The Anti-Depression Policies of Lauchlin Currie,
Paul Theodore Ellsworth and Harry Dexter White
[Reprinted with permission by Roger Sandilands]
Introductory Note by David Laidler (Bank of Montreal
Professor, University of Western Ontario) and Roger Sandilands
(Reader in Economics, University of Strathclyde)
The typescript whose text is reproduced
below is from Box 12, Folder 29, Harry Dexter White Papers, Seeley
G. Mudd Manuscript Library, Princeton University Library. Published
with permission of Princeton University Library. Its title,
authorship and date are written at the top of its first page, in
handwriting identified by Bruce Craig and Sandilands as that of
White. In preparing the text for publication we have corrected
obvious typographical errors. We are grateful to Daniele Besomi,
Milton Friedman, Perry Mehrling and an anonymous referee for
comments on an earlier draft of our Introduction.
This paper explains the significance to our understanding of the
origins and supposed uniqueness of the Chicago monetary tradition of a
hitherto almost unknown Memorandum on anti-depression policy that was
produced in January 1932 by three Harvard instructors, Lauchlin
Currie, Paul Theodore Ellsworth, and Harry Dexter White. The
memorandum sketched out an explanation of the then rapidly developing
Great Contraction, as well as a comprehensive and radical policy
programme for dealing with it. In keeping with the authors'
explanation of the Contraction as a consequence of a collapsing money
supply, the main domestic components of that programme were to be
vigorously expansionary open-market operations and substantial deficit
spending that, particularly in its early stages, was to be financed by
money creation; its international dimension involved a return to free
trade and the cancellation of inter-allied debts and reparations.
The document provides evidence of an original element in
macroeconomic thought at Harvard (influenced by Allyn Young's earlier
teaching and empirical work) in the early years of the depression,
before the New Deal, and before the importation of the somewhat
different theoretical ideas of Keynes's General Theory. Second, it
provides insight into the early intellectual development of Currie and
White, both of whom had great influence on U.S. domestic and
international economic policy during the Roosevelt years. Third, the
Memorandum is shown to have striking similarities with - and probably
to have had a significant influence upon - the set of recommendations
emerging at the end of the Harris Foundation conference on "Gold
and Monetary Stabilization" (January 31, 1932) that has been
cited as one of the seminal documents of the "Chicago monetary
The Memorandum's Authors and Their Message
Memorandum that this note introduces was completed by three
young members of the Harvard economics department some time in January
1932. Two of them, Lauchlin Currie and Harry Dexter White, were soon
to play key roles on the American, indeed the world-wide, policy
scene. Both of them would go to Washington in 1934 as founding members
of Jacob Viner's "Freshman Brains Trust". In due course,
first at the Federal Reserve Board, and later at the Treasury and the
White House, Currie would become a highly visible and leading advocate
of expansionary fiscal policy, while White, at the Treasury, was to be
a co-architect, with Keynes, of the Bretton Woods system. Both would
fall victim to anti-communist witch-hunts in the late 1940s, in
White's case perhaps at the cost of his life, since he died of a heart
attack in 1948 three days after a strenuous hearing before the House
Committee on Un -American Activities (HUAC). The third author, Paul
Theodore Ellsworth, later a Professor of Economics at the University
of Wisconsin, is perhaps best remembered nowadays as the author of a
leading textbook in International Economics (Ellsworth 1937), though
it is worth noting that he was also a very early (December 1936) but
hitherto unrecognised discoverer of what came to be called the IS - LM
model as a means of elucidating issues raised by Keynes' (1936)
It is not known how widely this Memorandum was circulated,
but the fact that it is a piece of policy advocacy, combined with its
relatively polished style, makes it inconceivable that it was meant
for the eyes and files of its authors alone. As readers will see, it
sketches out an explanation of the then rapidly developing Great
Contraction, as well as a comprehensive and radical policy programme
for dealing with it. In keeping with its authors' explanation of the
Contraction as a consequence of a collapsing money supply, the main
domestic components of that programme were to be vigorously
expansionary open-market operations and substantial deficit spending
that, particularly in its early stages, was to be financed by money
creation; its international dimension involved a return to free trade
and serious efforts to resolve the problems of international
indebtedness that had originated in the Great War and in the Treaty of
Versailles which had brought it to an uneasy end in 1919.
The Memorandum's Significance
The existence of this Memorandum has recently been noted in one or
two publications, but apart from a brief discussion in Sandilands
(2001), its significance has not been adequately appreciated. First,
it is self-evidently, a coherent work of high intellectual quality,
and provides documentary evidence about an original and provocative
element in the macroeconomic thought of an important intellectual
centre, namely Harvard, in the early years of the depression, before
the New Deal and before the importation of the theoretical ideas of
General Theory (1936). Second, it provides considerable
insight into the early intellectual development of Currie and White,
both of whom had great influence on the course of US domestic and
international economic policy in the years of the Roosevelt
Administration. The importance of a document in which these two had a
hand, and which deals extensively with domestic macroeconomic policy
and international economic relations is surely obvious. It merits the
attention of any historian of inter-war economic thought for this
The Memorandum is also interesting for a third reason. There
are strong similarities between the programme it sets out and the one
embodied in the "Recommendations" sent to President Hoover
over the signatures of 24 economists who participated in the
conference on "Gold and Monetary Stabilization" held under
the auspices of the Norman Wait Harris Foundation at the University of
Chicago on January 27-31, 1932, and published in its proceedings
(Wright 1932, 161-63). This conference took place at the end of the
very month in which this Memorandum was completed. Given its venue,
and the fact that no fewer than 12 of the signatories of its "Recommendations"
occupied posts at the University of Chicago, they have long been cited
as one the seminal documents of what has sometimes been claimed to be
a unique "Chicago Tradition" in monetary analysis. But as
one of us (Laidler 1993) has earlier noted, one of the non-Chicago
economists involved in drafting them was John H. Williams of Harvard.
As we shall see, the record of his oral contributions to the Harris
Foundation conference suggests that he was probably familiar with the
Harvard Memorandum, and certainly well acquainted with some of
the ideas emphasised in it. These considerations constitute strong
circumstantial evidence of a Harvard influence on one of the "Chicago
Tradition's" earliest documents. But even if this conjecture is
discounted, it is clear from the following Memorandum that there was
nothing unique about the Chicago Tradition as it stood in early
We shall now elaborate on these matters in turn.
Harvard Economists and the Depression
The best known product of the Harvard Economics Department dealing
with economic policy in the early 1930s is a collection of essays
The Economics of the Recovery Program (D. V. Brown et al.,
1934), which the department's historian Edward Mason (1982) has
tactfully characterised as "not very distinguished". We
prefer to stand by the verdict of Laidler (1993, 1078) that most of
them "verge on the incoherent and do no credit to their
distinguished authors". The only intellectually coherent
contribution to this collection, which offered a comprehensively
negative assessment of President Roosevelt's policy plans, was that of
Joseph Schumpeter. He advanced an essentially "Austrian"
interpretation of the depression, locating its causes in a bout of
over-investment which had collapsed in 1929, and arguing forcefully
that attempts at a cure by monetary or fiscal expansion would serve
only to prolong the slump. This was also the view of another member of
the Harvard department, albeit a visitor from Vienna at this time,
Gottfried von Haberler, who gave it a thorough airing in a paper
(Haberler 1932) presented to the very Harris Foundation conference
that produced the "Recommendations" referred to earlier,
which he did not sign.
There is, then, no question that Harvard's reputation for mediocrity
and policy pessimism in the early 1930s is founded in fact, but this
has never been the whole story. Its Economics department had until
quite recently been an important centre for the development of balance
of payments theory under the leadership of Frank Taussig, and monetary
economics, largely under the leadership of Allyn A.Young. Among
Taussig's supervisees in earlier years had been Jacob Viner, Frank
Graham, and John H. Williams, and among Young's, at Harvard, had been
James Angell, Arthur Marget, and Edward H. Chamberlin, while Currie
had expected to become another.
Taussig was still on the Harvard faculty in the early 1930s, and
still editor of the Quarterly Journal of Economics. He also
remained involved with graduate students' work, supervising the thesis
of Harry White, one of the authors of the following Memorandum, while
Currie was also closely enough associated with him to contribute to a
collection of essays in his honour in 1936. However, Taussig was by
then in his seventies and, as Tavlas (1997, 170-71) has noted, such
public comments of his on the Depression that survive were few and
non-committal. Young, moreover, had left Harvard in 1927 to take up a
temporary appointment at the London School of Economics, from which he
had expected to return in 1930, but he died of influenza in March 1929
at the early age of fifty-two.
As Perry Mehrling (1997) has argued, Young's work in monetary
economics had sought a middle ground between the quantity theory of
Irving Fisher and the real-bills approach of James Laurence Laughlin
and Henry Parker Willis which dominated thinking at the Federal
Reserve Board in the 1920s and early 1930s; and it had informed his
efforts as an advisor to Benjamin Strong at the Federal Reserve Bank
of New York. Young was also a great admirer of, and was in turn
admired by, Ralph Hawtrey, an official of the United Kingdom Treasury,
whose only academic appointment, as a visitor to Harvard in 1928-29,
he was instrumental in arranging. In common with Hawtrey, Young was a
supporter of the gold standard and an advocate of discretionary
monetary policy aimed at ironing out the cycle, but unlike Hawtrey he
was also an advocate of public works expenditure as a tool of
stabilisation policy in its own right. Young's death left a vacuum in
the field of what we would now call macroeconomics among the senior
ranks at Harvard that Joseph Schumpeter was soon to fill.
Currie, one of the three authors of the Memorandum that is
the focus of this note, had been Young's student, and Hawtrey's
assistant during his year at Harvard. He had expected to write his
Ph.D. thesis (Currie 1931) under Young's supervision, but it was, in
fact, completed under the guidance of Williams and submitted in
January 1931. This thesis is a clear antecedent of the Memorandum.
It blended Hawtrey's monetary cycle theory with Young's empirical
approach to the analysis of the United States monetary system, and
offered (among other things) a quantity theory based explanation of
the downturn that began in 1929, a critique of the Federal Reserve
system's passive response to it, and the suggestion that a more
vigorously expansionary monetary policy would have been appropriate
during 1929-30. It is worth noting that the quantity theory he
deployed was an income velocity version of the doctrine, such as
Hawtrey and Young customarily used, rather than the Fisherian
transaction velocity variant. And Currie's slightly later Supply
and Control of Money in the United States (1934), dedicated to
Young's memory, further developed these themes, and was (indeed still
is) particularly notable for expounding the thesis that, far from
having engaged in expansionary policy as it claimed at the time, the
Federal Reserve system had remained largely passive as the depression
gathered momentum into 1932-33. He can, then, reasonably be regarded
as having largely anticipated the monetary explanation of the Great
Contraction that was later developed by Friedman and Anna J. Schwartz
(1963). Only in his sometimes ambiguous discussions of the build-up of
excess reserves in the banking system during 1932-33 does his analysis
differ from theirs.
Particularly important given the joint authorship of the following
Memorandum, there already exists evidence that Currie did not
develop these ideas in isolation. It is already well known that he and
White were already close friends and worked together when at Harvard
(see Sandilands, 1990, 23). Furthermore, when Erik Lundberg spent time
at Harvard in 1933 he found the department a centre of lively debate,
and he described its environment in the following terms:
"Schumpeter had gathered around him a group of young
economists, all working with modern monetary theories. During most
of the summer I had discussions with some of them, especially on
monetary questions concerning the business cycle. In Washington, and
also to a large extent in New York, I had repeatedly heard of the
tremendous inflation during the years leading up to 1929. At
Harvard, reputed for its conservatism, I now learned that there had
been no inflation, but rather the contrary. Professor [sic] Currie
was the most eager advocate of this theory. . . .; Currie was
not alone in holding this opinion. He, as well as the others who
held this belief at Harvard were good economists, as were the
people with the opposite view in New York and Washington."
(Lundberg  1995, 62, italics added)
Evidently Currie was no lone wolf at Harvard in the early 1930s, as
Tavlas (1997) characterized him, but nor was he a professor as
Lundberg had it; he was an untenured instructor.
It would be a mistake to think that divisions of opinion about
macroeconomic questions at Harvard lay solely along lines demarcated
by age and rank, with mediocrity and pessimism being concentrated
among the department's "establishment". Though they would in
due course become members of that establishment, some contributors to
the Economics of the Recovery Program were, after all, young
and untenured in 1934 (e.g., Wassily Leontief, Edward Chamberlin,
Seymour Harris) while, as we shall see, at least one member of that
establishment, John H. Williams was quite sympathetic to proposals
like those of Currie and his associates. Even so, as the 1930s
progressed, those younger members of the Department whose
macroeconomic views were hostile to the New Deal won promotion and
stayed, while those who, like the authors of this Memorandum, took the
more radical and intellectually coherent position it epitomises,
either left or were eased out. By 1936, therefore, when "Keynes
came to America" with a new crop of graduate students who had
studied with him at Cambridge and then migrated to Harvard, the
department was perhaps a less interesting and lively place than it had
been only a few years earlier.
This Memorandum may be read, then, as giving some indication
of the character and quality of an alternative intellectual tradition
that might have developed at Harvard in the 1930s, had the
Department's promotion and tenure policies been different. And in the
background here perhaps there stands the shade of Young, who had
advocated activist monetary and fiscal stabilisation policies during
the 1920s, and had also, incidentally, written extensively on the
monetary problems created by the international indebtedness left over
from World War I and the Versailles Peace Conference, which he had
attended as a senior adviser to the American delegation.
Currie was among those eased out of Harvard. As we have already
noted, he was, along with White, a founding member of Jacob Viner's
so-called "Freshman Brains Trust" in Washington. This
appointment, which began in June 1934 was supposed to be for a matter
of months, and when he was invited to extend it into the autumn of
that year, Harvard refused to grant him further leave, in effect
forcing his resignation (see Sandilands 1990, 56-57).
By his own (1978) account, Currie had been in difficulty with some of
his senior colleagues for advocating unbalanced budgets as a means of
fighting the depression long before 1934. Though no one, to the best
of our knowledge, has ever questioned this particular claim, it does
at first sight sit oddly with the so-far available published record of
his work at Harvard which deals solely with monetary policy. At
the very least, it leaves open the question of how his analysis of
fiscal policy at that time might have fitted in with his work on
monetary questions. One commentator, Tavlas (1997, 170), has gone so
far as to suggest, largely on the basis of Currie's (1978) own
retrospective account, that his policy stance rested on a belief in "the
inefficacy of open market operations and the need for budget deficits."
Memorandum clarifies all of this. It first of all confirms the
evidence of his other writings of the time that, contrary to Tavlas,
Currie did indeed strongly and systematically advocate open market
operations as an important policy measure in their own right. Even
more striking, though written before the events of 1932, it also
discusses in some detail the likelihood that the commercial banks'
first response to open market operations would be to reduce their
indebtedness to the Fed.. Thus the stress that Currie laid on this
same point in (1934), in his after-the-event discussion of the
inefficacy of the open-market operations that were actually executed
in 1932, was in no way an ex post rationalization.
Nevertheless, Currie and his associates were unduly optimistic on two
matters. They underestimated the chances of open market operations
provoking a gold outflow, and they did not foresee the build up of
excess reserves in the banking system which would do so much to
inhibit the effectiveness of these operations, though they did appear
to believe that neither of these problems would arise if their
recommendations were implemented in full. Most striking of all,
however, this Memorandum shows that, as early as January 1932,
Currie and his associates had concluded that the economic situation
was sufficiently serious that open market operations alone might not
be enough to deal with it: hence their advocacy of fiscal expansion.
They were well aware of the potential for what we would now call "crowding
out" effects to mute its influence, however, and argued (in the
section on Public Expenditures, pp.29-30 below) the necessity of
financing budget imbalances with money creation, particularly in the
early stages of any such programme.
Here it is worth drawing attention to a certain similarity between
their views and those of Hawtrey, whose assistant Currie had recently
been. Hawtrey is rightly regarded as the originator of the "Treasury
view" that fiscal policy not financed by money creation would
usually be fully crowded out, and that, when deficits were financed by
money creation, it was this money creation, and not any direct
expenditure associated with the fiscal policy, that would do the work.
The Memorandum comes close to this position in raising the
possibility of fiscal policy's effects being crowding out if it is
financed by bond issues. It should also be recalled, however, that
Hawtrey (1925, pp. 41-42) discussed possible exceptions to his basic
position. In particular, he allowed that an increase of confidence
among the general public in an initially depressed economy could
create a rise in velocity and prevent the effects on output of
government expenditures being crowded out; and he also argued that
this would only be possible if such expenditures were initially
accompanied by money creation so as to permit a confidence-building
expansion to get under way in the first place. It is, furthermore,
worth recalling that Currie's later expositions of the case for
expansionary fiscal policy invariably paid more attention to the
interaction of such measures with the quantity and velocity of money
than did more explicitly Keynesian treatments of the topic.
Evidently, these later expositions rested on principles that he and
his colleagues had begun to develop while at Harvard in the early
1930s, and owed nothing to any later influence emanating from Keynes'
General Theory; but they may have owed something to Hawtrey's analysis
of exceptions to his own central position.
The Harris Foundation "Recommendations"
Finally we turn to the extremely strong similarities between the
Memorandum and the "Recommendations" to President
Hoover that emerged from the Harris Foundation conference of January
1932. These "Recommendations" (along with Jacob Viner's
contribution to the conference that produced them) are the earliest of
the sources cited by Milton Friedman (1974, 162-68) as epitomising the
economics of the "Chicago Tradition" of the 1930s, from
which, he claimed, his own work ultimately drew its inspiration.
Quoting J. Ronnie Davis Friedman called attention to Chicago
economists' advocacy of "'large and continuous budget deficits to
combat the mass unemployment and deflation of the times', "
(Davis 1968, 476, as quoted by Friedman 1974, 163) and went on to
remark, now quoting from the "Recommendations" (Wright 1932,
They recommended also "that the Federal Reserve
banks systematically pursue open-market operations with the double
aim of facilitating necessary government financing and increasing
the liquidity of the banking structure" (Friedman 1974, 163).
Friedman (1974) contrasted the "hopeful and 'relevant' view"
epitomised by these passages with the London School (really Austrian)
view that I referred to in my "Restatement"  when I
spoke of 'the atrophied and rigid caricature [of the quantity theory]
that is so frequently described by the proponents of the new
income-expenditure approach. . .' (Friedman 1974, 163).
Now Friedman was careful to note that the "Recommendations"
bore the signatures of twelve non-Chicago economists in addition to
twelve from that University, and he did not therefore claim that "this
more hopeful and 'relevant' view" of what could be done about the
depression "was restricted to Chicago" (1974, 163-64).
But a comparison of the Harris Foundation "Recommendations"
with the following Memorandum, completed, it should be
recalled, earlier in the same month, forces us to conclude that, at
this early stage in the development of the "Chicago tradition",
there was nothing at all unique about them.
The "Recommendations" urged President Hoover to support
vigorous open market operations and public works programmes, (paras. 2
- 4); so did the Currie, Ellsworth and White Memorandum,
though the latter were more enthusiastic about the second of these
measures. The "Recommendations" urged that the Federal
Reserve system be empowered to issue notes against government
securities, thus effectively increasing the amount of "free gold"
available to the system (para. 1); so did the Memorandum.
Finally, they urged that attention be given to reducing or canceling
inter-governmental debts, and to beginning international negotiations
with a view to securing a substantial reduction in tariffs and other
trade barriers (paras. 5 and 6); so, once again, did the Memorandum.
The similarities between the two documents are so great that we find
it hard to believe that they are coincidental. Moreover, there is
a direct connection between these two documents, in the person of John
H. Williams. He was beyond doubt familiar with Currie's earlier work,
having supervised his thesis, and he not only signed the Harris
recommendations, but also had a hand in drafting them sufficiently
important to have been chosen by his colleagues to prepare an essay
for the Harris Conference volume putting them in context (Williams
That essay, it must be said, makes no explicit reference to Currie,
Ellsworth, and White, nor did Williams refer directly to them or their
Memorandum in his extensive contributions to the oral
deliberations of the conference. Moreover, his essay has nothing to
say about fiscal policy, despite the fact that one of the
recommendations it was justifying was that "the federal
government maintain its program of public works and public services at
a level not lower than that of 1931-32." However, Williams's
conclusions - that "the greatest single help, internally, would
be a vigorous open-market policy designed to reduce rediscounts of
member banks and to increase the supply of purchasing power"
(Williams 1932, 157), and that "the greatest help of
international character would be the substantial reduction, or
cancellation, of war debts, and the scaling down of tariff barriers"
(Williams 1932, 157) - echo not only the other recommendations
emanating from the conference, but also, as we have already seen,
proposals set out in great detail in the Memorandum.
Furthermore, the transcript of the oral deliberations of the Harris
Foundation conference shows that Williams stressed the importance of
existing commercial bank indebtedness to the Federal reserve system as
a factor affecting the likely efficacy of open market operations, just
as the Memorandum does, and he also gave a quantitative
assessment of the scale of open market operations needed to influence
the economy that ran exactly parallel to a similar discussion in the
Memorandum. Where Currie, Ellsworth and White wrote
At the moment of writing the indebtedness [of commercial
banks to the Fed] amounts to over $800,000,000. We strongly
recommend, therefore, that the reserve banks purchase upwards of a
billion dollars of bills and securities. This action would satisfy
member banks' desire for liquidity and in addition give them large
If we examine our situation today we would find that it
would take something like double the present security holdings of
the Federal Reserve banks merely to get the banking system out of
debt. Apparently the first desire of the banking system would be to
clear itself from debt, so that I can express my point . . .
quantitatively by saying that it would take, for example,
$1,600,000,000 of Federal Reserve assets merely to get ready to get
started to pump money into circulation. (294)
If he has not actually read the Memorandum, then, Williams
demonstrably held essentially identical views to those of its authors
about the scale of open market operations needed at the beginning of
1932. An opinion on a critical question of monetary policy, with
roots in discussions then going on at Harvard was thus clearly
represented at the Harris Foundation conference by one of the
principle authors of its "Recommendations. . .". It is hard
to believe, as we have already remarked, that these two documents are
totally independent of one another.
To summarize then: the following
Memorandum is interesting from a number of points of view. It
provides concrete evidence that, whatever it may have been like later
in the decade, in 1931-32 the Harvard Economics department was the
scene of vigorous and constructive discussion of the depression and
how to deal with it, with an optimistic activist viewpoint well
represented. Lauchlin Currie's role here has long been recognized, and
this Memorandum throws important new light on it, showing
clearly that he was not a "lone wolf" at Harvard. More
important, it provides a unique source of evidence on just how far his
views on the use of fiscal policy had developed while he was still at
Harvard, and how they fitted together with his, by now well known,
monetary interpretation of the causes of the depression. Finally, the
similarities between this Memorandum's contents and those of
the famous Harris Foundation "Recommendations" of 31 January
1932 provide conclusive evidence that many of the ideas that
characterize the pre-General Theory "Chicago tradition"
in monetary economics, of which so much has been written in the last
twenty-five years, were also current at Harvard at the time when that
tradition was developing. For all these reasons, then, the following
Memorandum is an important document.
- The standard source of
information on Currie's life is Sandilands (1990); on White, see
David Rees (1973) and James M. Boughton (2001). We are unaware of
any biography of Ellsworth, but Paul Dedenhefer and Craufurd
Goodwin tell us that some information about him is to be found in
Robert J. Lampman (1993), though no single section of the book is
devoted to him. Ellsworth's (1936) exposition exposition of a
version of the IS-LM model, published when he held an appointment
at the University of Cincinnati seems to be the second to have
appeared (after that of W. B. Reddaway 1936) and antedates J. R.
Hicks's (1937) exposition of the system. Warren Young (1987) does
not refer to it in his now standard history of the "IS-LM-ization"
of Keynesian economics.
- The first mention of this
Chicago Tradition seems to have been in Milton Friedman (1956),
and its nature and claim to uniqueness were subsequently discussed
by, among others, Don Patinkin (1969, 1973) Thomas Humphrey
(1971), and Friedman (1974). The links, or absence thereof, of
this tradition to ideas current at Harvard are debated by Laidler
(1993, 1998) and George Tavlas (1997, 1998a). Tavlas (1998b) later
restates the view that the Chicago Tradition was unique. Friedman
(1974) makes much of the 1932 Harris Foundation conference as an
example of the Chicago Tradition, and in so doing he draws on the
work of J. Ronnie Davis (1968) who also discussed it extensively.
See also Davis (1971).
- A complete transcript of the
conference's deliberations (Norman Wait Harris Foundation 1932) is
to be found in the Regenstein Library at the University of Chicago
- In a letter to Laidler, dated
January 22, 2001, Milton Friedman remarks that "the
Memorandum is a truly remarkable and impressive document, and it
certainly supports your position that Chicago had no monopoly on
the quantity theory approach to the Great Depression and to
measures required to recover from it. I have no doubt, as you
suggest in your introductory comments, that more than coincidence
explains the similarity of the views expressed by the Harvard trio
and the recommendations coming out of the Harris conference."
We are grateful to Professor Friedman for permission to quote from
- Earlier, at Cornell, Young had
supervised Frank H. Knight and Harold Reed.
- See Sandilands 1990, p. 54.
Also, in a letter to Taussig, written in October 1934, Viner
remarks "I have had a few Harvard men working for me here [in
Washington], Currie, [Alan] Sweezy, and White, and have been very
favorably impressed indeed with them, especially the two former."
We are grateful to Bruce Craig for this information.
- In addition to Mehrling's
study of Young, the reader's attention is also drawn to Mehrling
and Sandilands's preface to their 1999 collection of work by him,
much of it hitherto unknown, as well as to Charles Blitch's 1995
- For Young on Hawtrey, see for
example his 1924 review of Currency and Credit, and for Hawtrey on
Young, his 1927 review of Economic Problems New and Old.
- Currie would later suggest
that Williams' role in shaping his thesis was rather minor. He
remarked in a 1992 letter to Laidler that "I probably had
more influence on his [Williams's] thinking than he did on mine."
For further discussion of this point, which corroborates the
suggestion we make below that the Memorandum reprinted
here influenced Williams's contributions to the 1932 Harris
Foundation conference, see Laidler 1993, p.1091, fn.25.
- Currie's thesis in its
original 1931 version contains an extensive discussion of
Hawtrey's work, but this material was deleted from the draft later
submitted for the Wells Prize competition at Harvard. See Laidler
1999, p. 234, fn.25. We speculate, without any direct evidence,
that he may have done this because Haberler, one of the judges for
the competition that year, was known to be hostile to Hawtrey,
having, for example, explicitly and sharply criticized him in his
Harris Foundation paper (Haberler 1932). Whatever the reason,
however, the modification was to no avail. The prize that year was
awarded to White. See Sandilands 1990, 23.
- Karl Brunner (1968) and
Humphrey (1971) were the first to note Currie's contribution here.
Frank Steindl (1995 chap.4) defends the uniqueness of Friedman and
Schwartz's interpretation, largely on the basis of his reading of
Currie's discussions of the role of excess reserves. See note 16
below for further comment.
- In this passage, the word "inflation"
should be read, in accordance with the common usage of the time,
as referring to the expansion of money and credit, rather than to
a rise in the price level. The view that the Depression was the
inevitable consequence of a previous overexpansion of credit in
the 1920s was held in common both by Austrian analysts such as
Haberler, but also by advocates of the Real Bills Doctrine such as
Henry Parker Willis. On this, see Laidler 1999, pp. 214-7. Currie
and his co-authors of the following Memorandum clearly
blamed it on the contraction of the money supply which began in a
mild way in 1928 but quickly gathered momentum after October 1929,
an interpretation already developed by Currie (1931).
- Colander and Landreth (1996)
contains a series of conversations with some of the economists
involved in this later episode.
- We nevertheless hesitate to
enroll Young as a posthumous supporter of Currie and his
colleagues in every aspect of their recommendations. During his
life, Young attached great importance to the gold standard, and
may well have hesitated to support wholeheartedly measures that
might have put US adherence to it at risk. But that his work
profoundly influenced Currie is beyond question.
- Indeed, an unpublished
December 1934 memorandum to Marriner Eccles titled "Confidence"
is the earliest substantive item dealing with expansionary fiscal
policy to appear in Sandilands's 1990 bibliography of Currie's
work. In his January 1931 PhD dissertation, however, Currie did
explore the links between monetary policy and the incentive to
expand public works. Furthermore: "In so far as the policy of
expanding public works in times of depression is adopted, and
banks purchase bonds of public authorities, the additional bank
credit will be spent directly and will not involve any decrease in
the spending ability of private individuals" (Currie, 1931,
- Although Currie largely
anticipated Friedman and Schwartz's (1963) explanation of the
Great Contraction itself, his interpretation of the later years of
the Depression differs markedly from theirs, particularly over the
matter of the buildup of excess reserves after 1934. Currie came
to regard this buildup as a sign that, whatever it might have
accomplished up until the end of 1932, orthodox monetary policy
alone was not likely to be effective in bringing about expansion
unaided as the depression continued (See Laidler 1999, 243-4, for
further discussion). Friedman and Schwartz on the other hand treat
this same phenomenon as a result of an increase in the liquidity
preferences of a badly shocked banking system. Currie was among
those who recommended the increase of reserve requirements in
1936-37, which, in Friedman and Schwartz's (1963, 520-34) view,
provoked a subsequent downturn in the money supply and recession
in 1937-38. Currie attributed this recession to an inadvertent
tightening of fiscal policy in that year. See Sandilands 1990,
87-92. Note finally that the claim here is not that Currie was in
any general way a precursor or early exponent of Friedman's
so-called monetarism. It is only that in one important respect,
namely the analysis of the Great Contraction of 1929, Currie's
work anticipated Friedman's later findings, as Friedman has
himself acknowledged. See Laidler 1993, 1077-78 n.12.
- See Laidler 1999, 125-28, for
further discussion of Hawtrey's treatment of this and related
matters. It is interesting to note that, on the second page of the
Memorandum there is a reference to "recommendations recently
made by Dr. [Warren] Persons." Though we have not been able
to track this reference down to a precise source, Robert S. Herren
(1997, 523) remarks that "As the depression deepened, Persons
became actively involved in attempts to promote economic recovery.
His proposals included monetary expansion, increased taxes,
eliminating price-fixing policies, and retaining the gold
standard. Although over fifty prominent economists and
statisticians endorsed his program in 1932, Persons' ideas did not
alter U.S. economic policy."
- On this matter, see Currie
(1978) and Sandilands 1990, 68-78.
- And to Keynes's own earlier
writings. He is quoted explicitly in the following Memorandum
(p.28) in a passage about "the bogy of inflation" that
Daniele Besomi has identified as coming from Can Lloyd George
Do It? (Keynes and Henderson 1929, 118).
- The signatories, and their
affiliations, were: James W. Angell (Columbia), John H. Cover
(Chicago), Garfield V. Cox (Chicago), Aaron Director (Chicago),
Irving Fisher (Yale), Harry D. Gideonse (Chicago), Max Handman
(Michigan), Alvin H. Hansen (Minnesota), Charles O. Hardy
(Brookings), Frank H. Knight (Chicago) Arthur W. Marget
(Minnesota), Harry A. Millis (Chicago), Lloyd W. Mints (Chicago),
Harold G. Moulton (Brookings), Ernest M. Patterson (Pennsylvania),
Chester A. Phillips, (Iowa) Henry Schultz (Chicago), Henry C.
Simons (Chicago), Charles S. Tippets (Buffalo), Jacob Viner
(Chicago), John H. Williams (Harvard), Chester W. Wright
(Chicago), Ivan Wright (Illinois), Theodore O. Yntema (Chicago).
Among those who were at the conference, but did not sign the "Recommendations"
were Gottfried von Haberler (Vienna, visiting Harvard), Henry
Parker Willis (Columbia), and Paul H. Douglas (Chicago).
- If, however, we follow Don
Patinkin (1969) and George Tavlas (1997, 1998a, 1998b), and focus
on advocacy of public works policies as a means of injecting money
into circulation as a key characteristic of Chicago thinking, then
it should be noted that a brief reference to this position occurs
in Jacob Viner's contribution to the informal discussions that
took place at the Harris foundation conference, during the session
of 29 January titled "What Should be Done in the Present
Emergency". He argued that earlier experience with public
works expenditures was irrelevant to the current situation
because, among other things, "none [were] connected with a
program of expansion of currency or banking funds" (Norman
Wait Harris Memorial Foundation 1932, 245). Steindl (1995, 84-85)
also quotes this passage, but cites Viner 1933 as the principal
source for his advocacy of this typical Chicago position. Laidler
(1999, 237-9) also dates its emergence from 1933, and now notes
that an explicit reference to Viner 1933 was inadvertently omitted
from or edited out of this passage.
- It must be recalled that,
contrary to later myths surrounding the so-called "Keynesian
Revolution", support for vigorous open market operations was
no novelty at this time - e.g., Keynes (1931), Hawtrey (1932) -
nor was advocacy of expansionary fiscal policy - e.g., Pigou
(1927), Robertson (1928), Douglas and Director (1931). However,
all of the last four above-mentioned advocates of expansionary
fiscal policy based their support on a belief that monetary policy
measures, including open-market operations, were too weak to
engender recovery. Thus, the main claim to originality of the
Currie, Ellsworth and White Memorandum and the Harris Conference "Recommendations"
is that they both, and particularly the first, canvassed the joint
and consciously coordinated use of monetary and fiscal measures at
a very early stage of the Depression. In this connection it might
be noted that Tavlas (1977, 1997, 1998a, 1998b) has long taken the
view that Douglas is a key figure in the Chicago tradition, and
that his 1931 book, written with his then research assistant Aaron
Director, is one of its important documents. In our view, this
book's pessimism about the effectiveness of expansionary monetary
policy, puts it outside that tradition as it is usually
understood. Douglas's earlier and later espousal of
underconsumptionism also seems to separate him from an
intellectual tradition based on the quantity theory. See Laidler
1999, 206-11, 222-28, and Steindl 1995, 93-94, for further
- The reader's attention is
drawn to the fact that Williams here estimates the total amount of
Federal reserve assets needed to establish conditions for
the further pursuit of expansionary policy, while Currie,
Ellsworth, and White estimate the amount by which such assets
need to be increased if monetary policy is to exercise an
expansionary effect. According to Friedman and Schwartz (1963,
347-8), the open market purchase program of 1932, which lasted
from April till July of that year, resulted in the system
acquiring roughly one billion dollars worth of government
securities. About half a billion of this increase was offset by an
outflow of gold, but a reversal of gold movements thereafter saw
gold holdings increase slightly over the year as a whole. However,
discounts and bills bought (mainly the former) fell by half a
billion between July 1932 and January 1933. Overall, the operation
was sufficiently strong to keep the stock of high powered money
expanding slowly during 1932, and to stabilize the growth rate of
the money supply in the second half of the year. Note that Currie,
Ellsworth, and White, who were optimistic that member banks "out
of debt and in possession of surplus reserves could be
relied upon to bring about an expansion of deposits," did not
foresee the growth in the ratio of reserves to deposits that would
continue throughout 1932. But this was partly because they had
linked their advocacy of open-market purchases with a call for the
government to increase its borrowings from banks, just as Currie
(1931, 236) had done.
- In 1930 the national income,
according to the National Industrial Conference Board, showed a
decline from the peak year 1929 of 14 billion dollars, or 10
billion dollars from the average of 1927-28-29. For 1931 the
decline has been considerably greater. During the three years
1917-18-19 the total federal government expenditures B converted
into 1931 dollars B were only about 17 billions, and of that sum a
portion was expended for normal government purposes and a larger
portion consisted of loans to the Allies. In the 24 months from
January 1, 1930 to January 1, 1932 the loss has amounted to double
the money expenditure caused by the war, and if the situation
continues, it will double again before the year is over.
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ON THE DEPRESSION