Eichengreen's Golden Fetters
Jude Wanniski
December 22-30, 2004


From: Ben S. Bernanke, 4:37 pm 12/30/2004
Subject: Re: Eichengreen Response
To: Jude Wanniski <jwanniski@polyconomics.com >

Thanks.  Eichengreen's response was interesting.  His point about focusing on the international aspects of the Depression is key to his point of view --- before his work everything on the Depression was excessively US-centric (not that the US wasn't important, of course).

I don't think you heard me when I said that the Eichengreen (-Bernanke) theory of the Depression is not necessarily dismissive of the gold standard per se (or at least one that is well managed).  The interwar gold exchange standard was badly constructed and plagued by financial instability and lack of cooperation between mutual distrustful powers.  When things started collapsing the problems were propagated and amplified, I believe, by the implosion of the international monetary system.  There was also some interaction of these forces with Smoot-Hawley, certainly.  As I wrote once in a book review, besides its effects on trade and the stock market, Smoot-Hawley may have greatly worsened international financial instability
--- not only in commodity exporters, as Eichengreen and Kindleberger stressed, but also in central Europe.  In particular, Germany could not earn the reserves necessary to pay reparations because its export markets were blocked, which led to a loss of confidence and helped to generate bank runs and an exchange-rate crisis.


From: Jude Wanniski   <jwanniski@polyconomics.com
To:  Ben.Bernanke@* * * *.gov          
Subject: Eichengreen Response   12/30/2004 04:09 PM                                                                         
How nice to get such a quick and thorough response from Eichengreen.  I'll respond to his e-mail and see if we can remain civil in our dialog. I'm not "broadcasting" his e-mail, of course, but I have not promised not to circulate his comments among a small number of people (three or four, including Mundell), as I have you. The difference is you are a public official and I don't want to have you embarrassed by having me send your thoughts to anyone, as they would probably be tempted to broadcast them further.

I am afraid Eichengreen will not be budged in our exchange as his career is built on his body of written works, which would be devalued if he changed course intellectually. You on the other hand are at the beginning of a new career, this one more important than the writings that have gotten you this far. I had a very important fellow close to the powers at the White House
e-mail me yesterday asking if I was "still touting Bernanke" as Greenspan's replacement. He said he thought "we could do better." I responded:  "I'm not touting him as much as trying to get him out of his Eichengreen mind set into the classical model. He isn't going away, and he is a force inside the FOMC because he does try to think out of the box." You could be the man on the margin, after all. The fellow e-mailed me back that he could see what I mean and agreed.


Date: Thu, 30 Dec 2004 11:56:20 -0800
From: Barry Eichengreen <eichengr@* * * *.EDU>
To: Jude Wanniski <jwanniski@polyconomics.com>
Subject: Re: Golden Fetters

Dear Mr. Wanniski,

It was a pleasure to receive your note.  I certainly am well aware of your book.  I think it receives less attention than it should in the groves of academe because of our unfortunate tendency to assign our students only works by people with academic titles.  I'd be happy to talk with you about these matters, maybe even face to face if we eventually end up in the same place one of these days.  I'd only ask that our emails don't end up in the public domain before that occurs (not for quotation, in other words).

A couple of other preferatory words. Yes, Ben Bernanke and I have a kind of mutual admiration society, although my role is to snipe at the Fed from 3000 miles away!  Another observation is that while I am proud of my 1992 book, my views have evolved -- maybe even matured -- over time, as is the case for all of us.  You can find a more recent summary statement of my views in my article "Understanding the Great Depression" in the Canadian Journal of Economics last year.  A final observation is that where you are a strong advocate of fixed exchange rates, I am an equally strong proponent of floating, as I have written widely.  My diagnosis of what kind of international monetary reform the world needs now is precisely the opposite of yours and my friend Bob Mundell's.  But that's another conversation.

I understand your work as focusing on the implications of Smoot-Hawley for investor confidence and on the perverse effects of Hoover's tax increases.  This is obviously a view that centers on US policy and, by implication, on the US economy.  My view has always been that the Depression was a global phenomenon that cannot simply be understood in terms of events occurring in the United States.  For a global event of this magnitude, the US was simply too small a tail to wag this large dog, by itself.  This is why I am inevitably led to place less weight than you on both Smoot-Hawley and US tax increases and to look elsewhere for causes.  But when I do look to the US (see my Canadian Journal article for a clear statement), I am led to emphasize the destabilizing role of the banking crises (like both Friedman and Schwartz and Bernanke), and I see these as something that monetary policy could have headed off.  (On this last point, see Richard Grossman's fine article, "The Shoe that Didn't Drop: Why There were no Banking Crises in Britain in 1931," in the 1985 Journal of Economic History). I should explain that I was a reluctant convert to the importance of monetary factors in the Depression.  My professors at Yale did their best to teach me otherwise.  But the conviction that the Depression was a global phenomenon leads one to look for global factors.  That in turn leads many of us to look to the global monetary system.  And one can't study the international monetary system without becoming a believer in the importance of money.  I am not the only international economist who has been drive in this direction.  I would also note that Mundell shares this conviction of the importance of monetary factors for the Depression, as explained in his Nobel article in the American Economic Review.

On to your particular hypotheses.  I am in full agreement as to the counterproductive effects of Hoover's tax increases and have echoed this point in a variety of places.  I do however worry that this point is too often invoked to support tax cuts where they are not appropriate.  Just so you know where I'm coming from, I think that making the Bush tax cuts permanent is the height of fiscal irresponsibility, and that the U.S. desparately needs "revenue enhancement" (we can say tax increases if you like) to put it back on the road to fiscal solvency.  But, again, this is a different conversation.

On Smoot Hawley, my views differ from yours.  (I will have to search for the reference where I discuss this most thoroughly.  I did have an early 1985 article in Research in Economic History that reviewed the arguments, but again my views have since evolved.) First, I am unconvinced by the evidence, such as it is, that SH caused the Crash.  I see the logic but not the evidence.

Second, I do not see the direct effects of SH as worsening the US Depression once the tariff actually came into effect in 1930.  The key problem as the depression unfolded was the collapse of price levels. And my analysis suggests that SH, if anything, had a modest upward impact on the U.S. price level (by shifting demand toward domestic goods).  Trade economists considering a setting of reasonably full employment are dismayed by the allocative distortions that result from such a tariff.  (Following them, I would certainly be highly critical of protectionist measures now, and worry that our fiscally-driven external deficit is creating a real danger of a protectionist backlash).  But in the Depression it took a lot of Harberger triangles to fill an Okun's gap.  The key thing was not allocative efficiency but putting unemployed resources back to work.  And here anything that countered the deflation then underway was helpful.  Even with foreign retaliation, analysis suggests that SH may have been weakly reflationary.

Third, SH and the associated retaliation did aggravate the problems of heavily indebted countries like those of Latin America.  The additional difficulty they had exporting helped to push them off the gold standard.  This observation opens up a discussion of whether moving from fixed to flexible exchange rates in the 1930s was a good or bad thing. My view is that, given the absence of concerted reflation, it was decidedly good.

Again, I appreciate your email and would welcome the opportunity to discuss these matters further.  Please enjoy your holidays.

Kind regards,

Barry Eichengreen

Jude Wanniski wrote:

Dear Professor Eichengreen:

As you may know, I've been an advocate of a return to a fixed rate international monetary system for the last 30 years, from my days at the WSJournal editorial page and my economics education via Bob Mundell and Art Laffer. I'm now 68 and still pounding away at Polyconomics in Parsippany, N.J., with a host of institutional investors as clients.

I'm writing because I've been having exchanges with Ben Bernanke at the Fed, and have been reading some of his work on the Depression, where he clearly has been influenced by your work. He in fact urged me to read "Golden Fetters," which I had been unaware of until he cited it, as it weighed heavily on his conclusion that the gold standard was the primary cause of the Depression... and if the U.S. had abandoned its fetters much earlier and expanded the money supply, the Depression would have been avoided.

My copy of "Fetters" arrived yesterday and I found it was written in 1992, 14 years after my 1978 book, The Way the World Works, was published. I told Bernanke that I was astonished that you made no mention of my hypothesis, re the Crash of 1929 being caused by the passage of the Smoot Hawley Tariff Act, and the Depression being the result of a series of fiscal errors made in the U.S. -- Hoover and FDR tax increases -- and currency devaluations and tariff retaliations elsewhere in the world. My guess is that you may have heard about my thesis, but dismissed it without having read TWTWW at the time.

So I ask if you have since then read TWTWW and confronted my hypothesis head on in your subsequent writings. I wouldn't be bothering you with these questions if it were merely a matter of debating ancient history, but I do believe the problems facing the U.S. and the world economy have been worsening because of an absence of any kind of international monetary "system," with the dollar/gold price bouncing all over the place and causing commercial dislocations throughout the world as governments and central banks struggle to adjust to the key currency -- with more and more talk of at least breaking loose from the dollar.

In what I have read so far (a small amount) of "Fetters," I do note that you found European countries after WWI deeply concerned about the wide swings in prices between 1918-20, with that concern leading them to make every attempt to return to gold. So you at least are aware of the similarity of circumstances. I've been warning my clients all year that the Fed was seriously erring in its belief that it could control inflation by raising the funds rate, and that to the contrary, it would only invite more inflation by causing the commercial world to decrease its demand for liquidity. The gold price goes up and the dollar falls against forex when the Fed has no means of draining the surplus liquidity it has previously put into the banking system.

I can see that your book is a treasure trove of data on the monetary side of things -- and at least mentions "taxes" along the way. (Friedman and Schwartz, by contrast, make no mention of taxation or tariffs in their "monetary history," which is why I think they totally misread history and came up with monetarism's faulty formulas for managing the economy. I'll spend as much time as I can in the next few days reading "Fetters," but wouild like to know if there is anything else you have done since 1992 on the Crash and Depression that discusses my thesis.

Best wishes for the New Year,

Jude Wanniski

From: Ben S. Bernanke, 9:56 am, 12/30/2004
Subject: Re: Eichengreen
To: Jude Wanniski <jwanniski@polyconomics.com>

Thank you!  I look forward to receiving it, though I did in fact read it when it came out.

Please send it to me at the Fed:   Federal Reserve Board, 20th and C
Streets NW, Washington DC 20551.



From: Jude Wanniski   <jwanniski@polyconomics.com                                             
To:  Ben.S.Bernanke@* * *.GOV              
Subject: Re: Eichengreen  12/30/2004 09:47  AM                        
I've signed a copy of TWTWW for you... But what is the best mailing address? The Fed or your home?


From: Ben S. Bernanke, 9:04 am 12/30/2004
Subject: Re: Eichengreen
To: Jude Wanniski <jwanniski@polyconomics.com>

Thanks for your thoughts.  Let me know how you make out with Eichengreen.

 From: Jude Wanniski   <jwanniski@polyconomics.com                                             
 To: Ben.Bernanke@* * * * *.gov          
 Subject: Eichengreen    12/29/2004 06:24  PM                                                            
 Dear Ben:

The $5 copy of "Golden Fetters" arrived today.  It is an incredible book, with hundreds of footnotes an a great many pages of bibliography, but not a single mention of Smoot-Hawley and only passing references to the Crash of 1929, as if it were a Tsunami, an act of God or speculation which he does not have to deal with.  And remember, the book was published 14 years after The Way the World Works, which was widely publicized and know throughout the serious economic academics. I really thought I'd find Eichengreen confronting my hypothesis and the facts underpinning them, but I have to say, Ben, that I consider this book a hallmark in sophistry. And I plan to contact Eichengreen and ask him if he has since written anything to correct this "oversight."  For you to cite Eichengreen as an authority persuades me that you are mistaken about reading TWTWW. I say again that Martin Anderson of Hoover Institution told me 20 years ago that I will have to wait until after I am dead to see academic economists embrace my arguments on the Crash and Depression... "They are still trying to explain how Adam Smith could have written the Wealth of Nations without any economic education." This is intellectual bankruptcy, although I understand it is the way the world works.

If any part of you intellectual edifice is still founded on "Golden Fetters," I suggest you give it a re-think. Academic economists who have tenure, a la Eichengreen, can say anything they want and get away with it. If you are serious about confronting the monumental problems of public finance we face, Ben, you need to read or re-read TWTWW and get Eichengreen's sophistry out of your head.


PS  I will spend some serious time reading "Golden Fetters" to see if there is anything in the book other than numbers than I should take seriously.

From: Ben.S.Bernanke@***.gov
Subject: Re: Eichengreen
To: "Jude Wanniski" <jwanniski@polyconomics.com>

Sent from my BlackBerry Wireless Handheld

----- Original Message -----
From: Jude Wanniski [jwanniski@polyconomics.com]
Sent: 12/22/2004 06:02 PM
To: Ben.Bernanke@* * * * *.gov
Subject: Eichengreen

Is this the right book, "Golden Fetters?"   JW

I'm going to be on Bloomberg radio tomorrow from 2:05 to 2:35 talking about Fed policy.   JW