Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder

Eminent monetary economists Richard Timberlake and Thomas Humphrey, via Cato Institute, announce the publication of  Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder, 1922–1938:

In Gold, the Real Bills Doctrine, and the Fed, preeminent monetary historians Thomas M. Humphrey and Richard H. Timberlake deliver a compelling critique of the U.S. central bank’s once-central theory on monetary policy: the Real Bills Doctrine. Theirs is the first full-length treatise on the doctrine and its formative role in the Great Depression and other monetary disorders of the early 20th century.

Among the book’s many compelling contributions are:

  • Its thesis that a centrally-managed “gold standard” is a contradiction in terms: a true gold standard requires no discretionary management whatsoever.
  • Its discussion of the difference between a money stock based on real production — which can be price-stabilizing — and a money stock based only on the nominal dollar value of real production, which can never stabilize prices. Humphrey and Timberlake illustrate this distinction by comparing the New York Federal Reserve Bank’s monetary regime, which stabilized prices by adhering to the “quantity theory” of money, with the dysfunctional Real Bills-driven monetary regime that the Washington Fed Board imposed, and struggled under, at the same time.
  • The authors’ revolutionary new economic model,which presents the Real Bills Doctrine as a “metastatic equilibrium concept”: one whose ability to support a stable economy is exogenous to the Doctrine itself. On its own, the authors’ formal model shows, the Real Bills Doctrine can neither stabilize nor destabilize the economy. It can only reflect the preexisting level of political or economic stability within the price level and money supply.
  • A chapter on the history of the quantity theory of money, explaining its relative success compared to the Real Bills Doctrine.
  • The authors’ full-fledged refutation of the Real Bills Doctrine’s erroneous beliefs about production and speculation: Humphrey and Timberlake show that all productive activity is driven by expectations of future outcomes, and is therefore partly speculative. Likewise, all speculative activity is capable of producing real value, and can therefore be productive.

Former president and CEO of the Federal Reserve Bank of Richmond Jeffrey Lacker writes that the book “persuasively document[s] the baneful effects of a well-intentioned but hopelessly flawed economic idea — the Real Bills Doctrine.” And long before the book’s publication, 1976 Nobel Prize recipient Milton Friedman praised Humphrey and Timberlake’s scholarship on the Real Bills Doctrine….

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