Published by EH.Net (February 2022).

Thomas M. Humphrey and Richard H. Timberlake. Gold, the Real Bills Doctrine and the Fed: Sources of Monetary Disorder, 1922-1938. Cato Institute, 2019. xix + 201 pp. $15 (paperback), ISBN 978-1-948647-12-0.

Reviewed for EH.Net by Nicolas L. Ziebarth, Department of Economics, Auburn University, and NBER.


There is a lot to like about this book. First, it shows how policy ideas matter and, moreover, that these ideas evolve according to an internal logic of evidence and debate rather than simply being driven by economic interests. For the authors, Thomas M. Humphrey and Richard H. Timberlake, there was no “deep” economic reason that explains why the Real Bills Doctrine came to hold such sway over the thinking of the Federal Reserve on the eve of the Great Depression. Instead, it was simply a brute fact that certain people ended up in certain positions of power at certain times with certain ideas that made all the difference. In a different world, Benjamin Strong doesn’t die in 1928. Or H. Parker Willis doesn’t end up teaching Carter Glass’ children economics at Washington and Lee University. In either of these counterfactuals, the whole complexion of monetary policy during the Great Depression could have been different.

The second reason I liked the book is that, in my view, it is correct in blaming the Real Bills Doctrine for fostering the inept response of the Federal Reserve during the Great Depression. The Real Bills Doctrine comes in many forms. One form is as a theoretical doctrine about the money creation process. Another is as a rule of thumb for prudent commercial bankers. One final form is as a rule for how monetary policy should operate. What is common to all these different forms is the idea that money production follows output production. For the monetary policy form, this means that the central bank should expand the money supply procyclically and that, as an empirical matter, low nominal interest rates are a sign that monetary policy is loose rather than tight. These implications of the Real Bills Doctrine for monetary policy are precisely what Humphrey and Timberlake are worried about in this book.

Given these reasons for liking the book, why then was I left unsatisfied? Mainly because the book does not do enough to establish how the Real Bills Doctrine was a major “source of monetary disturbances.” Instead the authors seem content to treat the work of Milton Friedman and Anna J. Schwartz as already having established the central claim of this book. While Friedman and Schwartz’s Monetary History is justly considered a masterpiece, it is now almost 60 years old and the study of the monetary history of the Great Depression did not simply end there. Yet I didn’t find a citation to a single academic article published after 2002.

This lack of connection to the recent academic literature was disappointing for two reasons. First, it left me unsure about the intended audience for the book. It was not published by an academic press, so I wasn’t expecting a “dry” academic tome with copious footnotes and claims qualified to death. Even with these expectations, I was still taken aback by some of the book’s bolder claims that were made almost in passing. For example, I have never seen the Weimar hyperinflation blamed on the Real Bills Doctrine. On the other hand, I wouldn’t call this a book for the general public. While it has much lively writing, it also has fairly intricate discussions of monetary theories and extensive use of technical jargon that would scare off the lay reader.

The bigger reason why I wish the book would have engaged with the recent academic literature is that it provides ample support for their central contention that the Real Bills Doctrine had disastrous economic consequences in the Great Depression. For example, an influential work published in 2012 by Gary Richardson and William Troost examines the state of Mississippi, which is split into the St. Louis and Atlanta Federal Reserve districts. The St. Louis Fed was a strong supporter of the Real Bills Doctrine and unwilling to offer aid during panics, while the Atlanta Fed was aggressive in rushing cash to struggling financial institutions. Richardson and Troost show that these policy differences led to drastically more banks going out of operation in the St. Louis part of Mississippi relative to the Atlanta part of the state following the collapse of the bank Caldwell and Company in 1930. This is precisely the kind of evidence that this book needed and yet went uncited.  Consequently, I cannot recommend this book as a book of economic history.

On the other hand, as a book of intellectual history, this book has much to offer. The authors do an excellent job of tracing the Real Bills Doctrine back to the work of John Law in the 17th century and following the debates over this doctrine up to Irving Fisher’s work in the 1920s. They provide a fascinating history of statistical tests of the Quantity Theory of Money stretching back to Simon Newcomb, who won the Copley Medal for his work in astronomy and believed that flying machines were impossible. I also appreciated their discussion of the confused nature of the Fed in its early years. It was not easy then and is still not easy now to understand how the stated goals in the Federal Reserve Act were supposed to work together with an overriding goal of defending the gold standard.

The issue I had with the authors’ intellectual history is that they made it hard to see how any reasonable observer could have believed in the Real Bills Doctrine on the eve of the Depression. For Humphrey and Timberlake, it should have been obvious to anyone by 1929 that the Quantity Theory had been established, both theoretically and statistically, beyond a shadow of a doubt. The problem with this claim is that the Real Bills Doctrine had “worked” until then in the 15-year period following the founding of the Fed. The doctrine’s success could be seen in the elimination of interest-rate seasonality and financial panics during the 1920s. As Jeffrey Miron has shown, these successes were due to the Fed accommodating seasonal fluctuations in money demand by expanding credit procyclically.

In the end, unlike the authors, I’m unwilling to condemn the Fed for what ended up being a faulty model of monetary policy on the eve of the Great Depression. Sadly, since the Depression, the Fed has continued to make mistakes in its thinking about the macroeconomy and monetary policy. Ben Bernanke’s comment in March 2007 that “the effect of the troubles in the subprime sector […] will likely be limited” is just the most recent example. What differentiates the Fed of the financial crisis of 2007-2008 from the Fed of 1929 was the difference in their responses. The Fed’s singular failure during the Depression was an unwillingness to revise its approach as the financial system collapsed and unemployment approached 25%. On the other hand, the Fed of 2007- 2008 was willing to act flexibly and aggressively as conditions deteriorated. In the end, this willingness to act is the most we can hope for from our fallible policymakers.


Nicolas L. Ziebarth is Associate Professor of Economics at Auburn University and a Research Associate at NBER. His publications include Credit Relationships and Business Bankruptcy During the Great Depression” (AEJ: Macro, 2017) and “Identifying the Effects of Bank Failures From a Natural Experiment in Mississippi During the Great Depression” (AEJ: Macro, 2012).

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 (February 2022). All EH.Net reviews are archived at