Mason asks: “Please define the ‘real-bills 
doctrine’, as you and Currie use the term. More 
specifically, is it the same thing as a quality 
control keeping banks out of real estate?”

Partly it is that. Currie’s concern was that by 
placing such stress on the quality of bank assets 
(and “credit”) to the neglect of the quantity of 
money, the “real-bills doctrine” (Currie called 
it the “commercial loan” or “needs of trade” 
theory of banking) had led policymakers into 
grave errors in the late 1920s and early 1930s.

This was the thrust of his 1931 Harvard PhD 
(“Bank Assets and Banking Theory”), three 
chapters of which were published for the first 
time in the Journal of Economic Studies, 31:3/4 
(2004), including chapter 1, “History of Theory 
of Bank Assets”. (An electronic version is available from me on request.)

He argued against the Fed’s insistence 
(especially after Benjamin Strong’s death in 
1928) that the most appropriate type of bank 
lending was short-term commercial loans. He 
claimed this almost guaranteed a pro-cyclical 
“perverse elasticity” of money, because demand 
for commercial loans and demand for money (the 
reciprocal of its velocity) vary inversely. And 
there was also a marked secular decline in 
commercial loans as a share of bank assets. Only 
by diversifying into longer term loans could 
banks be expected to remain fully loaned up ­ an 
important condition for effective monetary 
control in a fractional reserve system. 
Furthermore, short-term commercial loans 
suffered, paradoxically, from being often less 
liquid (because less marketable) than long-term loans.

Mason asks about real estate loans, and I 
sympathise with his concern about their role in 
the business cycle. However, control of 
speculation (where it is truly of the 
destabilizing kind) should not lead the 
authorities to abandon contra-cyclical monetary control.

In _The Supply and Control of Money in the United 
States_ (Harvard 1934) Currie wrote (alluding to 
Hawtrey’s _The Art of Central Banking_ and to his 
own article on the failure of the Fed to prevent 
the depression, JPE April 1934 ­ an article 
selected by Harry Johnson in 1963 as one of the 
24 best articles in the JPE’s first 70 years):
       “From the standpoint of monetary 
expenditures in relation to output, the evidence 
of a decline in building construction and in 
particular the various deflationary forces at 
work abroad, there exists strong ground for the 
view that a modification of the tight monetary 
policy in the spring of 1929 was in order. The 
reserve administration’s desire to “accommodate” 
industry, however, took the form of endeavoring 
to secure lower interest rates by forcing 
liquidation of security loans. Thus it brought 
about still higher interest rates, instead of 
attempting to offset the tightening effect of 
speculation. The result was the continuance of 
the restrictive policy for a considerable time 
after business activity had slackened” (p.44).

He went on to condemn A C Miller's view that “ 
the most simple formula of operating the Federal 
reserve system to give the country stability… is 
to stop and absolutely foreclose the diversion of 
any Federal reserve credit to speculative 
purposes. That is about as far as you can get, in 
so far as credit is concerned.”

Currie insisted that this approach both 
precipitated the depression and explained its depth. Thus:
       “… there is probably no problem of equal 
importance in the art of central banking to that 
of the determination of the function of banks. As 
long as the reserve administration conceives its 
task as that of the qualitative control of bank 
assets, the best work of the monetary theorists 
cannot fructify in actual banking policy.”

Is there a better case than this for the role of 
the history of economic thought in informing and evaluating current policy?

Roger Sandilands