successfully averted rarely get examined.? Wicker clearly points out that the New York Clearing House successfully dealt with the Panic of 1873, and he refers to the reactions to the Panics of 1884 and 1890 as success stories from the point of view of the Clearing House.? I mention this because there is a lot of historical analysis of specific panics out there that could have been tied into this essay.

The conclusion to the essay left me a bit puzzled.? Certainly financial markets are much more complicated today than, say, in 1907.? But is this the result of an increasing lack of social responsibility on the part of financiers today?? We are asked to compare today?s leaders with those of 1907, who ?stepped in to save a system from problems they themselves had created? (p. 131).? Whatever those problems were, I have a hard time imagining that saving his own skin was not first and foremost in J.P. Morgan?s mind, an incentive that just happened to be compatible with that of New York?s financial market in general.? Nevertheless, read the special issue or the book for the all of the essays.? Just do not expect to find a lot of lessons.

References:

Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton, NJ: University Press, 1963.

Gorton, Gary.? Slapped by the Invisible Hand: The Panic of 2007.? Oxford: Oxford University Press, 2010.

Kindleberger, Charles.? Manias, Panics, and Crashes: A History of Financial Crises, 6th edition. New York: Palgrave Macmillan, 2011.

Timberlake, Richard.? Monetary Policy in the United States: An Intellectual and Institutional History. Chicago: University of Chicago Press, 1993.

Wicker, Elmus.? Banking Panics of the Gilded Age.? Cambridge: Cambridge University Press, 2000.
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Jon Moen is an Associate Professor in the Department of Economics at the University of Mississippi.? He has studied retirement in the United States in addition to his research on the Panic of 1907.? He is currently working on a project with Ellis Tallman of Oberlin College and the Cleveland Federal Reserve Bank on the effectiveness of the New York Clearing House in the late nineteenth and early twentieth centuries.??
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Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (August 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

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

Money over Two Centuries: Selected Topics in British Monetary History

Author(s):Capie, Forrest
Wood, Geoffrey
Reviewer(s):Wood, John H.

Published by EH.Net (December 2012)

Forrest Capie and Geoffrey Wood, Money over Two Centuries: Selected Topics in British Monetary History. Oxford: Oxford University Press, 2012. x + 367 pp. $125 (hardcover), ISBN: 978-0-19-965512-0.

Reviewed for EH.Net by John H. Wood, Department of Economics, Wake Forest University.

Two eminent professors emeriti of economic history at City University London have collected some of their published work over three decades into a convenient and useful analytical account of British monetary experiences the last two centuries.? Competing hypotheses of connections between money, inflation, central banking, and financial stability are examined to help us understand twenty-first-century events as well as the past.? The authors say in the introduction that they began with the goal of a monetary history of the United Kingdom similar to Friedman and Schwartz?s Monetary History of the United States.? An insurmountable obstacle, however, was the openness of the British economy.? For an economy with a third of national income engaged in foreign trade, domestic policies are only part of the story.? It can hardly be said, for example, that because wage changes are moderate there are no inflation dangers.? Nor are other closed-economy models imported from the United States helpful.? An ?output gap? derived from a domestically measured ?supply potential? of an economy open to the world is a meaningless concept (pp. 1-2).? This would also explain why the NBER?s cyclical domestic measures at the center of Friedman and Schwartz?s study are less useful to the analysis of more open economies.? The book and the rest of this review are divided into three parts that treat (i) the causes and effects of money, 1870-1939, (ii) financial crises, 1914-1949, and (iii) international problems and policies since World War II.?
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Chapter 2 applies an ARIMA analysis to the distinction between two explanations of the Great Depression (which should probably be renamed ?The Great Price Fall?) of 1873-96 in Britain ? money and excess agricultural supply ? and finds in favor of the former; in particular, the international gold standard under which the quantity of money is outside the control of the authorities and the price level is determined internationally by gold production. (This reviewer would have said the relative cost of gold, but it comes to the same thing.)? The demand for money was also stable, helped by remarkable monetary stability (Chapter 3), which also explains why the post-1929 depression was less severe in Britain than the United States (Chapter 4).? Whatever monetary problems Britain had, including the return to gold in 1925 and the suspension of 1931, the authors conjecture that the stability of money contributed to general economic stability.? ?Institutions were crucial to the contrast in monetary stability between Britain and the rest of the world? (p. 99).? They were at least part of the reason why the deflations of 1873-96 and the interwar period had no important real effects, at least compared with the rest of the world.? The predictability of prices leads to the rejection of Keynes?s and Fisher?s theories of adverse effects of deflation on output in Britain (Chapter 5).?

Chapters 6 and 7 examine devaluations.? British monetary policies left much to be desired during the interwar period, but its institutions managed to get through what might have been crises without severe damage to the economy.? Although suspension of the gold convertibility of the pound in 1931 was a surprise, it was not associated with any of the shocks present in Minsky?s or Kindleberger?s accounts of crises.? There was no major boom and bust, bank run, reserve loss, or large government deficit.? Public and policy responses were mainly sighs of relief, and the suspension was treated as part of a considered adjustment to international events, forced in this case by the breakdown of the gold standard.? The 1949 devaluation was planned, on the other hand, but was similar to 1931 in being a response to conditions.? Both were ?beneficial? though feared beforehand (p. 203).
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The third part is historical with interesting implications for the present.? Chapter 11 notes that apparently significant technological and institutional innovations have not ?threatened to move us from a money-using society to one which transacts by some other means,? so that their ?implications for monetary policy have … been, in theory at least, trivial? (p. 235).? A strategic market game implies that as long as transactions costs exist there will be fiat money (p. 249).? To the question, ?Can the EMU Survive?? (Chapter 12), the history of monetary unions suggests: not without more fiscal and political union.? The history of central banks and inflation (Chapter 13) suggests that the distinction between dependent and independent central banks has been overdrawn.? The choice has always depended on the government?s preference.? The history of the IMF in Chapter 14 finds no redeeming qualities.? The institution?s purpose as originally envisioned ? a flexible international order ? was not realized, and its self-anointed role as crisis manager, consisting largely of indefensible bailouts, has not been surprising in ?unelected officials who are not accountable for their actions,? quoting Anna Schwartz (p. 323).? In ?Financial Crises from 1803 to 2009: The Crescendo of Moral Hazard? (Chapter 15), we see government regulation deteriorate from reinforcing market solutions by providing lender-of-last facilities to their opposite, i.e., impeding rather than helping market incentives.? Those who would understand the development of British monetary policies, and appreciate how we got where we are, can do no better than begin with this book.

John H. Wood, Reynolds Professor of Economics, Wake Forest University, is co-author (with Sandeep Mazumder) of ?The Great Recession of 1929-33: It (Almost) Had to Happen,? forthcoming in the Journal of Economic History.

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (December 2012). All EH.Net reviews are archived at http://www.eh.net/BookReview.

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

Monetary and Banking History: Essays in Honour of Forrest Capie

Author(s):Wood, Geoffrey
Mills, Terence C.
Crafts, Nicholas
Reviewer(s):Neal, Larry

Published by EH.Net (November 2012)

Geoffrey Wood, Terence C. Mills and Nicholas Crafts, editors, Monetary and Banking History: Essays in Honour of Forrest Capie. Abingdon, UK: Routledge, 2011. xxii + 316 pp.? $140 (cloth), ISBN: 978-0-415-45146-8.

Reviewed for EH.Net by Larry Neal, Department of Economics, University of Illinois.

As Forrest Capie was wrapping up his official history of the Bank of England covering the period 1950s to 1979, a book already a classic in the literature, he was honored at a conference held at the Bank of England organized by his friend, frequent co-author, and former colleague at the Cass Business School in the City University, Geoffrey Wood.? Geoffrey solicited papers from a wide range of fellow monetary and financial historians, even including the present reviewer, and most responded with excellent papers, each of which deserves reading on its own merits.? Alas for this reviewer and potential readers, however, the papers as a group do not cohere with each other in any obvious way.? Reflecting the variety of topics Forrest has dealt with over his career and the number of friends and admirers he has acquired, the papers cover a variety of subjects with a mix of methodologies, which range from time series analysis to narrative accounts of previous Bank of England histories.? Recognizing the problem, the editors have organized the contributions into categories pertinent to the corpus of Forrest?s scholarly work.

Part I, ?Writing History,? has Charles Goodhart disparaging previous histories of the Bank while setting a high bar for Forrest?s then unpublished history (update: Forrest met the bar and then some, see my jacket blurb) and Barry Eichengreen reviewing the literature of ?The New Monetary and Financial History,? that combines analysis of monetary disturbances with due attention to financial innovations and crises.? Goodhart provides a helpful guide to past histories of the Bank of England, while Eichengreen gives a masterly overview of the recent contributions to monetary and financial history covering the period from mid-nineteenth century on.

Part II, ?Crisis Management,? has Mae Baker and Michael Collins evaluating the information exchanges between Bank of England officials and private bank managers before and during the financial crisis of 1836; Eugene N. White arguing that the Banque de France did apply Bagehot?s rule effectively even in financial crises caused by miscalculations in the derivatives markets in Paris in the 1880s; and Charles Calomiris insisting that the Bank of England got the lender of last resort role right by 1856, while the U.S. financial system was repeatedly waylaid by misguided regulation.? Baker and Collins demonstrate how intense were personal communications between bankers and regulators dealing with the vicissitudes of impersonal and international money markets at the outset of global financial markets.? White elucidates how Bagehot?s rule depended on the role of collateral, but it took independent experts to assess the quality of collateral.? Calomiris highlights the problems of inadequate information and capital that plagued the fragmented American unit banking system as contrasted with both the British and Canadian systems of concentrated branch banking.

Part III, ?Money and Interest Rates,? presents three analyses of new financial and monetary time series to show: 1) that a true ?liquidity trap? did not exist even in the depths of Great Depression in the U.S. (Peter Basile, John Landon-Lane and Hugh Rockoff) as shown by the junk bond market of the time; 2) that the separate monetary regimes created in Britain over two-and-a-half centuries created different interactions between inflation and nominal interest rates so that Gibson?s famous paradox of a positive relationships between the price level and the nominal interest rate existed only during the gold standard periods (Terence C. Mills and Geoffrey Wood); and 3) that creating a consistent broad measure of the money supply, M4 retail, over the period of rapid monetary innovation of the 1970s and 1980s allows a stable money demand function to re-emerge despite the Bank of England?s decision to target exchange rates rather than money supply at the end of the 1980s (Alec Chrystal and Paul Mizen).??

Part IV, ?Implications of Economic Integration,? puts together two papers dealing with the flawed design of the euro, first from a comparative historical perspective that briefly surveys four successful monetary unions and two disasters leaving this reviewer convinced that the disaster examples of Argentina and Brazil are most relevant despite the authors? attempt to be optimistic (Michael Bordo, Lars Jonung, and Agnieszka Markiewcz); and then from an inside look at the turf battles between central bank governors and finance ministers that led to the eventual creation of the euro without, however, resolving the issue of bank regulation (Harold D. James).? These are followed by two papers that show how the progressive lowering of tariffs by the United Kingdom after World War II and then the reforms undertaken during the Thatcher era did improve Britain’s productivity significantly and permanently (?Openness, Protectionism and Britain?s Productivity Performance over the Long Run,? by Stephen Broadberry and Nicholas Crafts; and ?The Price-cost Markup in the UK: A Long-run Perspective,? by Nicholas Crafts and Terence C. Mills).? Neither contribution gives much credit to the removal of capital controls or the financial innovations that were key to the Thatcher reforms.

Overall, each reader can decide on the basis of his/her own interests which of these contributions is worth checking in the university library?s copy, but will probably not find it worthwhile to pay the $140 retail price for a personal copy.? They will, nevertheless, be well-advised to go directly to Forrest Capie, The Bank of England: 1950s to 1979, New York: Cambridge University Press, 2011, the completion of which was the occasion for the conference volume.

Larry Neal is professor emeritus of economics, University of Illinois at Urbana-Champaign, research associate of the National Bureau of Economic Research, and visiting professor at the London School of Economics.?? His books include The Rise of Financial Capitalism: International Capital Markets in the Age of Reason (1990) and ?I Am Not Master of Events?: The Speculations of John Law and Lord Londonderry in the Mississippi and South Sea Bubbles (2012).

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (November 2012). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

A Europe Made of Money: The Emergence of the European Monetary System

Author(s):Mourlon-Druol, Emmanuel
Reviewer(s):Mushin, Jerry

Published by EH.Net (November 2012)

Emmanuel Mourlon-Druol, A Europe Made of Money: The Emergence of the European Monetary System.? Ithaca: NY: Cornell University Press, 2012. viii + 359 pp. $55 (hardcover), ISBN: 978-0-8014-5083-9.

Reviewed for EH.Net by Jerry Mushin, School of Economics and Finance, Victoria University of Wellington, New Zealand.

At a time when the problems in the euro zone are frequently in the news, it is wise to consider the nature and origins of its immediate predecessor. Emmanuel Mourlon-Druol, of the University of Glasgow and the London School of Economics, has written a thorough description and analysis of the political and economic developments that led to the establishment, in 1979, of the European Monetary System [EMS].

The author explains that, especially from the early 1970s, there were several processes, which were often conflicting. Two were of particular importance. There was a cooperative, transnational monetary elite of technocrats, which was especially interested in the macroeconomic and operational benefits of monetary integration. In addition, from 1974, regular meetings of heads of government at the European Council ensured that this issue remained current. The politicians were often more interested in the importance of monetary stability in the establishment of a European identity. Despite the difficulties, there was a hesitant transition from emphasis on European cooperation to emphasis on European integration.

Although it deals with economic issues, this book is principally a political and diplomatic history, and not an economic history, of the founding of the EMS. It is part of the publisher?s Political Science series. The author has shown that the eventual outcome was reached by a tortuous process that was influenced by recent history and by traditional rivalries. The intermittent progress and regress of negotiations depended on the interaction of a small number of strong and idealistic personalities. Economic arguments were tempered by political pressures and vice versa. Political pressures frequently dominated the economic arguments.

Mourlon-Druol places the negotiations of the 1970s in their proper context. He refers to economic and political events in individual countries, including election results and national policies against inflation. He also shows the significance of world developments, including the perceived increasing weakness of the United States dollar. However, it is curious that the Sterling Area does not merit much attention. In the 1960s, the role of the UK in the Sterling Area was frequently seen, especially by France, as an obstacle in the British application to join the European Economic Community. The author also refers to the theoretical basis of monetary integration, including optimum currency area theory, and to the development of transnational and supranational institutions in Europe.

The negotiations occurred during the existence of the Snake, a cooperative exchange rate arrangement that dated from 1972. There were serious problems in this system. Membership was unstable; the United Kingdom and the Irish Republic withdrew after less than one month, and only the German Federal Republic remained a member for the whole of its existence. Other countries withdrew and rejoined and some, including France, did this more than once. The structure and processes that were eventually agreed for the EMS were an attempt to learn from the experience of the Snake. This was a lengthy process in which the dominant issues included the nature of the parity grid, the role of gold and of the SDR, the width of margins, the increased freedom of capital movements, and the precise obligations of members. The intention was that benefits and obligations would be symmetrical between larger and smaller members. The outcome was the establishment of the EMS, from which, in 1999, the euro zone could evolve.

Although Mourlon-Druol is a fluent and engaging writer, the volume of detail is likely to be overwhelming to all but the most committed specialists. This indicates one of the strengths of this book. It is based on extensive use of primary sources (including the archives of central banks). For this reason, it should be purchased by university libraries. However, it also indicates a weakness. An excess of detail means that this book is unlikely to be accessible to a wide readership.

Although this book should be purchased, as a research resource, by university libraries, it is unlikely to be included on undergraduate reading lists.

Jerry Mushin?s most recent book is Interest Rates, Prices, and the Economy, Scientific Publishers [India], Jodhpur, 2009. jerry.mushin@vuw.ac.nz

Copyright (c) 2012 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (November 2012). All EH.Net reviews are archived at http://www.eh.net/BookReview.

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

Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System

Author(s):Eichengreen, Barry
Reviewer(s):Toniolo, Gianni

Published by EH.NET (August 2011)

Barry Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. New York: Oxford University Press, 2011. iii + 215 pp. $28 (cloth), ISBN: 978-0-19-975378-9.

Reviewed for EH.Net by Gianni Toniolo, Departments of Economics and History, Duke University.

?We are seeing the government of a global sport (cricket) passing from west to east for the first time. The shift is unique and irreversible. The east can now take something western and make the west a supplicant. We had better get used to it? (M. Bose, Financial Times, 7/21/2011, p.11).? How long will it take before the main reserve currency will be added to the list of ?something western? passing east?? The main tenet of Barry Eichengreen?s book is that it will take a long time before the dollar follows the fate of cricket, not so much because of the dollar?s strength but because of the weakness of the alternatives.

The book, written for the general public, is useful and pleasant to read also by the so-called professionals. Those used to Eichengreen?s clear and fluent prose will find here a particularly light touch obtained by dropping here and there a good dose of anecdotal hints to lessen the weight of serious history and rigorous economics: this is particularly appreciated by those like me who write on monetary history and know how heavy a meal it is to digest — both by undergraduates and the educated public.

A brief introduction sketches the main argument of the book, namely that there is a ?fallacy behind the notion that the dollar is engaged in a death race with its rivals? (p. 9): rather than getting used to money moving, with cricket, from west to east we should prepare to a world ?in which several international currencies coexist,? as they did for most of the past two centuries.

Chapter 2 traces a brief history of the dollar, from its humble and foreign origin (it even got its name by assonance with the silver thaler coming from the south) to the turning point of the 1930s.? The main question here is why the dollar didn?t become the leading international currency by the end of the nineteenth century when American economy and trade were already larger than Britain?s, the producer of the most important among the international currencies of the day. The answer, for Eichengreen, is to be found in the underdevelopment of the U.S. money market vis ? vis Britain?s.? As long as acceptances were more efficiently traded in the liquid London market, the dollar could not aspire to the status of international currency. Had Jackson not vetoed the renewal of the Second Bank of the United States, things might have been different; as it was, the international rise of the dollar was checked by the absence of a central bank. Things changed after 1919 when the pound remained inconvertible and the United States became the main lender to Europe: by 1925, when London resumed convertibility, the dollar had already overtaken the sterling in the reserve portfolios of the world?s central banks. One might add that, had the Congress ratified the Versailles Peace Treaty, giving America a more decisive role in European affairs, by 1930 the dollar?s weight as international currency might have been more decisive.

Chapter 3 deals with the time when ?the dollar reigned supreme,? much to De Gaulle?s chagrin (hence the title of the book). Everything of course began at Bretton Woods where Keynes?s bancor never stood a chance. Brains or no brains, industrial might and military power had already decided in favor of the American currency. The history of the rise and fall of the Bretton Woods system has been told so many time, including by Eichengreen, that relatively few pages are devoted to the quarter-century following 1945. There were, of course, good reasons for the continued dominance of the dollar much beyond the demise of Bretton Woods: Eichengreen stresses both the strength of the American economy and the lack of alternatives.

Chapter 4 outlines the history of the euro, potentially the only credible rival to the dollar. An outstanding expert on European monetary history and economics, Eichengreen provides a lively account of the long gestation of the single currency from the road leading to the Warren Report of 1970, up to the present. The chapter will be my suggested reading to those in need a short briefing on the politics of European monetary union, an object still largely misunderstood not only by the American public and press but by academic experts as well. Eichengreen?s conclusion is that the euro would have made a formidable rival to the dollar had the UK opted in. This may be true from a technical point of view but, as Eichengreen knows only too well, for good or bad, Continental ways are not British ways. British participation has arguably weakened the progress towards a more politically integrated Europe (a prerequisite for the health of the euro in the long run) and one may wonder how British and German cultures would be integrated in running the ECB.

Chapter 5 provides a masterful user?s manual for the crisis that began in 2007. Interestingly, in fact, each chapter of this book can be read in its own right as a synopsis for relevant international monetary issues, regardless of their bearing on the book?s theme: the future of the dollar. The manuscript was given to the publisher when the Great Recession (the terminology might look awkward a few years hence) was on its way to being slowly overcome. The events of Summer 2011, unfolding while I write this review, might oblige at least a partial change the overall interpretation of the past eventful years. They might also impact on the prospects of the dollar-euro relation. It is, however, impossible to say to what extent this will be the case. Economic history stops at the end of the cycle previous to the one when it is written: economic historians need the perspective of the full cycle in order to explain both its origins and consequences.

Chapters 6 and 7 can be read together: they discuss the end of the dollar?s monopoly as reserve currency and ask whether the dollar will (relatively) soon crash or just slowly lose weight, sharing its reserve currency role with other means of international payment. History shows ? and this is one of the themes of the book ? that the ?normal? case is one where several reserve currencies coexist, with one of them in more or less dominant but not monopolistic position. Monopoly, in the post- Second World War years, was an exception due to both economic and geopolitical reasons. We are now back to ?normal? times but, for all the economic and political weakness of the United States, we shall not witness a precocious move away from the dollar. For one thing, the American economy is still the world?s largest and, at market exchange rates, it is destined to remain such for another while.? For the rest, alternatives don?t look very promising: the euro has problems of its own, the renminbi is not convertible, the Swiss franc is backed by too small an economy, the Indian and Brazilian currencies might in the future qualify for limited diversification but are no match to the dollar, gold is not used for current transactions, timber is illiquid, and so on. International trade is still largely invoiced in dollars and this is a powerful incentive for central banks to hold dollar reserves. All these conditions may, and probably will, change: the future will look like the early twentieth century when a number of reserve currencies coexisted with the leading one. What we saw after the publication of this book tends to reinforce its conclusions: the demand for T Bonds and other dollar-denominated assets increased in spite of Standard & Poor?s.

As I said, this is a book aimed to a large audience of non-specialists. Its chapters make superb assignments to undergraduate classes (most economics Ph.D. students would hugely benefit from reading it but I doubt that many of them ever will.). It contains a lot of details that will interest specialists as well. There is only one question the reader, specialist or otherwise, finds unanswered: what about geopolitical factors? Eichengreen brings them explicitly to the fore in discussing, with a wealth of details, the impact of the unfortunate Anglo-Franco expedition to Egypt in 1956. For the rest, there are here and there hints that politics matters for the international status of leading currencies and Eichengreen states that the leading world power also tends to own the leading currency but one remains a bit unsatisfied by the relative paucity of elaboration on this theme, particularly regarding future scenarios. Jeffrey Sachs recently stated the obvious when writing: ?For at least two decades the U.S. has been unable to provide monetary stability, financial regulation and fiscal rectitude? (Financial Times, May 31, 2011). Are we, in this respect, back to the interwar years? Eichengreen seems to agree that similarities exist. If so, will weak international leadership have no impact on the dollar?s status in any plausible scenario? The dollar might even get stronger in cases of looming international military or political crises, as it did in the late 1930s: by bringing geopolitical considerations more to the fore Eichengreen would have probably strengthened his own conclusions.

Gianni Toniolo is Research Professor of Economics and History, Duke University, Contract Professor of Political Science at the Libera Universit? delle Scienze Sociali (Roma) and Research Fellow at CEPR, London

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (August 2011). All EH.Net reviews are archived at http://www.eh.net/BookReview.

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

Inside the Fed: Monetary Policy and Its Management, Martin through Greenspan to Bernanke

Author(s):Axilrod, Stephen H.
Reviewer(s):Wood, John H.

Published by EH.NET (August 2011)

Stephen H. Axilrod, Inside the Fed: Monetary Policy and Its Management, Martin through Greenspan to Bernanke (revised edition). Cambridge, MA: MIT Press, 2011. viii + 225 pp.? $25 (cloth), ISBN: 978-0-262-01562-2.

Reviewed for EH.Net by John H. Wood, Department of Economics, Wake Forest University.

This book is truly from ?inside the Fed.?? The author served the Board of Governors from 1952 to 1986, nearly half the time as senior advisor for monetary policy to chairmen Arthur Burns (1970-78), G. William Miller (1978-79), and Paul Volcker (1979-87).? He also observed William McChesney Martin, Jr. (1951-70) in action as chairman of the Federal Open Market Committee, and has kept in touch with the making of monetary policy under Alan Greenspan (1987-2006) and Ben Bernanke (since 2006).? Axilrod?s accounts of policymaking as seen from inside the Fed are interesting and informative, as are the ?anecdotes,? as he calls them, which reveal the personalities and methods of Fed chairmen, including their working relationships with advisors, fellow governors, and other central bankers.
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Axilrod doesn?t deny that theory influences policy, but he suggests that the personal characteristics of chairmen and their sensitivities to the public and political circumstances are also important.? Burns, for example, was unable to deal effectively with the Great Inflation of the 1970s for several reasons.? Although he had been a student of the consistencies embodied in business cycles, he seemed to see ?each cyclical episode as embodying a unique set of events,? of which money was only one.? Rising inflation during 1974-77, when the real fed funds rate turned negative, caused the market to perceive ?that the Fed was doing too little to contain money growth to a pace that would significantly restrain inflation, and the institution?s anti-inflation credibility substantially eroded.?
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Although Burns possessed substantial persuasive powers in small groups, aided by an explosive temper, his effectiveness as inflation-fighter was hampered by his inability even ?to attempt to exercise powers of persuasion and logic dramatically and compellingly enough in public speeches and congressional testimony so as to evoke the public support that might have made it easier for the Fed itself to pursue a stronger anti-inflationary policy.?? Such a ?task may seem too Herculean,? but it should be remembered that Volcker?s shift was only a year or two in the future, and Burns had a president in Gerald Ford who probably would have supported a genuine attack on inflation (which the Whip Inflation Now ? WIN ? campaign against greed was not).? Burns was further limited by his lack of a potentially persuasive policy, of something more than a maneuver ?inside the box.?
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Paul Volcker, on the other hand, ?combined great sensitivity to shifting trends in political economy (he could see what the country would now accept) with a willingness to take dramatic action,? and see it through.? When a New York Fed official said ?the Fed was in the process of ?experimenting? with a new approach to policy [as it shifted from interest-rate to money targeting], Volcker … went ballistic …. The idea of an ?experiment? was anathema to him because it suggested a lack of conviction at the Fed and would most certainly not help us regain market credibility.?? Some of this might be hindsight on Axilrod?s part, but he had no difficulty finding concerns for credibility among successful Fed chairman such as Martin, Volcker, and the early Greenspan before it became a part of economic models.
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He does not give high grades to Bernanke or the later Greenspan in this respect.? He shares what might be the consensus belief that the Fed contributed to the recent crisis.? Its opposition to inflation seemed half-hearted after 1998, and belief in the Greenspan-put — that the Fed would underwrite the large risks being taken — contributed to its loss of credibility, Axilrod believes.
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Bernanke inherited a difficult situation and didn?t improve on it.? The Fed seemed unaware of speculative and inflationary pressures, and the real fed funds rate became negative before the Fed belatedly shifted to tight money.? Its reactions to the crisis were unusual, and how it will deal with its gargantuan balance sheet is unknown.? There may ?be no very significant technical difficulties in either reining in the monetary base or at least minimizing the extent to which some larger than normal monetary base can be transformed into excess public liquidity.? But the Fed?s ability to undertake effective monetary policies in so complicated and uncertain a transition requires more than technical capacity.? It also requires from its chairmen … a public stature that enables him to perform effectively on the national stage, [which] does not yet seem to be firmly within Bernanke?s grasp.????
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?My experiences at the Fed suggest that a great leader for monetary policy is differentiated not especially by economic sophistication, but by his or her ability to perceive when social and political limits can and should be placed to make space for a significant, paradigmatic change in the approach to policy should it be required, as well as by the courage and bureaucratic moxie to pull it off.?? ?Native good judgment and plain old common sense,? as well as ?an intuitive feel for markets,? are also important.
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He gives no formal ranking of the chairmen, but there is no doubt that Volcker would be at the top of his list, probably with Martin second, although the latter had no ?powerful, dramatic crises to deal with.?
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Unsurprising in a ?lifer,? Axilrod?s stories of people and policies at the Fed reveal institutional beliefs that might improve our understanding of American monetary policy.? One belief that has often found expression among the governors and the staff is that the Fed is fighting inflation, which is hard to swallow when we know that inflation is fully explained by the Fed?s injections of reserves.? Statements to this effect possess the characteristics of a state of denial in an organization that has caused the greatest inflation in U.S. history, and make sense only if it means that the fight is against other, primarily political, interests for the independence to conduct a stable price policy.? There is even less reason, in light of his delivery of inflation leading up to the 1972 election, to call Burns ?unfortunate in the particular decade, the 1970s, where fate placed him as chairman … in years of quite strong inflationary winds.?? The relatively stable conditions in Martin?s term might not have been all luck. ???
One reason why the governors and senior staff have resisted academic influence is the Fed?s immersion in the money markets that are barely evident in economic theories.? The groups have different models for different interests.? There has been a circle-the-wagons reaction to the nearly universal academic disapproval of monetary policy during most of the postwar period.? Axilrod?s recollections in this area are ambivalent.? In the early 1960s, he believed that monetarist Karl Brunner?s description of the Fed?s control of the money stock ?was telling us nothing that we didn?t already know.?? However, Axilrod?s account of the Fed?s growing interest in money seemed to reflect a similar development among economists.?

Whatever the intellectual causes and effects between academia and the Fed — I believe each underrates the other — Axilrod?s bilingual discussion of the development of monetary policy over time, particularly the logical and empirical connections between money and credit, is a genuine contribution to our understanding of monetary policy and the institution that makes it.?

This book by a uniquely placed participant is an interesting and informative read on its own, but those who would like to learn more about Axilrod and his times are advised to read some of the many writings that offer different perspectives of the same events, for example, Allan Meltzer, who confirms Axilrod?s warnings about lagged reserve accounting when it was adopted (A History of the Federal Reserve); the Bank of England?s Charles Goodhart, who gives Axilrod an almost equal share with Volcker for the 1979 policy shift and calls him the second most important person at the Fed, (?Review,? Economica, Jan. 2011); and William Greider, who wrote that Chairman Miller?s lack of expertise made Axilrod ?an extraordinarily powerful bureaucrat.? Axilrod contradicts this by saying that the staff tended to have ?more influence when the chairman was strong than when he was not. … I always had the feeling that in Miller?s time … my views? were received ?with a bit less intensity.?? An author and defender of the modified monetarist model that replaced interest targeting in 1979, Axilrod finds no sense in the statements ?by a policymaker or two [that] the new policy was simply a cover so that the Fed could raise interest rates while ducking direct responsibility.?? It should be noted that one of the offending parties was Volcker (Volcker and Tyoo Gyohten, Changing Fortunes).

John H. Wood, Reynolds Professor of Economics, Wake Forest University, jw@wfu.edu, is the author of A History of Central Banking in Great Britain and the United States (Cambridge University Press, 2005) and A History of Macroeconomic Policy in the United States (Routledge, 2009). A current research project connects the economics and politics of William McChesney Martin, Jr. at the Fed and as president of the New York Stock Exchange. His Federal Reserve experience has been as a fellowship student at the Federal Reserve Bank of Chicago for two summers, an economist at the Board for three years and the Federal Reserve Bank of Dallas for two years, and further visits at the Federal Reserve Banks of Dallas, Chicago and Philadelphia.? He remembers looking down enviously from his window in the Flow-of-Funds section at the noon tennis match of which Axilrod writes, although he eventually got a chance with the afternoon group formed by Dewey Daane when he joined the Board.

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (August 2011). All EH.Net reviews are archived at http://www.eh.net/BookReview.

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

The Plans That Failed: An Economic History of the GDR

Author(s):Steiner, André
Reviewer(s):Polyakova, Maria

Published by EH.NET (April 2011)

Andr? Steiner, The Plans That Failed: An Economic History of the GDR. (Translated from German by Ewald Osers.) New York: Berghahn Books, 2010. xiii + 228 pp. $60 (hardback), ISBN: 978-1-84545-748-8.

Reviewed for EH.Net by Maria Polyakova, Department of Economics, M.I.T.

In 1945, the Third Reich unconditionally surrendered to the Allied forces of Great Britain, France, the United States and the Soviet Union. The Allies occupied Germany in the same year, splitting the country and its capital into four Zones of Occupation. The northeastern part of modern Germany became the Soviet Occupation Zone governed by the Soviet Military Administration. In 1949, four years after the end of the War, the Socialist Unity Party of Germany (SED) proclaimed the foundation of the German Democratic Republic (GDR), also known as East Germany, in place of the Soviet Zone. The political history of East Germany has had a number of academic and broad audience publications devoted to it. Detailed analysis of its economic history, on the other hand, has been surprisingly scarce in comparison.

Andr? Steiner, Research Director for the Department of Economic and Social History at the Center for Contemporary History Potsdam (ZZF) and professor of economic and social history at the University of Potsdam, attempts to reduce this gap. The study is meant primarily to provide an analytical summary of the existing research on the topic (both by Steiner himself and other scholars) and accomplishes its goal well.? In about 200 pages of condensed prose, Steiner presents a detailed, yet concise, overview of the key economic decisions and policies — and their consequences — that characterized the socialist German state from 1945 to 1990. In his account, Steiner relies on a number of primary and secondary sources that include published collections of documents, archival materials, and scholarly writings. Among these sources are diverse protocols from the political discussions of the time, contemporary legal and regulatory publications, as well as analytical books and articles written in the midst of the historical developments.

Steiner?s main questions are ?why things happened the way they happened and, above all, what alternatives were available and why they were not chosen? (p. 1) as well as ?how was it possible … that the system survived for forty years? (p. 7). Steiner rightfully claims that, just by observing the end result of the economic development in the GDR, we cannot be confident that the system of the centrally planned economy, in and of itself, was the key reason for the failure of East Germany.? To get closer to the heart of the matters, Steiner lays out the details of the economic development of the GDR in six chapters. In each chapter, he considers both the political economy of the policies and the daily experience of the GDR?s population during different ?political caesuras? (p. 8) of the GDR?s economic history. The hard work of organizing and explaining the often chaotic and controversial economic events (as well as their academic accounts) in East Germany, allows Steiner to conclude that, indeed, ?the crucial negative element was the planned-economy system? (p. 1). This conclusion will hardly surprise the readers familiar with East German history. The merit of the book, however, lies in its well-structured account of the events and the relevant primary sources. These serve to convince readers of the non-dogmatic objectivity of the book?s conclusion.??

Steiner devotes the first two chapters of the book to the discussion of the immediate post-war situation in the Soviet Zone and the first five years of the GDR?s existence. Steiner shows that the area of the Soviet Occupation was highly industrialized and produced a sizeable agricultural surplus. Its industry, however, critically depended on the supplies of raw materials from the Western territories — a fact that would later cause much trouble for the GDR?s government.? Steiner provides evidence that the Zone?s wartime destruction was lower than in its Western neighbor and should not have been inhibitive for the economic reconstruction.? The controversial attempts to nationalize agriculture, restore the production of consumer goods, and, at the same time, develop heavy industry, as instructed by the Soviet Union, were, however, inhibitive.

The Soviet dismantling of plants and the reorganization of the industrial structures had a severe effect on the capacities of the GDR?s industry. The book further accounts for the complications that the GDR?s new political leadership faced in trying to restart production and stabilize employment, monetary exchange, and the supply of consumer goods and food.? Harvest failures and the collectivization reforms of agriculture resulted in severe food shortages.? Dismantling, reparations and incentive mismatch in the manufacturing resulted in the escape of more than 4,000 producers to the West, while the remaining ones struggled to provide desirable quantity and quality. The difficult situation led to the strike of June 17, 1953 that was forcefully resolved with Soviet tanks.

In the third chapter, Steiner discusses the economic situation during the second decade after the end of the War. He characterizes this period as a time that experienced rapid growth from the post-war production level. At the same time, there were consumption shortages, severe underinvestment into the production of consumer goods and big waves of emigration to the West. It was also a period of further deep structural changes in all sectors of the economy. Steiner emphasizes the dependency of the young German state upon the Soviet command and its struggle of keeping up with its Western neighbor, which by this time clearly offered a much more attractive environment for the consumers and firms of the East. The chapter culminates with the request of the East German government to the Soviet Union to allow for the construction of the Berlin Wall to shut off emigration from the country.

Although the official justification for the construction of the Wall was political, Steiner argues that the real reason (and the one that East German policy-makers stressed in their internal discussions) was economic. In the next two chapters, Steiner discusses how the forceful hold of the population and firms within the country allowed the GDR?s government to pursue the economic reforms it desired. The SED still advertised that the goal of the GDR was to ?overtake? the living standards of the Western neighbor, but now it didn?t have to worry about the extensive emigration that was the consequence of the obvious failures in the past. Over the course of these two decades, the GDR?s government implemented an array of reforms that tied it closer to the Eastern bloc and were supposed to convince its citizens of the merits of the socialist system. Steiner argues that the reforms of the ?New Economic System?? and the ?Overtake without Catching Up? programs were often undermined by structural inconsistencies that followed the attempt ?to simulate market mechanisms without, however, introducing the foundations of a market economy? (p. 111).? The standard of living and the industrial output showed improvement in the sixties and seventies.? Consumer demand continued to be dictated by the government, however, rather than by the consumers themselves. That is, there was no way for the economy to signal its needs to the planners.
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Lastly, Steiner discusses another big problem, namely the indebtedness of the different parts of the system and its reliance on support from the Soviet Union. The country was severely indebted to both the East and the West. Within the country, companies relied heavily on subsidies from the state. East German exports were not competitive and the economy was not self-sustainable, relying to a considerable extent on the imports. The political events of the following decades led to a termination of the credit line from the West. At this point, as Steiner skillfully puts it ?reality caught up with the GDR: it was in an indebtedness trap? (p. 142). The last decade before the fall of the Berlin Wall saw the country struggling with debt, rising prices for raw material imports, the growing demands of the population, shortages, declining investments and productivity and, finally, renewed emigration to the West. The economic crisis and the dramatic changes in the political circumstances in the Eastern bloc eventually led to the fall of the Wall and the GDR in 1989.

As Steiner sums up, ?the socialist economic system?s immanent incapacity to produce structural and technological or innovatory change was the decisive cause of the GDR?s economic weakness in its final decade? (p. 193)

The 2004 German edition of the book with the original title Von Plan zu Plan: Eine Wirtschaftsgeschichte der DDR became a popular read in Germany. This is, of course, not surprising, given the low number of good systematic accounts of economic life in East Germany and the slowly fading heritage of the GDR?s economy and society in modern Germany. The audience for the English translation of the book might be harder to define. While it is unlikely to arouse a lot of interest among the non-German casual readers, it is at the same time too general for specialized researchers of East Germany?s economic history, who would probably prefer to use the German edition anyway. On the other hand, it would provide an excellent introduction for students and researchers who are just starting their work in the area of East Germany?s history, or for the researchers of state-owned enterprises and planned economies, who are interested in an overview of the historical precedent. Furthermore, Steiner?s bibliography presents an impressive scholarly reference to a large subset of primary and secondary sources that are available on the topic.

Maria Polyakova is a graduate student at the Department of Economics of the Massachusetts Institute of Technology.? One of her current research projects concerns the organization of the German industry in the first decade after World War II.

Copyright (c) 2011 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (April 2011). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Economic Planning and Policy
Economywide Country Studies and Comparative History
Geographic Area(s):Europe
Time Period(s):20th Century: WWII and post-WWII

Integrazione internazionale e sviluppo interno: Stati Uniti e Italia nei programmi di riarmo del blocco atlantico 1945-1955 [International Economic Integration and Home Growth: The United States and Italy in the Western Bloc Rearmament Programs 1945-1955]

Author(s):Selva, Simone
Reviewer(s):Martinez Oliva, Juan Carlos

Published by EH.NET (April 2010)

Simone Selva, Integrazione internazionale e sviluppo interno: Stati Uniti e Italia nei programmi di riarmo del blocco atlantico (1945-1955) [International Economic Integration and Home Growth: The United States and Italy in the Western Bloc Rearmament Programs, 1945-1955]. Rome: Carocci, 2009. 383 pp. ?40 (paperback), ISBN: 978-88-430-5253-0.

Reviewed for EH.NET by Juan Carlos Martinez Oliva, Department for Structural Economic Analysis, Bank of Italy.

This book examines the economic and political relationship between Italy and the United States from the start of postwar reconstruction until the mid-fifties. The complex events characterizing those crucial years are depicted in the light of the rearmament program following the establishment of the North Atlantic alliance in 1949. The analysis highlights the main steps of the process of integration of Italy into the international economy and the strategy pursued by national authorities to trigger a successful growth process. To this end the author makes use of a broad amount of archival evidence from a large number of national and international sources.

The book is divided into six chapters. The first considers the link between the defense strategy of the U.S. and the industrial policy in the countries involved, particularly regarding its impact on productive capacity and aggregate demand in domestic markets. The growing worry that the military objectives of the rearmament plan could be in conflict with the goal of achieving stronger growth and investment in Europe initially brought about a separation of military and non-military expenditures, and of corresponding financial resources.

The second chapter analyzes the impact of rearmament as an engine of growth, starting from the institution of the Medium Term Defense Program (MDAP) in 1949, tailored to not interfere with the European Recovery Program (ERP). In the following years, however, this stance was replaced by one of larger support of European military production to the end of reinforcing Atlantic defense goals. Growing political pressure by the Europeans followed, aimed at achieving stronger U.S. support of the external and domestic imbalances created by costly military expenditure.

The third chapter moves to the policy of military foreign aid to Italy in the initial period of Atlantic alliance. Following the gradual shift from British to U.S. involvement in Italian military defense, Italy’s manufacturing sector progressively enhanced its role in producing military supplies, while nonetheless meeting financial constraints which were only partially alleviated by U.S. foreign assistance. The outbreak of the Korean conflict, with its heavy impact on international commodity prices, threatened the recovery outlook of Italian economy, thus inducing Italian authorities to use U.S. military aid as a means to alleviate the negative effects of the war on internal prices and production.

The fourth chapter discusses the impact of the 1947 Peace Treaty on the Italian aeronautical industry. The involvement of some major industrial groups in the attempt to boost and reinforce Italian productivity and exports testifies to the authorities’ continuing aim to achieve growth and stability in the fifties. During that period complex negotiations were carried out by the Italian government with the Mutual Security Agency (MSA), NATO, and the U.S. Department of State. A special role was played by the Off-Shore Procurements (OSP), which were orders for military items produced in Europe and destined for the armed forces of the producing countries or to those of their NATO partners. As one of the most relevant playing fields of the diplomatic dialogue between the U.S. and European partners, the OSP can be viewed as a relevant indicator of the complex interplay of the different policy objectives of the partners involved.

Particularly interesting is the description, in the fifth chapter, of the interaction between the OSP to the Italian aeronautical industry in 1953-54 and the political negotiations associated with relevant issues characterizing Italian postwar reconstruction such as the territorial question of Trieste, threatened by the Yugoslavian claims; the balance of payments difficulties experienced by Italy within the EPU following the almost total removal of trade barriers; and the U.S. preoccupations arising from the 1953 general elections in Italy.

The final chapter covers the years 1954-55. It is shown that in this period financial assistance to Italy, mostly represented by the OSP, became more strictly tied to the political objective of fighting communism in Italy. This orientation, started in 1954, was strongly supported by U.S. Ambassador Claire Luce, largely as a response to the unfavorable electoral results in the previous year. Quite interestingly, in that period the fight against unemployment became a top priority of U.S. foreign policy in Italy, and particular attention was paid to the task of improving the economic conditions of the Italian Mezzogiorno. The focus on prosperity as a means to counter communism, so closely resembling the original flavor of Truman doctrine, paved the way for a number of financial initiatives in favor of Italy in mid-fifties.

Simone Selva’s book once again confirms the Italian authorities’ ability to reconcile the country’s internal targets with its commitment with partner countries and allies throughout the fifties and the sixties [see Cavalieri and Martinez Oliva (2009)]. The commitment of the Italian authorities to a system based on Atlantic cooperation remained in place in spite of occasional difficulties. This allowed the achievement of the full-fledged integration of the country into the international environment, and the realization of the Italian ?economic miracle? of the 1950s and 1960s.

Simone Selva has carried out a very helpful investigation into a particular aspect of complex Italian-American relations in the years of Europe’s postwar recovery. The huge number of documents quoted testifies that there is still plenty of material for new research on issues related to the cold-war diplomacy of the early years of Italian Republican history. Recent decades have shown a growing interest of Italian historians in that particular period under a large number of viewpoints. Selva’s book is a further contribution to better knowledge of those years and worth reading for those who want to have a closer look at a very crucial juncture of Italian economic and political history.

Reference:

Elena Cavalieri and Juan Carlos Martinez Oliva, “Between National Interest and International Cooperation: Italy and the Bretton Woods System in the 1960s” in: H. James and J.C. Martinez Oliva (editors), International Monetary Cooperation across the Atlantic, Adelmann GmbH, Frankfurt am Main, 2009.

Juan Carlos Martinez Oliva is a Principal Director in the Department for Structural Economic Analysis of the Bank of Italy. His research work includes various contributions in international economics and economic history, among which are “Too Much for One Country: The United States and the Bretton Woods System, 1958-1971″ (with Harold James) in: H. James and J.C. Martinez Oliva (editors), International Monetary Cooperation Across the Atlantic (2009) and ?The Italian Stabilization of 1947: Domestic and International Factors,? Institute of European Studies, Paper 070514, University of California, Berkeley, 2007. He can be reached at: juancarlos.martinezoliva@bancaditalia.it.

Subject(s):Military and War
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

A History of the Federal Reserve: Vol. II, 1951-85

Author(s):Meltzer, Allan H.
Reviewer(s):Wood, John

Published by EH.NET (January 2010)

Allan H. Meltzer, A History of the Federal Reserve: Vol. II, 1951-85. Chicago: University of Chicago Press, 2010. xii + 1424 pp. $150 (two books, hardcover), ISBN: 978-0-226-52001-8 and 978-0-226-51994-4.

Reviewed for EH.NET by John Wood, Department of Economics, Wake Forest University.

Allan Meltzer?s History of the Federal Reserve from its founding in 1913 to near the end of Paul Volcker?s chairmanship in 1987 is primarily an account of the thinking behind monetary policy taken from the records of the chief policymaking bodies ? the Federal Open Market Committee (FOMC) and the Federal Reserve Board ? and the papers of members of those bodies ? the seven governors of the Board and the presidents of the twelve Federal Reserve Banks. Meltzer?s searches are a great service to historians and potentially a useful service to reformers. We know what the Fed did ? open market operations and changes in the discount rate and reserve requirements ? but seldom, if ever, its reasons. This history does not give us the reasons because many people with conflicting and often unclear views participated in these committee discussions and decisions, but Meltzer has given us a better chance to understand them or, in many cases, at least to conclude that a coherent rationale for monetary policy was absent.

Meltzer (Carnegie Mellon University) has been following the Fed since he and Karl Brunner prepared a study of The Federal Reserve?s Attachment to the Free Reserves Concept for the House of Representatives Banking and Currency Committee in 1964.

Volume II (the subject of this review) begins with the Treasury-Federal Reserve Accord of March 1951 that released the Fed from its obligation to support Treasury bond prices, and thereby recognized its freedom and responsibility to conduct an ?independent? monetary policy. There is more about independence below, but it was qualified immediately by the Accord?s condition that the Fed assist Treasury financing. This qualified independence of the Treasury was given or taken away in the late-1960s and early 1970?s, regained in 1979, and thrown away in 2008 (which is after Meltzer?s History but recognized in the Epilogue).

The years of this volume can be divided into three periods according to inflationary regimes: mostly 1-2% per annum between 1951 and 1966, rising to double digits in the 1970s, and falling to less than 2% in 1985. It is notable that these periods correspond to those of more or less independence. This review is limited to domestic monetary policy, which is the main emphasis of the book, abstracting from regulation and international monetary affairs.

Meltzer?s discussion is organized around the interwoven concepts of structure, independence, and procedures. At the center of the discussion for over half the volume is William McChesney Martin, Jr., the longest-serving chairman of the Board of Governors (1951-70; three months longer than Alan Greenspan. ?The structure of the modern Federal Reserve is, in large part, Martin?s creation? (p. 43).) The Fed?s main instrument, open market operations, is decided by the FOMC, composed of the seven governors of the Board (whose chairman is also chairman of the FOMC), the president of the Federal Reserve Bank of New York (vice-chairman of the FOMC), and four of the other Bank presidents on a rotating basis. When Martin arrived, the FOMC met four times a year, the minimum mandated by the 1935 Banking Act, to decide general policy while its five-person Executive Committee (including the chairman and vice-chairman) met every two weeks to implement the full committee?s objective and instruct the manager of the open market desk. The desk is in New York, where open market operations are conducted, and the manager is a subordinate of the president of the New York Bank, who had dominated FOMC discussions. Over the next few years, Martin persuaded the FOMC to meet more often and abolish the Executive Committee, thereby reducing the influence of New York. The Board?s power was increased but so was that of the presidents outside New York. Meltzer calls attention to the value of the presidents? market view that frequently opposed the governors in Washington who are more subject to political influence (pp. 55-59, 70-75). The presidents have been allies of the chairmen who opposed inflation (Martin, Volcker, and Greenspan) and the chief dissenters of the policies of Burns, Miller, and Bernanke (pp. 507, 934, 991; Wood 2005, pp. 347-49; FOMC Minutes).

Martin also persuaded the FOMC to limit open market operations to Treasury bills, ostensibly to avoid market breaks arising from operations in long-term bonds, but which also limited New York?s discretion and was defense against political pressures to reduce long rates (pp. 59-70).

These structural changes were qualified by the Fed?s understanding of its independence, defined by Martin as ?independence within the government, not independence of the government? (p. 48). This included, following the Accord, the duty to support Treasury financing, which restricted the Fed?s ability to fight inflation by raising interest rates in the presence of government deficits.

?Procedures? refer to the process by which the ideas of FOMC members are converted into policy. They studied economic conditions with the aid of their economic staffs, met, discussed, and voted on ?directives? to the manager of the desk. Sounds simple, but the difficulties in the way of understanding policy are great. The FOMC did not possess an explicit model of the relations between its instruments and its objectives. It was certainly not the Keynesian model prevalent among economists, including the Board?s staff. Its objectives were not transparent. Were they general conditions such as prices, employment, and output as directed by the Employment Act of 1946, or money market conditions, whose relations to the former were not clarified? ?Nothing in the 1950s compares [even to] the Board?s Tenth Annual Report or the Riefler (1930) and Burgess (1927) books.? (Both were Fed advisors.) Even so, the treatment of the effects of monetary policy in the third edition of The Federal Reserve System: Purposes and Functions (Board of Governors, 1954) ?was more complete than mainstream academic views of that time. … Although the various elements [of the transmission process] were not combined in an explicit framework, the emphasis given to expectations, capital values, and relative prices … suggests an underlying sophistication that anticipated much future research? (p. 79) ? although any policy influence of the staff economists is doubtful.

The Fed?s response to the 1953-54 recession, ?its first major trial after it regained independence,? was in many ways characteristic of later episodes, even to the present. It paid more attention to general economic conditions than in the 1920s and 30s, which was in line with President Eisenhower?s reaction to Council of Economic Advisor Arthur Burns? report to the cabinet that a recession had started: Ike ?recalled the Republican party?s commitment to use the full resources of the federal government to prevent another 1929.?

The Fed?s ?performance was mixed. It recognized the slowdown promptly and voted to provide additional ease. In June, a month before the start of the recession, the FOMC decided on a policy of ?aggressively supplying reserves to the market? rather than ?exercising restraint upon inflationary developments? as agreed at the March meeting.? However, the manager?s instructions that ?reserves should be supplied in sufficient volume to prevent further tightening, but not in such volume as to ease the degree of credit constraint? leaves much to be determined because of the lack of agreed measures of ease and other terms. Long rates were falling but short rates were rising, so that the rise in free reserves (because of a decline in member bank borrowing) ?probably misled the manager on this as on other occasions? [notably 1929-33]. ?Martin criticized the desk for ?failing to purchase Treasury bills more aggressively?? and keeping the FOMC informed, but ?rejected any specific measure of ease or restraint? (pp. 107-109).

Meltzer notes in connection with the onset of recession in 1960: ?Several members referred to the decline in the money supply and wanted to end it by using quantitative targets. The manager preferred to concentrate attention on the tone and feel of the market. … There was no agreement about how to define and conduct policy. [New York] President Hayes proposed more active use of regulation Q ceiling rates to signal the direction in which interest rates should change, and Leedy (Kansas City) proposed using an interest rate target. The FOMC could not reach a consensus. … Vague instructions gave the manager considerable freedom to make decisions or perhaps respond to direction from Martin or Hayes? (pp. 208-209).

Returning to 1954, conflicts continued into the recovery phase. ?Until December 1954, seven months after the recession ended, the System continued the policy of ?actively maintaining a condition of ease in the money market?,? although ?Martin expressed concern about a speculative boom. ?[T]here were indications of an exuberance of spirit among intelligent businessmen with respect to 1955 business prospects that seemed to him to be dangerous?.? Fed ?operations remained procyclical. Money growth was higher in the expansion than in the recession? [a tendency that continued into the next century] because ?the decline in member bank borrowing and rise in free reserves [was interpreted] as evidence of ease? (pp. 112-14).

Friedman and Schwartz (1963, pp. 628-31) wrote about this period that the Fed?s new attention to money represented ?a near-revolutionary change,? although it continued to ?lean against the wind.? As in Volume I, Meltzer?s accounts and interpretations of Federal Reserve actions give us no reason to revise those of Friedman and Schwartz, but reinforce them with the System discussions behind them.

The Fed was not free of easy-money pressures from the Eisenhower administration (pp. 135-53), but those were weaker than in the 1960s, especially during the Vietnam War when the seeds of the Great Inflation were sown. Meltzer gives Martin generally low marks, especially for failing to resist the later pressures more strongly. The reasons for the start of the Great Inflation were, first, ?Martin?s leadership and beliefs? (especially his willingness to coordinate policy with the administration). ?Second, neither Martin, nor his colleagues in the FOMC, nor the staff had a valid theory of inflation or much of a theory at all (which might have bolstered their resistance?). And some of their main ideas were wrong.? Meltzer?s third reason, ?institutional arrangements [that] hindered ? timely effective action? ? coordination with the administration and ?even keel? policies ? fit within the first two (pp. 472-78).

Meltzer?s rating of Martin was shared by most economists at the time, Keynesian and monetarist, who held him largely accountable for the longest peacetime inflation (averaging 2.3% over nineteen years) in history. However, many, probably most, students of monetary policy changed their opinions of Martin after the dozen unhappy years succeeding his tenure, when inflation averaged 7.1%. Some of them credit a sophisticated, if informal, model for what they came to see as the Fed?s success in the 1950s (Romer and Romer 2002), although Meltzer finds ?no evidence to support? this claim. ?A more important factor was the Eisenhower administration?s conservative fiscal policy … The Federal Reserve was not under pressure to finance budget deficits most of this decade? (p. 48).

This reviewer shares Romer and Romer?s view, and finds even more theoretical completeness/sophistication than they do. Contrary to his frequent protestations that ?I am not an economist? (p. 476), Martin was more sophisticated than his critics. Meltzer saw no evidence of ?economic explanations of inflation? (p. 476) but his quotations of Martin are filled with incentives, expectations, and the importance of credibility. Martin anticipated Greenspan?s definition of price stability as one in which inflationary expectations are not a factor in business and consumer decisions. He was explicit about the neutrality of money (or absence of a Phillips curve) in the long-run. His bills-only policy was designed to supply money (although he refused to define it) without obstructing the efficient allocation of resources. He understood that the Fed could not permanently reduce interest rates; reducing them led to inflation. He did not talk of real rates, but he understood them. ?The history of money demonstrates the difficulties which men have to distinguish the permanent from the temporary. … [M]aking this distinction is a constant imperative? (p. 843). Above all, he understood and embraced the idea that inflation was the Fed?s responsibility (pp. 59-60, 89, 112, 126, 207, 242). He rejected the argument of Senator Paul Douglas (himself an eminent economist) that inflation was a cost-push phenomenon generated by unions and oligopolistic industries. Martin wrote to Douglas in 1959 (as Greenspan told Congress in the 1990s; Wood 2005, p. 397): ?My interest in a monetary policy directed toward a dollar of stable value is not based on the feeling that price stability is a more important national objective than either maximum sustainable growth or a high level of employment, but rather on the reasoned conclusion that the objective of price stability is an essential prerequisite for their achievement? (p. 243).

Meltzer recognizes this in places. ?Pressure from the administration to increase purchases of long-term debt remained strong [1961]. Martin cooperated within the limits set by his concern about inflation and his beliefs about how monetary policy worked. But he regarded some of [James] Tobin?s [of the Council of Economic Advisors] arguments as ?hopelessly na?ve?? (p. 323).

Martin?s statements, and perhaps more important, the Fed?s performance under his chairmanship, show an almost explicit sophisticated modern model of monetary policy subject to a survival constraint measured by the costs of resisting political pressures, which Meltzer?s reaction to Romer and Romer seems to support.

The 1970s saw improvements in Federal Reserve data, increased transparency in more frequent reports to Congress, a state-of-the-art econometric model, quantitative money and interest targets, economic forecasts in ?green? and ?blue? books, and a distinguished economist (Arthur Burns, 1970-78) as chairman to join the growing number of economists on the FOMC (pp. 582-92). Unfortunately, the result was ?the Fed?s second great mistake? that produced the Great Inflation and stagflation. The reasons given for the excessive money growth are many: mistaken forecasts, an increased natural rate of unemployment (?bad luck?? Velde 2004), unwillingness to bear the social costs of disinflation, reliance on controls, a preference for an ?even keel? approach that inhibited action, and submission to political pressures (pp. 667-81, 843-63).

Underestimations of inflations could not realistically have persisted for years on end. ?The simple explanation of why inflation persisted and rose … through the 1970s is that the Federal Reserve did not sustain actions that would end it? even though it ?was aware that its actions increased inflation.? ?That was basically political,? said advisor Stephen Axilrod (p. 1005).

The summer of 1979 saw high and rising inflation and unemployment, and falling approval ratings of President Carter. He reorganized his administration, sending Fed Chairman G. William Miller to the Treasury and replacing him with New York Fed President Paul Volcker, a known inflation hawk. On October 6, with the Fed funds rate at 11.6% and inflation at 12.5%, the Fed announced that it would no longer control interest rates, but shift to money control. Interest rates skyrocketed ? the Fed funds rate reached 19.85% in March 1980 ? and recession ensued. The Fed was supported by Carter and his successor (Ronald Reagan, elected in November 1980), and it stuck to its guns. Inflation fell below 4% in late 1982, although real interest rates remained high for several years, until the public was persuaded that low inflation was permanent.

The Fed returned to interest targeting in 1982, but as Meltzer says about 1979, the ?change in objective [a genuine commitment to reduce inflation] was more important and more durable than the change in procedures? (p. 1034). The Fed?s aggressive actions in 1979, as in the months leading up to the Accord in 1951, were made possible by the support of a public and Congress weary of inflation, along with grudging acceptances by politically weak presidents (p. 1128).

The lesson that I draw from this book is that the necessary and sufficient conditions for price stability (or low inflation) are a Fed that recognizes its effect on inflation, is committed to its control, and is supported politically.

Meltzer?s primary proposal for ?better results? in the last chapter is to follow the example of inflation-targeting countries. This ?rule-like behavior? reduces short-term policy influences and improves credibility (pp. 1234-39), although he recognizes elsewhere that procedures are less important than objectives.

In any case, as Meltzer reports in his Epilogue on the 2007-2009 crisis, the current Fed shows no sign of having learned anything. Current pressures dominate its actions, it has no credibility (no one knows what it will do), it favors controls (like Burns and the Keynesian critics of Martin), and, after the Volcker-Greenspan era restored independence, ?Chairman Bernanke has acted frequently as a financing arm of the Treasury? (pp. 1243-56).

This book, or parts of it, should be required reading for students of American monetary policy. Those who study textbook chapters or journal articles about what policy is or ought to be learn only a small part of the subject, and that part contains much misinformation. Monetary policy is a complex combination of politics, structure, and monetary theory, and the least of these may be the last. ?The most comprehensive recent statement of modern macroeconomic theory, Woodford (2003), is an elegant, erudite development of the rational expectations model that currently dominates academic thinking. … Many central bank economists use this model. No central banker uses it? (p. 14).

References:

Burgess, W. Randolph. 1927. The Reserve Banks and the Money Market. Harper & Bros.

Friedman, Milton and Anna J. Schwartz. 1963. A Monetary History of the United States, 1867-1960. Princeton University Press.

Meltzer, Allan H. 2003. A History of the Federal Reserve: Vol. I, 1913-51. University of Chicago Press.

Riefler, Winfield W. 1930. Money Rates and Money Markets in the United States. Harper & Bros.

Romer, Christina D. and David H. Romer. 2002. ?The Evolution of Economic Understanding and Postwar Stabilization Policy,? in Rethinking Stabilization Policy. Federal Reserve Bank of Kansas City.

Velde, Francois R. 2004. ?Poor Hand or Poor Play? The Rise and Fall of inflation in the U.S.,? Federal Reserve Bank of Chicago Economic Perspectives.

Wood, John H. 2005. A History of Central Banking in Great Britain and the United States. Cambridge University Press.

Woodford, Michael. 2003. Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press.

John Wood, Reynolds Professor of Economics, Wake Forest University, is author of A History of Macroeconomic Policy in the United States (Routledge 2009) and is working on a book provisionally titled The Political and Economic Genius of William McChesney Martin, Jr..

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

The Ascent of Money: A Financial History of the World

Author(s):Ferguson, Niall
Reviewer(s):Horesh, Niv

Published by EH.NET (July 2009)

Niall Ferguson, The Ascent of Money: A Financial History of the World. New York: Penguin, 2008. v + 441 pp. $30 (hardcover), ISBN: 1594201929.

Reviewed for EH.NET by Niv Horesh, Faculty of Arts and Social Sciences, University of New South Wales.

Harvard?s Niall Ferguson is perhaps best known for his magisterial history of the House of Rothschild and, more recently, his exhortation against the risks of unbridled government borrowing and nebulous stimulus packages ostensibly designed to avert what is often termed the worst global economic crisis since the Great Depression. In the Ascent of Money he harnesses his narrative skills to offer lay readership a captivating account of global monetary history from time immemorial to the twenty-first century. The book?s release coincided with an eponymous television series that has already been broadcast in much of the English-speaking world. Both the series and the book are immensely entertaining and readily accessible, but the latter arguably makes for a more convenient platform from which academics can approach Ferguson?s many insights.

The Introduction (pp. 1-17) prepares readers for what Ferguson perceptively identifies as the core stories attending the evolution of money over the last four millennia. These are many and varied, as one would expect. He is concerned with, inter alia, the ?recurrent hostility? to financial intermediaries and religious minorities associated with them in early-modern European history; the triumph of the Dutch Republic over the Hapsburg Empire, the latter?s possession of silver mines in South America notwithstanding; the spread of paper money, fiat currency and invisible means of payment in the twentieth century; right through to the possible eclipse of American global primacy in the next two decades.

Titled ?Dreams of Avarice,? Chapter One sets course by recounting how the Incas were flabbergasted by the ?insatiable lust for gold and silver? that seemed to grip the Spanish conquistadors (p. 21). It then lays out with humor and verve the well-known story of Potos?, now a fairly sleepy town in the Bolivian Andes, which once provisioned Spain with untold amounts of silver. In the same breath, the chapter goes on to offer an overview of coinage since the seventh century BC. Notably, Ferguson sees the flow of silver from the Andes to Europe as a ?resource curse? which removed the incentives for more productive economic activity, while strengthening ?rent-seeking autocrats? in seventeenth-century Spain. Contrary to criticism of Eurocentrism often leveled at him, Ferguson carefully emphasizes here the contribution other peoples have made to modern finance: ?… economic life in the Eastern world ? in the Abassid caliphate or in Song China ? was far more advanced? at least until Fibonacci introduced Indian algebraic precepts in early thirteenth-century Italy (p. 32); these were later reified by the Medicis into double-entry bookkeeping in the Florentine republic (p. 43).

By the early seventeenth-century, European financial innovation had shifted from the Italian city-states to the Low Countries, though it was still driven by the exigencies of costly and recurrent warfare and ambitions of monopolizing trade with the East (p. 48-49). This spurt of European financial innovation had actually long ?preceded the industrial revolution,? a complex but much better-studied spate of events (p. 52). The financial and industrial revolutions then converged with the spread of joint-stock companies and proto-types of central banks in the latter half of the nineteenth century.

Subsequent chapters flesh out Ferguson?s analysis. Titled ?Of Human Bondage,? Chapter Two (pp. 65-118) explores, for example, the distinctness of the European economic trajectory, beginning with how the majority of Florentine citizenry partook of financing the Republic?s debt in the fourteenth century. In the seventeenth-century, the United Provinces of the Netherlands combined the borrowing techniques of an Italian city-state ?… with the scale of a nation-state.? The Dutch were able to finance their wars by pitching Amsterdam ?as the market for a whole range of new securities? (p. 75). The eighteenth and nineteenth centuries are characterized by Anglo-French friction, but here Ferguson sees a yawning gap between protestant Britain where public debt defaults became rarer and public debt itself increased many-fold and the powers of landed aristocracy diminished while a professional civil service became more influential ? and Catholic France where public offices were often sold to raise money, tax collection was farmed out and government bond issues lost credibility. Notably, the incremental spread of, and popular faith in, British government bonds allowed Whitehall to borrow overseas as well, much to the detriment of Napoleon?s armies. Ferguson similarly believes that (p. 97) the reluctance of European investors to buy into Confederate bonds during the American Civil War doomed the South?s endeavors. This historic lesson is invoked toward the end of the chapter when discussing, in passing, the Bush Administration?s large budget deficits.

Chapter Three (?Blowing Bubbles,? pp. 119-178) zooms in on arguably the most significant economic entity of our time: the joint-stock company. Ferguson aptly dubs it ?perhaps the single greatest Dutch invention of all.? Here, he elides earlier ? though fairly short-lived ? occurrences of comparable entities both in Europe and in pre-modern Asia. But there can be little doubt that the establishment of the Dutch VOC (1602) marked a veritable turning point, not least because it underlay the growth of the world?s first bourse. Indeed, the establishment of royally-chartered companies principally aimed at trade with Asia seems to have underpinned the rise of stock exchanges and public debt in Europe?s Northeast as a whole. The rise of public debt and publicly-listed equity was beset by frequent speculative bubbles, from which emerged a more sophisticated British credit economy.

Chapter Four (?The Return of Risk,? pp. 176-229) takes up a swag of issues from the impact of Hurricane Katrina on the U.S. psyche, through how the Great Fire of London (1666) created demand for insurance policies, to Japan?s welfare system and Milton Friedman?s mentorship of Latin American finance ministers. By comparison, Chapter Five (?Safe as Houses,? pp. 230-82) is more singularly framed around what Ferguson perceptively calls ?the passion for property? in the home-owning democracies of Anglo-Saxondom. He aptly reminds us (p. 233, 241) that as recently as the 1930s, little more than two-fifths of U.S. households owned their home compared with over 65% today, and traces back this staggering social transformation to the New Deal and the Civil Rights Movement. The expansion of home ownership was facilitated in the late 1930s by then-novel institutions like Fannie Mae, which are at the heart of the recent sub-prime meltdown. In that sense, but not in that sense only, Ferguson does a wonderful job of explaining well beyond clich?s the linkages between the Great Depression to today?s global finance crisis. He then points the finger (p. 269) at rating agencies such as Moody?s and Standard & Poor?s for obfuscating the precariousness of collateralized sub-prime mortgages, which financial ?alchemists? turned into tradable debt obligations.

In essence, the last chapter (?From Empire to Chimerica,? pp. 283-340) is dedicated to China?s resurgence in the twenty-first century, and subtly considers whether this might ultimately result in a catastrophic Sino-American military confrontation. From a China specialist?s perspective, it is perhaps a pity that a scholar of Ferguson?s wisdom and insight stops short of opining whether we are witnessing at present the rise of a new form of capitalism with Chinese characteristics (e.g. capitalism without democracy) or simply gradual Chinese adaptation to Western market norms. Academic pedants might also quip that Ferguson draws heavily on Kenneth Pomeranz?s path-breaking book, The Great Divergence, when writing that living standards in Europe and China were on par as late as the eighteenth-century (p. 285). This might have called for a more detailed discussion, given that earlier parts of the book allude to the Italian city-states (fourteenth century) as the progenitors of Europe?s financial revolution. Similarly, Ferguson?s assertion that the ?… ease with which the [Chinese] Empire could finance its deficits by printing money discouraged the emergence of European-style capital markets? (p. 286) might sound a little facile to specialists, not least because note issuance was all but abandoned by late-Imperial dynasties.

However, these are minor criticisms that do not detract in any way from the wonderful feat of storytelling which Ferguson has again pulled off. This book makes for a bold and original attempt to provide a comprehensive history of what, some say, makes the world go around. It is likely to turn into a best-selling classic, and a must-read item in countless undergraduate courses.

Niv Horesh is Lecturer in Chinese Studies at the School of Languages and Linguistics, University of New South Wales, Sydney, Australia. His first book, Shanghai’s Bund and Beyond (Yale University Press, 2009), is the first comparative study in English of foreign banks and banknote issuance in pre-war China. His second book (forthcoming in 2010), is a comprehensive socio-economic account of Shanghai?s rise to prominence (1842-2010).

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):General or Comparative