Money, Banking and Inflation: Essays in the History of Monetary Thought.

Most contemporary monetary theory is woefully ahistoric. Today, volume after volume buries us in abstract formalistic models whose technical precision is eclipsed only by their intrinsic sterility. The rich legacy of monetary thought has been inadvertently lost or callously pushed aside. Gone are the visionary theorists - the Thorntons, Bagehots, and Penningtons - whose work defined and refined the very foundations of monetary thought. These men gave the theory life, not through reduced form equations but in open forum exchanges.

Fortunately, not all contemporary research displays this historical deficiency. The work of Thomas M. Humphrey is the conspicuous exception. Humphrey returns historical perspective by employing a methodology which he calls the "historical-doctrinal" approach. This approach allows Humphrey to "select a prominent theory or idea, examine its constituent components, identify its doctrinal origins and trace its evolution across a succession of writers, events, episodes and public policy debates" [p. xi]. Each of the thirty-eight essays in Money, Banking and Inflation: Essays in the History of Monetary Thought uses this evolutive methodology. The essays were written over a twenty-one year period at the Federal Reserve Bank of Richmond where Humphrey is a research economist who specializes in applying the history of economic thought to the analysis of policy problems. All the papers in this volume have been published previously but they have often been difficult to obtain. This collective volume eliminates this problem and adds a very convenient cumulative index which makes tracing common themes far easier.

The book is divided into nine sections which include banking theory, interest rates and inflation, the quantity theory, inflation theory, the Phillips curve, money neutrality, price-level stabilization, open economy consideration and geometrical tools. Running through all of Humphrey's essays are two defining beliefs. The first is that most of the core ideas actually date back to at least the eighteenth or nineteenth centuries and are seldom named after their original discoverer. Humphrey's second belief is that strawman interpretations of older theories are often misleading or actually wrong. When viewed from Humphrey's historical-doctrinal perspective it can be argued that, in many respects, monetary economics is only a superficially progressive science [p. x]. Humphrey believes that monetary theory has certainly developed a more powerful statistical foundation and mathematical structure but that its central focus has changed little in the past few centuries. Issues such as money neutrality, nominal rigidities, and inflation theory remain the fundamental arguments. Tracing the evolution of these core issues is where Humphrey truly excels. A good example of this is found in his essay entitled "Precursors of the P-Star Model." In this paper Humphrey shows that the model which the New York Times hailed as "new theory" in 1989 [p. 178] actually has roots reaching back more than two centuries. The foundations of the inflation forecasting P-Star model originated in David Hume's essays "Of Interest" and "Of Money" in 1752 [p. 178]. After Hume, the theory was refined by Henry Thornton, Irving Fisher and finally Milton Friedman. Humphrey does an excellent job of showing that the only thing that is truly new about the P-Star model is its name.

The format of the individual essays is quite consistent despite the collection's twenty-odd year gestation. Most of the papers use a particular model or topic as the primary research vehicle. In essays like "The Real Bills Doctrine," "Lender of Last Resort: The Concept in History," and "The Early History of the Phillips Curve" Humphrey takes a single topic and traces its development through as many as two dozen separate scholars. At every stage in the theory's evolution the author points out the contributions made by each scholar as well as the historical undercurrents which may have shaped their thought. Alternately, in several of the papers, Humphrey focuses on the work of a single individual or pair of authors. "Keynes on Inflation," "Adam Smith and the Monetary Approach to Balance of Payments" and "Ricardo Verses Thornton on the Appropriate Monetary Response to Supply Shocks" are examples of this structure. Irrespective of the individual format, when the collection is taken as a whole very comprehensive sketches of the early monetary economists emerge. As the reader proceeds through the volume it becomes clear that history can and does repeat itself, and, as a result, the core concerns of contemporary thought have actually been with us for centuries. Without the benefit of history's lessons we are fated to repeat many otherwise avoidable policy mistakes. Vassily Kliuchesky, the late Russian medievalist, was right when he said "History teaches nothing, but only punishes for not learning its lessons."(1)

This book will prove to be an indispensable reference for anyone who teaches monetary theory at any level. Beyond this, its true usefulness probably lies as a supplemental text to money and banking courses. Today, any money and banking textbook which contains a focus box on the 1984 Continental Illinois failure is considered to have a historical slant. As the standard texts continue to drop their historical coverage it becomes very difficult to find supplemental material that is accessible to the undergraduate. This volume will certainly fill this void. The majority of the collection does not require a sophisticated understanding of monetary theory. Each essay can stand alone and will need little explanation. I have been using several of the articles for the past two years in my own undergraduate money and banking courses. The response has been excellent. In particular, "The Theory of Multiple Expansion of Deposits: What It Is and Whence It Came" has proven to be very effective. It shows students that the ideas that most texts take for granted actually have unique and interesting individual histories. Every essay in this book has this potential. I highly recommend this book to everyone.

Michael C. Carroll Colorado State University 

1. Quoted in Vladimir Smelev and Nikolai Popov, The Turning Point (New York: Doubleday, 1987), p. 75.