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History of Political Economy 35.3 (2003) 606-609
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Politics and Banking: Ideas, Public Policy, and the Creation of Financial Institutions. By Susan Hoffmann. Baltimore: The Johns Hopkins University Press, 2001. xii; 304 pp. $42.00.
This book discusses three institutions: central banks, savings and loans (S&Ls), and credit unions (CUs). The author's self-appointed mission is to analyze these institutions in their role as purveyors of public policy. Central banks make monetary policy and therefore control banking activities; S&Ls are instrumental in financing housing; and CUs cater to the public's small savings needs. All of these institutions are depository intermediaries, and all of them create and "allocate" money. The author explores their existence and growth with normative questions in mind: Given the ideas that created them, what should be their roles in public life?
She offers three philosophies with which to judge and classify these institutions: (classical) liberalism, and its contemporary form, neoliberalism, by which she means the principle of free markets in which individual decision-making is preeminent, while government is severely limited. Contemporary writers, she notes, who espouse this philosophy include (the late) Robert Nozick and Milton Friedman (12). The liberal view would have it that corporations were also individuals and therefore a part of the private sphere (11–12).
Her second "paradigm" is populism, which refused to reconcile the corporation with the liberal paradigm: "Corporate organizations controlled the allocation of resources which individuals needed to live at a basic level in the political economy as it was unfolding—they had power" (12). Populism expanded the role of the public sphere dramatically. It included not only regulation but also outright public ownership. Progressivism, she contends, arose in the wake of populism. It "was grounded in the pragmatic philosophy of John Dewey . . . and William James. John Commons and Thorstein Veblen spun out its implications for political economy" (142). It did not condemn corporations, as did populism, but "admitted a power differential between corporations and individuals and inquired into terms that would legitimate" organizations with human beings (13).
A large part of Hoffmann's work is a review of how central banking appeared in the United States, first in the form of the Second Bank of the United States, then the early Federal Reserve System, and finally the Fed after the Banking Act of 1935. [End Page 606] Hoffmann is a political scientist writing about an economic institution. While politics played a prominent role in central banking evolution and structure, a scholar writing analytically about it must know the technical monetary economics of the subject. She must understand how banks work—how they create money, how an individual bank creates money, and how a banking system creates money. She especially must understand how a central bank creates base money, and how and why its actions differ from those of commercial banks and S&Ls. Finally, she must understand how metallic standards work to supply economies with money.
Hoffmann's knowledge of these processes is no more than superficial, and completely inadequate for examining the main subjects of her book. Her principal references for banking and central banking history are Bray Hammond's Banks and Politics in America (Princeton University Press, 1957) and Herman Krooss's Documentary History of Banking and Currency in the United States (Chelsea House, 1969). Hammond's work, while charmingly written, is forty-five years old and had serious flaws to begin with. Hoffmann includes only one reference to Milton Friedman and Anna Schwartz's monumental Monetary History of the United States (Princeton University Press, 1963), and no mention at all of this reviewer's work, Monetary Policy in the United States (which is also an intellectual and institutional history, and which contains much material that is germane to the issues she raises). Wesley Mitchell's History of the Greenbacks (University of Chicago Press, 1903) is not cited or mentioned when she deals with the Civil War period, nor is A. Barton Hepburn's History of Currency in the United States (Macmillan, 1924), an earlier work...