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
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