The Allegory That Would Not Die

The BBC Online examines the Wizard of Oz as a monetary allegory. I was interviewed because of my paper “The Fable of the Allegory: the Wizard of Oz in Economics” Journal of Economic Education (Summer 2002). I said in the interview that there is no evidence that the Wizard of Oz was written as an allegory. Even those who advocate using it as a monetary allegory generally agree. See, for example, Ranjit Dighe’s book and reply to my paper. I also say that I am not convinced that the allegory adds to the understanding of monetary issues in the late nineteenth century. In particular, I don’t think it add to the understanding of support for the gold standard. In general support for the gold standard was not based on some superstitious notion that only gold could be money. People at the time had experience with gold and silver as well as paper money. Participation in the gold standard required that currency be convertible into gold at a fixed rate. Adherence to this requirement meant that control of the money supply was taken out of the hands of policy makers. When multiple countries adhered to the gold standard it also created a system of fixed exchange rates. Fixed exchange rates remove exchange rate risk and, other things equal, encourage foreign investment. Advocates of the gold standard recognized these benefits. The issues surrounding the adoption of the gold standard in 1900 are still relevant to today. Students can gain historical perspective on the adoption of the euro, and the use of fixed exchange rates or dollarization in less developed countries by studying the gold standard. I am not yet convinced that The Wizard of Oz adds to the understanding of economic history.

Constraining the state's ability to employ force

"Constraining the state's ability to employ forces: the standing army debates, 1697-99" by Shawn Humphrey and Bradley A. Hansen was just accepted by the Journal of Institutional Economics.

Abstract: Britain's Glorious Revolution of 1688 is one of the most widely studied cases of institutional change. Recent institutional analyses of the Glorious Revolution, however, have failed to address one of the central issues in political science: control of the state’s comparative advantage in violence. This paper examines this issue through analysis of the standing army debates of the late 1690s. Participants in the debates disputed whether a standing army or a militia would be the most effective institutional arrangement to guard against threats from abroad and tyranny at home. Both sides of the debate analyzed the effects of a standing army in terms of the incentives that it created for soldiers, citizens, the monarch, and foreign governments.

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Alexander Hamilton

Robert Wright reviews Hamilton's Curse a new book by Thomas D Lorenzo.

Majoring in Economics

If you are thinking about majoring in economics you are not alone. Here are stories from NPR and the Chronicle of Higher Education.

More Historical Perspective on Finance

Ed Perkins writes about The Rise and Fall of Relationship Banking at Common Place.

Rodrik on the Reinvention of Capitalism

Dani Rodrik writes that "we need to contemplate a transition from the national version of the mixed economy to its global counterpart.
This means imagining a better balance between markets and their supporting institutions at the global level. Sometimes, this will require extending institutions outward from nation-states and strengthening global governance. At other times, it will mean preventing markets from expanding beyond the reach of institutions that must remain national.The right approach will differ across country groupings and among issue areas.
Designing the next capitalism will not be easy."

Reviews of the Lords of Finance

Both the New York Times and the Washington Post review Liaquat Ahamed’s Lords of Finance: the Bankers Who Broke the World. The book is about the leaders of the central banks of the U.S., England France and Germany during the years leading up to the Great Depression. Both reviews are quite positive. I have not looked at the book yet, but I m a little worried because, although both reviewers liked the book, both also seem to have come away from it with little understanding of how monetary policy, generally, or the gold standard, specifically, operated. Joe Nocera in the Times states that “In a brilliant stroke, Schact created a new currency, the Rentemark, then chose the exact right moment to fix it to the mark … In so doing, he restored faith in Germany’s currency and beat back inflation.” The key to beating inflation isn’t to introduce a new currency at the right moment. The trick is to not keep printing that currency at an ever more rapid pace. Likewise, Frank Ahrens in the Post quotes Ahamed to the effect that all the gold mined up to 1914 “was barely enough to fill a modest two-story town house.” He then adds that, “There simply was not enough of it to fund a global conflict or to allow economic recovery afterward.” To be clear the first quote is Ahamed the second is Ahrens. The small supply of gold is of course what made it useful as an international monetary standard. People didn’t carry around bags of gold. They had long used bank notes or checks as we do now. People can by the same amount of stuff with a few valuable dollars as they can with lots of worthless dollars. By requiring convertibility at a fixed rate the gold standard placed a constraint on changes in the money supply. It limited inflation and exchange rate risk, and encouraged foreign investment. It was adopted for the same sorts of reasons that countries sometimes peg their currency to the dollar or the franc, for instance. The gold standard did not create complete stability. Gold flows and, therefore, changes in the money supply could be influenced by political factors as well as economic ones. And the United States experienced periodic financial crises while on either a gold or bimetallic standard.

When I have had a chance to look at the book I’ll let you know what I think of it, but I worry that the reviewers do not seem to have come away with a very clear picture of the way things worked.