Monetary historians need to move beyond Friedman and Schwartz’s Monetary History of the United States

I had blogged about the Nobel Money and Banking Symposium held in Sweden recently.

In the symposium, Prof Barry Eichengreen presented a paper chastising monetary/financial historians for being too narrow in their research.

First, there is too much attention on  Friedman and Schwartz’s Monetary History of the United States which basically looked at US as closed economy. Since then research (including Prof Barry’s) has shown how gold standard led the depression to become a global event. Second related point is much of research remains centred on US economy and does not look at other economies. Third, we draw false similarities such as those between gold standard and Euro whereas both systems are very different.

He starts with a bang:

Everyone presenting at this symposium has an inference problem, the problem of inferring which aspect of their work they’re supposed to discuss. My inference problem may be more serious than most, since my work is historical, atypically for this setting. That work is also on international money and finance, where the stated focus of this symposium is money and banking. Still, I infer from the fact that I was invited to participate in this session that it would not be amiss for me to talk about my work on international business cycles, monetary transmission, and the Great Depression (the last of which my co-presenter has called “the holy grail of macroeconomics”).


On Monetary history of US book:

Early work on the Depression was heavily closed economy. I am thinking, first and foremost, of Friedman and Schwartz’s Monetary History of the United States, arguably the most influential book on money and banking in the 20th century.2 Methodologically, Friedman and Schwartz showed how statistical and narrative material could be combined into more than the sum of the parts. They described a model in which shocks to the money stock and the banking system were transmitted to the real economy. They applied their framework to the Great Depression, the ultimate testing ground for any theory of macroeconomic fluctuations.

I don’t believe I’m doing violence to their analysis when I say that theirs was essentially a closed-economy model in which the money stock was under control of the national authorities, and in which the gold standard, exchange rates and capital flows were not central to the story. This was a logical perspective for economists writing in the 1950s and early 1960s, when open-economy considerations didn’t loom as large as before or since, and for scholars whose stated focus was the United States, a relatively closed economy.

But it became less logical once one recognized that the Great Depression was a global phenomenon and that national monetary policies were endogenously determined, to a considerable extent, so long as countries maintained fixed exchange rates, as they did in the 1920s and 1930s.

On flawed comparisons:

This brings me to a final issue – that of false analogy – relevant to a session with the title Lessons from the Global Financial Crisis and Crises Past. An analogical fallacy, according to Madsen Pirie, “consists of supposing that things which are similar in one respect must be similar in others.”17 This kind of fallacious reasoning by analogy is a very real problem when attempting to draw lessons from the Global Financial Crisis and crises past .

An example is the analogy between the gold standard and the Great Depression on the one hand and the euro crisis on the other. For about ten years it was popular to argue that because the gold standard collapsed in the Great Depression, the euro system would collapse in the Great Recession. Or, framed normatively, it was popular to argue that since countries recovered in the 1930s only after they abandoned the gold standard, European countries in order
to recover should abandon the euro.18 My view from the start was that this was flawed analogical reasoning.19 Some similarities between the gold standard and the euro there were, but over-emphasizing them led commentators to neglect key differences. Reintroducing your national currency when you no longer have one is an order of magnitude harder than devaluing that currency when you still retain it, and the destabilizing financial consequences of even contemplating that option, in the case of the euro, are considerably greater.

The euro was an obligation of and governed by a treaty signed by a group of countries, whereas going on or off the gold standard was a unilateral national decision that did not immediately put other treaty obligations and political relationships at risk.20 These two considerations, one financial and one political, made it obvious (at least to me) that no European country was going to abandon the euro. The comparison between the crisis of the euro and the crisis of the gold standard was valuable because it pointed up differences, not similarities.



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: