vol. 52, no. 2 (Octoberl), 1985, pp. 572-74           


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 arbitrary.
        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 of what?
        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 view.
        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 availabilities.
        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
    Auburn University