Published by EH.Net (July 2022).

Ben S. Bernanke. *21st Century Monetary Policy: The Federal Reserve from
the Great Inflation to COVID-19*. New York: W. W. Norton & Company, 2022.
xxvi + 480 pp. $35.00 (hardcover), ISBN 978-1324020462.

Reviewed for EH.Net by Lanny Ebenstein, Department of Economics, University
of California, Santa Barbara.



Ben Bernanke\’s *21st Century Monetary Policy* is sure to become a classic
work on the history of the Federal Reserve System in the postwar era to the
COVID-19 recession. It will be required reading for all future students of
and officials at the Fed. Bernanke\’s perspective is shaped by two
fundamental virtues: his academic work as a scholar of the Fed and of
monetary policy and his practical work as a member of the Federal
Reserve\’s Board of Governors and, from 2006 to 2014, its Chair. Both
virtues are displayed in this excellent book.

Bernanke\’s description of Fed policymaking will be enlightening to most.
There has not really been a work on the history of the Fed that has
captured the public or academic minds since Milton Friedman and Anna
Schwartz\’s *A Monetary History of the United States, 1867-1960* (1963).
Friedman\’s mantra, \”Inflation is always and everywhere a monetary
phenomenon,\” became implanted in popular consciousness, and his monetary
interpretation of the Great Depression–that the primary source of the
depression was a monetary collapse initiated by the Federal Reserve System
or which, in any event, the Fed could largely have forestalled–became the
conventional scholarly wisdom.

On the basis of favorable comments Bernanke made at Friedman\’s 90th
birthday party in 2002–\”I would like to say to Milton …: Regarding the
Great Depression. You\’re right, we [the Fed] did it. We\’re very sorry.
But thanks to you, we won\’t do it again\” (p. xvii)–it is sometimes
mistakenly thought that Bernanke is basically a Friedmanite monetarist. As
he makes clear in *21st Century Monetary Policy*, however, Bernanke is
fundamentally a Keynesian in analytic apparatus and perspective:
\”So-called Keynesian economics, in a modernized form, remains the central
paradigm at the Fed and other central banks\” (p. vii). Friedman\’s mantra
is replaced by Bernanke\’s dictum: \”Although growth in the money supply
and inflation bear some relation in the long run, at least in certain
circumstances, in the short run the connection can be unstable and
difficult to predict\” (p. 35). For Bernanke–as with his predecessors and
successors at the Fed–monetary policy, except in unusual circumstances, is
basically interest rate policy.

The early chapters of *21st Century Monetary Policy* on the Fed from the
1960s through the 1990s have many nuggets of information and provide great
insight into theoretical analysis at the Fed to this day. William McChesney
Martin, Chair of the Federal Reserve from 1951 to 1970, famously said that
the Fed\’s job is to \”take away the punch bowl just as the party gets
going,\” that is, to raise interest rates in order to stem inflation as
economic growth increases. This is the policy to which Martin and his
successors have largely adhered. Bernanke\’s outlook is that inflation is
usually conditioned by \”changes in economywide *demand* for goods and
services [emphasis in original]\” and \”shocks to supply rather than
demand\” (p. 12), with significant emphasis on \”expectations\”: \”Debates
about the determinants of inflation expectations and about how central
banks can affect those expectations have been central to the analysis and
practice of monetary policy since at least the 1960s, if not earlier\” (p.
13). Friedman\’s focus on money supply is hardly a factor in the analysis.

The Fed Chair to whom Bernanke gives the most praise is Paul Volcker, who
served from 1979 to 1987. Bernanke credits Volcker for having the wisdom
and tenacity to initiate and maintain the high interest rates between 1979
and 1982, which, in the form of the federal funds rate, reached 20 percent
in 1980–the highest ever, before or since. As a result of Volcker\’s \”war
on inflation\” (p. 36), as Bernanke and others have called it, inflation
\”dropped from about 13 percent in 1979 and 1980 to about 4 percent in 1982
… Thus, in only a few years, the Fed largely reversed the increase in
inflation built up over a decade and a half\” (p. 36).

Bernanke\’s appraisal of Alan Greenspan\’s long span as Fed Chair from 1987
to 2006 is somewhat more, at least to this reviewer, mixed. Though he gives
Greenspan high marks for managing the domestic and, to a significant
extent, world economies for most of his tenure in office, it cannot be
gainsaid that the roots of the Global Financial Crisis and Great Recession
emerged during Greenspan\’s chairmanship. Bernanke sagely observes: \”The
extended rise in the Fed\’s [interest] policy rate likely contributed to
the decline in housing prices that began in the summer of 2006\” (p. 106).

With respect to his own transformative chairmanship, Bernanke recounts the
aggressive and unprecedented actions the Fed took to diminish the Global
Financial Crisis and Great Recession. He persuasively argues these actions
were necessary to prevent the meltdown of the American and world financial
systems and thereby economies. About the only criticisms I would offer here
of his presentation is that he does not adequately incorporate into his
analysis the impact of nonfinancial factors, such as increasing energy
prices and demographic changes, on economic activity, but this is perhaps
not an entirely fair cavil to make against a work whose title states it
concerns monetary policy.

*21st Century Monetary Policy: The Federal Reserve from the Great Inflation
to COVID-19* extends to 2021 and includes thinking on the future of Federal
Reserve and its policy, but it is probably best to defer discussion of
these subjects as a result of their proximity to the present. Bernanke
believes that a historical approach is the best way to understand \”how the
Fed\’s tools, strategies, and communication have evolved to where they are
today\” (p. xi). All interested in the history of the Federal Reserve,
Federal Reserve policy, and the theory underlying Fed policy will want to
read this book.



Lanny Ebenstein is a Lecturer in the Department of Economics at the
University of California, Santa Barbara. He is the author of ten books and
many articles on economic and political history, history of economic
thought, and public policy.

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