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A Monetary History of the United States, 1867-1960

Author(s):Friedman, Milton
Schwartz, Anna Jacobson
Reviewer(s):Rockoff, Hugh

Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press (for the National Bureau of Economic Research), 1963. xxiv + 860 pp.

Review Essay by Hugh Rockoff, Department of Economics, Rutgers University.

On Monetarist Economics and the Economics of a Monetary History

A Monetary History of the United States, 1867-1960 by Milton Friedman and Anna J. Schwartz is surely one of the most important books in economic history, and indeed, in all of economics, written in the twentieth century. It has had a profound impact on the way economists think about monetary theory and policy. And it is still one of the most frequently cited books in economics. To some extent, it has suffered the fate of most classics: it is often cited, but seldom read. In the course of preparing this review essay, I have been repeatedly struck by the difference between what people think Friedman and Schwartz say, and what they actually say. Below I try to set out some of the reasons for the enormous impact of A Monetary History, and some of the reasons why there is such a large gap between (to subvert the title of Axel Leijonhufvud’s fine book on Keynes) “Monetarist Economics and the Economics of A Monetary History.”

The main point of A Monetary History is that “money matters: ” The quantity of money is an independent and controllable force that strongly influences the economy. This view, which is now accepted, at least in some measure, by most economists is very different from the view that prevailed when A Monetary History was published. At that time the professional consensus considered monetary policy ineffective. The job of central bankers was to keep interest rates as low as possible as long as unemployment was a problem. Following this policy would mean, however, only that investment might be bit higher than it would otherwise be and unemployment a bit lower. And although inflation might be countered with higher interest rates, the presumption was that monetary policy would have little impact. The rate of unemployment and the behavior of costs, particularly wage rates, largely determined the rate of inflation. Controlling labor unions was important for controlling inflation; monetary policy was at best a secondary consideration. The main tool for keeping the economy on an even keel was fiscal policy. It was a development in the real world, of course, the growing problem of inflation in the 1960s and 1970s, that was the main factor overturning the Keynesian orthodoxy. But A Monetary History was a powerful voice for restoring to monetary policy some of its former prestige. How did Friedman and Schwartz persuade the majority of the profession that money matters? The basic methodology of A Monetary History is to highlight “natural experiments,” occasions when the stock of money changed for reasons unrelated to the current state of the economy, so that we can then attribute the corresponding changes in the economy to changes in money.

Friedman and Schwartz offer an impressive array of case studies. To convey a sense of their approach, let me cite three of their most famous examples: (1) the contrast between 1879-1896 and 1896-1914 in terms of the behavior of the price level; (2) the contrast between World War I and World War II in terms of the behavior of the price level; and (3) the impact of restrictive actions taken by the Federal Reserve system in 1937.

(1) Prices (the NNP deflator) fell -0.93 percent per year between 1879, when the United States returned to the gold standard, and 1896, when the deflation came to an end, and then rose 2.08 percent per year between 1897 and 1914. The stock of money behaved in a similar way. Money per unit of output (money divided by real NNP) rose 2.99 percent per year from 1879 to 1896, and then rose 4.23 percent per year between 1897 and 1914. The acceleration in money growth was the result of the flow of new gold, much of it from the mines of South Africa. (High-powered money rose 3.49 percent per year between 1879 and 1896 and 4.83 percent per year between 1897 and 1914.) To be sure, the intense searches for new gold mines and new ways of refining gold ore that were rewarded when the mines of the Rand became productive and the cyanide process for refining it had been perfected, had been encouraged by rising real price of gold before 1896. But these events long preceded the post-1896 inflation. The correlation between rising money supplies and rising prices after 1896, Friedman and Schwartz argue, must be chance or must reflect a causal connection running from money to prices.

(2) Surprisingly, prices rose more in World War I than in World War II, and by about the same magnitude in World War I as in, to go outside the strict boundaries of A Monetary History, the Civil War. Yet measured in almost any conventional way (length of war, casualties, government deficits, etc.) World War I was a much smaller war for the United States than the Civil War or World War II. The monetary facts, however, are roughly in line with the inflation facts. From 1914 to 1920 money per unit of output rose 8.45 percent per year while the price level rose 10.84 percent per year. From 1939 to 1948 money per unit of output rose 7.90 percent per year while the price level rose 6.65 percent per year.

As these figures indicate, money cannot explain everything. The difference in inflation in the two wars exceeds the difference in the rate of growth of money per unit of output. Nevertheless, the striking fact is that the rate of inflation and the rate of growth of money per unit of output were broadly similar in the two wars. One would have expected, based on the degree of mobilization, far more money growth and inflation in World War II.

Part of the reason that the United States could “get away with” slower monetary growth in World War II was that the deposit-reserve ratio of the banking system was lower during World War II. The government, therefore, received a larger share of the revenues produced by increases in the stock of money. High-powered money, the main channel through which the government acquires seigniorage, rose 10.78 percent per year in World War II compared with 12.25 percent per year in World War I. Friedman and Schwartz conclude that the correlation between prices and money per unit of output suggests causation running from money to prices, rather than the common effect of some third factor, such as the intensity of the mobilization.

(3) One of the most famous and most hotly debated examples offered by Friedman and Schwartz is the 1937-1938 recession. In early 1937 the Federal Reserve doubled the required reserve ratios of the banking system with the purpose of immobilizing reserves and preventing future inflation. After some months, this action was followed by declines in the stock of money and real output. Money fell -0.37 percent between 1937 and 1938 while prices fell -0.50 percent, and real output fell -8.23 percent. High-powered money, responding to other forces, rose by 7.95 percent during the same year. Friedman and Schwartz conclude that the correlation between the decline in the stock of money and the decline in economic activity must have resulted from chance or from causation running from money to economic activity.

These case studies, I should note, arose in three different institutional regimes. In case (1) the United States was on the gold standard, and there was no central bank. In case (2) the Federal Reserve was constrained by the need to finance large wartime government deficits, and had to follow the Treasury’s lead. In case (3) the Federal Reserve was relatively independent, and could follow its own judgments about appropriate monetary policy. Drawing examples from different institutional environments strengthens the argument. In each case there is a rough correlation between monetary changes and changes in the economy, yet the factors determining the supply of money are very different. This suggests that the proposition “money matters,” represents a fundamental economic relationship, and is not the adventitious result of some particular set of institutional arrangements.

None of these “natural experiments” or the many others cited in A Monetary History, was conducted in a laboratory. Many variables were changing, and it is always possible, although not always easy, to construct an alternative explanation based on some other key factor. An extensive literature, for example, has grown up elaborating and contesting the Friedman-Schwartz interpretation of case (3), and attributing the 1937 downturn to other factors, such as fiscal policy. But for someone seeking to overturn A Monetary History, contesting one of these explanations is only the beginning. What gives weight to Friedman and Schwartz’s argument is the multiplicity of examples. So far, I would argue, none of Friedman and Schwartz’s critics has been able to forge an alternative explanation – whether based on fiscal policy, or labor union militancy, or technological change, or whatever – that fits all of the examples explored in A Monetary History. Indeed, to my way of thinking, the major advances since A Monetary History, have been the attempts by Brunner and Meltzer, Bernanke, and others to enrich the picture of how disturbances in the financial sector, and in particular the banking sector, affect the rest of the economy, rather than attempts to explain macroeconomic events from totally different perspectives.

Perhaps the greatest mystery is not that the Friedman-Schwartz methodology was persuasive, but rather that despite the enormous impact of A Monetary History, few economists use its methodology. Typically, when an economist attempts to persuade other economists, the first step is to feed the numbers through the computer and in the process strip away the historical circumstances that adhere to them.

Friedman and Schwartz’s interpretation of the Great Depression is both figuratively and literally at the heart of their book. The detailed discussion occupies about 30 percent of the total, and the episode is referred to by way of contrast in discussions of other episodes. Princeton University Press later issued this section as a separate volume, The Great Contraction.

Their point, as most college students of economics now know (or should know), is that the Great Depression could have been greatly ameliorated by better monetary policy. Today, only a few dyed-in-the-wool Keynesians reject any causal role for monetary policy, although many economic historians would place the major blame for the Depression on other factors, and relegate bad monetary policy to a secondary role. The Friedman-Schwartz interpretation of the Depression was crucial, moreover, to the revival of confidence in market-based economics. The Great Depression, and the way it was interpreted by Keynesian economists, convinced a generation of American intellectuals that only socialism (or near-socialism) could save the American economy from periodic economic meltdowns. If Great Depressions could be prevented through timely actions by the monetary authority (or by a monetary rule), as Friedman and Schwartz contended, then the case for market economies was measurably stronger.

It has been objected that Friedman and Schwartz don’t prove that monetary forces caused the Great Depression. They merely describe the Great Depression in great detail as if monetary forces were the causal factor. This objection is true, but not as decisive as it might seem at first glance. From the point of view of proving the importance of money, the Depression is merely another period, although a particularly revealing one, in which to search for natural experiments. It provides additional evidence, such as the case of the doubling of required reserve ratios in 1937 discussed above, and other episodes, but this one short period by itself cannot prove anything.

Friedman and Schwartz are doctors writing up the results of a detailed clinical examination of a patient who entered the hospital on the verge of death. Their observation that the patient was suffering from a bacterial infection is not by itself proof that the infection caused the patient’s illness. The fact that other patients with the same symptoms and the same infection have been seen at other hospitals in other places and at other times is what makes their argument persuasive. And it is the evidence taken as a whole that makes the prescription offered by Drs. Friedman and Schwartz, that the patient should have been given a strong dose of antibiotics (high-powered money), appear so sensible.

Perhaps the most misunderstood aspect of A Monetary History is the way that Friedman and Schwartz treat Nonmonetary factors. Their approach is to assume a “real” business cycle, which is then pushed a pulled by monetary factors. I use the term “real” with some trepidation. What Friedman and Schwartz have in mind is the sort of cycle described by Wesley C. Mitchell, Arthur Burns, and other scholars at the National Bureau of Economic Research in work that preceded A Monetary History, rather than what now goes by the name “real business cycle.” Yet there is a family resemblance worth stressing. Friedman and Schwartz, unfortunately for us, say little about the sources of this cycle, although at times they make some interesting observations about the tendency of good harvests in the United States to occur at the same time as bad harvests in Europe, and a few other factors. Nevertheless, it is clear that various supply-side shocks including technological shocks that now appear important to macroeconomists would fit easily into the Nonmonetary cycle that forms the backdrop for Friedman and Schwartz’s analysis.

The real cycles in which Friedman and Schwartz impound other factors are often forgotten when economic historians recount “monetarist” interpretations of historical episodes. I have heard economic historians claim that Friedman and Schwartz “say” that the recession of 1937 was caused by the doubling of reserve requirements in 1937. In fact, they write the following.

“Consideration of the effects of monetary policy [the increase in required reserve ratios] on the stock of money certainly strengthens the case for attributing an important role to monetary changes as a factor that significantly intensified the severity of the decline and also probably caused it to occur earlier than otherwise” (p. 544).

Similarly, I have heard economic historians claim that Friedman and Schwartz say that money caused the Great Depression, or that the stock market crash did not cause the Great Depression. In fact their statements on both points are more circumspect, and assume a Nonmonetary contraction of some magnitude. Of the stock-market crash Friedman and Schwartz write that “… its [the stock market crash’s] occurrence must have helped to deepen the contraction in economic activity. It changed the atmosphere within which businessmen and others were making their plans, and spread uncertainty where dazzling hopes of a new era had prevailed” (p. 306).

The crucial turning point in the Depression, according to Friedman and Schwartz, was late 1930 or early 1931, when they thought the contraction might have come to an end in the absence of the banking crises. But they acknowledge that even so, the contraction of the early 1930s “would have ranked as one of the more severe contractions on record” (p. 306).

In their counterfactual discussion of the effects of an open market purchase of $1 billion, they conclude that if undertaken between January 1930 and October 1930 the open market purchase would have “reduced the magnitude of any crisis that did occur and hence the magnitude of its aftereffects” (p.393). If undertaken between September 1931 and January 1932, the open market purchase would have produced a change in the monetary tide and as a result “the economic situation could hardly have deteriorated so rapidly and sharply as it did” (p. 399).

In discussing the banking panic of 1907, to give an earlier example, Friedman and Schwartz conclude that “There can be little doubt that the banking panic served to intensify and deepen the contraction: its occurrence coincides with a notable change in both the statistical indicators and the qualitative comment. If it had been completely avoided, the contraction would almost surely have been milder” (p. 163).

In short, Friedman and Schwartz tried to show that good monetary policy – best of all, as Friedman argued elsewhere, a monetary rule – would make the world a better place; they never promised a rose garden.

Although the central thesis is “money matters,” Friedman and Schwartz follow a large number of closely related threads. These range from the determinants of the greenback price of gold after the Civil War, to the relative effects of mild inflation and mild deflation on long-term economic growth, to the effects of deposit insurance on the stability of the banking system, and so on. Their discussions of these episodes are invariably intelligent, and often at variance with what was the conventional wisdom at the time they wrote. Not only do these discussions help us to understand these particular episodes; they also increase our confidence in their central thesis. They convince us that we are reading economic historians of outstanding ability who have explored every nook and cranny of American monetary history.

As most readers of A Monetary History recognize the book also succeeds in part because of how well it is written. Friedman and Schwartz employ a style that might be called high-NBER. It is written for the intelligent lay person. No special knowledge of statistics is required to read it, and no equations appear in the text, although there is an appendix on the determinants of the stock of money that uses equations. The quantity theory of money never appears in algebraic form. The sentences flow in magisterial fashion, and yet one is aware that the authors have thought about what they are discussing and are eager to make sure that the reader understands. In many ways their book, with its myriad of examples and its telling analogies, is the most similar, among all the classics of economics, to The Wealth of Nations. One can’t help but feel that the former lecturer on rhetoric would have approved of Friedman and Schwartz’s polished yet straightforward style.

For all these reasons, my choice for the most significant book in the field of economic history in the twentieth century is A Monetary History of the United States, 1867-1960 by Milton Friedman and Anna J. Schwartz.

Annotated References:

There is a large and growing literature on A Monetary History. Here I will mention just a few sources that I have found particularly useful.

Bernanke, Ben S., Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression. American Economic Review. Vol. 73 (3): 257-76, June 1983.

Bordo, Michael D., editor, Money, History, and International Finance: Essays in Honor of Anna J. Schwartz. National Bureau of Economic Research Conference Report series. Chicago: University of Chicago Press, 1989. (This volume, a Festschrift for Anna J. Schwartz, contains a number of relevant essays, including one by Bordo that focuses explicitly on the contributions of A Monetary History.)

Brunner, Karl and Allan H. Meltzer, “Money and Credit in the Monetary Transmission Process.” American Economic Review. Vol. 78 (2): 446-51, May 1988.

Hammond, J. Daniel, Theory and Measurement: Causality Issues in Milton Friedman’s Monetary Economics. Cambridge: Cambridge University Press. 1996. (Hammond discusses all of the Friedman-Schwartz work on money focussing on methodological issues and the large volume of criticism their work generated).

Leijonhufvud, Axel, On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory. New York: Oxford University Press, 1968.

Lucas, Robert E, Jr., “Review of Milton Friedman and Anna J. Schwartz’s A Monetary History of the United States, 1867-1960.” Journal of Monetary Economics. Vol. 34 (1): 5-16, August 1994. (Lucas lays out what he considers the most important contributions of A Monetary History.)

Miron, Jeffrey A., “Empirical Methodology in Macroeconomics: Explaining the Success of Friedman and Schwartz’s A Monetary History of the United States, 1867-1960. Journal of Monetary Economics. Vol. 34 (1): 17-25, August 1994. (Miron explains why members of the younger generation of macroeconomists, even those not trained at Chicago, found A Monetary History so persuasive.)

Steindl, Frank G., Monetary Interpretations of the Great Depression. Ann Arbor: University of Michigan Press, 1995. (Steindl provides a useful overview, which compares and contrasts the Friedman-Schwartz interpretation of the Great Depression with the interpretations offered by other monetary historians.)

Temin, Peter, Did Monetary Forces Cause the Great Depression? New York: Norton, 1976 and Temin, Peter, Lessons from the Great Depression. Cambridge, MA: MIT Press, 1989. (Temin presents a detailed and extremely skeptical reading of the Friedman-Schwartz interpretation of the Great Depression.)

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19

Author(s):Bernanke, Ben S.
Reviewer(s):Ebenstein, Lanny

Published by EH.Net (July 2022).

Ben S. Bernanke. 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19. New York: W. W. Norton & Company, 2022. xxvi + 480 pp. $35.00 (hardcover), ISBN 978-1324020462.

Reviewed for EH.Net by Lanny Ebenstein, Department of Economics, University of California, Santa Barbara.


Ben Bernanke’s 21st Century Monetary Policy is sure to become a classic work on the history of the Federal Reserve System in the postwar era to the COVID-19 recession. It will be required reading for all future students of and officials at the Fed. Bernanke’s perspective is shaped by two fundamental virtues: his academic work as a scholar of the Fed and of monetary policy and his practical work as a member of the Federal Reserve’s Board of Governors and, from 2006 to 2014, its Chair. Both virtues are displayed in this excellent book.

Bernanke’s description of Fed policymaking will be enlightening to most. There has not really been a work on the history of the Fed that has captured the public or academic minds since Milton Friedman and Anna Schwartz’s A Monetary History of the United States, 1867-1960 (1963). Friedman’s mantra, “Inflation is always and everywhere a monetary phenomenon,” became implanted in popular consciousness, and his monetary interpretation of the Great Depression–that the primary source of the depression was a monetary collapse initiated by the Federal Reserve System or which, in any event, the Fed could largely have forestalled–became the conventional scholarly wisdom.

On the basis of favorable comments Bernanke made at Friedman’s 90th birthday party in 2002–“I would like to say to Milton …: Regarding the Great Depression. You’re right, we [the Fed] did it. We’re very sorry. But thanks to you, we won’t do it again” (p. xvii)–it is sometimes mistakenly thought that Bernanke is basically a Friedmanite monetarist. As he makes clear in 21st Century Monetary Policy, however, Bernanke is fundamentally a Keynesian in analytic apparatus and perspective: “So-called Keynesian economics, in a modernized form, remains the central paradigm at the Fed and other central banks” (p. vii). Friedman’s mantra is replaced by Bernanke’s dictum: “Although growth in the money supply and inflation bear some relation in the long run, at least in certain circumstances, in the short run the connection can be unstable and difficult to predict” (p. 35). For Bernanke–as with his predecessors and successors at the Fed–monetary policy, except in unusual circumstances, is basically interest rate policy.

The early chapters of 21st Century Monetary Policy on the Fed from the 1960s through the 1990s have many nuggets of information and provide great insight into theoretical analysis at the Fed to this day. William McChesney Martin, Chair of the Federal Reserve from 1951 to 1970, famously said that the Fed’s job is to “take away the punch bowl just as the party gets going,” that is, to raise interest rates in order to stem inflation as economic growth increases. This is the policy to which Martin and his successors have largely adhered. Bernanke’s outlook is that inflation is usually conditioned by “changes in economywide demand for goods and services [emphasis in original]” and “shocks to supply rather than demand” (p. 12), with significant emphasis on “expectations”: “Debates about the determinants of inflation expectations and about how central banks can affect those expectations have been central to the analysis and practice of monetary policy since at least the 1960s, if not earlier” (p. 13). Friedman’s focus on money supply is hardly a factor in the analysis.

The Fed Chair to whom Bernanke gives the most praise is Paul Volcker, who served from 1979 to 1987. Bernanke credits Volcker for having the wisdom and tenacity to initiate and maintain the high interest rates between 1979 and 1982, which, in the form of the federal funds rate, reached 20 percent in 1980–the highest ever, before or since. As a result of Volcker’s “war on inflation” (p. 36), as Bernanke and others have called it, inflation “dropped from about 13 percent in 1979 and 1980 to about 4 percent in 1982 … Thus, in only a few years, the Fed largely reversed the increase in inflation built up over a decade and a half” (p. 36).

Bernanke’s appraisal of Alan Greenspan’s long span as Fed Chair from 1987 to 2006 is somewhat more, at least to this reviewer, mixed. Though he gives Greenspan high marks for managing the domestic and, to a significant extent, world economies for most of his tenure in office, it cannot be gainsaid that the roots of the Global Financial Crisis and Great Recession emerged during Greenspan’s chairmanship. Bernanke sagely observes: “The extended rise in the Fed’s [interest] policy rate likely contributed to the decline in housing prices that began in the summer of 2006” (p. 106).

With respect to his own transformative chairmanship, Bernanke recounts the aggressive and unprecedented actions the Fed took to diminish the Global Financial Crisis and Great Recession. He persuasively argues these actions were necessary to prevent the meltdown of the American and world financial systems and thereby economies. About the only criticisms I would offer here of his presentation is that he does not adequately incorporate into his analysis the impact of nonfinancial factors, such as increasing energy prices and demographic changes, on economic activity, but this is perhaps not an entirely fair cavil to make against a work whose title states it concerns monetary policy.

21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19 extends to 2021 and includes thinking on the future of Federal Reserve and its policy, but it is probably best to defer discussion of these subjects as a result of their proximity to the present. Bernanke believes that a historical approach is the best way to understand “how the Fed’s tools, strategies, and communication have evolved to where they are today” (p. xi). All interested in the history of the Federal Reserve, Federal Reserve policy, and the theory underlying Fed policy will want to read this book.


Lanny Ebenstein is a Lecturer in the Department of Economics at the University of California, Santa Barbara. He is the author of ten books and many articles on economic and political history, history of economic thought, and public policy.

Copyright (c) 2022 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 ( Published by EH.Net (July 2022). All EH.Net reviews are archived at

Subject(s):Economic Planning and Policy
Financial Markets, Financial Institutions, and Monetary History
Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII
21st Century

Milton Friedman & Economic Debate in the United States: 1932-1972

Author(s):Nelson, Edward
Reviewer(s):Sumner, Scott

Published by EH.Net (January 2022).

Edward Nelson. Milton Friedman & Economic Debate in the United States: 1932-1972. Volumes 1 and 2. Chicago: University of Chicago Press, 2020. xx + 737 pp. and xiv + 587 pp. $50 each (hardcover), ISBN: 978-0226683775 and 978-0226684895.

Reviewed for EH.Net by Scott Sumner, Professor Emeritus of Economics, Bentley College.


Milton Friedman was at the center of economic policy debates in the US during much of the 20th century. Edward Nelson, an economist at the Federal Reserve System, has now completed the first two volumes of an intellectual biography of Friedman’s career, focusing on his policy views during the period from 1932 to 1972. It is work of outstanding quality.

While much has been written on Friedman’s career, no previous biographer has Nelson’s deep and sophisticated understanding of monetary economics. This makes his new book especially useful for those with a serious interest in policy issues, especially macro policy. While Friedman had policy views on a wide variety of issues, including the military draft and education voucher programs, Nelson focuses his attention on the areas where Friedman’s influence was greatest–the field of macroeconomics.

The timing of this book is particularly fortuitous. Friedman began his career during a period when left-wing economics was ascendant. During the middle of his career, the economics profession in the US and other developed countries shifted to the right–the so-called neoliberal revolution.  Indeed, Friedman played a major role in that intellectual shift, probably more than any other single economist.

After Friedman’s death in 2006, however, the profession began moving back again toward the left, and Friedman’s reputation declined somewhat. Some younger economists may be unaware of the extent to which ideas they take for granted were highly controversial when first proposed by Friedman.

Today, Friedman is often associated with monetarism, particularly the idea that the Fed should stabilize the growth rate of the money supply, perhaps at 3% or 4% per year. After the early 1980s, however, money supply targeting fell out of favor, mostly due to perceptions that velocity was too unstable. This led many to erroneously conclude that monetarism was discredited.

Nelson shows that money supply targeting was not Friedman’s most important contribution to monetary economics. Instead, Friedman’s critique of Keynesian economics is where he had an enduring influence. Indeed, that critique eventually led to a major evolution in Keynesian thought, toward an approach often dubbed “New Keynesianism”, which combined older Keynesian ideas with monetarist insights developed by Friedman and others.

While the two-volume set covers many topics, here I’ll focus on four key areas where Nelson shows that Friedman dissented from Keynesian orthodoxy during the 1950s and 1960s. Consider these mainstream Keynesian ideas from the 1960s:

1. High nominal interest rates indicate tight money, and vice versa.

2. Fiscal policy is the most effective tool for managing the business cycle.

3. The Phillips Curve demonstrates that we can permanently reduce unemployment by accepting higher inflation.

4. Wage and price controls are often a useful way to control inflation, whereas monetary policy does more harm than good.

Nelson shows that at various times during the 1960s and early 1970s, all four of these ideas were widely accepted by many prominent Keynesian economists. In all four cases, Friedman argued against the conventional wisdom, and in all four cases subsequent events vindicated Friedman’s views. Let’s take them one at a time.

While Irving Fisher’s analysis of nominal and real interest rates was known to most economists, even as late as the 1960s the importance of this distinction was often overlooked. Keynes himself viewed the distinction as a mere theoretical curiosity, except during times of hyperinflation. Thus when Friedman argued that interest rates were rising during the late 1960s due to the Fisher effect, prominent Keynesians such as James Tobin rejected his claim.

By the late 1970s, however, evidence for the importance of the Fisher effect from both time series and cross-sectional data had become overwhelming. Eventually, this insight was incorporated into monetary policymaking, most famously in various versions of the Taylor Rule.

During the second half of the 1960s, many Keynesian economists did understand that the economy was overheating and that inflation was a threat. They advocated fiscal austerity to reduce aggregate demand, and President Johnson responded with a tax increase in 1968, which pushed the Federal budget into surplus. Contrary to popular opinion, the peak years of the Vietnam War were not associated with highly expansionary fiscal policy–the national debt was falling rapidly as a share of GDP.

Friedman argued that the real problem was rapid growth in the money supply, and that fiscal austerity would not reduce inflation. As the rate of inflation continued to accelerate in 1969 and 1970, Friedman’s warning proved to be accurate.  Monetary policy dominates fiscal policy.

During the 1960s, many Keynesian economists became convinced that the Phillips Curve provided a reliable tool for reducing unemployment. In their view, a bit less unemployment could be purchased at the cost of slightly higher inflation.  Friedman argued that this relationship was illusory. Only unanticipated inflation reduced unemployment. Once workers began to anticipate a higher rate of inflation, they would demand compensating pay increases and unemployment would return back to its natural rate.

By the 1970s, it was clear that Friedman was correct. Unemployment was higher than during the 1960s, despite inflation also being much higher. The 1980s would provide further evidence in support of Friedman’s Natural Rate Hypothesis, as after inflation was brought down to much lower levels, the increase in unemployment proved to be only temporary.

When the economy experienced stagflation during the early 1970s, many Keynesians became discouraged by the poor performance of Phillips Curve models. Theories of “cost-push inflation” replaced standard Keynesian demand-pull explanations. This led many prominent Keynesians to support wage/price controls. Friedman warned that artificially suppressing inflation would not solve the problem, and that the only enduring solution was a slower rate of growth in the money supply.

By the mid-1970s it was clear that the wage/price controls had not worked, as inflation reached even higher levels than in the late 1960s. Inflation would not be brought down to a low level until Paul Volcker adopted a contractionary monetary policy during the early 1980s, slowing the growth rate of the money supply.

All four of the insights discussed here have one thing in common; they reflect Friedman’s understanding of the importance of changes in the growth rate of the money supply, as distinct from one-time changes in levels. In 1975, Friedman said:

“Double-digit inflation and double-digit interest rates, not the elegance of theoretical reasoning or the overwhelming persuasiveness of serried masses of statistics massaged through modern computers, explain the rediscovery of money.”

And in the same year:

“As I see it, we have advanced beyond [the theory of money proposed in the eighteenth century by David] Hume in two respects only; first, we now have a more secure grasp of the quantitative magnitudes involved; second, we have gone one derivative beyond Hume.”

Persistent increases in the growth rate of the money supply made the Fisher effect much more important than during the gold standard era. Persistent changes in inflation caused the Phillips Curve to break down. And the inflationary forces unleashed by rapid money growth were too powerful to restrain with fiscal austerity or wage/price controls.

And as Nelson demonstrates, it was Friedman himself who pushed the profession “one derivative beyond Hume.”

In my view, graduate programs in macroeconomics now put too much weight on technique and too little emphasis on the history of macroeconomic ideas and policy. We’d all be better off if graduate students in macroeconomics read Nelson’s authoritative study of the development of Milton Friedman’s views on economic policy.


Scott Sumner is Professor Emeritus of Economics at Bentley College, as well as a research associate in the Program on Monetary Policy at the Mercatus Center at George Mason University and a Research Fellow at the Independent Institute. His most recent book is The Money Illusion: Market Monetarism, the Great Recession, and the Future of Monetary Policy (University of Chicago Press, 2021). He blogs at

Copyright (c) 2022 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 ( Published by EH.Net (January 2022). All EH.Net reviews are archived at

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
History of Economic Thought; Methodology
Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII

Monetary War and Peace: London, Washington, Paris, and the Tripartite Agreement of 1936

Author(s):Harris, Max
Reviewer(s):Otte, T.G.

Published by EH.Net (November 2021).

Author: Max Harris

Reviewer: T.G. Otte

Max Harris. Monetary War and Peace: London, Washington, Paris, and the Tripartite Agreement of 1936. Cambridge: Cambridge University Press, 2021. Xiii + 279 pp. £85 (hardcover), ISBN 978-1-108-48495-4.

Reviewed for EH.Net by T.G. Otte, Professor of Diplomatic History, University of East Anglia.


The history of interwar international finance presents something of a paradox. In many respects, it is a well-known story; and yet, it is not known well enough. Max Harris’ study of the Tripartite Agreement of 26 September 1936, which provided for informal consultation and cooperation on managing their respective currencies between the governments of between France, Great Britain and the United States and their central banks, throws this peculiarity into sharper relief.

In his seminal study The World in Depression, 1929-1939 (1973), Charles Kindleberger called the agreement a “milestone,” though he immediately qualified this statement. Above all, he gave no indication along which particular road this way-marker was to be found, and in which direction it might have pointed. Harris offers an answer of sorts. Monetary War and Peace is an exercise in macroeconomic history. Its chief concern is with the efforts, conceptual and practical, of central bankers and finance ministry officials to grapple with the financial and broader politico-strategic consequences of the collapse of international finances after the First World War and then the global financial crisis of 1929-31.

The inner workings of the international economy during the “golden age” before 1914, of course, are well known and well understood, as are the attempts by various Western governments to adjust their economic and financial arrangements to the altered landscape of the post-war years. Harris offers a succinct and sure-footed account of this and of the decision of Britain’s National Government, an emergency coalition formed to deal with the financial crisis, to go “off” the gold standard. Thereafter, for the first time in almost two hundred years, there was no precedent to guide policymaking. Senior officials at the Bank of England and the Treasury had to feel their way forward and refine what instruments were to hand and proved useful. In Britain’s case the Exchange Equalisation Account, established in 1932, turned out to be the chief monetary innovation. Endowed with sufficient reserves, it allowed the British authorities to intervene on the currency exchange to prop up Sterling. The Americans followed suit, two years later, with the Exchange Stabilization Fund. The EEA and ESF were the principal instruments for currency intervention. Their actions, in turn, as Harris shows with admirable lucidity and fine sense for relevant detail, were the source of considerable transatlantic friction in the mid-1930s.

Harris’ treatment is enriched by vignettes of key central bank and treasury personnel, primarily in Washington and London. In his telling, Bank of England economists such as Harry Siepmann and George Bolton or David Whaley (né Sigismund Schloss) emerge as perhaps unlikely heroes of this story. So does Henry Morgenthau, the slow-speaking, apple-farmer-turned-Treasury-Secretary and Roosevelt confidante. These men had a shrewd appreciation of the disruptive effect of competitive currency interventions and the mutual suspicions they sowed and then entrenched on both sides of the Atlantic. Above all, they understood that cooperation between the democratic nations in the field of finance might counterbalance the increasingly disruptive actions of the revisionist powers on the continent of Europe.

To no small extent, the Tripartite Agreement obscured fundamental differences between Paris, London, and Washington. And yet, it established in the place of the now defunct gold bloc a system of gold clearing, and this helped to stabilise the currency system, gold convertibility remaining the glue that held the whole edifice together. It was informal but transparent; it was focused on day-to-day transactions, but it helped to engrain habits of constant exchanges between the three sides (Belgium, the Netherlands and Switzerland joined the agreement in November 1936). “Ni accord, ni entente, uniquement coopération journalière,” it worked well enough. The absence of carefully coordinated action, for instance during the gold scare in April 1937, however, meant that it did not work as well as it might have.

In the face of the exigencies of war the arrangements of September 1936 did not survive. Both Britain and France, for instance, introduced exchange controls. But as the war progressed and policymakers began to contemplate post-war international arrangements, they drew on the experiences of the Tripartite Agreement and the spirit of 1936. In Harris’ reading, the agreement, then, was a milestone on the road to Bretton Woods and the post-1945 international financial system.

In examining the Tripartite Agreement in detail Max Harris has done a considerable service to scholars of economic and international history alike. His analysis is forensic, and his judgment is shrewd. Similarly, his tentative conclusions as to the possible lessons of 1936 for present-day, post-hegemonic international politics are sensible. There is much to praise in Monetary War and Peace. If it has a defect, it is that is essentially an Anglo-American story, based on British and American archives. French decision-making is reconstructed largely with the aid of Anglo-American sources, and although Belgian, Dutch, French and Swiss archival materials are listed in the bibliography, these offer no more than a decorative sprinkling. As with other works of macroeconomic history, there is sometimes a lack of granularity with regard to government decision-making. Much of the reconstruction of it is refracted here through Bank of England and Treasury lenses. The concerns of other departments, especially the foreign ministries, are given little consideration, even though most took a strong interest in finance; and Harris’ grasp of government decision-making is occasionally less surefooted. Some of the material which used to support conclusions about Treasury thinking, for example, consists of copies of Foreign Office despatches forwarded to the Treasury for information and kept in that department’s files. Further, it would have been interesting and useful to examine whether Neville Chamberlain, a confirmed America-sceptic as Chancellor of the Exchequer, was influenced by experiences of the Tripartite Agreement after his move from No. 11 to No. 10 Downing Street in May 1937 (just after the gold scare).

None of this, however, should detract from the merits of this work, which are considerable.


T.G. Otte is Professor of Diplomatic History at the University of East Anglia. His works include Statesman of Europe: A Life of Sir Edward Grey (Allen Lane (Penguin), 2020) and July Crisis: The World’s Descent into War, Summer 1914 (Cambridge University Press, 2014).


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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Macroeconomics and Fluctuations
Geographic Area(s):Europe
North America
Time Period(s):20th Century: Pre WWII

The Evolution of Central Banking: Theory and History

Author(s):Ugolini, Stefano
Reviewer(s):Siklos, Pierre

Published by EH.Net (November 2019)

Stefano Ugolini, The Evolution of Central Banking: Theory and History. London: Palgrave Macmillan, 2017. xiii + 330 pp. €135 (hardcover), ISBN: 978-1-137-48524-3.

Reviewed for EH.Net by Pierre Siklos, Department of Economics, Wilfrid Laurier University.

The so-called Global Financial Crisis raised the profile of central banks around the world. While books about central banks were, of course, published prior to the events of 2008-2009, none captured the attention of the wider public until the monetary authorities intervened on a massive scale and continue to do so well over a decade since the near collapse of the global financial system. A new set of books emerged, with titles like The Only Game in Town, or After the Music Stopped, which used a chronological approach to describe what central banks did as well as contemplating the implications of the shift from conventional to unconventional monetary policies. The approach of these books is largely descriptive and the analysis is largely rooted in depicting the evolution of central banking activities in select countries over time.

Stefano Ugolini, an Assistant Professor at the University of Toulouse, argues that this strategy, termed the institutionalist approach by the author, is not satisfactory. Instead, he proposes a functional approach to the analysis of the evolution of central banking. Four functions of central banking are explored. They are: the payments system, the lender of last resort and supervision, the issuance of money, and monetary policy. The author claims that one need not rank order these functions, though the number of pages devoted to the payments system and the lender of last resort functions suggest that these may perhaps be relatively more important to the author than the remaining two functions.

The discussion blends a history of events that reflect the growing importance of central banks in the global economy together with the history of thought about the balance between public and private roles in carrying out central banking functions. As a result, private banks and their connection with monetary authorities play an important role in the depiction of the evolution of central banking. For example, we see how the emergence of clearinghouses led to the creation of “conventional” central banks via the centralization of this function at the public level. Hence, this function is treated as a “natural monopoly.” The same is true of the evolution of many of the other functions examined. Nevertheless, the author is careful to highlight how in some countries, such as the United States, the tension between a role for government versus a preference for a strong role by the private sector in carrying out certain financial functions can explain certain cross-country differences in how central banks evolved when viewed through the lens of the functional approach. It may also be noted in passing that the experiences of Venice and Naples figure prominently in the discussion.

Ugolini has written a compact history of the critical functions of central banks emphasizing how the forces of centralization spurred or prevented financial innovations. The approach taken is a fresh one and will be useful, especially to scholars who are interested in specific areas where central banks have played an important role in economic development over time. That said, does the book provide new insights into central banks and their functions? This is debatable. For example, while financial stability is often mentioned it is not treated as a separate function. This is a shame in light of the ongoing debate about whether central banks are possibly over-burdened with responsibilities. It is also relevant for the question of the degree of centralization of the various functions considered at the level of a single institution. Stated differently, greater emphasis by the author on governance matters might have helped.

Ugolini concludes as follows: “central banking is deeply rooted in the economic and political context in which it happens to operate, and that the evolution of the former closely depends on the evolution of the latter” (p. 271). Readers of “institutionalist” style books of central banking would have reached the same conclusions. Hopefully, this is welcome as it means that the functional and institutional approaches yield similar results but this also means that no fundamentally new insights about the evolution of central banking are generated.

Three other elements about the functional approach adopted by Ugolini are also worth mentioning. First, the discussion is overwhelmingly centered on the European, British, and American experiences. The book is silent about how central banking functions evolved in Canada, Asia, or Australasia. Second, the chapter on the issuance of money does not discuss how history, or the history of thought, might inform the current debate about the digitization of money. Finally, the discussion of the monetary policy function glosses over the evolution of policy regimes, such as exchange rate or inflation targeting, preferring instead to focus on its role as a means of regulating and taxing the public to ensure something called monetary stability. Unfortunately, the latter expression is never sufficiently clearly explained. Nevertheless, Ugolini is correct to underscore the importance of examining how monetary and fiscal policy interact. After all, this is an issue that is very much at the center of the debate about the future of central banking.

Pierre Siklos is Professor of Economics at Wilfrid Laurier University and the Balsillie School of International Affairs. His latest books on central banking are Central Banks into the Breach: From Triumph to Crisis and the Road Ahead and The Economics of Central Banking, co-edited with David Mayes and Jan-Egbert Sturm, both published by Oxford University Press

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
North America
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder, 1922-1938

Author(s):Humphrey, Thomas M.
Timberlake, Richard H.
Reviewer(s):Thies, Clifford F.

Published by EH.Net (October 2019)

Thomas M. Humphrey and Richard H. Timberlake, Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder, 1922-1938. Washington: Cato Institute, 2019. xix + 201 pp. $21.21 (hardcover), ISBN: 978-1-948647-55-7.

Reviewed for EH.Net by Clifford F. Thies, School of Business, Shenandoah University.

Thomas M. Humphrey was a long-time research economist for the Federal Reserve Bank of Richmond with a penchant for the history of thought concerning monetary economics, and Richard H. Timberlake is a professor emeritus at the University of Georgia whose writings on money mainly concern the constitution of money, money and the U.S. Constitution, and other institutional arrangements for money. Their book is meant to debunk the “well-established” view that a slavish devotion to the gold standard condemned the United States and much of the rest of the world to the Great Depression. Instead of gold, the authors argue, the problem was the Real Bills Doctrine. Regardless of how persuasive they are in shifting the blame from gold to the Real Bills Doctrine, they tell a tale delicious in its detail, naming the names of those responsible.

According to Humphrey and Timberlake, John Law’s Bank of Mississippi was the first attempt to implement the Real Bills Doctrine (pp. 9-11). This bank, and other land bank schemes such as characterized the U.S. colonial period, may have had some connection to the Real Bills Doctrine, such as antecedents. However, the doctrine says that an appropriate backing for bank demand liabilities is short-term, “self-liquidating” loans collateralized by goods in transit and other such evidences of real activity. Land, not being self-liquidating, would not be appropriate. In addition to the heterogeneity of land, the value of land is speculative because it is based on the present value of its future services. Speculative assets, according to the Real Bills Doctrine, are not appropriate to back bank demand liabilities. Nor would state-issued or railroad-issued bonds be good backing for banknotes, as was mandated by various states during the Free Bank Era, because their values, too, are speculative. Nor would U.S. Treasury bonds as was allowed during the National Bank Era. The market values of long-term bonds and mortgages, even those that are substantially free of the risk of default, are dependent on interest rates and, therefore, are not appropriate to back bank demand liabilities. The misadventure of John Law has been repeated many times since his day, sometimes with banks, sometimes with depository institutions, and most recently with “shadow banks.” But land banks are more like the opposite of the Real Bills Doctrine, than an example.

A good example of the Real Bills Doctrine in conjunction with an operational gold standard was the chartered banks of Louisiana from 1845 to 1861. These banks backed their demand liabilities with a specie reserve of one-third and the remainder by bills of exchange, discounted commercial paper, and other short-term loans. Crucially, as Humphrey and Timberlake repeatedly state in conjunction with the bank panics of the 1930s, the specie reserve of the Louisiana chartered banks was only an initial reserve. During a bank panic, banks could pay out the specie in their vault. If the run on the banks wasn’t directly ended by the paying out of specie, the coming-due of a bank’s short-term loans (which could be paid in the banknotes of that bank or in specie) would either sop up the remaining banknotes in circulation or provide the specie needed to redeem those banknotes. None of the chartered banks of Louisiana suspended during the Panic of 1857, while the several Free Banks of the state suspended (albeit for a short time). Of course, Louisiana being on the losing side of the Civil War couldn’t provide the model for the National Bank Era. New York with its Free Banking system (based on bond collateral) did. As Humphrey and Timberlake correctly argue, the Real Bills Doctrine by itself wasn’t the culprit for the Great Depression (p. xiii). When operated in conjunction with an operational gold standard, as the Louisiana chartered banks did, the doctrine is innocuous. It is when the Real Bills Doctrine operates in a vacuum, without a commodity-money anchor, that something bad will inevitably happen.

The reason something bad will inevitably happen with the Real Bills Doctrine detached from an operational gold standard is, at one level, obvious, and, at another level, sophisticated. The obvious problem with the doctrine is that it links one nominal variable (the money stock) to another nominal variable (the money-value of qualifying loans), leaving the price level indeterminant (p. 5). The sophisticated argument, captured in the one diagram in Humphrey and Timberlake’s book (p. 24), is that the system is unstable. A move to inflation brings about more inflation, and a move to deflation brings about more deflation. During a hyperinflation, because the velocity of money accelerates, there is a shortage of money, requiring more money to prevent recession. Knut Wicksell called this or something like it the accumulation process; Milton Friedman, the accelerationist hypothesis; and, Friedrich Hayek, a tiger by the tail. The book describes this instability in the case of the German hyperinflation of the 1920s (p. 22). We are currently seeing this instability in Venezuela. The key argument of the book is that this instability works in both directions, downward as well as upward, and explains the deflation that accompanied the Great Depression, as well as various episodes of hyperinflation.

Part of the reason the money supply spirals downward as well as upward is because of fractional reserve banking (p. 28). Every dollar withdrawn from a bank results in a multiple contraction of the money stock. At this point, it is important to distinguish between what is today called base money, or M0, and what is called the money stock or money supply, or M1. Humphrey and Timberlake use the term “common money” to refer to the latter (and perhaps something more). The Real Bills Doctrine justifies fractional reserve banking because it says that real bills and not merely base money can be used to back bank demand liabilities. During the 1920s and early ‘30s, the monetary base consisted of gold coins and Gold Certificates, Silver Certificates and U.S. Notes outside the Fed, Federal Reserve Notes, reserves of banks held on deposit at the Fed, and limited legal tender subsidiary coins, mostly silver. The U.S. Notes were fixed in their supply, as essentially were also the Silver Certificates and coins. The dynamics of the fractional reserve system played out in the fractional backing of Federal Reserve Notes and bank reserves by gold, and by the fractional backing of bank demand and time liabilities by the base money in their vaults and their reserves held on deposit at the Fed. During good times, there was a tendency for the banking system to increase the money multiplier, and during bad times, to decrease it. By tracking the monetary aggregates, central banks can counteract these destabilizing tendencies, but the Fed did not track the monetary aggregates at the time. William McChesney Martin during the 1950s characterized the practice of counteracting destabilizing tendencies by saying the Fed should “lean against the wind.” But, unabashed Real Bills-central bankers run with the wind, instead of lean against the wind.

The real culprit precipitating a downturn in the monetary aggregates, however, wasn’t an automatic tendency. It was an explicit decision to suppress “speculation” made by a narrow majority of the Board of Governors of the Federal Reserve led by Adolph C. Miller, overriding the Federal Reserve Bank Presidents, the Federal Advisory Council, and many prominent private bank presidents. Pages 77-85 are the most engaging part of the book. Although the authors do not say so explicitly, by using terminology such as “an evangelical crusade,” they imply that Miller was from the populist and anti-bank wing of the Democratic Party. From the diary of a member of the Federal Reserve Board who served with him, it appears Miller was self-righteous and dogmatic. This is the impression I got reading the referenced articles by Miller justifying the actions of the Fed. That and a whiff of a backstop defense that the Board was compelled to take the actions it took because of the Federal Reserve Act of 1913.

According to the authors, it was the Fed’s actions to suppress “speculation” that precipitated the Stock Market Crash of 1929, and it was the Fed’s slavish devotion to the Real Bills Doctrine that allowed the monetary aggregates to subsequently spiral downward, taking the economy with it. But, this story, even if its fixes the blame, might not fully exonerate gold. Historically, the problems of inflation and deflation have usually been associated with war. In this country, the problems of post-war adjustment include the messy resumption that followed the War of 1812, and the “Grow to Gold” policy following the Civil War that involved a protracted period of deflation and a series of financial panics. Following the Great War, subsequently renamed World War I, there was a significant post-war deflation, but prices were stabilized at a level higher than pre-war. A second bout of deflation might have been necessary or perhaps there was a more creative solution. As other nations sought to return to the Gold Standard, something was going to have to give. The unfinished job of post-war adjustment didn’t mean, however, that we were condemned to the utter calamity that was the Great Depression.

Clifford F. Thies is the Eldon R. Lindsey Chair of Free Enterprise and Professor of Economics and Finance at Shenandoah University. He has recently written on debt repudiation by Mississippi (The Independent Review).

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

The Second Bank of the United States: “Central” Banker in an Era of Nation-Building, 1816-1836

Author(s):Knodell, Jane Ellen
Reviewer(s):Brennecke, Claire

Published by EH.Net (May 2018)

Jane Ellen Knodell, The Second Bank of the United States: “Central” Banker in an Era of Nation-Building, 1816-1836. New York: Routledge, 2017. xiii + 188 pp. $110 (hardback), ISBN: 978-1-138-78662-2.

Reviewed for EH.Net by Claire Brennecke, Federal Deposit Insurance Corporation.

Many economic historians have analyzed the Second Bank of the United States through the lens of modern central banking. In The Second Bank of the United States: ‘Central’ Banker in an Era of Nation-Building, 1816-1836, Jane Knodell builds on this literature with a unique and nuanced view of the institution. Knodell argues that the Second Bank of the United States did not act as a modern central bank, as it did not provide services to state banks: the Bank did not act as a lender of last resort or issue high powered money for state banks to use as a reserve currency. But neither was the Bank purely a profit-maximizing commercial bank. The Bank acted in the national interest when it took on the role of a fiscal agent for the federal government and when it maintained monetary stability through specie market operations. Knodell draws on a variety of sources to present this case including contemporary accounts, state bank balance sheet data, and Second Bank branch geography.

Knodell begins, in the second chapter, by pointing out that the Second Bank was never intended to explicitly support state banks. Congress chartered the Bank to address specific challenges that the United States government faced in the early nineteenth century. The federal government was more concerned with the possibility of a public finance crisis rather than a banking crisis. The Second Bank was founded in order to create a uniform currency for the national government and transfer public funds around the country. The Bank placed many of its branches to help achieve this goal, as well as placing branches to provide a place to deposit custom duties. It also exploited its monopoly on interstate branching to profit by placing other branches in locations with few state banks and more growth potential.

Modern central banks produce monetary stability in part by issuing high-powered money for commercial banks to use as reserves and by acting as a lender of last resort (LOLR) for banks. Knodell uses state bank balance sheet data to show that those banks never considered Second Bank notes high-powered money. Moreover, the Bank did not even allow state banks to use the Second Bank’s large-denomination notes for interbank payments (p. 104). Neither did the Second Bank create stability by acting as a LOLR to state banks during the crisis of 1825-26.

However, the Second Bank did act to create monetary stability in ways possibly unfamiliar to scholars of modern central banking. Primarily, the Bank managed the monetary system through specie market operations. As discussed in Chapter 4, the Bank accumulated significant specie reserves through its trade in the domestic and foreign bills of exchange markets. These specie reserves allowed the Bank to conduct specie market operations that stabilized the money markets and suppressed private arbitrage. Through these operations, the Bank both earned profit and acted in the national interest.

In this book, Knodell makes a convincing case that the Second Bank of the United States was neither a conventional modern central bank nor a purely profit-motivated commercial bank. Furthermore, she makes excellent use of a variety of data sources to clearly lay out her argument. However, she misses an opportunity to discuss what the history of the Second Bank can tell us about a) the purpose of a central bank and b) the American economy in the early nineteenth century. Modern central banks affect the economy primarily through their interactions with commercial banks. However, the importance of a central bank comes from its impact on the economy, not the specific policies. The book could have gone further to consider how the Second Bank compares to modern central banks in its motives rather than just its policies. Furthermore, the policies of the Bank were specific to the early nineteenth century U.S. economy. The book could have explored what these policies reveal about how the economy functioned historically relative to how it does today. For example, the Second Bank arguably did create high-powered money for merchants even if it did not do so for banks, and so provided a useful service in creating currency for exchange. The Bank allowed non-bank members of the public, but not banks, to redeem notes for specie at par at all bank branches (p. 127). The book could have discussed the goal of the policy, what that goal tells us about central banking, and what the decision to use this policy to achieve that goal tells us about the broader economy. Overall, this book is an important contribution to the understanding of the Second Bank of the United States and an excellent point of reference for scholars of early American economic and political history.

Claire Brennecke is a financial economist with the Federal Deposit Insurance Corporation. Any opinions, findings, conclusions, and recommendations expressed above are those of the author and do not necessarily reflect the views of the Federal Deposit Insurance Corporation. She is the author of “Information Acquisition in Antebellum U.S. Credit Markets: Evidence from Nineteenth-Century Credit Reports,” FDIC Center for Financial Research Working Paper No. 2016-04.

Copyright (c) 2018 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 ( Published by EH.Net (May 2018). All EH.Net reviews are archived at

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

The Oxford Handbook of Banking and Financial History

Editor(s):Cassis, Youssef
Grossman, Richard S.
Schenk, Catherine R.
Reviewer(s):Neal, Larry

Published by EH.Net (July 2017)

Youssef Cassis, Richard S. Grossman, and Catherine R. Schenk, editors, The Oxford Handbook of Banking and Financial History. Oxford: Oxford University Press, 2016. xviii + 537 pp., $160 (hardcover), ISBN: 978-0-19-965862-6.

Reviewed for EH.Net by Larry Neal, Department of Economics, University of Illinois at Urbana-Champaign (emeritus).

The global financial crisis that began in 2007-08 and continued to rattle the Eurozone countries after 2010 has certainly been good for the market for financial history.  The Oxford Handbook of Banking and Financial History is clearly a response to these events.  In their introductory chapter, the editors set out their ambitious agenda, which is to deal with the individual parts of our modern complex financial system and trace how each has evolved over time.  Each chapter ends with some insight into how the current turmoil in global banking and finance might affect part of the global financial system. This broad-ranging approach is very much in keeping with current analysis by policy economists, who have become very sensitive to how our financial system intertwines banks, which specialize in particular niches of the economy; shadow banks, which innovate to find new niches; money markets, which deal with short-term finance; capital markets, which provide long-term finance; and regulators, who attempt to oversee the operation of the financial system for the interest of the public (or the government).  The editors’ goal is to provide anyone concerned with a particular aspect of the financial system an authoritative treatment by an acknowledged expert that is clearly written for the non-specialist combined with a useful bibliography to follow up particular aspects.

The Oxford Handbook is organized into four parts: Part I, Thematic Issues, deals explicitly with the problems that the editors confronted at the outset: how have historians approached the issues in financial history (Youssef Cassis); how have economists dealt with the issues that interest them (John D. Turner); and how have policy makers tried to apply lessons from history for promoting economic development (Gerard Caprio, Jr.).  To pay due attention to historical contingency, economic analysis, and policy relevance in each of the following chapters is, indeed, a daunting task for each author.

Part II, Financial Institutions, takes up these challenges by separating out several categories of distinctly different institutions, a useful distinction too often overlooked in practice and one that illustrates nicely the complexity of any financial system.  Youssef Cassis’s “Private Banks and Private Banking” begins with the initial role models for banks, from their origins in kinship networks in Renaissance Italy to today’s Swiss managers of private wealth.  Gararda Westerhuis’s “Commercial Banking: Changing Interactions between Banks, Markets, Industry, and State” follows by dealing with the nineteenth-century spread of industrialization globally, which led to the rise of universal banks.  By the end of the twentieth century, however, it appeared that commercial banks might be in “a state of terminal decline.” (See Raghuram Rajan, 1998, “The Past and Future of Commercial Banking Viewed through an Incomplete Contracts Lens,” Journal of Money, Credit, and Banking. 30(3), 524.)  The financial crisis of 2008 led many observers to push for a separation of investment and commercial banking once again in the interest of financial stability.  Westerhuis goes on to distinguish the motives for establishing market-based systems (U.S. and England) versus bank-based systems (Germany and Japan).  She posits that the two paths diverged early on due to the differences in government control over banks and then the role played by banks in financing industrialization for follower countries, such as Germany and Japan.  Oddly missing from her overview is any consideration of the experience of Scottish banking, which developed joint-stock banks with national branches early in the eighteenth century.  Only after the financial crisis of 1825 did the English care to look seriously at the Scottish example for improving their commercial banking system!  Further, joint-stock banks did not disappear in the U.S. during the “free banking” period as she asserts. While they were confined within state boundaries, limitations on branching within a state varied considerably.  The wide range of experiments undertaken by various states has stimulated a growing and interesting literature among U.S. scholars, largely omitted from her bibliography.

Caroline Fohlin’s “A Brief History of Investment Banking from Medieval Times to the Present” takes up the most challenging role of banks, how to transform short-term liabilities into long-term assets.  Rather than taking specific organizational forms, she prefers to analyze investment banks as a set of services that help finance the long-term capital needs of business and governments. After briefly looking at merchant banks from medieval times to the early nineteenth century, this loose definition requires her to take up individual countries one by one during the nineteenth century.  Sections follow that deal with England, the European continent, Belgium and the Netherlands, France, Germany, Austria and Switzerland, Italy, Japan, and the United States. Each section highlights the differences in organizational structures created to accomplish basically the same goals, helping governments promote industrialization.  The twentieth century presents more interesting differences, essentially due to the ways various governments regulated, deregulated, and then re-regulated from the 1920s to the present.  She concludes, “even well-known investment banking names that have endured over the centuries bear little resemblance to their ancestors” (p. 159).

Christopher Kobrak’s “From Multinational to Transnational Banking” takes up the complex transformations of the world’s leading banks by size as they successively internalized their international operations.  The availability of huge advances in information technology combined with increasing opportunities for re-allocating domestic savings across foreign investments provided the basis for the growth of today’s megabanks.  Oddly, however, Kobrak takes as archetypes of the new transnational bank two of the worst performers after 2008 — Deutsche Bank and Citibank.  Relying on their respective annual reports in 2007-2010, he touts each of them as “market players” rather than staid fiduciary agents, lauding their scale and scope of activities that are only vaguely related to financial intermediation associated with banks “lending long, while borrowing short.” He dispassionately notes that three-quarters of Deutsche Bank’s two trillion euros in assets in 2007 were securities held for trading, and 40 percent were financial derivatives (p. 183), without disparaging the obvious omission of fiduciary responsibility. Citibank, similarly, by 2007 had “invested huge resources in creating an internal market, in essence warehousing securities and derivatives to build hedged positions and for future sale” (p. 182). All these intra-bank holdings of assets and liabilities enabled such banks to make a lot of money by proprietary trading that remained unobserved by regulators or by publicly accessible financial markets.  He refrains from criticizing the model developed by these two megabanks, each of which has suffered huge losses and justified public acrimony since 2008, confining himself to the anodyne remark that “megabanks may be forced, as they have many times in the past, to find an intertwined institutional and organizational adaptation more sustainable in the modern social order” (p. 185)!

R. Daniel Wadhwani’s “Small-Scale Credit Institutions: Historical Perspectives on Diversity in Financial Intermediation” concludes Part II by lumping together a motley assortment of credit cooperatives, savings banks, industrial banks, pawn shops, and savings and loans associations.  Wadhwani argues their cumulative size makes their impact on their respective economics arguably as great or greater than that made by the commercial, investment, and public banks dealt with in the previous chapters.  Their common origin across many cultures and through past millennia he finds in the ubiquitous presence of ROSCAs (rotating savings and credit associations).  Beginning with small kinship groups desiring to pool their limited resources to enable individual members to acquire a desired goal, perhaps a piece of land, a dwelling, livestock, or even the means to migrate somewhere else for employment, ROSCAs often provide a basis for transition to the more modern forms of intermediation.  These include savings banks, credit cooperatives, and savings and loans, with each evolving quite differently depending on local circumstances.  Critical to their evolution historically is the role of government, whether as regulator (restricting competition), competitor (postal savings banks), or customer (providing sovereign debt as risk-free asset).  The theoretical economic bases for their evolution and persistence are robust, both for their monitoring capability and for their local knowledge of investment possibilities.  Nevertheless, Wadhwani calls attention to more post-modern “theories” that favor the creation of supportive narratives when cultures confront changes in economic regimes.

Part III, Financial Markets, begins with Stefano Battilossi’s “Money Markets,” which emphasizes the importance of access to outside liquidity for banks when they face unanticipated shocks either for increased loans or increased withdrawals of deposits.  Further, Battilossi argues that a key lesson learned by banking theorists and practitioners in the nineteenth century, namely that money markets are essential for a smooth working of the economy but are inherently unstable, was lost over the course of the twentieth century.  The success of the Bank of England in stabilizing the money market at the center of the global economy of the nineteenth century, he argues, was due to a complex combination of close monitoring by the Bank of England and cartel complicity by the major joint-stock banks, each with extensive branching networks domestically and overseas.  U.S. efforts to imitate the British example after creation of the Federal Reserve System in 1913 failed due to irreconcilable differences in institutional structures between the two banking systems and their respective central banks.  It took over a century and a half for the Bank of England to learn how to avoid being a dealer of last resort, a role that the Federal Reserve System in the U.S. had to undertake in the 2008 crisis, and which it has not yet been able to relinquish.  Readers are left to draw the implications for the future of the global financial system for themselves!

Ranald C. Michie’s “Securities Markets” lays out convincingly and clearly the importance of securities markets for a successful financial system.  Divisibility and transferability of a security expands greatly the potential customer base, adding the virtue of diversity in demands for liquidity among the creditors as well.   He distinguishes clearly between “Primary Securities Markets” and “Secondary Securities Markets,” showing their interdependence in layman’s terms.  “Stock Exchanges” provide the effective linkage between the two levels of markets, but fall prey in turn to problems either of monopoly pricing or government repression. His exposition of the underlying theory of securities markets provides the structure for his narrative that follows. From “Early Developments in Securities Markets,” which only mentions briefly the roles of informal markets in the speculative booms of 1720, Michie insists on focusing on the nineteenth century, starting with the London Stock Exchange in 1801.  It’s unfortunate that he ignores recent work on the Amsterdam stock market, (e.g., Lodewijk Petram, The World’s First Stock Exchange, New York: Columbia University Press, 2014), or early work by this reviewer on the precedents for the London Stock Exchange (Larry Neal, The Rise of Financial Capitalism, New York: Cambridge University Press, 1990).  Committed to the importance of formal structures for modern stock exchanges, however, Michie takes up their rise in the advanced capitalist economies of the nineteenth century and then their eclipse from 1914 to 1975.  Thanks to the exigencies of war finance from World War I through the Cold War, stock markets seemed to “appear somewhat irrelevant in a world dominated by governments and banks” (p. 253)  “The Era of Global Banks” did not come to an end in 2008, however, but what had ended was the “self-regulation that had contributed so much to the attractions of stocks and bonds to governments, businesses, and investors through the reduction or elimination of counterparty risk and price manipulation and the certainty that sales and purchases could be made as and when required” (p. 258).  Big banks are bad once again!

Moritz Schularick’s “International Capital Flows” is the most quantitative and instructive of the chapters, as he summarizes succinctly in nine brief tables and one graph, the levels of international capital flows over the nineteenth and twentieth centuries, their size relative to Gross Domestic Product, and the main sending countries and main receiving countries over time.  In sum, rich countries invested in poor countries in the nineteenth century, when international capital flows were highest relative to GDP, and the rich continued to invest in poor countries even when capital flows were severely constrained during the period 1914-1975.  But after the collapse of Bretton Woods, when international capital flows rose sharply once again, the result has been for poor countries to invest in rich countries.  Further, when capital does flow suddenly to emerging economies, financial crises often follow when the flow tapers off, undoing whatever economic advance may have occurred.

Youssef Cassis’s “International Financial Centres” concludes the coverage of financial markets by analyzing the recurring features of international financial centers that lead to their persistence over time.  The physical layout of the dominant cities, the combination of functions they perform (government, communications, education, as well as trade and finance), and their organization may change as the technology of transport, communications, and information change, but, Cassis argues, the network externalities created by the concentration of so much expertise in one location make the existing centers hard to replace.

Part IV, Financial Regulation, takes up the most vexing questions for policy makers, starting with Angela Redish’s “Monetary Systems.”  Redish begins with the complexity of metallic currencies with coins minted in varying combinations of copper, silver, and gold in early modern Europe, and deftly reviews the causes that concerned European policy makers as they sought to maintain coins with fixed legal tender values, whether minted in any or a combination of the three precious metals.  Basically, their concerns were the same as today, “whether nominal change can have real consequence for the balance of trade or level of economic activity?” (p. 327).  Redish goes on to trace out the academic literature that has dealt with the Emergence of the Gold Standard, the Latin Monetary Union, the Cross of Gold, the Classical Gold Standard, and the Good Housekeeping Seal of Approval, highlighting the controversies that have arisen under each rubric.  Next, she divides the End of the Gold Standard into the First World War and the Interwar Period, Bretton Woods and European Monetary Arrangements, and the End of Bretton Woods and the Rise of the Euro.  Reproducing faithfully the graph produced by Eichengreen and Sachs to show that countries that stayed committed to the gold standard after 1929 suffered in terms of industrial production relative to those that devalued, she doesn’t point out that the outliers of Germany and Belgium are readily explained by mistaking their formal exchange rate regimes with the ones they followed in practice (Germany using bilateral trade agreements to increase industrial exports while keeping the nominal exchange rate fixed, and Belgium reducing its nominal exchange rate while being forced to maintain existing trade agreements with France).  She concludes with a brief discussion of both inflation targeting under fiat currency regimes and the rise of crypto currencies such as Bitcoin, Her conclusion is merely that “money is information, a method to enable multilateral clearing of myriad transactions.  It would be surprising if the digital revolution did not lead to a revolution in how this information is managed” (p. 339).

Forrest Capie’s “Central Banking” takes up the baton passed on by Redish to provide a brief synopsis of the issues confronting central banks as they have increasingly taken control of the supply of money over the past two or more centuries.  Monetary stability, their prime responsibility, can be assessed in terms of price stability, but financial stability, which has become a major concern, he notes is more difficult to assess, much less to sustain.  Central bank independence, however defined, does seem to correlate with monetary and price stability, which shows that policy lessons have been learned successfully on that score.  Continued independence of central banks, however, hinges very much on attaining and then sustaining financial stability.  This task, very much underway now among the world’s central banks, 174 at last count, may require expanding their role to include financial regulation as well as oversight of the banking system.

Harold James’s “International Cooperation and Central Banks” makes an interesting argument that central banks in their pursuit of the goal of monetary stability naturally tend to cooperate with other central banks internationally, but without need for formal mechanisms.  Cooperation can then be merely discursive, as it was during the classical gold standard.  Financial crises, however, often do call for international cooperation, but cooperation is difficult, perhaps impossible, to sustain given the priority of strictly national policy concerns.  Large countries, needed to make cooperative efforts successful, are the most reluctant to join in cooperative efforts.  His examples cover episodes during the classical gold standard, the interwar period, the brief Bretton Woods period, and the ongoing travail of the euro-system, which he concludes is “the global test case for both the possibilities and the limits of central bank action” (p. 391). In an interesting aside, he explains why the Bank for International Settlements was resuscitated to manage the European Payments Union in the 1950s.  Top U.S. officials were wary of using the newly-established International Monetary Fund because its staff were largely protégés of Harry Dexter White, then under suspicion as a possible Russian agent!

Catherine Schenk and Emmanuel Mourlon-Droul’s “Bank Regulation and Supervision” develops a sub-theme to the arguments presented by Harold James, namely the recurring problems of regulatory competition, moral hazard, and regulatory capture.   Essentially, “[r]eputation and private information are key bank assets in a market with information asymmetry, but this complicates the ability to engage in transparent prudential supervision” (p. 396).  The U.S. stands out for having the most complicated and unwieldy array of conflicted regulatory agencies, summarized in Table 17.1.  The authors conclude, as do Charles Calomiris and Stephen Haber (Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, Princeton, NJ: 2014), that it is no accident that Canada and the UK, with more coherent approaches to bank regulation have had fewer banking crises.  Much of the remaining chapter focuses on China and the successive efforts of China’s rulers to establish, then regulate, a banking system to enable industrialization and modernization, concluding, perhaps prematurely, that China managed to reduce the problem of non-performing loans after their peak in 2000.  The difficulties of deciding where to locate the regulator of the banking system are highlighted by tracing the successive efforts of the U.S., then the UK to find an ex post regulatory solution to the problems of recurring financial crises.  The efforts of the Basel Committee, established after the collapse of the Bretton Woods System, are described in the context of the European Union’s efforts to move toward regulatory cooperation within a more limited scope of international cooperation.  Prospects for success on that score are still very much in doubt.

Laure Quennouelle-Corre’s “State and Finance” takes a step back to look at the origins of the ongoing dilemma for the Eurozone of the interaction between governments’ sovereign debt and financial fragility of their banks.  The recurring differences between France and the other members of the European Union form the backdrop for his rambling notes on the interactions of private and public financial institutions, ending with the observation that France alone has had to deal with the European Union’s pro-market ideology versus the French tradition of state intervention.

Part V, Financial Crises, opens with Richard Grossman’s “Banking Crises,” which reprises the standard story of boom-bust cycles, exacerbated when new opportunities for speculative investments open up (first globalization after 1848; second globalization after 1979; post-war adjustments after WWI) but then moderated under strict regulation (capital controls, interest rate restrictions from 1945-71).  In his perspective, the Eurozone crisis fits the boom-bust pattern first described by D. Morier Evans in 1859 (The History of the Commercial Crisis, 1857-58, and the Stock Exchange Panic of 1859, New York: Augustus M. Kelley, 1969).

Peter Temin’s “Currency Crises: From Andrew Jackson to Angela Merkel” takes up the international aspect of the boom-bust paradigm by extending it into national decisions about setting the exchange rate with foreign trading partners and possible investors. To bolster his long-standing conviction that most, if not all, banking crises are really currency crises at heart, he lays out in detail the open macro-economy model developed by Trevor Swan. Swan’s diagram relates a country’s domestic level of production to its real exchange rate.  Internal balance is maintained if production rises with the real exchange rate, while external balance requires the real exchange rate to fall when production increases. The model leads to dire consequences for a country if it does not succeed in maintaining both internal balance (matching domestic investment with domestic supplies of savings) and external balance (matching capital account flows with offsetting trade balances) simultaneously.  Either excessive inflation or long-term unemployment occurs whenever imbalances are sustained due to misguided government policy.  Banking crises then arise as the necessary outcome of such policy failures by governments. The historical evidence to support Temin’s argument starts with Andrew Jackson and the crisis of 1837 in the U.S., continues through the Great Depression in the U.S. in the 1930s, not to mention the concurrent crisis in Germany, and concludes with the ongoing Eurozone crisis, all basically due to misguided political leaders, as named in his sub-title.

Juan H. Flores Zendejas’s “Capital Markets and Sovereign Defaults: A Historical Perspective” concludes the Oxford Handbook.  The first global financial market, arising with the collapse of the Spanish Empire in Latin America after the Napoleonic Wars, saw various devices to cope with the recurring problem of governments defaulting on the sovereign bonds they issued for whatever reason, usually to fight a war or quell a revolution.  Flores recounts the success of the London Stock Exchange in bringing governments to heel if they wanted access to British savers. The monitoring capabilities of the leading merchant bankers, especially the Barings and Rothschilds, put their imprimatur on bonds issued through their firms.  Twentieth century regulatory restrictions on these leading investment banks by their host governments, however, have limited the effectiveness of their “branding” and their intrusive follow-up in monitoring the finances of their customer governments.  Flores casts some doubt as well on the effectiveness of the Council of Foreign Bondholders in the nineteenth century.  He could also have challenged the effectiveness of international financial control committees that served as the model for the League of Nations Financial Commission after World War I if he had cited the recent work of Coskun Tuncer (Sovereign Debt and International Financial Control, The Middle East and the Balkans, 1870-1914, London: Palgrave Macmillan, 2015).  Flores concludes in general that governments that avoided defaulting in times of general crisis did so because they had been excluded from the earlier expansion of international credit.

All in all, the editors did get the compilation in print still in time to be useful for anyone concerned with how the ongoing financial crisis of the early twenty-first century will play out.  Specialists in each topic, however, may be disappointed in the necessary brevity of treatment, not to mention absence of references to their own work, particularly if they worry most about the future of the U.S. financial system.

Larry Neal is the author of A Concise History of International Finance: From Babylon to Bernanke, Cambridge: Cambridge University Press, 2015

Copyright (c) 2017 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 ( Published by EH.Net (July 2017). All EH.Net reviews are archived at

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

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

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

Published by EH.Net (September 2016)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

Copyright (c) 2016 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 ( Published by EH.Net (September 2016). All EH.Net reviews are archived at

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