Monetary economics - Chapter 4

American Journal of Economics and Sociology, The,  Dec, 2002  

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Introduction

AS ONE WOULD ANTICIPATE, Harry Gunnison Brown was a strong and life-long adherent of the monetary approach of Irving Fisher. Brown began his career when such views were considered orthodox, saw the eclipse during the 1930s, and witnessed their revival in part in his later years. Joseph Dorfman, in The Economic Mind in American Civilization, characterized Brown as a monetary specialist. This is not strictly true because his concentration produced only four articles along with the relevant sections of his texts prior to 1940. But the characterization is accurate insofar as Brown did collaborate with Fisher in The Purchasing Power of Money and in later years would write articles on macroeconomic issues, some of which were critical of Keynesian views. Brown also read and commented on the manuscripts of other books by Fisher, such as Booms and Depressions. AS Paul Junk noted, in 1935 Fisher called Brown one of eleven economists in the United States "who understood the real significance of money." (1) Milton Friedm an has commented favorably on Brown's work in the area of money. (2) W. W. Hutt in The Keynesian Episode ranked Brown with such economists as Wicksell, Cannan, Mints, Hayek, Viner, Kemmerer and Benjamin Anderson as leaders in the pre-Keynesian thought on money. (3) Leland Yeager and James Dorn have identified Brown as part of the tradition of the "theory of monetary disequilibrium." (4)

Brown's exact role in The Purchasing Power of Money is impossible to determine. Robert W. Dimand has recently provided an analysis of Brown's "contribution" to the study. (5) Fisher felt that Brown's efforts were so extensive that they deserved acknowledgment on the title page. AS Fisher stated in his preface,

There are two persons to whom I am more indebted than to any others. These are my brother, M. Herbert W. Fisher and my colleague, Dr. Harry G. Brown.... My thanks are due... to Brown for his general criticism and suggestions as well as detailed work throughout. In recognition of Mr. Brown's assistance, I have placed his name on the title page. (6)

What can clearly be discerned is that Brown took advantage of this experience and wrote several texts of his own within a few years.

Early Articles

BROWN PUBLISHED THREE ARTICLES ON MONETARY TOPICS while still an instructor at Yale; all three were cited by Fisher in The Purchasing Power of Money. The first, "A Problem in Deferred Payments and the Tabular Standard," considered the problems of price indexing set forth by Gorrea Walsh and Fisher. (7) Brown explained how the stated purpose of the tabular standard (that of ensuring that contracting parties receive or pay back with interest purchasing power over an equivalent amount of goods) was complicated by the type of good to be chosen as a standard: capital or consumption goods. Brown saw no solution but that of a practical compromise, which was to

weigh the price change of each kind of good in proportion to neither an existing stock nor to consumption during any period, but in proportion to the value of the "exchanges" of that kind of goods during the period. (8)

R. A. Jones has credited Brown with having "convincingly demonstrated that the linking of payments to a price index could not generally eliminate all price risk for both payer and recipient." (9)

Brown's second article was primarily a description of the role of commercial banks in financial intermediation and emphasized the part played by banks in interest rate determination. (10) This short article is quite farsighted in that Brown remarks on the efficiency aspects of financial intermediation and its contribution to economic growth. In addition, Brown noted in 1909 that banks and trusts were beginning to pay interest on demand deposits. He reasoned that the convenience return to depositors and the competition among banks were not sufficient to attract deposits adequate to meet loan demands.

The third article, "Typical Commercial Crises Versus a Money Panic," appeared in the Yale Review in 1910. (11) In it, Brown attempted to describe a typical credit cycle that culminated in a speculation crisis. The key factor in the cycle was the lagging adjustment of nominal interest rates to unanticipated changes in the price level. Charles Kindleberger in his Manias, Panics and Crashes would later refer to this as the "Fisher-Brown" thesis. (12) The credit cycle would feature alternating periods of speculative prosperity and depression, even with a sound banking system. (Brown appears to be drawing primarily on the early work of Fisher and Wicksell. (13)) However, with a less than sound banking system, a loss of confidence would tend to precipitate a money panic. The panic period, according to Brown, typically would feature plentiful currency followed by sudden scarcity, which would drive rates abruptly upward. He then tried to identify those crises in the United States since 1873 that displayed these chara cteristics, taking into account those that were due, at least in part, to other, nonmonetary causes. Using what he admitted to be inadequate data, Brown examined the crises of 1873, 1882-1884, 1890, 1893 and 1907. He found indications that in most of these crises low real (virtual) rates of interest may have stimulated credit expansion, which led to a high ratio of deposits to reserves, and precipitated a crisis that featured falling prices and a rapid rise in nominal interest rates.