American Monetary Thought, 1920-1970 by Perry Mehrling

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Table of Contents

Introduction
Organization of the Book
Conclusion
Works Cited

Introduction

The book under review is The Money Interest and the Public Interest: American Monetary Thought, 1920-1970, and it was written by Perry Mehrling and published in 1997. It examines the general monetary thought in America as was during the time of Keynes, leading up to the Second World War and the subsequent periods. Perry’s main inspiration to write this book was his displeasure regarding the conditions that were prevailing in America and the monetary policies that were in place at that time. The author, therefore, set out to review the monetary economics history of the country to find out how they dealt with similar situations in the past. He focused on the works of three economists to help him accomplish his goal, namely Alvin Harvey Hansen, who lived between 1887 and 1975, Allyn Abbot Young who lived between 1876 and 1929, and finally Edward Stone Shaw who lived between 1908 and 1994.

In as much as the focus was on their work, Perry also focused on the economists as individuals to understand what actually led them to develop the kind of thinking they had. He, therefore, did extensive research on them and their published and unpublished works and settled on showing the relationship between peoples’ democracy and its relation to finance. In addition, he studied the relationship between the American peoples’ interest and money interest (Mehrling x). It is important to note at this point that the book took a biographical view on how the three mentioned economists looked at the situations that faced them at the time they gave their views on monetary economics of the time such as those experienced during the different wars, the great depression and the stagnation of the economy among others.

According to Perry, what set economists he focused on apart from the rest is that they spoke out regarding the economic issues that were prevailing during their time despite the obvious tensions their outspokenness caused, as opposed to the current situation where most economists choose to remain dumb and let issues play themselves out. Therefore, the book was meant to inspire economists to give their views and opinions on burning issues that are relevant and require to be talked about (Mehrling ix).

Organization of the Book

The book is organized into three major sections with each section focusing on a different economist and the situations that were prevailing during his time. It has eleven chapters, with the first section having four chapters, the second also having four, and the third and final section having three chapters. A detailed discussion is given below:

Section One- Chapters One to Four

The first section focuses on Allyn Abbot Young and his time as well as his intellectual thought and influences. A further breakdown of this section is as follows:

The first chapter gives Allyn Abbot’s intellectual formation, which is a brief personal history, family background, and other influences that led him towards his line of view. Perry gives Abbot’s initial interest in economics as having been influenced by his father who showed major interest and support for the free movement of silver. In high school, he studied political economy with his book of focus being Richard Ely’s Outlines of Economics. Later he went on to work, and then joined the University of Wisconsin where he majored in economics and minored in history and statistics. After graduating, he opted to work as a professor as opposed to working in a secure government job. During his working life, Abbot faced a series of personal problems but they did not dent his quest to come up with publications of his own on the prevailing economic conditions. Some of his works were published in other people’s books such as Ely’s Outlines of Economics in 1908, 1916 and 1923 editions.

While developing his work, he had discovered that there was a disconnect between statisticians’ work and that of economists and therefore he saw his main challenge was finding a way to bring the two together, since some of the assumptions on which classical economists worked, such as ceteris paribus did not apply to the prevailing situations. He was therefore of the opinion that new concepts would have to be introduced to get rid of this disconnect (Mehrling, p. 29). At the time, new statistical theories were being developed and had brought with them a lot of enthusiasm from supporters. He was of the view that when these fields operated differently on taking actions regarding prevailing economic conditions nothing much would be accomplished and therefore there was a need to bring them together. This shows his outspokenness regarding the issue even at the onset of obvious opposition and thus fulfills Perry’s need to encourage economists to speak out on views that would contribute positively towards bringing more viable solutions to matters concerning money and peoples’ economic interests.

Allyn’s realization of the classical economists’ downplay of the use of monofin the economy, though not discrediting their theories sought to show the importance of money and the monetary system in shaping peoples’ economic life and as such, they need to incorporate factors such as prices of commodities was necessary.

The second chapter of the book introduces monetary ideas that were developed by economists such as Irvin Fisher who tried to introduce the concept of the quantity of money into the economy in helping to resolve the situations that were at hand and also enable the country to take a different direction as far as the public’s interest on money was concerned. Fisher even came up with a formula to determine the level of money supply in the economy at any given time. This sought to change the focus from the views held by most classical economists regarding the relationship between the quantity of money in the economy and the prevailing economic conditions.

With the onset of the war, policies were put in place to counter the effects of the war and as such, they affected the level of money in the economy. When it came to an end new actions were taken to help in the recovery of the country’s monetary systems. These reforms threatened the existence of small businesses but not at the expense of big businesses thereby calling into action the progressive economists who sought to defend the survival of people and protect their interests in relation to money. Among those who participated in pushing for the interests of the public were economists like Ely and Robert La Follette. Even though they faced opposition, they had already instilled the thought in people and not even politics could hinder their actions (Mehrling, pp. 51-52). This brings out Perry’s agenda as it encourages economists to push their views to work for the public’s interest even when they face opposition because the eventual result is to do what is right for the public because they largely determine the direction of the economy of a country takes.

Section Two- Chapters Five to Eight

This second section focuses on Alvin Harvey Hansen and centers on four sections, namely his intellectual formation, the great depression, the stagnation period, and the golden age. Again, Perry in the first section concentrates on Hansen’s personal history, showing how it influenced his economic thought. Alvin Hansen’s thoughts were influenced by the works of economists such as Schumpeter who contributed to the business cycle theory. This theory paved the way for new developments regarding investments at the continental or international level. Hansen was also influenced by Albert Aftalion who was also involved in the development of the business cycle theory. This is despite the fact that Aftalion’s work faced opposition due to the fact that it was developed with the use of modern analytical tools as opposed to the historical tools and views which were more acceptable at that time (Mehrling, p. 99).

Perry credits Hansen with the push to drive for adjustment of the country’s price system in order to allow factors of production to change in relation to changes in technology as was taking place in the country. This is because the inflexibility of the system at the time was leading to a situation of slow economic development. During this period when the country was facing depression, Hansen, therefore, advocated for price flexibility as according to him this was the right solution to the problem. He faced opposition from different economic agents who sought to cushion themselves from the problems caused by the depression by continuing to hinder price fluctuations in line with the prevailing economic conditions (Mehrling, p. 108). It was believed at this point that the depression was part of the economic cycle and after some time, it would end and as such advances in technology would be a good measure to encourage such recovery. This would mean lowering interest rates and the cost of production. Even though Hansen knew that these measures were not forthcoming and thus his greatest fear which was a prolonged depression period was confirmed. Political pressure at this point was also mounting as more and more people called for actions that would lead to a quick economic recovery from the depression. Largely borrowing from the measures Britain had undertaken when it was experiencing depression, Hansen came up with a proposal advocating for aggregate social control such as consumption stabilization. According to him, this would make peoples’ purchasing power more stable, a view that was shared by the likes of Irvin Fisher who was a radical monetarist.

Hansen believed that social control of prices would be more acceptable because of its similarity to the liberal market system, with the exception of unemployment insurance. Internationally he advocated for the control of capital flows to developing economies which would lead to the stabilization of international trade markets and bring back free trade (Mehrling 110). This view has been brought out clearly by Perry in his book and continues to show the importance of borrowing from historical events in order to deal with current situations. This is the whole concept on which his book is built and thus justifies his venture into the historical backgrounds of the periods he is dealing with in this book. This shows that in as much as economies thrive, there are always accompanying downturns and as such, it is necessary to come up with a necessary and viable measure that will salvage the situation quickly and efficiently and as such restore normalcy for the benefit of the public.

Section Three- Chapters Nine to Eleven

In this section, Perry presents the views of Edward Stone Shaw and like in the other sections starts by giving his personal background and main influences for his line of thinking. Shaw established himself as a pre-war economist and his theories and works are largely associated with those of Friedman. Since he held divergent views regarding the monetary policy system of the country, he developed a model of his own to explain his point of view. His theories always portrayed banks as a central unit of analysis as he thought that they had a major role to play as far as the decentralization of the market economy was concerned. Even though Hansen shared his view to a certain extent, Shaw did not agree with Hansen and instead advocated that the country’s reserve base be stabilized to enable the growth and development of the country’s financial infrastructure which would lead to economic growth. Shaw’s views were greatly influenced by those of Robertson, John Canning and Keynes, though not always in a positive way which explains his divergence away from Keynes theories (Mehrling, p. 171).

Shaw’s views were presented in a theory that showed the importance of financial institutions such as banks with regards to economies that were still experiencing growth. To come up with the correct theory, he depended on historical works and the works of his predecessors which he learned from and argued against. The theory was developed in different stages with elements such as financial institutions, markets, monetary systems developed by governments, and the money factor being taken into consideration (Mehrling, p. 201).

Shaw’s drive to come up with his own framework of thinking was influenced by the state of affairs in the economy during the time in which he lived and the actions that were taken to deal with the situation, which he did not agree with. At the time there were divergent views on the country’s monetary thought and to his dissatisfaction, these views influenced the country’s monetary policy and monetary system in a manner he disagreed with (Mehrling, p. 204). This can be compared to Perry’s reason for writing the book under review and encourages thinking beyond the common way in order to come up with new ways of dealing with problems which may prove to be even more efficient even though different from those held by the majority. Shaw’s independence was however revealed in his later works such as the Financial deepening in Economic Development, as he worked on it as an individual was influenced by the development of new thoughts on his part, away from the point of view he held in previous occasions which were incorporated in his works during the 1960’s (Mehrling, p. 206). His works were developed in a period when America was experiencing alarming inflation rates between 1960s and 1980s.

Conclusion

From the book, one gets the historical, intellectual, economical, and policy contributions of Perry’s three major characters who are Abbot, Hansen, and Shaw within the times they lived. Even though Abbot was the only heavyweight and largely recognized economists among the three, Perry manages to tell Hansen and Shaw’s stories in a way that shows their contribution to America’s monetary thought was after the First World War, a period in which work of monetary economists was largely disregarded in the field of economic theory. He also places the three economists in an institutionalized tradition because of their interest in linking money and public interest and showing how finance and money could be used to promote the public interest. Perry thinks that his three main characters were influenced by their quest to serve the public interest and the fact that political insights were not in their favor did not deter them from developing different theories concerning money and finance.

The book is written intellectually and objectively and there is the usage of the necessary language regarding economics in pushing for the views of the three main characters. The information is given in a form of narration but at the same time gives a chronological exposition of different happenings in the periods mentioned.

Works Cited

Mehrling, Perry. The Money Interest and the Public Interest: American Monetary Thought 1920-1970. Massachusetts: Harvard University Press, 1997. Print.

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