William L. Silber on The Story of Silver

SilberThis is the story of silver’s transformation from soft money during the nineteenth century to hard asset today, and how manipulations of the white metal by American president Franklin D. Roosevelt during the 1930s and by the richest man in the world, Texas oil baron Nelson Bunker Hunt, during the 1970s altered the course of American and world history. The Story of Silver explains how powerful figures, up to and including Warren Buffett, have come under silver’s thrall, and how its history guides economic and political decisions in the twenty-first century.

Why did you write this book?

In 2014 Bunker Hunt died and when I told my children – who had worked in finance all their lives—they thought Bunker was one of the guys who kept hitting the ball into the sand in my Sunday golf group. Right then I knew that I had to write this book to at least tell the story of the greatest commodities market manipulation of the 20th century – one that was perpetrated by the larger than life Nelson Bunker Hunt – the richest man in the world who ultimately went bankrupt trying to corner the silver market with his brothers, Herbert and Lamar, in the 1970s. The Hunts drove the price of silver to a record $50 an ounce in January 1980 and nearly brought down the financial markets in the process. But the Hunt brothers were not the first nor the last to be seduced by the white metal. In 1997 Warren Buffett, perhaps the most successful investor of the past fifty years, bought more than 100 million ounces, almost as much as the Hunts, and pushed the price of silver to a ten-year peak. In 1933 Franklin Delano Roosevelt raised the price for silver at the U.S. Treasury to mollify senators from western mining states while ignoring the help it gave Japan in subjugating China. Was FDR’s price manipulation in the 1930s less criminal than Nelson Bunker Hunt’s in the 1970s? Reading this book will let you make an informed judgment and it will also show that the white metal has been part of the country’s political system since the founding of the Republic. Perhaps the most famous speech in American electoral politics, Nebraska Congressman William Jennings Bryan’s “Cross of Gold” sermon at the 1896 Democratic convention, was all about silver. Bryan’s cause, the resurrection of silver as a monetary metal, aimed to rectify the injustice perpetrated by Congress in the Crime of 1873, which discontinued the coinage of silver dollars that Alexander Hamilton had recommended in 1791. Thus, the Story of Silver spans two centuries and is woven into the fabric of history like the stars and stripes.   

Why did Bunker Hunt become obsessed with silver in the 1970s?    

A member of the right-wing John Birch Society, Bunker became the richest man in the world at age forty in 1966 when oil was discovered in Libya where he owned the drilling rights. His ultraconservative politics made him distrust government and its paper currency and favor real investments, such as oil, land, and racehorses. The Arab oil embargo in 1973 provoked an outburst of inflation and Libya’s Muammar Qaddafi nationalized Bunker’s oil fields, forcing the Texan into precious metals to protect against the declining value of the dollar. He bought silver, rather than gold, because he thought the yellow metal was “too political” and “too easily manipulated” by outside forces. Bunker worried that central bankers could sell their massive gold reserves and depress its price. Silver, on the other hand, benefited from favorable fundamentals: the demand for the white metal by industry, for use in electronics, photography, and medicine, exceeded mine production by nearly 200 million ounces a year (Warren Buffett invested in silver in 1997 for the same reason). Moreover, in 1973 the price of silver was cheap relative to gold. The price ratio of gold to silver had been about 16 to 1 for a century before the Crime of 1873, meaning that it took 16 ounces of silver to buy an ounce of gold. In 1973, before Bunker began his accumulation, the price ratio was almost 40 to 1. Bunker thought silver’s industrial uses should have boosted its price to where only 5 ounces of silver were needed to get an ounce of gold. Bunker picked 5 to 1 because it was lower than 16 to 1 but he could have gone further. In ancient Egypt silver’s scarcity and medicinal uses had made it more valuable than gold.   

Did the Hunt Brothers really manipulate the price of silver?

The Commodity Futures Trading Commission (CFTC) argued that during the second half of 1979, the Hunt brothers and their Arab collaborators coordinated a scheme to drive up silver prices in the futures markets by purchasing over 200 million ounces of the white metal, more than the combined annual output of Canada, Mexico, Peru, and the United States, the four largest noncommunist producing countries. They pressured the market by controlling more than 40% of silver in exchange warehouses and by taking delivery of almost 50 million ounces of bullion. But the alleged manipulation was not the classic corner of futures markets, where the longs prevented the shorts from delivering. As silver prices accelerated in December 1979, for example, even the CFTC said that the shorts “anticipated no difficulties in making delivery on their positions.” Moreover, the Hunts denied manipulative intent, dismissed any coordination, even among themselves, and justified their demand for silver as a hard asset to protect against global risks in the second half of 1979, when inflation reached double digit levels, Iranian terrorists invaded the United States embassy in Teheran and seized American hostages, and when the Russians invaded Afghanistan.  Disentangling the impact of the alleged manipulators from legitimate speculation took extensive litigation in this case. In a civil trial in 1988 a jury easily concluded that the Hunts conspired with others to manipulate but disagreed about the impact on prices. The jury had to distinguish between the defendants’ accumulation and the unsettling news of 1979. The CFTC argued that gold prices reflect political and economic turmoil and silver increased twice as much during 1979, providing a benchmark for damage calculation for the jury. But that ignores the historical evidence that the white metal is normally twice as volatile as the yellow. For example, during the European debt crisis following Lehman’s bankruptcy in 2008, silver rose 400% and gold increased by 250% and none of that disparity came from manipulation. That evidence came too late to exonerate the Hunts.  

How did FDR’s silver subsidy help Japan subjugate China in the 1930s?

During the Great Depression, after the price of silver hit a record low of 24¢ an ounce, Democratic Senator Key Pittman of Nevada, the powerful chairman of the Senate Foreign Relations Committee, urged President Roosevelt to reverse the Crime of 1873 and restore the white metal’s full monetary status. In exchange, Pittman promised the support of fourteen senators from western mining states for Roosevelt’s controversial New Deal legislation. FDR agreed and responded with a series of purchase programs for silver by the U.S. Treasury that ultimately doubled the price of the white metal. The higher price attracted silver from the rest of the world, especially from China, whose currency was backed by the precious metal, and ultimately forced China to abandon the silver standard when that country was most vulnerable. It was 1935 and China, led by American ally Chiang Kai-shek, faced an internal threat from Mao Tse-tung’s communist insurgents and an external threat from Imperial Japan. Roosevelt’s Treasury secretary, Henry Morgenthau, worried that China’s insecure government, weak economy, and susceptibility to Japanese aggression made her especially vulnerable to the dislocations arising from American silver policy. Morgenthau was right to worry. Roosevelt’s pro-silver program to please western senators helped the Japanese military subjugate a weakened China and boosted Japan’s march towards World War II, demonstrating the danger of formulating domestic policy without considering international consequences.  It is a cautionary lesson for putting America First today, especially since the fallout from such narrow-minded policymaking may not materialize until it is too late, just like in the 1930s.

Was the Crime of 1873 really a crime?

The Crime of 1873 refers to legislation passed by Congress on February 12, 1873, negating Alexander Hamilton’s favorite law, that both gold and silver be monetary standards in the United States, and establishing gold as sole legal tender for all obligations. The new law omitted the free and unlimited coinage of silver dollars at the mint, an option since 1792, and restricted the legal tender status of subsidiary silver coins, such as dimes, quarters, and half-dollars, to five dollars or less. The U.S. Constitution allows Congress to “coin money” and “regulate the value thereof,” so no legislator voting for the act technically committed a crime. The allegations of impropriety arose because few people realized the full consequences of the shift to gold when the law was passed. Moreover, Senate Finance Committee Chairman John Sherman, who introduced the legislation, not only failed to sound the warning bell but also soft-pedaled the bill despite knowing its importance. Sherman’s removal of the silver dollar from the Coinage Act of 1873 eroded the value of the white metal, cutting its price in half by the mid-1890s, and altering the course of American history. Twenty-five years of price deflation during the last quarter of the 19th century increased the burden of debts like mortgages which remained fixed in dollar terms even though home prices declined. The drop in wages and agricultural prices launched a generation of social combat, pitting “silverites” against “goldbugs,” debtors versus creditors, and midwestern farmers against East Coast bankers, all combining to darken the political landscape like a dust storm. Many consider L. Frank Baum’s children’s story, The Wonderful Wizard of Oz, which has entertained millions since it was published in 1900, an allegory of the contemporary class warfare. William Jennings Bryan capitalized on the social upheaval, captured the Democratic nomination for the presidency in the 1896 election with his Cross of Gold speech promoting the monetary status of silver and easier credit. Bryan lost to William McKinley, leaving silver a second class monetary metal until Key Pittman and Franklin Roosevelt joined forces to rescue the white metal in the 1930s.  

Should investors own silver today?

The worldwide experiment in fiat currency, pure paper money, that began on August 15, 1971, when President Nixon suspended the right of foreign central banks to convert dollars into gold, almost failed at the start. The newly designed freedom from precious metals allowed America’s central bank, the Federal Reserve System, to deliver easy credit in response to political pressure, spawning the Great Inflation of the 1970s and nearly destroying the U.S. dollar. But the chaos unleashed popular support for making price stability the primary objective of an independent central bank. Since then, central bank independence throughout the world has replaced gold and silver as guardian of the currency. And if central bankers do their job that arrangement will continue, but public support can evaporate, undermining banker resolve. The U.S. Congress, for example, can abolish the Federal Reserve with a simple majority vote, suggesting that America’s central bank might run a printing press when rising interest rates bring an avalanche of protest to Capitol Hill. The Federal Reserve has survived the fifty-year trial of fiat currency, but that period is less than a heartbeat in world history. The Soviet Union’s experiment with communism challenged America for world domination for the better part of the twentieth century before expiring like the worthless paper currency of Germany’s Weimer Republic. Central bankers remain on trial, and the uncertain verdict sustains the ancient role of gold and silver as storehouses of value in the new millennium.

William L. Silber is the Marcus Nadler Professor of Finance and Economics at New York University’s Stern School of Business. His many books include When Washington Shut Down Wall Street (Princeton) and Volcker (Bloomsbury). He lives in Teaneck, New Jersey.

Browse our 2019 Economics Catalog

Our new Economics catalog includes a candid assessment of why the job market is not as healthy we think, an engaging and enlightening account of why American health care is so expensive—and why it doesn’t have to be, and an international and historical look at how parenting choices change in the face of economic inequality.

If you’re attending the Allied Social Science Associations meeting in Atlanta this weekend, you can stop by Booth 405-407 to check out our economics titles! We’ll be celebrating the new titles on January 5 at a reception at the booth from 10 to 11 a.m.

 

Uwe Reinhardt was a towering figure and moral conscience of health-care policy in the United States and beyond. In Priced Out, Reinhardt offers an engaging and enlightening account of today’s U.S. health-care system, explaining why it costs so much more and delivers so much less than the systems of every other advanced country, why the situation is morally indefensible, and how we might improve it.

 

Blanchflower_Not Working book cover

Don’t trust low unemployment numbers as proof that the labor market is doing fine—it isn’t. In Not Working, David Blanchflower shows how many workers are underemployed or have simply given up trying to find a well-paying job, how wage growth has not returned to prerecession levels despite rosy employment indicators, and how general prosperity has not returned since the crash of 2008. Blanchflower draws on his acclaimed work in the economics of labor and well-being to explain why today’s postrecession economy is vastly different from what came before.

 

Doepke, Zilibotti, Love, Money, and Parenting book cover

Parents everywhere want their children to be happy and do well. Yet how parents seek to achieve this ambition varies enormously. For instance, American and Chinese parents are increasingly authoritative and authoritarian, whereas Scandinavian parents tend to be more permissive. Why? Love, Money, and Parenting investigates how economic forces and growing inequality influence parenting practices and what is considered good parenting in different countries.

Ten years on from the collapse of Lehman Brothers: A Reading List

Gennaioli & ShleiferA Crisis of Beliefs by Nicola Gennaioli and Andrei Shleifer makes us rethink the financial crisis and the nature of economic risk. In this authoritative and comprehensive book, two of today’s most insightful economists reveal how our beliefs shape financial markets, lead to expansions of credit and leverage, and expose the economy to major risks. They present a new theory of belief formation that explains why the financial crisis came as such a shock to so many people—and how financial and economic instability persist.

To mark the 10th anniversary of the collapse of Lehman Brothers on September 15, 2008, these books shed light on the causes and effects of the financial crisis, and make suggestions for where we should go from here. 

 

 

Sandbu

Europe’s Orphan: The Future of the Euro and the Politics of Debt – New Edition
Martin Sandbu

brunnermeier

The Euro and the Battle of Ideas
Markus K. Brunnermeier, Harold James & Jean-Pierre Landau

Acharya

Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance
Viral V. Acharya, Matthew Richardson, Stijn Van Nieuwerburgh & Lawrence J. White

Admati

The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It – Updated Edition
Anat Admati & Martin Hellwig

Akerlof

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
George A. Akerlof & Robert J. Shiller

Bernanke

The Federal Reserve and the Financial Crisis
Ben S. Bernanke

Cochrane

The Squam Lake Report: Fixing the Financial System
Kenneth R. French, Martin N. Baily, John Y. Campbell, John H. Cochrane, Douglas W. Diamond, Darrell Duffie, Anil K Kashyap, Frederic S. Mishkin, Raghuram G. Rajan, David S. Scharfstein, Robert J. Shiller, Hyun Song Shin, Matthew J. Slaughter, Jeremy C. Stein, and René M. Stulz

Rajan

Fault Lines: How Hidden Fractures Still Threaten the World Economy
Raghuram G. Rajan

Reinhart

This Time Is Different: Eight Centuries of Financial Folly
Carmen M. Reinhart & Kenneth S. Rogoff

Shiller

Irrational Exuberance: Revised and Expanded Third Edition
Robert J. Shiller

Shiller

The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It
Robert J. Shiller

Turner

Between Debt and the Devil: Money, Credit, and Fixing Global Finance
Adair Turner

Michael Best on How Growth Really Happens

BestAchieving economic growth is one of today’s key challenges. In this groundbreaking book, Michael Best argues that to understand how successful growth happens we need an economic framework that focuses on production, enterprise, and governance. Best makes the case that government should create the institutional infrastructures needed to support these elements and their interconnections rather than subsidize individual enterprises. The power of Best’s alternative framework is illustrated by case studies of transformative experiences previously regarded as economic “miracles”: America’s World War II industrial buildup, Germany’s postwar recovery, Greater Boston’s innovation system, Ireland’s tech-sector boom, and the rise of the Asian Tigers and China.Accessible and engaging, How Growth Really Happens is required reading for anyone who wants to advance today’s crucial debates about industrial policy, free trade, outsourcing, and the future of work. 

Why is the study of economic “miracles” important?

National and regional experiences of rapid growth that lack easy explanations are often casually ascribed to divine intervention. Over two dozen national and regional experiences of rapid growth lacking explanation have been dubbed ‘miracles.’ These ‘miracles’ are unexpected and outside the scope of the conventional policymaking mindset. This book brings several such purported miracles back to earth. It offers an explanation in terms of an economics anchored by fundamental principles of production and business organization. The claim is that we can learn about how capitalist economies function and malfunction from examining cases of rapid and transformative growth. The lesson is that there is no divine intervention, just a man-made conjunction of capabilities.

What does the book do?

The book characterizes the economic policymaking framework and implementation means common to the rapid growth experiences. The framework is informed by a historical genealogy of major economic thinkers that have contributed to an economics of transformative growth. It is an economics of capability development and mutual adjustment processes in which changes in business organization, production system, and skill formation are inextricably bound together. The three domains are not separable and additive components of growth, but mutually interdependent sub-systems of a single developmental process. No one of the three can contribute to growth independently of mutual adjustment processes involving all three. I call this the capability triad. 

What unites the neglected economic theorists that shed light on transformative experiences?

The economic theorists whose ideas are discussed in this book examine the innovation dynamics that underlie productivity growth. They share an alternative economics methodology for understanding how economies function and for informing and conducting policymaking. Each thinker focuses on a different interactive connection in the economy to characterize an innovation dynamic within a multidimensional and complex economy. But taken together the innovation processes have common features and can interact with one another. Strategically organized, they can produce dynamic increasing returns.

These great scholars lived and wrote about the real world, which their descriptions suggest is not amenable to magic bullets. But there is no throwing up of hands in despair and depicting episodes of rapid growth as unexplained and inexplicable. Each contribution does offer, at the minimum, an analytical framework in lieu of a “growth miracle.” These models can protect policymakers from unreflective failures. Together they offer more. Economic policymaking is always informed and defended by models, but no single model can mimic modern complex economies or fit all contexts. The capability triad is a better way to understand how crises can be overcome and robust growth achieved.

How did you come to study economic miracles?

In 1969 when I started teaching economics at the University of Massachusetts, the economic outlook for the region was not encouraging. Between the 1930s and mid-1970s, with the exception of World War II, the New England economy underwent a sustained period of economic decline.  Boston’s population declined from 800,000 in 1950 to 560,000 in 1980.

What occurred next is known as the Massachusetts Miracle. Between 1975 the mid 1980’s unemployment fell from 12% to less than 3% as upwards of a half a million jobs were created most in new sectors. Michael Dukakis, governor of Massachusetts, campaigned for the US presidency in 1988 attributing the ‘miracle’ to the creation of a range of quasi-public agencies. But as a board member of one such agency, I was acutely aware this was not the case. At the same time, it was not a consequence of a spontaneous burst of ‘animal spirits’ or unleashed by laissez-faire policies and free markets.

What role did government policy play in the Massachusetts Miracle?

State policy did not plan, foresee, or drive the Massachusetts Miracle. But it was not passive. The state government funded a huge investment to increase the number of electrical engineering students in public higher education from around 600 in 1976 to over 1600 ten years later. In so doing it turned a transformative potential into a sustained growth experience. These graduates were like a high-octane fuel for an explosive growth in the size and number of engineering intensive enterprises. 

Nevertheless, the Massachusetts Miracle cannot be explained without reference to the institutionalized means by which the US economy was transformed during World War II. State education policy responded to an increase in demand driven by the post-war emergence of a large population of technology-driven enterprises themselves exploiting opportunities created by the federal government’s wartime investment in technologically advanced weapon systems. Greater Boston’s research-intensive universities and the state’s legacy of precision engineering were key components in the design, development, and implementation of the President’s wartime strategic vision and mobilization programs. The federal government oversaw the creation of a national science and technology infrastructure of which Massachusetts was and has remained a major beneficiary.

What can we learn from the US World War II experience about industrial policymaking?

World War II was a period of policymaking experimentation and government intervention much as the Great Depression that preceded it. But while the Great Depression inspired an emerging Keynesian macroeconomic demand management perspective, the successful policy regime of the wartime American economy, namely to create and grow new industries and transform existing industries to meet unprecedented performance targets, did not inspire a new supply side, production development perspective within the economics profession.

In fact, the World War II US policymaking experience was an unparalleled industrial policy success. GDP nearly doubled in a four-year period, far exceeding all other nations. Its unmatched performance can be measured by comparing national rates of expansion in munitions production Over the period from 1935-9 to 1944, munitions output expanded 7 times in Germany; 10 times in the USSR; 15 times in Japan; 22 times in the UK; and 140 times in the US (Goldsmith 1946). Furthermore, the US alone produced guns and butter; guns were not produced at the expense of the civilian standard of living (Edelstein 2001; Overy 1995).

President Roosevelt’s vision to create the Arsenal for Democracy was not enacted by either an invisible hand or by central planning but purposefully by an industrial policy and economic governance agenda that organizationally integrated and diffused rapid technological and production innovation. Three complementary productive structures were pivotal. 

The first was the integration of science and industry to design, develop, produce, and deploy new technologically advanced products (e.g., radar systems, penicillin). The second was the diffusion of mass production principles to build and ramp up new organizationally complex products/plants/industries (e.g., aircraft, ships), and to convert existing factories to new products (e.g., cars to jeeps) and to extend mass production and enterprise output coordination principles throughout and across supply chains. The third was the design, administration, and implementation of a participatory management philosophy and skill formation methodology to foster workforce involvement in job design, quality improvement, and new technology introduction. Each of these productive structures is examined using case studies that take us inside the real-world economics of production, business, work, universities, and industrial organization to examine how US industrial policy transformed the nation’s industrial innovation system.

What unites the policy frameworks of the successful transformative growth experiences examined in the book?

Explosive growth experiences are many. I apply the Capability Triad framework to explain other success stories including West Germany, Ireland’s Celtic Tiger, Japan and China as well as policy framework failure in the UK, Italy and the US in recent decades.

We know that they are not explained by stabilization policy. No amount of adjustment of stabilization and market reform policies are sufficient to address matters of productivity and growth. We find in the success stories the crafting and implementation of strategic development policy frameworks. This takes us beyond the terrain of the economics equilibrium and optimal resource allocation, although economics is critical to it. But it is an economics of capability development and mutual adjustment processes in which changes in business organization, production system, and skill formation are inextricably bound together.

This does not mean that macro policy instruments are irrelevant; it means that the transformative experiences are better understood as capability informed macro policies. The idea is to characterize successful economic policies from an organizational capabilities perspective.

In the success stories we find a unified or coordinated set of extra-enterprise, capability-development infrastructures that galvanize a population of companies to engage in product development and technology management capabilities; we find macro-policymaking guided by a production-centric awareness of where a region or country fits within the global competitive environment and the use of the critical barrier analysis to inform infrastructural investment priorities. These can include access to a machine tool industry, engineering support services, development finance and skill formation institutions which, if inter-connected, enable a whole group of firms to innovate and grow without generating severe skill gaps and thereby curtailing progress.    

Why is the formulation of a conceptual policy framework important?

The historical experiences described in this book tell us that a development policy framework is important for success. The case studies reveal extraordinary leaders responding to daunting challenges by crafting appropriate strategic policy frameworks at both enterprise and government levels. At the same time, luck plays a large part in successful outcomes. The expected external conditions needed to support success do not always arrive conveniently, and their absence may frustrate otherwise admirable policy initiatives. Nor is the true significance of the internal elements of a strategy always fully understood even by its own designers. But luck and chance, however random, can be handled best within well-thought-out and coherent frameworks that take full account of the nature of the external environment (opportunities and threats), as well as realistic views of domestic capabilities (strengths and weaknesses). What we can add, as well, is that the resulting SWOT (strengths, weaknesses, opportunities, and threats) analysis can be much richer if it is guided by the alternative economic baseline of the capabilities and innovation perspective and of the dynamic growth processes that it illuminates.

Perhaps the most daunting aspect of the capability triad is that it treats the scope for public policy as being almost completely and seamlessly blended into the detailed mechanics of change that occur within private firms. In this framework, public policy and private entrepreneurial actions do not operate in isolation from each other but become mutually reinforcing. There is some scope for a separable public policy, such as in skill formation, to ensure that the right mix of education and skills is produced to accommodate the changing demands of the economy as it develops. But even here, the links between public and private activity are crucial.

In the quest to break free from narrow, dependent, and reactive policy mindsets, the capability triad framework proposed here does not provide all the answers. But it helps those who hope to fashion transformative policies to be smart when time is pressing and when financial and human resources are limited. Such policies are essential if we wish to bring focus and synergy to the disparate policies that make up a broad enterprise-development strategy in a national, provincial, or local economy.

What is the relationship between conceptual framework and policy success?

Conceptual frameworks and policy design, implementation, and renewal usually evolve in parallel with each other. Frameworks are rather like maps that tell you where you are, where you need to go, and the direction that you must take to get there. Policy design and implementation deal with the messy business of gathering resources, making pragmatic choices, overcoming obstacles, and bringing the team along to a collective goal. To confuse these separate but interrelated elements of strategy, or to emphasize one at the expense of the other, will almost certainly lead to failure. Having a wonderful map, but of a route that would take you over impassable terrain, is useless. Wandering aimlessly in the wilderness bereft of any maps is equally futile.

Fortunately, the capability triad is not like the weatherman! It can offer diagnoses, and  even contingent predictions, and it can also suggest ways forward. The country case studies examined in this book suggest that the logic of the capability triad, based as it is on a distillation of actual experience, provides both structure and content to strategy design. To neglect its lessons, and to focus on price competition and stabilization processes as advocated in standard economics, has condemned national and regional economies to stagnation and decline and to all the social problems that such failures propagate.

What about research methodology in economics?

The economics advanced by a review of the historical experiences of rapid growth and decline in this book do not advance a policy framework with the clarity or certainty of the market fundamentalist or even Keynesian perspectives. Together they tell us that economies are inherently complex and not reducible to mechanical relationships. The methodological argument is that an alternative paradigm, beginning with case studies and empirical research rather than formal models grounded in a priori principles, is a more fruitful approach to understanding real-world economies and guiding policy. This is the position taken by all the thinkers in the production-centric paradigm.

Why have Nobel prizes overwhelmingly gone to the economics of optimal resource allocation? Part of the answer is that it is a comprehensive, context-free theory of individual rationality tractable to elegant simplification. Capabilities do not fit; they are about activities that cannot be done alone or at once.

My book goes the route of a different research methodology of which Darwin is the most prominent. This is systemic observation in which one searches for general principles, applies them to more experiences and in the process subjects them to tests. Not a complete answer but we start with what goes on inside the business enterprise because it is here that innovation and value creation either take place or do not take place. My book links Edith Penrose’s capabilities theory of the growth of the firm with Charles Babbage’s principles of production and Darwin’s evolutionary principles of variation, descent with adaptation and population dynamics. All three operate within the systemic observation methodology that distinguishes the production-centric economics perspective. 

Michael H. Best is professor emeritus of economics at the University of Massachusetts, Lowell, where he was codirector of the Center for Industrial Competitiveness. He has held numerous academic fellowships and participated in development projects with the United Nations, the World Bank, and governments in more than twenty countries. He is the author of The New Competition: Institutions of Industrial Restructuring and The New Competitive Advantage: The Renewal of American Industry.

Sebastian Edwards on American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold

EdwardsThe American economy is strong in large part because nobody believes that America would ever default on its debt. Yet in 1933, Franklin D. Roosevelt did just that, when in a bid to pull the country out of depression, he depreciated the U.S. dollar in relation to gold, effectively annulling all debt contracts. American Default is the story of this forgotten chapter in America’s history. At a time when several major economies never approached the brink of default or devaluing or recalling currencies, American Default is a timely account of a little-known yet drastic experiment with these policies, the inevitable backlash, and the ultimate result.

Americans believe that the Federal government has never defaulted on its debt. Yet in your book, you tell the story of a massive debt restructuring that happened only eight decades ago, in 1933. A debt restructuring that changed contracts unilaterally and retroactively, and imposed losses of 61% on investors. Why do you think that this episode is so little known?

This is a case of “collective amnesia.” Americans think of themselves as law-abiding citizens. We think of the United States as a country where institutions work and where contracts are sacred; a country where the rule of law prevails at all times. Reneging on contracts is not something this nation does. And, certainly, we don’t change contracts retroactively. It is something that “banana republics” do. And when they do it, we scold them and denounce them. We also demand compensation for damages.

When the Supreme Court heard the gold clause cases in 1935, most analysts thought that these were among the most important cases ever considered by the Court. Today, however, they are not even taught in most law schools. We have forgotten the episode because it is convenient, because it helps us maintain the view we have about our nation: a nation that always pays its debts. But, as I show in this book, this is not the case.

Your book is about the annulment of the gold clauses in 1933, and the Supreme Court decisions that ruled that it was legal to change debt contracts retroactively. What were the gold clauses, exactly? And what was their role?

Historically, most long-term debt contracts in the United States were written in terms of gold. That is, the borrower committed himself to paying back an amount of gold (or gold equivalent) equal to the amount borrowed, plus interest. This practice started during the Civil War to protect lenders from possible inflation.

In 1933, when President Franklin D. Roosevelt took the U.S. off the gold standard, all public debt included the gold clause. In addition, most railway and public utility bonds had gold clauses, as did most mortgages. Overall, debt equivalent to approximately 120% of GDP was subject to these escalation riders. That is a huge number. To put things in perspective, it is about twice as large as the debt that Argentina restructured unilaterally in 2002.

You write that the abrogation of the gold clauses was closely related to the abandonment of the gold standard in 1933.

In 1933, President Roosevelt thought that the U.S. could benefit from devaluing the dollar with respect to gold. This had been done by the United Kingdom in September 1931, and it appeared to be helping the UK get out of the depression. However, FDR was told by his advisers that the gold clauses stood in the way of a devaluation. With the gold clauses in place, a devaluation of the USD would immediately trigger an increase in debts by the same amount as the devaluation. This would bankrupt almost every railway company, and many other businesses. It would also be extremely costly for the government. It was at this point that FDR decided to abrogate the gold clauses. The actual annulment took place on June 5, 1933.

When emerging countries, such as Argentina, devalue their currency and restructure their debts, we often brand them as “populists.” Was there a populist element in FDR’s decision to abandon the gold standard and abrogate the gold clauses?

One of the main issues in 1933 was how to raise agricultural prices, which had declined by almost 70% since 1919. After the 1932 election there was a large bloc of populists, pro-agrarian members in Congress. The better known one was Senator Huey Long, but there were others. Two very influential ones were Senator Elmer Thomas from Oklahoma, and Senator Burton Wheeler from Montana. They were “inflationists,” and believed that getting off gold would help increase commodity prices. To a large extent the devaluation of the dollar—from $20.67 to $35 per ounce of gold—was to placate this group of “populist” lawmakers. Wheeler was also an isolationist. In Philip Roth novel The Plot against America, Wheeler is a fictional vice president, and aviator Charles Lindbergh is the president.

There are still some people who believe that getting off gold was a mistake. Was it necessary? Did it work? Should the U.S. go back to gold?

Most economic historians—including Milton Friedman and Ben Bernanke—agree that one of the main consequences of devaluing the dollar in 1934 was that the country received a huge inflow of gold. This additional gold was monetized by the Federal Reserve. As a consequence, there was a large increase in credit. This triggered a recovery, and helped reduce unemployment. A key question, which I address in the book, is whether it was possible, at the time, to put in place an expansionary monetary policy and still maintain some form of a gold-based standard. This is a controversial issue; British economist John Maynard Keynes believed that it was possible; many modern economists believe that it was not.

You argue in the book that at the time most economists were perplexed and didn’t know how to face the Great Depression. Apparently they didn’t understand the effects of fluctuating exchange rates.

In the 1930s the economic analysis of currency values and currency adjustments was in its infancy. Some well-known economists, such as Yale’s Irving Fisher, were very critical of the gold standard, and suggested pegging the value of the dollar to a basket of commodities. Other, including Princeton’s Edwin Kemmerer and Chicago’s Jacob Viner, were convinced that, in spite of some shortcomings, the gold standard was the best available monetary system. In the book I tell the story of how these two groups for FDR’s ear. I discuss who said what and how the President reacted to their advice.

You write that in 1933 George F. Warren was the most influential economist in the world. However, today almost no one knows his name. Who was he, and why was he so important?

George F. Warren was a professor of agricultural economics at Cornell, and a friend of Henry Morgenthau Jr.

Morgenthau was a neighbor and friend of President Roosevelt, who eventually became Secretary of the Treasury. In 1931, Warren published a book titled Prices, where he argued that agricultural prices were related in a one-to-one fashion to the price of gold. If the price of the metal increased through a devaluation of the USD, the price of wheat, corn, cotton, eggs and so on would increase immediately and by the same amount. Starting in July 1933, Warren became Roosevelt’s main economic adviser. In October the president put in place a “gold buying program” based on Warren’s theories. Every morning FDR would determine an arbitrary price at which the government bought small amounts of gold. The president’s expectation was that agricultural prices would follow in short order. But that didn’t happen; the program did not work as expected. John Maynard Keynes criticized it strongly, and in January 1934 the program was abandoned. In the book I discuss, in great detail, Warren’s theories and I compare them to those of other prominent economists, including Irving Fisher’s.

You devote quite some time to the cases argued in front of the Supreme Court. What can you tell us about them?

At the time, the Court was deeply divided. There was a conservative bloc led by Justice James Clark McReynolds, and a liberal bloc that included Justices Brandeis and Cardozo. Charles Evans Hughes, the Chief Justice, was often the swing vote. The cases were fascinating for several reasons; first, the Administration used a “necessity” argument to support the Joint Resolution that abrogated the gold clauses. This argument is very similar—in fact, almost identical—to the argument used recently by countries such as Argentina when restructured their debts unilaterally. Second, the government made very sophisticated economic arguments; in order to support them, it included a number of charts and diagrams in its briefs. Third, the rulings were very convoluted and controversial. In the case involving public debt (a Liberty Bond, to be more precise), the Court ruled that Congress had exceeded its power, and that the abrogation was thus unconstitutional. However, the Court said, there were no damages involved. That is, the government had violated the Constitution, but didn’t have to compensate bond holder for losses.

In modern times, countries that default and/or restructure their debts unilaterally pay a cost. Generally speaking, they have great difficulties accessing the capital markets. However, this was not the case for the U.S. What do you think are the reasons for this?

I discuss this issue in great detail in the book. Milton Friedman argued that by expropriating property rights the abrogation had severe negative effects on the U.S. economy. It negatively affected investment. I combed the data and didn’t find significant dislocations or signs of distress in the weeks and months following the Supreme Court rulings. In the final chapters of the book I give a possible explanation for this. I point out why the U.S. case is so different from recent default episodes, including Argentina and Greece.

Sebastian Edwards is the Henry Ford II Professor of International Economics at the University of California, Los Angeles. His books include Toxic Aid: Economic Collapse and Recovery in Tanzania and Left Behind: Latin America and the False Promise of Populism. He lives in Los Angeles.

Eric Posner & Glen Weyl on Radical Markets: Uprooting Capitalism and Democracy for a Just Society

Radical MarketsMany blame today’s economic inequality, stagnation, and political instability on the free market. The solution is to rein in the market, right? Radical Markets turns this thinking—and pretty much all conventional thinking about markets, both for and against—on its head. The book reveals bold new ways to organize markets for the good of everyone. It shows how the emancipatory force of genuinely open, free, and competitive markets can reawaken the dormant nineteenth-century spirit of liberal reform and lead to greater equality, prosperity, and cooperation. Only by radically expanding the scope of markets can we reduce inequality, restore robust economic growth, and resolve political conflicts. But to do that, we must replace our most sacred institutions with truly free and open competition—Radical Markets shows how. Read on for an interview between the two authors. 

Eric: I’ve never thought of myself as a radical, yet our book is called Radical Markets. Is this a marketing gimmick or are the ideas really radical?

Glen: Our proposals seem pretty radical to me. In our scheme, private property turns into a kind of an auction, so there would be a price on most property all the time and the benefits would flow equally to all citizens, eliminating most inequality of wealth.  The conventional system of democracy—one-person-one-vote and judicial protection of most minority rights—would turn into a market-based system of trading voice credits and using them to buy votes. The current immigration bureaucracy would be radically decentralized, as ordinary people would take over sponsorship of migrant workers. There are certainly ideas more radical than these, but not many that you hear discussed seriously by our academic colleagues.

Eric: Yet, unlike true radicals, we urge a go-slow approach. Test things out, we say. Things could go wrong, we warn. And then we claim to be in favor of markets. That doesn’t sound like Saint-Simon or Marx. Sure, enough our book is #1 on Amazon in the category of libertarianism, though neither of us think of ourselves as libertarians.

Glen: True revolutions occur in slow motion; they begin with ideas. Democracy is a revolutionary idea in a world of kingdoms; it did not happen overnight. Unions began as working men’s associations and only gradually gained power and state sanction. Even Saint-Simon inspired small-scale utopian communities. Revolutions that move rapidly to take over a whole society, like the French or Russian, usually quickly determine they didn’t have their plans fleshed out and end in chaos or greater tyranny than the system they replaced. We have radical, even revolutionary, aims, but we want the changes we propose to stick and that will only happen if they are fully developed, their weaknesses exposed by experimentation.

Eric. I’m still not sure. I like the title because I’m a sucker for word play. The root of the word radical is, well, root. Being radical means getting to the root of things. I think we do that. A radical in math is the root of a number, and several of the ideas in the book have their origin in quadratic equations. And then there is the idea of radical as left-wing. Here, I’m not so sure. In fact, one of our goals is to appeal to people with different political views.

Glen: Well, radical doesn’t necessarily mean left wing, though I guess it depends how you define it.  In fact, The Economist defines its ideology as the “radical center.” To me, that sense of radical is more about favoring fundamental changes to the social order rather than, say, putting the government in charge of everything or redistributing wealth. In that sense, I think we are very much radicals

Eric: We even appeal to Adam Smith and Milton Friedman. What could be less radical than that?

Glen: Adam Smith has an unfair reputation as a “conservative” these days only because his ideas were so successful. He put the finishing touches, intellectually at least, on the unthinking feudalism of the day. In fact, Smith helped found the first major political movement to identify itself as “Radical,” the Philosophical Radicals who are our inspiration. Not surprisingly, ideas that were radical in the eighteenth century can be reactionary in the twentieth, when Friedman wrote. But we give Friedman credit for seeing that central planning and a certain kind of bureaucratic mindset leads to a dead end.

Eric: And for market thinking: Friedman was right to emphasize the value of competition and exchange—essential features of market system—but, like many economists, took our system of property rights and politics for granted, as if thinking on these topics had stopped centuries ago. One way you can tell that you are being radical in an intellectual sense—the sense I care about—is that you find yourself being criticized by people with different political views. If you’re radical enough, people will get angry. We’ve already seen a bit of this. Immigrant advocates and alt-right types don’t agree on much, but they seem to be scandalized by our foreign worker proposal. I’ll be curious to see how people react to our other proposals.

Eric A. Posner is the Kirkland and Ellis Distinguished Service Professor at the University of Chicago Law School. His many books include Climate Change Justice. He lives in Chicago. E. Glen Weyl is principal researcher at Microsoft and visiting senior research scholar in economics and law at Yale University. He lives in Boston.

W. Kip Viscusi on Pricing Lives: Guideposts for a Safer Society

ViscusiLike it or not, sometimes we need to put a monetary value on people’s lives. In the past, government agencies used the financial “cost of death” to monetize the mortality risks of regulatory policies, but this method vastly undervalued life. Pricing Lives tells the story of how the government came to adopt an altogether different approach—the value of a statistical life, or VSL—and persuasively shows how its more widespread use could create a safer and more equitable society for everyone. In this book, Kip Viscusi provides a comprehensive look at all aspects of economic and policy efforts to price lives. Pricing Lives proposes sensible economic guideposts to foster more protective policies and greater levels of safety in the United States and throughout the world.

What do you mean by “pricing lives,” and where does this occur?

What we mean by pricing lives depends on the context. For the government’s risk and environmental regulation policies, the challenge is to determine how much we are willing to spend to prevent each expected fatality. The principal measure used to set this price is known as the value of a statistical life (VSL), or the amount society is willing to pay to prevent the risk of each statistical death. Companies also set an implicit price on life every time they make products that are not risk-free. Sometimes companies have assigned numerical amounts to the value of the fatalities that are prevented, though how they have done so is seriously flawed and has greatly undervalued life. There is also a role for pricing lives after fatalities have occurred. Regulatory agencies set the penalties that firms must pay for regulatory violations that led to the fatalities. The courts also set a price on lives in wrongful death cases in terms of the amount of compensation that must be paid to the decedent’s family after the death.

Why should there be any limit at all on what the government spends to save lives?

So long as resources are limited, we cannot make an unbounded commitment to a risk-free society. The practical issue is where to set these limits. In the 1980s, I was asked to settle a dispute between OMB and OSHA over the proposed hazard communication regulation. OMB had rejected the proposal, concluding that the costs exceeded the benefits. In my analysis of this debate, I introduced the VSL concept to government agencies. Doing so made the calculation of the benefits of risk regulations ten times more valuable than they were under the previous cost of death approach. It also led to the issuance of a regulation that previously had been rejected because it was viewed as being too costly. Although some government agencies were slow to adopt the higher VSL numbers, this approach is now the norm in government agencies. The VSL is the most important single number used in the evaluation of government regulatory policies.

Where can we get these values of a statistical life numbers?

The most reliable evidence is based on U.S. labor studies of the extra pay workers get for extra risk.  Suppose, for example, that a worker was paid $900 extra per year to face a risk of 1/10,000. Then, for a group of 10,000 workers, they would be paid $9 million (10,000 × $900) for the one expected death to their group. My current estimates of the VSL in the U.S. place this value at $10 million. Once people understand that the VSL greatly exceeds people’s earnings, the criticism that the approach is immoral generally diminishes. Instead, people wonder how people can value their lives by more than what they make. The reason for this surprisingly large value is that they are not buying out of the prospect of certain death. Instead, the VSL only pertains to very small risks of death that are much less costly to prevent.

What do other countries do? Does this U.S. labor market evidence have any pertinence to them?

Many other countries have also adopted the VSL approach, usually based on studies in which people are asked in interviews how much they are willing to pay for safety. Unfortunately, the VSL estimates that are used outside of the U.S. are very low—far lower than is warranted based on the income levels relative to the U.S. Even countries such as the United Kingdom and Australia greatly undervalue lives, with far greater disparities observed for many low-income countries. In this book, I present an approach for transferring the U.S. estimates to other countries, along with appropriate adjustments for income level differences. The estimates I provide for a wide range of countries will greatly increase the value placed on safety throughout the world.

Are there other factors, like age, that can affect the VSL?

What matters is people’s own willingness to pay to reduce risk. Unlike purported economic measures, such as the cost of death approach, people can still have a high VSL even if they are retired. As it turns out, the VSL rises over people’s lifetime, and then does decline somewhat, but it does not plummet with age. The VSL for those age 65 and over is very similar to that of people in their early 20s. There was a public outcry against the Environmental Protection Agency when it attempted an age adjustment that put “seniors on sale, 37% off.” Unfortunately, this age adjustment was not based on any U.S. labor market evidence but on a more speculative interview study from the United Kingdom. Typically, government policies have impacts across the entire population so that in most instances, relying on an average VSL is all that is needed. 

This whole idea of pricing lives sounds similar what businesses do when they decide how much to spend on product safety improvements. Do they get it right?

Unfortunately, companies historically have underpriced lives as well, as they have focused on how much they have to pay in court after a fatality rather than on how much it is worth to consumers to reduce the risk of death. Companies fell prey to the same cost of death approach that government agencies used to use. Jurors have expressed alarm after reviewing these corporate practices, sometimes levying punitive damages of $100 million or more against companies that have valued lives in this way. The result has been that most companies have abandoned such risk analyses altogether and now keep such deliberations secret, for fear of liability. In my book, I propose that companies adopt the VSL in their product safety decisions and that they be given legal protections to encourage responsible corporate risk analyses.

How is it that setting a finite price on life can provide “guideposts for a safer society?”

A properly set VSL raises rather than reduces the amounts that government agencies throughout the world assign to the prevention of fatality risks. Adoption of this approach for corporate risk decisions likewise would lead to safer products. In this book, I also advocate that the VSL be used to set penalties for regulatory violations leading to fatalities. Doing so would lead to an enormous increase in penalties by, for example, boosting penalties for job safety violations by a factor of 1,000. The courts similarly can use the VSL in both assessing product safety and setting damages in situations where deterring risky behavior is the concern. My proposed expansion of the application of the VSL will provide greater incentives for safety in all these contexts. What is particularly striking is that the single VSL number can serve multiple purposes and set the price on life in so many different situations.

W. Kip Viscusi is the University Distinguished Professor of Law, Economics, and Management at Vanderbilt University. His many books include Economics of Regulation and Antitrust and Fatal Tradeoffs: Public and Private Responsibilities for Risk.

Paul Tucker on Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State

TuckerCentral bankers have emerged from the financial crisis as the third great pillar of unelected power alongside the judiciary and the military. They pull the regulatory and financial levers of our economic well-being, yet unlike democratically elected leaders, their power does not come directly from the people. Unelected Power lays out the principles needed to ensure that central bankers, technocrats, regulators, and other agents of the administrative state remain stewards of the common good and do not become overmighty citizens. Like it or not, unelected power has become a hallmark of modern government. This critically important book shows how to harness it to the people’s purposes.

What is the regulatory state?

It’s a term that has come to be used to describe a host of government bodies that regulate particular economic sectors or the public more generally to protect, say, investors, the environment, consumers, workers, and so on. In a rudimentary form it has existed for a long time, going back to the 19th century and beyond. Going wider, Americans sometimes refer to the administrative state, meaning the evolution of government beyond a world of legislators and courts to one in which the executive branch makes policy and is divided up into departments, agencies, bureaus, commissions, and so on.

What are Independent agencies, and why do they matter?

They are government organizations that are not under the day-to-day control of elected politicians, whether in the executive branch or the legislature. Obvious examples today are the central banks, such as the Federal Reserve, European Central Bank, and the Bank of England, but also various regulators insulated from ongoing political control. By no means all agencies in the administrative state are independent. On both sides of the Atlantic, many are under the control of cabinet ministers or subject to annual budget approvals from the legislature, which makes them sensitive to politicians’ sentiments and whims. Independent agencies are distinctive in that politicians can control them only by amending or repealing legislation.

That sounds problematic in a democracy. Is it?

That’s the point of the book. The way I’ve just described them it could be a hell of a problem. Imagine an independent agency that had lots of powers but only the vaguest purpose and objective. Who would be able to tell whether it had succeeded in its mission if it set its own goal posts?! That’s at odds with some of our deepest values: just as “no taxation without representation” was a rallying cry a couple of centuries’ ago, we might just as well demand “no regulation without representation.”

Are central banks a particular problem?

They have become the poster boys and girls of today’s unelected power. Compared with what happened after the Great Depression in the 1930s, when it was politicians who did the heavy lifting, this time it has been central banks that have led the way in reviving the economy and redesigning the financial system. They have used their balance sheets on a truly gigantic scale to influence credit conditions in lots of markets, and have been given lots of new regulatory powers. They are more powerful than ever before, ranking with the judiciary and military as a third core pillar of unelected power.

Do people object to all this?

Yes, but in rather different ways in different countries. In the US, since the New Deal there have been critics who object that regulatory agencies violate the values associated with the separation of powers or even the Constitution itself. In France, not long ago the parliament passed legislation to put more structure around such agencies. In the UK, there is episodic antagonism to government by ‘experts.’

And on central bank independence, there have been challenges in the German constitutional court and attempts to pass reforming legislation in the US Congress.

So what is the solution?

Our democracies need norms for whether and how to delegate to independent agencies that measure up to the deep political values of our democratic, liberal republics: the various values of democracy, rule of law, constitutionalism. My book proposes and defends just such a set of Principles for Delegation, as I call them. They come in two broad parts: criteria for whether to delegate, and precepts for how to delegate.

Criteria for whether to delegate: I argue that a policy function should not be delegated to a truly independent agency unless (1) society has settled preferences; (2) the objective is capable of being framed in a reasonably clear way; (3) delegation would materially mitigate a problem of credible commitment; and (4) the policymaker would not have to make big choices on society’s values or the distribution of its resources.

Precepts for how to delegate: (1) the agency’s purposes, objectives and powers should be clear and set by elected legislators; (2) its decision-making procedures should be set largely by legislators and should accord with the values of the rule of law; (3) the agency itself should publish the operating principles that will guide its exercise of discretion within the delegated domain; (4) there should be transparency sufficient to permit accountability to the legislature for the agency’s stewardship of the regime and, separately, for politicians’ framing of the regime; and (5) it should be clear what (if anything) will happen, procedurally and/or substantively, when the edges of the regime are reached but the agency could do more to avert or contain a crisis. 

Perhaps the biggest thing is that elected legislators should set a monitorable objective. Independent agencies really can improve the credibility of commitments made by government, but only if we know what we want them to do and can track whether or not they are doing it.

Would those Principles affect anything much?

Yes. Here are just three examples.

They would challenge the acceptability of judges completely having completely overhauled the principles of competition policy a few decades ago. The legislation was vague and the views of economists had moved on, so the courts had room and reason to act. But, given our democratic values, this should have been work for elected politicians.

They suggest that role of some financial-market regulators in preserving a stable financial system needs either to be better insulated from politics (such as the SEC in the US) or subject to much clearer objectives (UK).

And they would restrict the roles and activities of central banks rather more than we have seen in recent years.  

Is any of this realistic in actual democratic states?

Well, that’s the point of the book. There are no deep constitutional blockages, so it’s a question of whether we want to be governed in a way that’s consistent with our values. I’m hoping that people who see merit in my Principles for Delegation (or something like them) will cite many more examples than I can (or even know about), generating the kind of debate that is badly needed about how state power is allocated.

Anyway, surely something has to be done to bring the role of experts in government in line with our democratic commitments.

Why did you write the book?

I spent a good part of my central banking career helping to design regulatory and monetary regimes, none more important than the expansion of the Bank of England’s powers after the Great Financial Crisis. We resisted some powers, wanted others constrained, and had strong views on how the different responsibilities should be assigned to distinct committees so as to disperse power and focus incentives. I wanted to try to write down the values and considerations lying behind that. When I moved to Harvard in late-2013, I had the opportunity to do so.

Paul Tucker is a fellow at the Harvard Kennedy School and chair of the Systemic Risk Council. For more than thirty years, he was a central banker and regulator at the Bank of England and the Bank for International Settlements. He lives in London.

Jerry Z. Muller on The Tyranny of Metrics

Today, organizations of all kinds are ruled by the belief that the path to success is quantifying human performance, publicizing the results, and dividing up the rewards based on the numbers. But in our zeal to instill the evaluation process with scientific rigor, we’ve gone from measuring performance to fixating on measuring itself. The result is a tyranny of metrics that threatens the quality of our lives and most important institutions. In this timely and powerful book, Jerry Muller uncovers the damage our obsession with metrics is causing—and shows how we can begin to fix the problem. Complete with a checklist of when and how to use metrics, The Tyranny of Metrics is an essential corrective to a rarely questioned trend that increasingly affects us all.

What’s the main idea?

We increasingly live in a culture of metric fixation: the belief in so many organizations that scientific management means replacing judgment based upon experience and talent with standardized measures of performance, and then rewarding or punishing individuals and organizations based upon those measures. The buzzwords of metric fixation are all around us: “metrics,” “accountability,” “assessment,” and “transparency.” Though often characterized as “best practice,” metric fixation is in fact often counterproductive, with costs to individual satisfaction with work, organizational effectiveness, and economic growth.

The Tyranny of Metrics treats metric fixation as the organizational equivalent of The Emperor’s New Clothes. It helps explain why metric fixation has become so popular, why it is so often counterproductive, and why some people have an interest in pushing it. It is a book that analyzes and critiques a dominant fashion in contemporary organizational culture, with an eye to making life in organizations more satisfying and productive.

Can you give a few examples of the “tyranny of metrics?”

Sure. In medicine, you have the phenomenon of “surgical report cards” that purport to show the success rates of surgeons who perform a particular procedure, such as cardiac operations. The scores are publicly reported. In an effort to raise their scores, surgeons were found to avoid operating on patients whose complicated circumstances made a successful operation less likely. So, the surgeons raised their scores. But some cardiac patients who might have benefited from an operation failed to get one—and died as a result. That’s what we call “creaming”—only dealing with cases most likely to be successful.

Then there is the phenomenon of goal diversion. A great deal of K-12 education has been distorted by the emphasis that teachers are forced to place on preparing students for standardized tests of English and math, where the results of the tests influence teacher retention or school closings. Teachers are instructed to focus class time on the elements of the subject that are tested (such as reading short prose passages), while ignoring those elements that are not (such as novels). Subjects that are not tested—including civics, art, and history—receive little attention.

Or, to take an example from the world of business. In 2011 the Wells Fargo bank set high quotas for its employees to sign up customers who were interested in one of its products (say, a deposit account) for additional services, such as overdraft coverage or credit cards. For the bank’s employees, failure to reach the quota meant working additional hours without pay and the threat of termination. The result: to reach their quotas, thousands of bankers resorted to low-level fraud, with disastrous effects for the bank. It was forced to pay a fortune in fines, and its stock price dropped.

Why is the book called The Tyranny of Metrics?

Because it helps explain and articulate the sense of frustration and oppression that people in a wide range of organizations feel at the diversion of their time and energy to performance measurement that is wasteful and counterproductive.

What sort of organizations does the book deal with?

There are chapters devoted to colleges and universities, K-12 education, medicine and health care, business and finance, non-profits and philanthropic organizations, policing, and the military. The goal is not to be definitive about any of these realms, but to explore instances in which metrics of measured performance have been functional or dysfunctional, and then to draw useful generalizations about the use and misuse of metrics.

What sort of a book is it? Does it belong to any particular discipline or political ideology?

It’s a work of synthesis, drawing on a wide range of studies and analyses from psychology, sociology, economics, political science, philosophy, organizational behavior, history, and other fields. But it’s written in jargon-free prose, that doesn’t require prior knowledge of any of these fields. Princeton University Press has it classified under “Business,” “Public Policy,” and “Current Affairs.” That’s accurate enough, but it only begins to suggest the ubiquity of the cultural pattern that the book depicts, analyzes, and critiques. The book makes use of conservative, liberal, Marxist, and anarchist authors—some of whom have surprising areas of analytic convergence.

What’s the geographic scope of the book?

In the first instance, the United States. There is also a lot of attention to Great Britain, which in many respects was at the leading edge of metric fixation in the government’s treatment of higher education (from the “Teaching Quality Assessment” through the “Research Excellence Framework”), health care (the NHS) and policing, under the rubric of “New Public Management.” From the US and Great Britain, metric fixation—often carried by consultants touting “best practice”—has spread to Continental Europe, the Anglosphere, Asia, and especially China (where the quest for measured performance and university rankings is having a particularly pernicious effect on science and higher education).

Is the book simply a manifesto against performance measurement?

By no means. Drawing on a wide range of case studies from education to medicine to the military, the book shows how measured performance can be developed and used in positive ways.

Who do you hope will read the book?

Everyone who works in an organization, manages an organization, or supervises an organization, whether in the for-profit, non-profit, or government sector. Or anyone who wants to understand this dominant organizational culture and its intrinsic weaknesses.

Jerry Z. Muller is the author of many books, including Adam Smith in His Time and Ours and Capitalism and the Jews. His writing has appeared in the New York Times, the Wall Street Journal, the Times Literary Supplement, and Foreign Affairs, among other publications. He is professor of history at the Catholic University of America in Washington, D.C., and lives in Silver Spring, Maryland.

Jonathan Haskel & Stian Westlake on Capitalism without Capital

Early in the twenty-first century, a quiet revolution occurred. For the first time, the major developed economies began to invest more in intangible assets, like design, branding, R&D, and software, than in tangible assets, like machinery, buildings, and computers. For all sorts of businesses, from tech firms and pharma companies to coffee shops and gyms, the ability to deploy assets that one can neither see nor touch is increasingly the main source of long-term success. But this is not just a familiar story of the so-called new economy. Capitalism without Capital shows that the growing importance of intangible assets has also played a role in some of the big economic changes of the last decade.

What do you mean when you say we live in an age of Capitalism without Capital?

Our book is based on one big fact about the economy: that the nature of the investment that businesses do has fundamentally changed. Once businesses invested mainly in things you could touch or feel like buildings, machinery, and vehicles. But more and more investment now goes into things you can’t touch or feel: things like research and development, design, organizational development—“intangible’ investments. Today, in developed countries, businesses invest more each year intangible assets than in tangibles. But they’re often measured poorly or not at all in company accounts or national accounts. So there is still a lot of capital about, but it has done a sort of vanishing act, both physically and from the records that businesses and governments keep.

What difference does the rise of intangible investments make?

The rise of intangible investment matters because intangible assets tend to behave differently from tangible ones—they have different economic properties. In the book we call these properties the 4S’s—scalability, sunkenness, synergies, and spillovers. Intangibles can be used again and again, they’re hard to sell if a business fails, they’re especially good when you combine them, and the benefits of intangible investment often end up accruing to businesses other than the ones that make them. We argue that this change helps explain all sorts of important concerns people have about today’s economy, from why inequality has risen so much, to why productivity growth seems to have slowed down.

So is this another book about tech companies?

It’s much bigger than that. It’s true that some of the biggest tech companies have lots of very valuable intangibles, and few tangibles. Google’s search algorithms, software, and prodigious stores of data are intangibles; Apple’s design, brand, and supply chains are intangibles; Uber’s networks of drivers and users are intangible assets. Each of these intangibles is worth billions of dollars. But intangibles are everywhere. Even brick and mortar businesses like supermarkets or gyms rely on more and more intangible assets, such as software, codified operating procedures, or brands. And the rise of intangibles is a very long-term story: research by economists like Carol Corrado suggests that intangibles investment has been steadily growing since the early twentieth century, long before the first semiconductors, let alone the Internet.

Who will do well from this new intangible economy?

The intangible economy seems to be creating winners and losers. From a business point of view, we know that around the world, there’s a growing gap between the leading businesses in any given industry and the rest. We think this leader-laggard gap is partly caused by intangibles. Because intangibles are scalable and have synergies with one another, companies that have valuable intangibles will do better and better (and have more incentives to invest in more), while small and low performing companies won’t, and will lag ever further behind.

There is a personal dimension to this too. People who are good at combining ideas, and who are open to new ideas, will do better in an economy where there are lots of synergies between different assets. This will be a boon for educated, open-minded people, people with political, legal, and social connections, and for people who live in cities (where ideas tend to combine easily with one another). But others risk being left further behind.

Does this help explain the big political changes in recent years?

Yes—after the EU referendum in the UK and the 2016 presidential election in the US, a lot of pundits were asking why so many so-called “left behind” communities people voted for Brexit or Donald Trump. Some people thought they did so for cultural reasons, others argued the reasons were mainly economic. But we would argue that an intangible economy, these two reasons are linked: more connected, cosmopolitan places tend to do better economically in an intangible economy, while left-behind places suffer from an alienation that is both economic and cultural.

You mentioned that the rise of intangible investment might help explain why productivity growth is slowing. Why is that?

Many economists and policymakers worry about so-called secular stagnation: the puzzling fact that productivity growth and investment seems to have slowed down, even though interest rates are low and corporate profits are high, especially since 2009. We think the growing importance of intangibles can help explain this in a few ways.

  • There is certainly some under-measurement of investment going on—but as it happens this explains only a small part of the puzzle.
  • The rate of growth of intangible investment has slowed a bit since 2009. This seems to explain part of the slow-down in growth (and also helps explain why the slowdown has been manly concentrated in total factor productivity)
  • The gap between leading firms (with lots of intangibles) and laggard firms (with few) may have created a scenario where a few firms are investing in a lot of intangibles (think Google and Facebook) but for most others, it’s not worth it, since their more powerful competitors are likely to get the spillover benefits.

Does the intangible economy have consequences for investors?

Yes! Company accounts generally don’t record intangibles (except, haphazardly, as “goodwill” after an acquisition). This means that, as intangible assets become more important, corporate balance sheets tell investors less and less about the true value of a company. Much of what equity analysts spend their days doing is, in practice, trying to value intangibles.

And there’s lots of value to be had here: research suggests that equity markets undervalue intangibles like organizational development, and encourage public companies to underinvest in intangibles like R&D. But informed investors can take advantage of this—which can benefit both their own returns and the performance of the economy.

Jonathan, you’re an academic, and Stian, you are a policymaker. How did you come to write this book together?

We started working together in 2009 on the Nesta Innovation Index, which applied some of the techniques that Jonathan had worked on to measure intangibles to build an innovation measurement for the UK. The more we thought about, the clearer it became that intangibles helped explain all sorts of things. Ryan Avent from the Economist asked us to write a piece for their blog about one of these puzzles, and we enjoyed doing that so much we thought we would try writing a book. One of the most fun parts of writing the book was being able to combine the insights from academic economic research on intangibles and innovation with practical insights from innovation policy.

CapitalismJonathan Haskel is professor of economics at Imperial College Business School. Stian Westlake is a senior fellow at Nesta, the UK’s national foundation for innovation. Haskel and Westlake are cowinners of the 2017 Indigo Prize.

The Greatest Showman and the Deceptions of American Capitalism

by Edward J. Balleisen

BalleisenPerhaps unsurprisingly, The Greatest Showman, the new cinematic musical about the nineteenth-century American impresario of entertainment P. T. Barnum, unabashedly takes liberties with the historical record. As reviewers have already documented (Richard Brody in the New Yorker, Bruce Chadwick for History News Network), it fabricates matters large and small, as is the wont of Hollywood screenwriters and directors who work on biopics, while ignoring a host of truthful vignettes that cry out for cinematic treatment. As a historian of business fraud, I found myself especially disappointed that the musical steered clear of many aspects of Barnum’s career that speak powerfully to elements of our own moment, including the rise of a Barnum-esque publicity hound and conductor of media misdirection from the White House, and the constant turmoil swirling over allegations of fake news. And yet, The Greatest Showman does get some of the larger implications of Barnum’s life right—especially his injection of a democratic style of hullabaloo into American capitalism.

A full inventory of the film’s flights of fancy would require catalogue length. But a sampling conveys the minimal concern for fidelity to historical detail. The movie portrays the young Barnum as the poorly-clad son of an impoverished Connecticut tailor, rather than the child of a respectable proprietor who had a number of well-to-do relatives and also owned a store and inn. It gives Barnum experiences that he never had (begging and stealing food as an orphaned New York City street urchin; clerking for an insurance company). It depicts his move into the world of entertainment as occurring sometime well after the establishment of the railroad, perhaps even after the Civil War, rather than in the 1830s.

The Greatest Showman ignores Barnum’s earliest promotions of lotteries, curiosities and hoaxes, including his cruel exhibition of the elderly African-American slave woman Joice Heth as supposedly the 161-year old former wet-nurse of George Washington, and his willingness to profit further after her death through a public autopsy, experiences that laid the groundwork for his management of the American Museum. The screenwriters (Bill Condon and Jenny Bicks) have Barnum buy the museum on a wholly fictional mix of frustration, fantasy, and fraud, made possible by his fraudulent provision of fake collateral to a New York City bank that lends him the necessary $10,000. Instead of coming to grips with the actual Barnum’s vociferous advocacy of temperance, the film conjures up a hard-drinking man who makes deals over whiskeys in saloons. Rather than showing how Barnum consistently found new performers over the years, it brings together the midget Charles Stratton (known on stage as Tom Thumb), the Siamese twins Change and Eng, and the other members of the troupe within weeks of Barnum’s purchase of the American Museum.

The historical Barnum had a falling out with the famed Swedish singer Jenny Lind not because he refused her amorous advances in the middle of their American tour (the musical’s explanation), but because she tired of his relentless focus on maximizing the returns from her concerts. A key antagonist for Barnum in The Greatest Showman is one “Bennett,” portrayed as a stiff-collared, high-toned theatre critic of the New York Herald. The actual James Gordon Bennett was the publisher of that paper, who proved more than happy to go along with hoaxes and sensationalism himself, using both to help cement his newspaper’s position as the first penny newspaper that catered to the broad masses. The character of Barnum’s high society sidekick Philip Carlyle is entirely fictional, as in his relationship with Anne Wheeler, an African-American female trapeze artist. One last illustration—the film attributes the fire that destroyed Barnum’s New York City Museum to neighborhood toughs who did not like his business, rather than the actual arsonist, a Confederate sympathizer who wished toward the end of the Civil War to strike a blow against the Union.

Of course, by indulging a willingness to elide facts or push outright lies in the service of a hokey story, the makers of The Greatest Showman adopt Barnum’s own modus operandi as a purveyor of entertainment. And the movie does a creditable job of engaging with some of Barnum’s larger cultural significance—his recognition that publicity and HYPE of any kind was often a marketing asset; his understanding that the public would be forgiving of misrepresentations and humbug if they, on balance, enjoyed the eventual show; his embrace of difference and variation within the human condition as worthy of celebration (if also exploitation); his compulsion to expand operations to take advantage of new opportunities, even at the cost of incurring gargantuan debts; his relentless focus on the American mythos of democratic opportunity, whether through his own experience (as carefully narrated in his autobiographies) or those of the stars in his shows. As the film implies, there was indeed deep-seated antagonism to Barnum’s business practices and willingness to engage in fakery, though the complaints came overwhelmingly from pulpits and the pages of evangelical newspapers, rather than protesters who made their presence known outside the Museum. And Barnum did in fact seek to defuse those critiques through the promotion of respectable performers such as Jenny Lind, alongside his curiosities, penchant for misdirection, and outright fakery.

Nonetheless, The Greatest Showman also missed many opportunities to explore episodes in Barnum’s life that have renewed resonance in the early twenty-first century. One crucial theme here concerns Barnum’s engagement with American race relations, both as promoter and in his post-Civil War forays in Connecticut politics and public service. Barnum’s often dehumanizing treatment of people of color and his evolving political views on race will surely occasion much commentary amid the current dramatic growth in ethnocentric nationalism and racially-grounded politics, as in a recent Smithsonian Magazine piece by Jackie Mansky. Other contemporary developments that suggest the value of reconsidering Barnum’s historical significance, closer to my own expertise, include the reoccurrence of massive business frauds, the emergence of enduring conflict over the appropriate role of government in consumer and investor protection, and diminished faith in institutions of all sorts.

The musical, for example, overlooks Barnum’s own bankruptcy in 1855, brought about because of his misplaced faith in the promises of a clock manufacturer who was willing to relocate his operation to Barnum’s adopted home town of Bridgeport, Connecticut, as part of an industrial development scheme. Barnum freely endorsed the Jerome Clock Company’s loans, opening himself up to devastating losses when the company failed, losses made worse by the firm’s eventual forging of Barnum’s endorsement on many additional notes. Yet he also sidestepped the worst consequences of that failure by illegally transferring assets into his wife’s name, a move that greatly facilitated his ability to get back on his financial feet, and for which he never faced public condemnation or legal penalty. Barnum’s insolvency thus speaks to the reality that even the savviest operators can be victims of imposition; and that well-connected perpetrators of commercial deceit have often been able to sidestep the most damaging fallout from their actions.

Another fascinating episode that The Greatest Showman ignores is Barnum’s growing focus on debunking the deceit of other purveyors of rhetorical (or actual) snake oil. By the 1860s, the promoter sought to legitimize his own brand of hokum and bluster not only by adding unquestionably respectable acts to his museum and eventual circus, but also by exposing frauds in many sectors of American life.  Compiled in his 1866 volume, Humbugs of the World, these endeavors targeted misrepresentations in retail trade, medicine, and religion (especially in the realm of spiritualism). Here Barnum intuited the great power associated with well-constructed strategies of deflection—that one could gain trust in part by setting oneself up as an arbiter of untrustworthiness. Perhaps there is no greater contemporary practitioner of this particular form of showmanship than the current occupant of the White House. Donald Trump has rarely hesitated to get out ahead of critiques of his own business and political practices by casting the first stones, as through his allegations of malfeasance by political opponents (the pleas during the 2016 general election campaign to investigate Hillary Clinton and “Lock Her Up”) or representatives of the media (the incessant allegations of FAKE NEWS.) In addition to muddying factual waters, such strategies can shore up support among the faithful, sustaining the conviction that their champion is fighting the good fight, and could not possibly be engaging in duplicitous behavior of his own.

In the end, The Greatest Showman cares most about exploring fictionalized or wholly fictional romantic tensions—those between Barnum and his wife Charity and between the Philip Carlyle and Anne Wheeler—as well as the degree to which Barnum lives up to his purported insistence on an inclusive respect for his socially marginalized performers. These choices constrain the musical’s capacity to engage deeply with Barnum’s historical significance as an entrepreneur who played an outsized role in creating modern mass entertainment. And so a multitude of opportunities go begging. Barnum’s many legacies, however, continue to reverberate in contemporary America, whether one focuses on the the dynamics of social media saturation, the process of invented celebrity, the sources of abiding racial tensions,  the implications of pervasive commercial dissembling, or the nature of popular skepticism about expert appraisals of reality. And so the ground remains open for cultural reinterpretations of the Great Showman’s life and times.  If the twentieth-century is any guide, we won’t have to wait too long for another cinematic treatment—every generation or so, some movie-maker finds the resources to put Barnum back on the screen.[1]

[1] Previous films include “The Mighty Barnum” (1934), “The Greatest Show on Earth” (1952), “Barnum” (1986), and “P. T. Barnum” (1999).

Edward J. Balleisen is professor of history and public policy and vice provost for Interdisciplinary Studies at Duke University. He is the author of Fraud: An American History from Barnum to Madoff. He lives in Durham, North Carolina.

Barry Eichengreen on How Global Currencies Work

At first glance, the modern history of the global economic system seems to support the long-held view that the leading world power’s currency—the British pound, the U.S. dollar, and perhaps someday the Chinese yuan—invariably dominates international trade and finance. In How Global Currencies Work, three noted economists provide a reassessment of this history and the theories behind the conventional wisdom. Read on to learn more about the two views of global currencies, changes in international monetary leadership, and more.

Your title refers to “two views” of global currencies. Can you explain?
We distinguish the “old view” and the “new view”—you can probably infer from the terminology to which view we personally incline. In the old view, one currency will tend dominate as the vehicle for cross-border transactions at any point in time. In the past it was the British pound; more recently it has been the U.S. dollar; and in the future it may be the Chinese renminbi, these being the currencies of the leading international economies of the nineteenth, twentieth, and twenty first centuries. The argument, grounded largely in theory, is that a single currency has tended to dominate, or will dominate, because it pays for investors and producers when engaging in cross-border transactions; specifically, it pays for them to do cross-border business in the same currency as their partners and competitors. This pattern reflects the convenience value of conformity—it reflects what economists refer to as “network externalities.” In this view, it pays to quote the prices of one’s exports in the same units in which they are quoted by other exporters; this makes it easy for customers to compare prices, enabling a newly competitive producer to break into international markets. It pays to denominate bonds marketed to foreign investors in the same currency as other international bonds, in this case to make it easier for investors to compare yields and maximize the demand for the bonds in question.

In what we call the new view, on the other hand, several national currencies can coexist—they can play consequential international roles at the same point in time. In the modern world, it is argued, network externalities are not all that strong. For one thing, interchangeability costs are low as a result of modern financial technology. The existence of deep and liquid markets allows investors and exporters to do business in a variety of different currencies and switch all but effortlessly between them—to sell one currency for another at negligible cost. The existence of hedging instruments allows those investors to insure themselves against financial risks—specifically, against the risk that prices will move in unexpected ways. Prices denominated in different currencies are easy to compare, since everyone now carries a currency converter in his or her pocket, in the form of a smartphone. These observations point to the conclusion, which is compelling in our view, that several national currencies can simultaneously serve as units of account, means of payment and stores of value for individuals, firms and governments engaged in cross-border transactions.

In our book we provide several kinds of evidence supporting the relevance of the new view, not just today but in the past as well. We suggest that the old view is an inaccurate characterization of not just the current state of affairs but, in fact, of the last century and more of international monetary history.

What exactly motivated you to write this book?
We were worried by the extent to which the old view, which pointed to a battle to the death for international monetary supremacy between the dollar and the renminbi, continues to dominate scholarly analysis and popular discourse. This misapprehension gives rise to concerns that we think are misplaced, and to policy recommendations that we think are misguided. Renminbi internationalization, the technical name for policies intended to foster use of China’s currency in cross-border transactions not just within China itself but among third countries as well, is not in fact an existential threat to the dollar’s international role. To the contrary, it is entirely consistent with continued international use of the greenback, or so our evidence suggests.

In addition, making a convincing case for the new view requires marshaling historical, institutional and statistical material and analyzing the better part of a century. We though this extensive body of evidence cried out for a book-length treatment.

To what revisions of received historical wisdom does your analysis point?
We use that historical, institutional and statistical analysis to show that the old view of single-currency dominance is inaccurate not just for today but also as a description of the situation in the first half of the twentieth century and even in the final decades of the nineteenth. In the 1920s and 1930s, the pound sterling and the dollar both in fact played consequential international roles. Under the pre-World War I gold standard, the same was true of sterling, the French franc and the German mark. Our reassessment of the historical record suggests that the coexistence of multiple international currencies, the state of affairs toward which we are currently moving, is not the exception but in fact the rule. There is nothing unprecedented or anomalous about it.

And, contrary to what is sometimes asserted, we show that there is no necessary association between international currency competition and financial instability. The classical gold standard was a prototypical multiple international and reserve currency system by our reading of the evidence. But, whatever its other defects, the gold standard system was a strikingly stable exchange-rate arrangement.

Finally, we show that, under certain circumstances at least, international monetary and financial leadership can be gained and lost quickly. This is contrary to the conventional wisdom that persistence and inertia are overwhelmingly strong in the monetary domain owing to the prevalence of network effects. It is contrary to the presumption that changes of the guard are relatively rare. It is similarly contrary to the presumption that, once an international currency, always an international currency.

So you argue, contrary to conventional wisdom, that changes in international monetary leadership can occur quickly under certain circumstances.  But what circumstances exactly?
The rising currency has to confront and overcome economic and institutional challenges, while the incumbent has to find it hard to keep up. Consider the case of the U.S. dollar. As late as 1914 the dollar played essentially no international role despite the fact that the U.S. had long since become the single largest economy. This initial position reflected the fact that although the U.S. had many of the economic preconditions in place—not only was it was far and away the largest economy but it was also the the number-one exporter—it lacked the institutional prerequisites. Passage of the Federal Reserve Act in 1913 corrected this deficiency. The founding of the Fed created a lender and liquidity provider of last resort. And the Federal Reserve Act authorized U.S. banks to branch abroad, essentially for the first time. World War I, which disrupted London’s foreign financial relations, meanwhile created an opening, of which the U.S. took full advantage. Over the first post-Fed decade, the greenback quickly rose to international prominence. It came to be widely used internationally, fully matching the role of the incumbent international currency, the British pound sterling, already by the middle of the first post-World War I decade.

The shift to dollar dominance after World War II was equally swift. Again the stage was set by a combination of economic and institutional advances on the side of the rising power and difficulties for the incumbent. The U.S. emerged from World War II significantly strengthened economically, the UK significantly weakened. In terms of institutions, the U.S. responded to the unsettled monetary and financial circumstances of the immediate postwar period with the Marshall Plan and other initiatives extending the country’s international financial reach. The UK meanwhile, was forced to resort to capital controls and stringent financial regulation, which limited sterling’s appeal.

What are the implications of your analysis for the future of the international monetary and financial system?
The implications depend on the policies adopted, prospectively, by the governments and central banks that are the issuers of the potential international currencies. Here we have in mind not just the dollar and the renminbi but also the euro, the Euro Area being the third economy, along with the U.S. and China with the economic scale that is a prerequisite for being able to issue a true international currency. If all three issuers follow sound and stable policies, then there is no reason why their three currencies can’t share the international stage for the foreseeable future—in effect there’s no reason why they can’t share that stage indefinitely. The global economy will be better off with three sources of liquidity, compared to the current status quo where it is all but wholly dependent on one.

In contrast, if one or more of the issuers in question follows erratic policies, investors will flee its currency, since in a world of multiple international and reserve currencies they will have alternatives—they will have somewhere to go. The result could then be sharp changes in exchange rates.  The consequence could be high volatility that would wreak havoc with national and international financial markets. So while a world of multiple international currencies has benefits, it also entails risks. Policy choices—and politics—will determine  whether the risks or benefits dominate in the end.

EichengreenBarry Eichengreen is the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley. His books include Hall of Mirrors, Exorbitant Privilege, Globalizing Capital, and The European Economy since 1945Arnaud Mehl is principal economist at the European Central Bank. Livia Chiţu is an economist at the European Central Bank.