vol. 52, no. 2 (Octoberl), 1985,
Money in Crisis: The Federal Reserve, the Economy,
and Monetary Reform
edited by Barry N. Siegel
Cambridge MA: Ballinger Publishing Co., 1984, pp. xxv, 335
This publication project was undertaken by the San Francisco-based Pacific
Institute for Public Policy Research. Most of the thirteen papers comprising
the volume were presented at a Pacific Institute conference held in November
of 1981—a fact not reported in the book itself. The delay in the publication
of these conference papers, however, does not subtract from the book's
importance and appeal. For the most part, the contributors avoided the
short-term tactical issues with which the monetary authority must continually
cope. They focused instead on the underlying, or structural, problems that
threaten the stability of our monetary institutions.
A Foreword by Leland B.
Yeager and an Introduction by Barry N. Siegel precede the book's three
major parts. Part I, Money and the Economy, consists of three papers; Part
II, The Record of Federal Reserve Policy, four papers; and Part III, Monetary
Reform, six papers. But many of the papers contain their own mix of theoretical,
historical, and prescriptive concerns, making the three-part format somewhat
Axel Leijonhufvud's "Inflation
and Economic Performance" and Lawrence H. White's "Free Banking as an Alternative
Monetary System" are the two most insightful and challenging contributions
in the volume. Leijonhufvud establishes the triviality of the conventional
view of inflation—a view in which some particular rate of inflation comes
to be anticipated by market participants. He then identifies the discoordinating
effects of inflation when the expected rate of inflation varies across
individuals and across time. There is a market mechanism that will impose
a uniformity throughout the economy on the nominal rate of interest, but
there is no market mechanism that will impose a uniformity on the manner
in which that nominal rate is divided—in the minds of different market
participants—between the real rate of interest and the inflation premium.
The result is intertemporal discoordination and a general reduction in
the level of investment activity. Leijonhufvud goes on to point out likely
political consequences of the perceived injustices (gains and losses) that
result from such inflation-induced discoordination.
White breathes some life
into the idea of free banking and shows that such a system would contain
its own check on inflation and hence on inflation-induced discoordination.
Most advocates of market-provided money commit one of two errors: They
endorse some (usually implausible) monetary institution that could be brought
about by no known market process; or they simply give their blessings to
whatever market mechanisms may be "out there" governing the competitive
supply of money. White commits neither error. He identifies the set of
incentives that would be inherent in a competitive environment and then
shows that money holders, bank depositors, and competitive bankers would
respond to those incentives in predictable and desirable ways. The market
process that disciplines competing banks weeds out unsound banks, allows
the banking system to respond in a healthy way to changes in the demand
for money, and contains no inflationary bias.
Ironically, F. A. Hayek,
who has taught us so much about undesigned order, comes dangerously close
to a constructivist solution to our monetary problems as he ponders "The
Future Monetary Unit of Value." He envisions an international monetary
unit tied by pledges of competing issuers to some index number of widely
traded and standardized raw materials. Hayek sees a great competitive advantage
in the distinctiveness of the name bestowed upon the monetary unit
by the issuer. He even confesses that he has thought of—but, on legal advice,
is not disclosing—a very attractive name, "indeed one that would probably
be worth millions" (p. 329). The reader can hardly resist wondering: Millions
Charles E. Wainhouse offers
some "Empirical Evidence for Hayek's Theory of Economic Fluctuations."
He conducts tests for so-called "Granger causality" to demonstrate that,
e.g., during some cyclical episodes, the volume of credit, interest rates,
and relative prices moved in ways consistent with Hayek's theory. Alan
Reynolds conducts tests for what might be called "Reynolds causality" in
his "Gold and Economic Boom: Five Case Studies, 1792-1926. Drawing from
the experiences of the United States, England, and France, Reynolds chronicles
five episodes in which a return to the gold standard was followed by an
economic boom. He suggests, in effect, that the words "was followed by"
can justifiably be replaced with "was the cause of." Granger, Wainhouse,
and Reynolds all play fast and loose with the concept of causality, but
even when read critically, these two papers give us reason to believe that
Hayek has a defensible theory and that gold has an honorable history.
Two other contributions
deal directly with the gold question. Michael David Bordo's "The Gold Standard:
Myths and Realities," and the late Robert E. Weintraub's "The New Role
for Gold in U. S. Monetary Policy" both run counter to the general spirit
of the book—as does Robert E. Hall's "A Free-Market Policy to Stabilize
the Purchasing Power of the Dollar." The spirit of these papers can be
accounted for in terms of two contrasting views of gold: Some monetary
reformers see gold as a device for conferring credibility upon a monetary
authority; others see gold as an attractive alternative to a thoroughly
discredited monetary authority. Bordo and Weintraub have adopted the first-mentioned
Bordo (p. 198) clearly sees
gold as an instrument of (rather than an alternative to) a monetary authority.
He portrays gold, so used, as a mixed blessing and then, in the last two
paragraphs of his paper, suggests two possibly superior monetary standards:
the Fisherian tabular standard and the Friedmanian monetary rule. The distinction
between a decentralized system and a centralized system is simply ignored.
Weintraub's proposed scheme involves a non-convertible gold certificate
whose initial value reflects a gold-value of $42.22 per ounce. Programmed
increases in both the number of certificates and their non-redemption value
would be implemented so as to promote price-level and economic stability.
Robert E. Hall, who rejects all such roles for gold, advocates a policy
of pegging the rate of interest. He does not deal with the problems of
pegging an otherwise market-determined interest rate, a rate that must
continually adjust to changing preferences, technologies, and resource
Although Richard H. Timberlake
does not specifically call for a gold standard, his "Federal Reserve Policy
Since 1945: The Results of Authority in the Absence of Rules" adopts the
above second-mentioned view of gold. He conceives of the gold standard
as an unregulated monetary system (p. 189), and he recognizes that "An
unregulated monetary system implies the abolition of the central bank"
(p. 191). But as hinted in his title, gold or no gold, Timberlake prefers
rules to authority.
Murray N. Rothbard's contribution
helps to complete a modern view of regulatory agencies. His "The Federal
Reserve as a Cartelization Device: The Early Years, 1913-1930" demonstrates
that the Fed-as-cartel story of the Federal Reserve Act and subsequent
legislation dovetails nicely with similar stories about e.g. the Interstate
Commerce Commission and the Federal Trade Commission.
J. Stuart Wood's "Capital
Formation in the United States and the Question of a Capital Shortage"
associates inflation with capital consumption. Jonathan R. T Hughes's "Stagnation
without 'Flation: the 1930s Again" confirms that the New Dealers were bad
economists but good politicians. Stephen J. DeCanio analyses the effects
of "Expectations and Business Confidence During the Great Depression."
In his Introduction Barry
Siegel remarks that after being in existence for more than seventy years,
the Federal Reserve, we might expect, should be imbued with "serenity and
wisdom." But both his introduction and the papers that follow suggest that
it is imbued instead with senility and sclerosis. As economists, the contributors
to this volume have added at a high academic level to the discourse on
monetary matters during these troubled times; as reformers, they are chomping
at the bit while they await—and possibly contribute to—the Fed's passing.
Roger W. Garrison