The Money Interest and the Public Interest: American Monetary Thought, 1920-1970 (review)

The title of this penetrating study reflects one of the major concerns of American institutionalism and the Progressive tradition: the role of money and high finance in a democracy, and how sectional interests in money may diverge from the social interest.

The three economists whose work is scrutinized—Allyn Young (1876–1929), Alvin Hansen (1887–1975), and Edward Shaw (1908–94)—are very different characters who addressed the issue of money against very different world conditions and academic tides. Nevertheless, they shared approaches that distinguish them from the orthodoxies of their day; and they are misunderstood by today’s mainstream. Perry Mehrling’s virtue is to have explained the intellectual and social milieus that shaped the Young-Hansen-Shaw research agendas and their engagement in institution building and public policy.

All three were bridge builders between the quantity theorists and their opponents. Though their interpretations do not always coincide, they shared a common concern for realism, hence a common rejection of equilibrium theorizing, whether it be that of Irving Fisher’s version of the quantity theory, Keynesian multiplier analysis, or Walrasian general equilibrium theory (especially its “real,” nonmonetary version). All three understood money and the organic deepening of the financial system as a nonneutral partner of a disequilibrium growth process.

Young and Hansen studied under Richard T. Ely and John Commons, whence their belief that economic enquiry should be “engaged,” realistic, and empirical rather than a prioristic. Young pioneered detailed investigation of banking statistics to understand seasonal and cyclical flows of money, credit, and reserves between New York and banks of the interior, as well as gold flows with the outside world. An elastic supply of credit was needed for seasonal, emergency, and secular needs, but a strong central bank was essential to protect the public interest and moderate the cycle.

Though cycles may be nonmonetary in origin, they are always monetary in nature, Young concluded, for money underpins the whole system and is inherently unstable (echoes of Ralph Hawtrey) absent a monetary standard defended by a body whose concern is not profit and accommodation of every demand for credit, but rather the maintenance of sustainable growth. But Young—like Hansen and Shaw—understood that this could not be fully resolved without international cooperation. Shortly before his untimely death, Young condemned the deflationary hoarding of gold by noncooperating central banks. He did not live to see the Great Depression but would have despaired at the inadequate response of monetary authorities.

Prolonged depression caused Hansen to believe that demand for loans rather than supply of money was key. Hence his eventual “conversion” to Keynesian fiscalism and embrace of big government and the “new frontier,” though Mehrling says Hansen endorsed Keynes only when he thought Keynes had moved closer to him! Meanwhile, Shaw condemned short-term equilibrium Keynesianism and later turned to problems of long-term growth and financial deepening. In short, Mehrling’s book has highlighted the creativity and vitalism that may arise from the tensions between a distinctive American institutionalist tradition and the more formalistic approaches that have run in parallel.