Mason Gaffney invites me to reconcile Lauchlin Currie's article on "The
Decline of the Commercial Loan" (QJE August 1931) with his campaign
against the real-bills doctrine (as, for example, in his paper "The
Failure of Monetary Policy to Prevent the Great Depression of 1929-32",
JPE April 1934, or in his 1934 book.

Actually the phrase "real-bills doctrine" was not Currie's but Lloyd
Mints's (whom Mason mentions and who was influenced by Currie). Currie
himself referred instead to "the commercial loan principle of central
banking" (hence identifying it with the Banking School as against the
Currency School -- the latter more focused on the quantity of money than
the quality of loans). He also referred to it as "the needs-of-trade
doctrine", with its focus on short-term, "productive" commercial loans
as the proper business of commercial banks.

Currie's diagnosis of the onset of the Great Depression was that the Fed
had become increasingly preoccupied with "speculative" and
"unproductive" credits. These it attacked with monetary instruments
(interest rates and open-market operations) that were ineffective
against loans by banks and non-banks, but only too effective against the
nation's money supply (purchasing power). He defined money as cash plus
demand deposits (today's M1) and this was constrained to slower growth
than real GDP. However, a gentle rise in the income velocity of money
enabled nominal income (Pq) to be taken off the market with MV, with
prices steady or falling. As the real economy turned down the Fed
continued restrictive measures until the stock market burst. Then the
cry was "liquidate, liquidate!" The Fed did too little too late to help
the banks out of debt and a downward spiral developed.

The Fed was not much interested in the money supply, and there was no
series published on it until Currie's article in the QJE Nov 1933 on the
income velocity of circulation. Instead the Fed focused on "credit" or
loans. Banks and non-banks make loans based on savings deposits as well
as demand deposits, and the Fed's volume of "credit" series bore little
relation to current output and employment. Another of Currie's
significant articles at this time was "The Treatment of Credit in
Contemporary Monetary Theory", JPE Feb 1933, exposing the hopeless
confusion surrounding the word credit.

Incidentally, Currie also insisted that short-term commercial loans were
in practice less liquid than marketable securities because banks,
especially country banks, were reluctant to call in local loans to
farmers etc with urgent seasonal needs.

His 1931 Harvard PhD thesis was on "Bank Assets and Banking Theory"
where the commercial-loan theory was subject to detailed criticism. I
edited a special issue of the _Journal of Economic Studies_ in 2004 that
includes chunks of this thesis, as well as many of his hitherto
unpublished memoranda to Marriner Eccles and President Roosevelt when he
was their close economic adviser at the Fed (1934-39) and in the White
House (1939-45). I have electronic copies of much of this that I can
send anyone interested.  

On Mason's other question about why "Currie came under extreme pressure
from various red-baiters who eventually drove him into exile from the
U.S.", first he was never "in exile". He was recruited as the chief of
the first World Bank comprehensive country study mission to Colombia in
1949 [it included Richard Musgrave who died last month] and stayed on at
the urging of the Colombian Government. He did not flee the country, and
indeed returned to give evidence to a grand jury in the famous case of
Owen Lattimore in December 1952. But the atmosphere in the US at that
time was poisonous and he chose to stay in Colombia after marrying a
Colombian. The US refused to renew his passport in 1955, ostensibly on
the grounds that as a naturalised US citizen he had to remain resident
in the US (this rule has since been declared unconstitutional).

When the "Venona" papers were declassified in 1996 Currie's name cropped
up nine times in Soviet wartime cables. It has suited some
neoconservatives to regard this as evidence that Currie was a Soviet
spy. I deal with this -- and the related case of Currie's friend Harry
Dexter White -- in a paper in HOPE, Fall 2000 and (with James Boughton
of the IMF) in a paper in _Intelligence and National Security_, Fall
2003, entitled "Politics and the Attack on FDR's Economists: From the
Grand Alliance to the Cold War".

As for the effect of all this on Currie's postwar reputation and
influence -- which Mason also asks about -- I mention in my biography
(Duke UP, 1990) that Friedman & Schwartz (1963) ignored his seminal
contributions in the 1930s partly on the grounds that, as Friedman said
later to Karl Brunner when questioned on this: "Currie? He is a fugitive
from justice somewhere in South America".

But Friedman later offered an explicit 'mea culpa' for his neglect, in a
letter to David Laidler that was mentioned in the latter's article on
the origins of the Chicago School (JPE, December 1993 -- which coincided
with the date of Currie's death). 

Roger Sandilands