The Money Interest and the Public Interest: : American Monetary Thought, 1920‐1970

Citation

Backhouse, R.E. (1999), "The Money Interest and the Public Interest: : American Monetary Thought, 1920‐1970", Journal of Economic Studies, Vol. 26 No. 1, pp. 73-75. https://doi.org/10.1108/jes.1999.26.1.73.1

The Keynesian revolution is probably surrounded by more myths than any other episode of the history of economic thought. This outstanding study of US monetary economics challenges several of these. Central to the whole story is Alvin Hansen, who appears not as a convert to pure Keynesianism, but as someone who remained an intitutionalist in his outlook, unable to accept many aspects of Keynesian economics. Hansen drew on the continental business cycle tradition initiated by Albert Altalion to arrive, independently of Keynes, at an income‐flow analysis of the depression. After the general theory he allied himself with Keynes because he saw that Keynesian economics could be used to further the goals to which he was committed. Before Hansen came Allyn Young, perhaps best‐known for his famous article on increasing returns, but also responsible for an extensive body of writing on monetary economics. After Hansen comes Edward Shaw, also an institutionalist in his outlook, but who used orthodox ways of expression in an attempt to communicate effectively with other economists.

Mehrling’s book comprises intellectual biographies of these three figures. Each represents a different generation in institutionalist monetary thinking and each faced a different underlying problem. Young studied with Richard T. Ely at Wisconsin around 1900 and assisted with the revisions of the latter’s textbook between 1908 and 1923. For him, the overriding monetary question was stabilisation. Hansen too was influenced by Ely and John R. Commons, but he started his studies 15 years later, completing his PhD only in 1918, and was concerned primarily with the problem of depression rather than stabilisation. Shaw was a generation younger than Hansen and saw his main task as explaining the role of money in economic development.

All three, Mehrling contends, have to be understood as working within the institutionalist tradition. Young and Hansen were introduced to institutionalism at Wisconsin. After the Second World War, Keynesian doctrine spread widely within US universities and Shaw was able to develop a distinctive approach to monetary economics only because he was comparatively isolated at Stanford, then a second‐tier university. Institutionalist monetary economics differed from the quantity‐theory and Keynesian orthodoxies. It was inductive, all three of the book’s subjects immersing themselves in financial data as the starting point of their inquiries, and it rejected the simplifications found in both Keynesianism and the quantity theory. Shaw, for example, objected to the monetarist doctrine of long run neutrality of money on the grounds that money played a structural role in the economy and affected growth in the long run.

The story Mehrling tells is persuasive and important and such criticisms as I have concern only marginal points. At several points I found myself seeing analogies with Hawtrey’s very unorthodox view of money, rooted in the link between flows of goods and the creation of trade credit. Given Laidler’s claim that Hawtrey lies at the root of the Chicago tradition in monetary economics, such a link would be interesting.

More seriously, the book’s subtitle is “American monetary thought, 1920‐1960”, whereas one might well argue that it concerns but one tradition in US monetary thought. To complete the story requires that Mehrling’s story is told alongside that of Fisher, Chicago and more well‐known episodes in monetary economics. However, the institutionalist story is a distinctively US one, rooted in the progressive movement. Moreover, it impacts very heavily on orthodox stories, such as that of the Keynesian revolution. The Young‐Hansen‐Shaw story is thus central to an understanding of US monetary economics during this period.

One of the most interesting aspects of a new interpretation such as this is the light it sheds on the role played by characters other than the principal ones. Dennis Robertson, marginalised in most stories of the Keynesian revolution, emerges as a major influence on Hansen. The empirical work of Raymond Goldsmith and Morris Copeland is a significant factor underlying the work of both Hansen and Shaw. Mitchell and Arthur Burns are more sympathetically treated than in many accounts of their debate with Tjalling Koopmans and the Cowles Commission in the mid‐1940s.

Mehrling is writing this book as a historian, trying to understand the developments he discusses. It is, however, hard to avoid drawing the conclusion that he is attracted by the institutionalist tradition that he describes so well. One of the most important effects of the Keynesian revolution was methodological, and Mehrling provides further evidence that, in sweeping away so much of the variety of earlier monetary economics and business cycle theory, there were significant losses to be set against the gains. That monetarists should argue this is no surprise, but Mehrling shows that the case can be made from the other side too.

The structure of the book, as three intellectual biographies, is an unusual way to tell the story of monetary economics. It is, however, extremely effective. Readers may start out wondering whether it is going to become an exercise in reviving forgotten marginal figures but it soon becomes clear that it is much more than that. By the time we get to Hansen it becomes clear that what we have is a major reinterpretation of US macroeconomic thought.

The Money Interest and the Public Interest is an important book that is clearly essential reading for anyone interested in the history of twentieth‐century macroeconomics or in the remarkable transition that took place in economics between the 1930s and the 1950s. Perhaps controversially, I would like to suggest that it shows that the marginal returns to historians of economic thought from working on topics such as this far exceed those from working on the “big names” such as Smith, Ricardo, Marx and Keynes.