Thomas M. Humphrey - Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder, 1922–1938

In this book, preeminent monetary historians Tom Humphrey and Richard Timberlake persuasively document the baneful effects of a well-intentioned but hopelessly flawed economic ideathe Real Bills Doctrine. Conceived as a principle for achieving sustainable noninflationary monetary conditions by tying note issue to a subset of bank loans, those driven by real transactions as opposed to speculative purposes, it guided the original design and early policy decisions of the Federal Reserve. The resulting preoccupation with credit market conditions led Fed leadership to dramatically misread signals after 1929 and effectively tighten monetary policy just as the U.S. economy began contracting at the onset of the Great Depression. The authors thus demonstrate the neglected contribution of bad economic ideas to the greatest economic contraction of the 20th century. Unfortunately, remnants of the Real Bills Doctrine live on today, as seen in central bankers ruminations about excessive lending and macroprudential policy. If youve ever wondered about the historical origins and intellectual foundations of such rhetoric, you will be interested in this fascinating book.

JEFFREY LACKER , former president and CEO of the Federal Reserve Bank of Richmond

It certainly was not adherence to any kind of gold standard that caused the [Great Depression]. If anything, it was the lack of adherence that did. Had either we or France adhered to the gold standard, the money supply in the United States, France, and other countries on the gold standard would have increased substantially. [Tom Humphrey and Dick Timberlakes] emphasis of the Real Bills Doctrine complements in an important way Anna [Schwartz] and my analysis of why Fed policy was so inept. We stressed and discussed at great length the shift of power in the System. We did not emphasize, as in hindsight we should have, the widespread belief in the Real Bills Doctrine on the part of those to whom the power shifted.

MILTON FRIEDMAN , recipient of the 1976 Nobel Prize in Economic Sciences

In my opinion, this is the most important book written on the Great Depression since Friedman and Schwartz published their Monetary History of the United States. In originality and significance, I know of no other book that comes close to this book in explaining why U.S. monetary policy during the Depression allowed a financial panic, not significantly different from the Panic of 1907, to cripple the banking system, destroy a third of the money supply, and cause the most traumatic economic downturn in our history.

Humphrey and Timberlake provide clear and convincing arguments and evidence that the Gold Standard was not a cause or even a contributing factor in producing the Great Depression in the United States. Of greater significance, in my opinion, the book points to an obscure and largely forgotten theory, the Real Bills Doctrine, as the culprit for the failure of the Federal Reserve Bank to respond to the collapse of the money supply, which turned a financial panic into a Great Depression. That failure changed the history of America and its system of government.

Except for a few monetary historians no one today even remembers the Real Bills Doctrine or the sway it held over economic thinking, despite the fact that it had been discredited over and over again for 225 years. By the time that the Financial Panic of 1929 occurred, the majority of the members of the Fed leadership believed that if banks made short-term loans on the basis of real collateral or real bills, backed by real economic activity in industry and agriculture, the money supply was self-regulating and inherently stable, even without the gold standard. This doctrine led the Federal Reserve Bank to stand by and watch one-third of the banks in the country go broke and the money supply fall faster than prices. An irrational distaste for speculation led the Fed to end its lending to banks that made loans for the purpose of investing in stocks and bonds, needlessly contributing to bank failures and a collapse in the money supply. It was the Real Bills Doctrine, which Senator Carter Glass had espoused 20 years before the Great Depression, that led to the Glass-Steagall Act of 1933, which artificially narrowed the scope of American banking for almost 70 years.

I strongly recommend this book to anyone who seeks to understand the economic history of America.

PHIL GRAMM , economist and former chairman of the Senate Banking Committee

THOMAS M. HUMPHREY
RICHARD H. TIMBERLAKE

Copyright 2019 by the Cato Institute.
All rights reserved.

eBook ISBN: 978-1-948647-13-7
Paperback ISBN: 978-1-948647-12-0
Hardback ISBN: 978-1-948647-55-7

Library of Congress Cataloging-in-Publication Data available.

Printed in the United States of America

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