Monetary Policy in the United States: An Intellectual and Institutional History.

Hammond, J. Daniel

The first half of this book is a reprinting with minor editing of Timberlake's 1978 book, The Origins of Central Banking in the United States. These chapters (1-9, 11-13, and 15-16) trace the development of the idea of central banking - that an authority should exercise control over the monetary and banking system to stabilize trade - in Congressional speeches and testimony and statements of policymakers from the 1790s up to the advent of the Federal Reserve. Though he gives limited attention to the ideas of economists, Timberlake's primary attention is to the ideas of people directly involved in public policy.

Timberlake's thesis is that "central banking was made, not born, and that it evolved as a pragmatic and opportunistic action when favorable circumstances set the stage." By this he means that there was no decision by authorities that the central banking function was necessary and no deliberate decision to charge an institution with carrying out the function. More often than not the institutions that came to perform central banking were initially proscribed from doing so. For example, in the 1790s arguments were made in favor of the First Bank of the United States as a national bank and as a fiscal agent of the Treasury, but not as a counter-cyclical regulator of the money supply. But in fact the First Bank became the first institution to perform central banking in the U.S. Even the Federal Reserve was designed so as not to give the appearance of being a central bank.

To this previously published history of the evolution of central banking ideas and practices up to the Federal Reserve, Timberlake has added chapters 10, on the origin and judicial sanction of greenback currency, and 14, on the central banking activities of private clearinghouse associations in the latter half of the nineteenth century. There are another eleven new chapters that bring the history through the Federal Reserve period to 1991. In the Federal Reserve era, when one would presume that the central banking function was well understood, Timberlake emphasizes the way political pressures prevented the Fed from carrying out the function effectively. The Fed continued through much of the period to serve the same function for which the First Bank of the United States was created, acting as a fiscal agent for the Treasury. Seigniorage rather than business cycle stability was the Fed's object.

Timberlake's benchmark for evaluating the Fed's performance is the nineteenth century experience of the clearinghouse associations. To evaluate the legal tender fiat currency through most of the Fed's era he speculates on how the historical record would compare with a system of private money. As Timberlake leads readers through the history of deliberations about the Federal Reserve's role, he periodically raises the question of whether the U.S. Constitution actually prohibits the federal government from exercising discretionary control over the money supply. Based on his plain reading of the Constitution, Timberlake's judgment is that it does so. He sees the growth of central banking from the 1790s through the current era of the Federal Reserve and the evolution of money to the current fiat legal tender currency as the replacement of rule of law with rule of men. Moreover, the historical record of deliberations and maneuvers within the Executive Branch, Congress, and the several central banking institutions leads one to be unsanguine about the prospects for wise rule by men.

Among the topics covered by the new chapters are the banking and monetary legislation and policies of the 1930s, the Fed's domination by the Treasury during the 1940s, and the post-Accord period from 1951 through 1967. Timberlake gives particular attention to the presumptions of members of the Patman and Douglas Subcommittees that discretionary rule by the Federal Reserve guided by the Employment Act of 1946 was superior to the gold standard. The debate about whether the Fed should answer to the Executive Branch or Congress is a theme running through the entire post-Accord period.

Timberlake argues that the Federal Reserve's purported experiment with monetarism from 1979 through 1982 was not genuine monetarism, since there was no monetary base targeting, much less a constant growth target. He argues that the Monetary Control Act of 1980 was a disingenuous means to the Fed's acquisition of power rather than enhancement of control over the money supply. He criticizes the Fed under Paul Volcker's leadership for passing over a golden opportunity to sustain price level stability, opting instead to produce seigniorage for the federal government. The Alan Greenspan Fed gets better marks for moving toward a single goal of price level stability. This shift, applauded by most economists, would have been ratified and mandated by House Joint Resolution 382, introduced in August 1989 by Rep. Stephen Neal, chair of the House Banking Committee's Subcommittee on Domestic Monetary Policy. However, the resolution met opposition from the Reagan and Bush administrations, and was not acted on by Congress.

The final chapter contains Timberlake's argument that the Federal Reserve should act as a steward of the real money stock, overseeing its gradual growth. Real money, he argues, is the product of the central bank, and accumulation of real money is analogous to accumulation of capital by business firms. The Federal Reserve was doing a credible job of stewardship in 1991 when Timberlake finished writing this book, and has continued to do so since then. But from the extensive historical record presented in his book Timberlake expects the Fed to be inclined to create seigniorage for the government at the expense of the capital value. He concludes that the public would be better served without a central bank, with the additional benefit of bringing the monetary system within the bounds set by the Constitution. Facing the political barriers to total abolition, Timberlake offers a modestly radical proposal. He would privatize the Federal Reserve banks and allow them to issue notes and provide check clearing and other financial services as demanded by banks. He would freeze the Federal Reserve Board's legal tender liabilities at their current level and restrict the legal tender provision to payments to and from the government. These reforms, he argues, would allow private money to flourish with minimal departure from current institutional arrangements.

Timberlake's book is highly valuable as intellectual history of the ideas that matter most proximately in the formation of public policy institutions and practices, ideas of people inside the government. Paradoxically, the ideas that have been stated most clearly and forcefully by members of Congress in crafting legislation to set up money and banking institutions have often not been the most effective. For the nature and practices of the institutions were determined later by officials who took advantage of opportune situations. This lesson applies not only to institutions such as the Federal Reserve that evolved into central banks, but also to the U.S. Constitution.

J. Daniel Hammond Wake Forest University