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EXCHANGE RATES
Fixed or Floating?
Depression Scrip in Georgia
Inflation and the Dollar Index
Economic
Review
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ISSN 0732-1813
V O L U M E LXXV, N O . 5, S E P T E M B E R / O C T O B E R
1990, E C O N O M I C R E V I E W
!
2
Flexible Exchange Rates:
An Idea Whose Time Has Passed?
The author looks at the pros a n d cons of the flexible
exchange rate system in place since 1973.
Joseph A. Whitt, Jr.
16
Lenders of the Next-to-Last Resort:
Scrip Issue in Georgia during the
Great Depression
William R o b e r d s
32
F.Y.I.
44
Book Review
This u n i q u e study of Georgia's depression scrip
issues provides lessons concerning the usefulness
of certain forms of private money, such as money
market accounts.
Inflation a n d the Dollar Index
Karen R. H u n t e r
William R o b e r d s
I
FEDERAL RESERVE BANK O F ATLANTA
The Making of an Economist
by Arjo Klamer a n d David Colander
Flexible Exchange Rates:
An Idea Whose Time
Has Passed?
Joseph A. Whitt, Jr.
Given the current flexible exchange rate system's disappointing performance, especially during recent years, the
debate over whether major industrialized nations should return to a fixed rate system has intensified. After a
brief description of various episodes of fixed and floating exchange rates during the past century, the author
discusses the arguments for and against a return to fixed rates. He concludes that limits on exchange rate
movements are feasible in principle but that fixing exchange rates would probably require governments to give up some of their economic autonomy.
h o u l d the major industrialized countries s u p p o r t a return t o fixed exc h a n g e r a t e s ? This q u e s t i o n h a s
garnered increased attention in the past few
years as large fluctuations in key exchange
rates have led s o m e observers to c o n c l u d e
that t h e current floating exchange rate system, which arose more by default than design
in t h e early 1970s, has failed. Critics argue
t h a t f l o a t i n g e x c h a n g e rates h a v e a l l o w e d
large, u n p r e d i c t a b l e m o v e m e n t s that h a v e
d e p r e s s e d international trade a n d at t i m e s
resulted in massive j o b losses in particular
industries. R o n a l d I. McKinnon (1974, 1988)
has a d v o c a t e d a return to fixed rates since
t h e e a r l y d a y s of f l o a t i n g , w h i l e J o h n
Williamson (1983) prefers a system of target
zones that w o u l d allow l i m i t e d flexibility of
exchange rates. More recently, Arthur J. Rolnick and Warren E. W e b e r (1990) of the Fede r a l R e s e r v e B a n k of M i n n e a p o l i s h a v e
favored fixing e x c h a n g e rates, a n d
The
Economist (1990) magazine, which a d v o c a t e d
S
2
t h e m o v e t o flexible exchange rates d u r i n g
the early 1970s, has editorialized that the exp e r i m e n t with flexible rates has b e e n a failure. However, supporters argue that floating
rates h e l p e c o n o m i e s a d j u s t t o policy a n d
other shocks a n d that fixing exchange rates
would only m a k e things worse.
To give s o m e background on how t h e current system arose, this article includes a brief
historical review of t h e experience with exc h a n g e rates d u r i n g t h e p a s t century. That
discussion l e a d s to t h e main arguments for
a n d against a return to fixed exchange rates
in light of recent experience.
Changes in the Exchange Rate System
during the Past Century
During t h e past century, the exchange rate
s y s t e m h a s o s c i l l a t e d b e t w e e n fixed a n d
floating rates several times. 1 In the late nine-
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
¿ 4
teenth century, exchange rates between the
currencies of the major industrialized countries were fixed b e c a u s e each country was
on the gold standard. Each currency was red e e m a b l e for a fixed a m o u n t of g o l d ; for
e x a m p l e , U.S. d o l l a r s c o u l d b e freely red e e m e d at the rate of $20.67 per ounce. Because gold could b e transferred from o n e
country to another with little cost or regulatory restriction, arbitrage in the gold market
kept e x c h a n g e rates b e t w e e n c u r r e n c i e s
fixed. Even so, the size of gold flows prior to
1914 was modest for two reasons. Most international t r a d e was f i n a n c e d using British
pounds, even when the trade was between
third c o u n t r i e s (for i n s t a n c e , Mexican exports to France). In addition, there was considerable c o n f i d e n c e that the existing
pattern of exchange rates w o u l d b e maintained. As a result, when capital flowed from
one country to another, as was common because g o v e r n m e n t restrictions on c a p i t a l
flows were rare, settlement usually was d o n e
F E D E R A L R E S E R V E B A N K O F ATLANTA
Ä ^ f e
through the banking system, without requiring physical movements of gold.
The gold standard came to an abrupt end
in 1914 with t h e o u t b r e a k of World War I.
During the war the combatant governments
i m p o s e d n u m e r o u s restrictions on international trade and on citizens' seeking to convert
paper money into gold; these governments also printed large amounts of m o n e y to h e l p
pay wartime expenditures. When the conflict
finally e n d e d , various governments, including
Great Britain and France, proclaimed their int e n t i o n to return e v e n t u a l l y to prewar exchange rates. In the meantime, however, they
allowed their currencies to float.
Because prewar exchange rates were no
longer consistent with e c o n o m i c equilibrium, the decision to return to them was a dubious one. As argued at the time by Swedish
The author is an economist in the macropolicy
lanta Fed's research department.
section of the At-
3
e c o n o m i s t G u s t a v C a s s e l , t h e c o n c e p t of
purchasing p o w e r parity i m p l i e s that if t h e
price level rises more in o n e country than in
a n o t h e r , t h e first c o u n t r y ' s e x c h a n g e rate
s h o u l d d e p r e c i a t e . 2 Because wartime inflation varied considerably, restoration of prewar exchange rates on a lasting basis would
have required either substantial deflation by
countries that h a d e x p e r i e n c e d t h e largest
price rises during t h e war or substantial additional inflation by countries that had experie n c e d t h e s m a l l e s t . In a d d i t i o n , s o m e
c o u n t r i e s , n o t a b l y G r e a t B r i t a i n , s o l d off
many foreign assets to finance the war effort,
t h e r e b y r e d u c i n g t h e i r f u t u r e s t r e a m of
d i v i d e n d a n d interest rate remittances from
abroad. As a result their exchange rates may
have n e e d e d to b e d e v a l u e d b e l o w prewar
levels, even aside from t h e effects of differential inflation. However, t h e gold standard
was a rigid system that m a d e no provisions
for changing exchange rates in response t o
economic circumstances.
After a few years of t u r m o i l , Britain succ e e d e d in fixing the p o u n d at its prewar rate.
France p e g g e d its currency at a new, muchd e p r e c i a t e d rate. The U n i t e d States maint a i n e d its prewar p e g to gold. However, t h e
new pattern of exchange rates was probably
n o t c o n s i s t e n t with long-run e q u i l i b r i u m ;
Britain maintained t h e p o u n d only by shortterm borrowing from foreigners, while France
eventually d e v e l o p e d balance of p a y m e n t s
surpluses that swelled French gold reserves.
In any event, the restored system of fixed exchange rates only lasted a few years before
t h e G r e a t D e p r e s s i o n d i s r u p t e d it. In res p o n s e t o mass u n e m p l o y m e n t , many governments b o o s t e d tariffs and some i m p o s e d
quotas on imports in h o p e s of stimulating dem a n d for d o m e s t i c a l l y p r o d u c e d g o o d s . In
a d d i t i o n , s o m e governments apparently devalued their currencies in an attempt to boost
exports a n d cut i m p o r t s . Such tactics may
b o o s t e m p l o y m e n t in o n e country, b u t they
d o so at t h e e x p e n s e of e m p l o y m e n t elsew h e r e ; h e n c e t h e y c a m e t o b e k n o w n as
"beggar-thy-neighbor" policies. Also during
this p e r i o d , g o v e r n m e n t - p e g g e d exchange
rates s o m e t i m e s came under severe pressure
as a result of private capital flows from o n e
country to another. The governments regard-
4
e d these capital flows as a constraint on their
f r e e d o m of action, t h o u g h t h e p e r s o n s who
were transferring capital may have been merely
trying to protect their wealth from the effects of
anticipated devaluations. At the outbreak of
World War II, the exchange rate system again
went under tight government control.
The Bretton Woods Period When the end
of t h e Second World War was in sight, deleg a t e s from m a n y n a t i o n s m e t at B r e t t o n
Woods, New Hampshire, to plan postwar economic arrangements. The international leaders
generally recognized that the economic problems of the interwar years had contributed to
the tensions that resulted in the war and shared
a desire to avoid repeating past mistakes. The
industrialized nations agreed to set u p a system
in which government intervention would fix ex-
"When the end of the Second World War was
in sight, delegates from many nations met at
Bretton Woods. . . . The industrialized
nations agreed to set up a system in which government intervention
would fix exchange
rates."
change rates. Unlike under the gold standard, if
a nation were running a continual balance of
payments surplus or deficit, its exchange rates
would b e altered to bring an end to the payments imbalance; however, the change in exc h a n g e rates c o u l d only b e m a d e with t h e
agreement of the nation's major trading partners. This condition was intended to prevent
beggar-thy-neighbor policies. In addition, restrictions on international capital flows were
maintained; otherwise, it was feared, private
currency speculators w o u l d p u t u n b e a r a b l e
pressure on the exchange rate pegs, forcing exchange rate changes inconsistent with economic fundamentals (see Ragner Nurkse 1945).
The early postwar years were d o m i n a t e d
by the problems of reconstruction, but in the
1950s t h e Bretton W o o d s system c a m e into
full operation. Exchange controls on trade in
goods and services were largely eliminated in
E C O N O M I C REVIEW, SEPTEMBER/OCTOBER
1990
the advanced industrial countries, a n d late in
t h e d e c a d e controls on c a p i t a l flows were
loosened substantially in some countries. Under t h e Bretton W o o d s system, governments
pegged their currencies by intervening in the
foreign exchange markets, b u y i n g or selling
their own currencies in exchange for international reserves to k e e p the market exchange
rate in a narrow target range. While gold was
one international reserve asset, U.S. dollars
were used more often as reserves, in part because during most of the Bretton Woods period t h e U.S. g o v e r n m e n t was c o m m i t t e d to
redeeming dollars in gold for foreign central
banks at the rate of $35 per ounce. Under this
system, if a nation experienced a continuing
deficit in its balance of payments, its government would b e continually s p e n d i n g reserves
stable source of a d d i t i o n a l international reserves to finance the growing v o l u m e of intern a t i o n a l transactions. With t h e world g o l d
stock growing slowly, central banks gradually
relied more a n d m o r e on U.S. dollars as reserves. However, Robert Triffin (1960) pointed
out that as foreign central b a n k holdings of
dollars got larger and larger, the U.S. p l e d g e
that it would b e willing to redeem dollars for
gold at $35 an ounce was b e c o m i n g increasingly untenable. 3
to maintain the currency peg. As its reserves
dwindled, t h e government would eventually
face a dilemma: either impose unpopular austerity measures to stop the deficit; borrow reserves from o t h e r g o v e r n m e n t s , t h e r e b y
b e c o m i n g subject to various c o n d i t i o n s imp o s e d b y t h e l e n d e r s ; or a b a n d o n t h e exchange rate peg and devalue.
A third issue was the growing policy conflict b e t w e e n t h e U n i t e d States a n d o t h e r
countries, especially West G e r m a n y . In t h e
late 1960s, U.S. inflation rose substantially,
f u e l e d in p a r t b y t h e V i e t n a m W a r . T h e
u n i q u e role of t h e dollar as the main international reserve currency in a system of p e g g e d
exchange rates caused part of the inflationary
pressure t o b e exported to other countries.
For e x a m p l e , in m a i n t a i n i n g t h e exchange
rate p e g for t h e D e u t s c h e m a r k , W e s t Germ a n y f o u n d it necessary t o b u y m o r e a n d
more dollars in exchange for Deutschemarks
in t h e foreign exchange market. This action
kept excess s u p p l i e s of dollars off t h e market, but it also a d d e d Deutschemarks to t h e
G e r m a n m o n e y s u p p l y . The increase in t h e
German m o n e y supply eventually h e l p e d to
fuel u n w a n t e d inflationary pressures there.
The conflict b e c a m e acute in the s u m m e r of
1971. At that t i m e t h e U.S. b a l a n c e of payments was worsening, suggesting a n e e d for
economic austerity to preserve the exchange
v a l u e of t h e d o l l a r . However, t h e n a t i o n ' s
economy was recovering slowly from the mild
recession of 1970, a n d t h e a d m i n i s t r a t i o n
wanted to take stimulative measures, in part
b e c a u s e t h e p r e s i d e n t i a l e l e c t i o n year of
1972 was rapidly approaching.
As the 1960s wore on, the system was more
and more strained. A significant issue was the
adjustment problem, the tendency of governments to resist either changing their monetary
and fiscal policies to preserve exchange rate
pegs or changing the exchange rate to make it
c o n s i s t e n t with given m o n e t a r y a n d fiscal
policies. For example, the British government
p o s t p o n e d changing its exchange rate for several years in the mid-1960s, before finally dev a l u i n g in 1967. A n o t h e r c o n c e r n was t h e
liquidity problem stemming from the lack of a
nation of policies a n n o u n c e d on August 15,
1971, resolved the policy d i l e m m a . Domestically, the Nixon administration took stimulative actions c o m b i n e d with wage a n d price
controls in an a t t e m p t to reduce inflation. In
t h e international sphere, t h e administration
i m p o s e d a t e m p o r a r y 10 percent surcharge
(tax) on imports t o pressure other countries
into agreeing on a devaluation of the dollar,
d e s i g n e d t o i m p r o v e t h e b a l a n c e of payments. At t h e s a m e time, the "gold window"
"As the 1960s wore on, . . . a significant issue was the adjustment problem, the tendency of governments
to resist
either
changing their monetary and fiscal policies
to preserve exchange rate pegs or changing
the exchange rate to make it consistent with
given monetary and fiscal policies."
F E D E R A L R E S E R V E B A N K O F ATLANTA
The Breakup of Bretton Woods. A combi-
5
was closed, m e a n i n g that t h e United States
r e p u d i a t e d its c o m m i t m e n t t o convert dollars into gold for foreign central banks; this
a c t i o n p r e e m p t e d a n y t h r e a t t h a t foreign
central banks might b u y u p all t h e U.S. gold
stockpile with their dollar reserves, b u t it also e l i m i n a t e d t h e o n l y c o n s t r a i n t on U.S.
monetary policy i m p o s e d by t h e Bretton
W o o d s system.
During the next several m o n t h s the United
States and the other major industrialized
countries negotiated feverishly. Foreign gove r n m e n t s were anxious to h a v e t h e United
States abolish t h e special import surcharge,
while t h e U n i t e d States wanted t h e foreign
governments to realign exchange rate parities
to d e v a l u e the dollar. Agreement on both issues was reached in D e c e m b e r 1971, during a
m e e t i n g at t h e S m i t h s o n i a n in Washington,
D.C. As a result, t h e d o l l a r was d e v a l u e d an
a v e r a g e of a b o u t 10 p e r c e n t versus o t h e r
m a j o r c u r r e n c i e s ; t h e d e v a l u a t i o n was
l a r g e r vis-a-vis t h e J a p a n e s e yen a n d t h e
D e u t s c h e m a r k , s m a l l e r versus t h e British
p o u n d , the French franc, and the Italian lire.
As part of the agreement, and largely at the
insistence of France, t h e official price of gold
was raised from $35 to $38 per ounce; however, the gold window remained closed. In add i t i o n , t h e U n i t e d States agreed t o abolish
the import surcharge. 4
D e s p i t e t h e agreement at the Smithsonian, foreign exchange markets c o n t i n u e d t o
b e turbulent. Even at the t i m e of t h e agreem e n t , s o m e estimates i m p l i e d that a larger
devaluation was n e e d e d if t h e U.S. external
deficit was going to b e corrected (see Robert
S o l o m o n 1977, 210). Moreover, considerable
skepticism c o n t i n u e d a m o n g market particip a n t s a b o u t w h e t h e r t h e U n i t e d States or
m a n y other g o v e r n m e n t s were p r e p a r e d t o
take u n p o p u l a r measures to d e f e n d t h e new
parities, lust six m o n t h s after t h e Smithsonian agreement, t h e British p o u n d came u n d e r
p r e s s u r e , a n d t h e British g o v e r n m e n t res p o n d e d by a b a n d o n i n g its fixed parity a n d
allowing it to float downward.
The Bretton W o o d s system came to a
definitive e n d in early 1973, when various key
g o v e r n m e n t s (notably West Germany) gave
u p trying to k e e p their exchange rates with
the dollar pegged in t h e face of massive capi6
tal flows. At t h e t i m e s o m e h o p e r e m a i n e d
that the system could soon b e brought back
to life in a modified form, but other economic
e v e n t s — n o t a b l y t h e oil price shock of late
1973 a n d t h e e n s u i n g recession throughout
the industrialized world—quickly grabbed
the attention of policymakers a n d p u s h e d reform of t h e exchange rate system to the back
burner, where it has r e m a i n e d . As a result,
t h e years since 1973 constitute t h e longest
period of generalized floating exchange rates
in m o d e r n history.
The Recent Experience with Flexible
Exchange Rates
In assessing the pros a n d cons of flexible
exchange rates, it is useful to compare flexible exchange rates' actual performance since
they took hold in 1973 with their advocates'
expectations during the last years of the Bretton W o o d s system. 5 Flexible rates were expected to have several important advantages
over fixed rates. G o v e r n m e n t s w o u l d h a v e
greater freedom t o use monetary a n d fiscal
policy to pursue d o m e s t i c objectives, propon e n t s m a i n t a i n e d , w i t h o u t having t o worry
a b o u t international consequences or balance
of p a y m e n t s p r o b l e m s . With t h e exchange
rate adjusting automatically to achieve equilibrium in the external p a y m e n t s flows, gove r n m e n t s would no longer b e t e m p t e d to
i m p o s e "temporary" import limitations, controls on capital outflows, or other such policies to stave off currency changes.
Flexible exchange rates were also expecte d to insulate each national e c o n o m y from
shocks originating elsewhere. For e x a m p l e ,
m a n y E u r o p e a n s c o m p l a i n e d that when inf l a t i o n a r y p r e s s u r e s in t h e U n i t e d S t a t e s
rose in t h e late 1960s b e c a u s e of t h e Vietn a m War, part of t h e inflation was exported
to E u r o p e through t h e workings of fixed exc h a n g e rates. If e x c h a n g e rates h a d b e e n
flexible, it was argued, E u r o p e could h a v e
r e m a i n e d unaffected by t h e inflation in t h e
United States.
Advocates of flexible exchange rates criticized t h e Bretton W o o d s system b e c a u s e in
t h e i r v i e w its p e g g e d e x c h a n g e rates en-
E C O N O M I C REVIEW, SEPTEMBER/OCTOBER
1990
a b l e d e c o n o m i e s to d e l a y a d j u s t i n g to
changing international circumstances until a
d i s e q u i l i b r i u m h a d r e a c h e d crisis proportions. Only then could an exchange rate b e
changed, often by a large a n d economically
disruptive a m o u n t . By contrast, they expected that u n d e r a system of flexible exchange
rates, c r i s e s w o u l d b e rare b e c a u s e exc h a n g e rates w o u l d m o v e g r a d u a l l y u p or
down in response t o changes in underlying
e c o n o m i c c o n d i t i o n s or g o v e r n m e n t policies, t h e r e b y p r o d u c i n g t h e e c o n o m i c adj u s t m e n t s n e e d e d to p r e s e r v e b a l a n c e of
payments e q u i l i b r i u m .
Now that t h e m o d e r n system of generali z e d f l o a t i n g e x c h a n g e rates h a s b e e n in
o p e r a t i o n for m o r e t h a n a d e c a d e a n d a
half, it is p o s s i b l e t o c o m p a r e t h e a c t u a l
p e r f o r m a n c e of a g e n e r a l i z e d flexible rate
s y s t e m with t h e e x p e c t a t i o n s of its advocates. In several respects, t h e record of t h e
years since 1973 i n d i c a t e s that flexible exchange rates h a v e fallen short in p r o v i d i n g
e x p e c t e d b e n e f i t s . E x c h a n g e rates h a v e
b e e n far m o r e v o l a t i l e t h a n a n t i c i p a t e d ,
a n d nations h a v e not e n j o y e d as much policy i n d e p e n d e n c e a n d i n s u l a t i o n from foreign shocks.
Those w h o a d v o c a t e d flexible exchange
rates p r i o r t o t h e b r e a k d o w n of B r e t t o n
Woods d i d so largely on t h e theoretical
g r o u n d s d i s c u s s e d a b o v e b e c a u s e at t h e
time they had little historical experience on
which to draw. A brief period of flexible exchange rates h a d occurred during t h e early
1920s—a t i m e of considerable e c o n o m i c a n d
monetary disorder, including the famous
German hyperinflation, as E u r o p e began t o
rebuild after World War I. Observers at that
time b e l i e v e d exchange markets to b e disorderly a n d s u b j e c t t o s p e c u l a t i v e frenzies,
but with hindsight it is easy to argue that t h e
exchange markets merely reflected t h e period's chaotic e c o n o m i c a n d political conditions. M o r e o v e r , it s e e m s l i k e l y t h a t t h e
wide gap b e t w e e n t h e market's e s t i m a t e of
e q u i l i b r i u m exchange rates consistent with
postwar e c o n o m i c c o n d i t i o n s a n d governmental announcements that prewar exchange
rates would sooner or later b e restored disrupted the exchange markets even more.
With regard to policy i n d e p e n d e n c e , governments have continued to experience conflicts between d o m e s t i c policy objectives a n d
exchange rate policy. For example, in the early and mid-1980s Europeans c o m p l a i n e d that
they were having to run tighter monetary policy than was desirable in light of very high une m p l o y m e n t rates, b e c a u s e high i n t e r e s t
rates in the United States were boosting dem a n d for t h e d o l l a r a n d causing its apprec i a t i o n , which in turn was c o n t r i b u t i n g t o
inflationary pressures in E u r o p e . Since oil
was priced in dollars, this problem was sometimes described as a second oil price shock.
Importing countries such as France and West
Germany experienced o n e inflationary shock
when t h e price of oil soared in t h e 1979-80
period and then another when dollar apprecia t i o n s e n t t h e franc- o r D e u t s c h e m a r k d e n o m i n a t e d price even higher d u r i n g t h e
next several years.
Advocates of flexible exchange rates preferred to e m p h a s i z e the experience of Canada, which allowed its exchange rate to float
from 1950 to 1962 while other industrialized
c o u n t r i e s were p e g g e d u n d e r t h e Bretton
Woods system. Canada's experience was fairly t r a n q u i l ; its exchange rate never m o v e d
d r a m a t i c a l l y , a n d its e c o n o m y s h o w e d n o
signs of t h e disastrous c o n s e q u e n c e s foreseen b y o p p o n e n t s of f l e x i b l e e x c h a n g e
rates. Those who favored flexible exchange
rates believed that if the Bretton Woods system were abolished, exchange rates between
the major currencies would b e h a v e much like
Canada's. 6
F E D E Rfor
A L FRASER
R E S E R V E BANK O F ATLANTA
Digitized
In a d d i t i o n , flexible exchange rates have
clearly not succeeded in eliminating political
pressure for trade restraints to protect particular i n d u s t r i e s . I n d e e d , as t h e U.S. t r a d e
deficit soared in t h e mid-1980s, t h e U n i t e d
States experienced its worst b o u t of protectionist fever in years. Import quotas, "voluntary" export restraints, or other restraints on
imports of a variety of products, including autos, steel, motorcycles, textiles, and apparel,
were maintained or tightened.
P e r h a p s t h e m o s t d i s c u s s e d f e a t u r e of
flexible exchange rates has b e e n their
volatility. Chart 1 shows t h e exchange rate
for t h e British p o u n d relative to t h e U.S. dollar since 1960. Clearly t h e 1960s experienced
very little volatility; t h e only major j u m p was
7
Chart 1.
The Dollar-Pound Exchange Rate
Exchange Rate
(1960-1989)
associated with t h e p o u n d ' s 15 percent dev a l u a t i o n in 1967. 7 Those w h o a d v o c a t e d
flexible exchange rates during t h e Bretton
W o o d s years suggested that u n d e r flexible
exchange rates day-to-day volatility might
increase s o m e w h a t b u t large m o v e m e n t s
w o u l d b e s m o o t h e d by t h e actions of private speculators; u n d e r flexible exchange
rates t h e large a d j u s t m e n t that occurred
overnight in 1967 might have occurred gradually over a period of several years, if not
more. 8
In early 1973 the Bretton Woods system of
pegged exchange rates collapsed, and since
then the rates between the United States and
o t h e r m a j o r i n d u s t r i a l i z e d countries have
been flexible. A glance at Chart 1 shows that
in contrast to expectations, during the flexible
rate period rates have been volatile, with far
more major m o v e s than u n d e r t h e Bretton
W o o d s system. Other major exchange rates
show similar patterns. Admittedly, no day-today moves by the pound have been as large
as 1967's 15 percent devaluation; however,
8
n u m e r o u s large moves d o occur over fairly
short periods of time.
Table 1 gives the dates and sizes of large
moves—defined as exceeding 10 percent over
a period of six months—in the pound-dollar
exchange rate since the breakup of Bretton
Woods. The choice of size and the six-month
time interval is somewhat arbitrary. The goal
was to delineate relatively short periods during
which the flexible exchange rate moved by an
amount sufficient to create export and import
adjustment problems comparable to those associated with the pound's 1967 devaluation. 9
When overlapping six-month periods showed
more than one large change, only the largest
was chosen for t h e t a b l e to avoid d o u b l e counting. To leave out all data for the Bretton
Woods period, the earliest period considered
for the table is June to December 1973. The last
period considered is june to December 1989,
resulting in a total of sixteen years of coverage.
As the t a b l e indicates, during t h e years
since the breakdown of Bretton W o o d s the
dollar-pound rate has m o v e d more than 15
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
than the p o u n d - d o l l a r rate. Although n o n e of
Table 1.
Large* Six-Month Percentage
Changes in the Pound-Dollar
Exchange Rate since the
Breakup of Bretton Woods,
Ranked by Size of Change
Ending Date
Size of Change'
(Percent)
July 1981
August 1985
February 1985
September 1975
May 1989
December 1987
October 1976
March 1983
July 1979
October 1978
May 1987
January 1978
September 1988
December 1973
25.1
-25.0
18.4
16.6
16.0
-15.1
13.8
13.5
-13.4
-13.2
-12.4
-11.6
10.9
10.6
t h e D e u t s c h e m a r k r e a l i g n m e n t s were q u i t e
a s l a r g e as t h e 25.1 p e r c e n t m o v e b y t h e
p o u n d - d o l l a r rate, t h e D e u t s c h e m a r k . d i d
h a v e eight s e p a r a t e e p i s o d e s of m o v e m e n t
greater t h a n 15 p e r c e n t in six m o n t h s , comp a r e d to four for t h e p o u n d ; in a d d i t i o n , t h e
mark h a d eight other p e r i o d s when it m o v e d
by m o r e than 10 percent. The y e n - d o l l a r rate
had even more
episodes—eleven—during
which t h e rate m o v e d m o r e than 15 percent,
a n d in three o t h e r cases it m o v e d m o r e t h a n
10 percent.
In contrast, t h e D e u t s c h e m a r k a n d t h e yen
s h o w e d e v e n less m o v e m e n t d u r i n g the
1950s a n d 1960s t h a n t h e British p o u n d . The
D e u t s c h e m a r k h a d two n o t i c e a b l e c h a n g e s —
revaluations of 4.88 percent in 1961 a n d 8.88
p e r c e n t in 1969; t h e y e n was v i r t u a l l y unc h a n g e d d u r i n g t h e s e two d e c a d e s . Clearly,
exchange rate volatility has b e e n
much
greater u n d e r flexible rates t h a n u n d e r Bretton W o o d s . Large exchange rate changes, rare
u n d e r B r e t t o n W o o d s — o c c u r r i n g less t h a n
o n c e a d e c a d e o n a v e r a g e — b e c a m e comm o n , e v e n ordinary, u n d e r flexible rates. In-
* Defined as exceeding 10 percent.
" Positive values indicate depreciation of the
pound; negative values indicate appreciation.
End-of-month exchange rate data were used.
Percentage changes were measured using logarithmic differences.
Source: Calculated by the Federal Reserve Bank
of Atlanta using data from the International Monetary Fund's IFS tapes.
d e e d , since 1973 it has b e e n rare to h a v e a
year t h a t d i d not c o n t a i n a m a j o r e x c h a n g e
rate m o v e c o m p a r a b l e in size to t h e 1967 devaluation of t h e p o u n d .
E x p l a i n i n g t h e V o l a t i l i t y . W h y h a v e exchange rates b o u n c e d a r o u n d so m u c h in recent years? Since t h e early years of
floating,
r e s e a r c h e r s h a v e a t t e m p t e d t o m o d e l exc h a n g e rate b e h a v i o r in terms of c h a n g e s in
v a r i a b l e s that theory suggests m i g h t b e im-
percent in a six-month period six times, in the
p o r t a n t , such as m o n e y s u p p l i e s , i n t e r e s t
two biggest moves, t h e rate c h a n g e d 25 per-
rates, real ( i n f l a t i o n - a d j u s t e d ) G N P growth,
cent. Moreover, in eight o t h e r e p i s o d e s t h e
and current account balances.
rate changed by more than 10 percent. By con-
t h e s e m o d e l s h a v e p e r f o r m e d p o o r l y in ex-
However,
trast, u n d e r Bretton W o o d s t h e p o u n d - d o l l a r
p l a i n i n g e x c h a n g e r a t e m o v e m e n t s of t h e
rate h a d e x p e r i e n c e d o n l y t h e o n e l a r g e
f l e x i b l e rate p e r i o d . M o r e o v e r , R i c h a r d A.
change of slightly m o r e than 15 percent during
M e e s e a n d K e n n e t h Rogoff (1983) show that a
the d e c a d e s of t h e 1950s a n d 1960s.
s i m p l e random-walk m o d e l of t h e e x c h a n g e
Large exchange rate m o v e m e n t s h a v e also
rate, which always predicts that t h e future ex-
occurred for o t h e r currencies d u r i n g t h e peri-
change rate will e q u a l today's prevailing rate,
od of flexible exchange rates. Tables 2 a n d 3
o u t p e r f o r m s m o r e c o m p l e x m o d e l s t h a t in-
give i n f o r m a t i o n on large m o v e m e n t s in t h e
c l u d e other variables in forecasting exchange
D e u t s c h e m a r k - d o l l a r a n d y e n - d o l l a r ex-
rates. A c c o r d i n g l y , c o n v i n c i n g l y a t t r i b u t i n g
change rates, respectively, s i n c e t h e break-
t h e o b s e r v e d m o v e m e n t s of e x c h a n g e rates
down of Bretton W o o d s . 1 0 In s o m e respects,
to any particular c o m b i n a t i o n of variables has
these rates h a v e shown e v e n m o r e volatility
t h u s far b e e n i m p o s s i b l e .
FEDER
A L FRASER
R E S E R V E BANK O F ATLANTA
Digitized
for
9
f l u c t u a t e d less t h a n s t o c k m a r k e t s d u r i n g
Table 2.
Large* Six-Month Percentage
Changes in the DeutschemarkDollar Exchange Rate since the
Breakup of Bretton Woods,
Ranked by Size of Change
this p e r i o d . They c o n c l u d e that g o v e r n m e n t s
can b e s t r e d u c e t u r b u l e n c e in t h e exchange
markets b y r e d u c i n g high a n d v a r i a b l e rates
of m o n e t a r y e x p a n s i o n a n d generally reducing uncertainty a b o u t future e c o n o m i c policies.
However, M c K i n n o n (1988) argues that turb u l e n c e is i n h e r e n t in t h e flexible exchange
Ending Date
Size of Change**
(Percent)
rate system b e c a u s e flexible e x c h a n g e rates
are highly s e n s i t i v e to s m a l l c h a n g e s in exp e c t e d m o n e t a r y p o l i c i e s or a s s e t prefer-
February 1986
J u n e 1981
August 1985
October 1978
January 1974
November 1986
September 1984
February 1975
December 1987
J u n e 1988
December 1989
May 1989
March 1978
September 1975
August 1983
March 1980
-22.6
19.9
-17.8
-17.4
16.8
-15.7
15.5
-15.4
-14.6
14.1
-14.0
13.5
-13.2
12.7
11.2
10.8
e n c e s , which are extremely uncertain in the
current p o l i c y e n v i r o n m e n t . To r e d u c e t h e
uncertainty, he advocates that t h e Federal
Reserve, t h e Bank of j a p a n , a n d t h e G e r m a n
B u n d e s b a n k agree to p e g t h e dollar-yen a n d
d o l l a r - D e u t s c h e m a r k e x c h a n g e rates a n d to
a d j u s t t h e i r d o m e s t i c m o n e t a r y p o l i c i e s to
m a i n t a i n s i m i l a r inflation rates for prices of
internationally t r a d e d goods.
An alternative interpretation is that flexible
e x c h a n g e rates are excessively v o l a t i l e bec a u s e of d e s t a b i l i z i n g s p e c u l a t i o n . 1 1 For instance, s u p p o s e monetary policy changes in a
way that justifies a m o d e s t a p p r e c i a t i o n of the
d o l l a r b u t m a r k e t p a r t i c i p a n t s are uncertain
a b o u t how m u c h a p p r e c i a t i o n is justified. As
* Defined as exceeding 10 percent.
** Positive values indicate depreciation of the
Deutschemark; negative values indicate appreciation. End-of-month exchange rate data
were used. Percentage changes were measured using logarithmic differences.
Source: See Table 1.
t h e dollar b e g i n s to appreciate, a speculative
b a n d w a g o n may d e v e l o p if speculators react
by shifting capital into dollar-denominated
assets, thereby t e n d i n g to a p p r e c i a t e t h e dollar further. In principle, such b e h a v i o r could at
least temporarily drive t h e dollar far a b o v e its
long-run e q u i l i b r i u m .
Paul R. Krugman (1985, 1989) a n d jeffrey A.
Frankel a n d K e n n e t h Froot (1988) argue that
part of t h e h u g e d o l l a r a p p r e c i a t i o n of t h e
In this vacuum, various explanations of t h e
early 1980s, e s p e c i a l l y t h e surge in t h e sec-
l a r g e m o v e m e n t s of e x c h a n g e r a t e s h a v e
o n d half of 1984 a n d t h e first few w e e k s of
arisen. O n e possibility is that t h e large move-
1985, t o o k t h e d o l l a r far a b o v e a n y reason-
m e n t s are rational a n d a p p r o p r i a t e responses
a b l e e s t i m a t e of its long-run e q u i l i b r i u m ; the
to an u n s t a b l e e n v i r o n m e n t characterized b y
lack of a large i n t e r e s t d i f f e r e n t i a l favoring
f r e q u e n t c h a n g e s in g o v e r n m e n t p o l i c y as
t h e d o l l a r at t h a t t i m e l e a d s t h e m t o con-
well as shocks to technology a n d oil prices. In
c l u d e that t h e market was irrationally failing
this view, a flexible exchange rate is an asset
to forecast a sharp d o l l a r d e c l i n e of t h e sort
price t h a t r e s p o n d s i n s t a n t a n e o u s l y to n e w
that occurred subsequently.12
information, much like prices in t h e stock mar-
(1989) c o n c l u d e s that an e v e n t u a l return to
ket. Jacob A. Frenkel a n d M i c h a e l L. M u s s a
fixed exchange rates is d e s i r a b l e to p r e v e n t
(1980) q u e s t i o n w h e t h e r exchange rate fluctu-
such speculative b u b b l e s . S u p p o r t e r s of flex-
ations of t h e 1970s were in fact excessive, not-
ible exchange rates c o u n t e r with
ing that b y various m e a s u r e s exchange rates
F r i e d m a n ' s (1953) a r g u m e n t t h a t destabiliz-
10
Krugman
Milton
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
c h a n g e rates b u t a system of target z o n e s that
Table 3.
Large* Six-Month Percentage
Changes in the Yen-Dollar
Exchange Rate since the
Breakup of Bretton Woods,
Ranked by Size of Change
w o u l d allow s o m e e x c h a n g e rate flexibility,
within l i m i t s s u b s t a n t i a l l y b r o a d e r t h a n t h e
very narrow o n e s t h e Bretton W o o d s agreem e n t allowed.
Finally, Wallace (1979) argues that when fiat
currencies are in u s e — t h a t is, currencies not
b a c k e d b y g o l d or any o t h e r c o m m o d i t y — a s
has b e e n t h e case since at least 1971, foreign
Ending Date
Size of Change :
(Percent)
exchange rates h a v e n o f u n d a m e n t a l equilibrium in t h e a b s e n c e of g o v e r n m e n t intervent i o n or certain t y p e s of legal restrictions.
February 1986
October 1978
April 1979
March 1978
December 1987
October 1982
September 1980
May 1989
April 1983
July 1981
September 1986
April 1987
January 1974
February 1980
-27.8
-23.6
21.6
-17.7
-17.4
16.5
-16.3
15.9
-15.7
15.7
-15.6
-14.6
12.7
12.7
S u p p o r t e r s of f l e x i b l e rates a r g u e t h a t , left
a l o n e , market forces can set exchange rates at
a p p r o p r i a t e levels and that
governments
s h o u l d r e n o u n c e e x c h a n g e m a r k e t intervent i o n a n d c o n t r o l s on c a p i t a l flows or a s s e t
h o l d i n g s ; h o w e v e r , W a l l a c e c l a i m s t h a t it is
i m p o s s i b l e for g o v e r n m e n t s to d o b o t h . In his
i n t e r p r e t a t i o n e x c h a n g e rate
movements
s i n c e 1973 reflect to a c o n s i d e r a b l e d e g r e e
m a r k e t r e s p o n s e s to a c t u a l or a n t i c i p a t e d
g o v e r n m e n t intervention. Market participants
are c o n s t a n t l y trying t o g u e s s w h a t governm e n t s are going to d o , b u t t h e g o v e r n m e n t s
rarely m a k e their intervention strategies pub-
* Defined as exceeding 10 percent.
"
Positive values indicate depreciation of the yen;
negative values indicate appreciation. End-ofmonth exchange rate data were used. Percentage changes were measured using logarithmic
differences.
Source: See Table 1.
lic. In his view, volatility w o u l d b e r e d u c e d if
g o v e r n m e n t s w o u l d c o o p e r a t i v e l y set p u b licly r e v e a l e d e x c h a n g e rate target z o n e s of
s o m e k i n d a n d d e f e n d t h e m with intervention.
In contrast, s u p p o r t e r s of flexible rates arg u e that given t h e differences in a t t i t u d e s tow a r d i n f l a t i o n a n d r e c e s s i o n in t h e m a j o r
countries, fixed exchange rates or e v e n target
z o n e s are n o t feasible; as soon as t h e y b e g a n
ing s p e c u l a t o r s w o u l d s o o n e r or later l o s e
to constrain g o v e r n m e n t policy significantly,
m o n e y a n d b e driven o u t of business.
t h e e x c h a n g e rate target w o u l d b e aban-
Even if o b s e r v e d e x c h a n g e rate c h a n g e s
are r a t i o n a l a n d a p p r o p r i a t e r e s p o n s e s to
d o n e d . For i n s t a n c e , R u d i g e r
Dornbusch
(1988) claims that E u r o p e a n d Japan are m u c h
policy i n s t a b i l i t y , W i l l i a m s o n (1983) a r g u e s
m o r e o p p o s e d t o inflation t h a n t h e U n i t e d
that greater fixity of exchange rates is also de-
States is; in his view, they are willing to toler-
sirable as a way of constraining g o v e r n m e n t s
ate recession or d e p r e s s i o n to k e e p inflation
from p u r s u i n g d e s t a b i l i z i n g p o l i c i e s , w h i c h
low, whereas t h e U n i t e d States is not. Greater
p r o b a b l y explain in part t h e large e x c h a n g e
fixity of e x c h a n g e r a t e s w o u l d
rate m o v e m e n t s of recent years. U n d e r fixed
conflict with t h e s e preferences, forcing either
exchange rates, a single g o v e r n m e n t ' s policy
t h e U n i t e d States to tolerate m o r e u n e m p l o y -
o p t i o n s w o u l d b e c o n s t r a i n e d by e i t h e r t h e
m e n t or E u r o p e a n d Japan to t o l e r a t e m o r e
n e e d to maintain t h e exchange rate p e g or to
inflation than they w o u l d want.
o b t a i n t h e a p p r o v a l of o t h e r g o v e r n m e n t s if
an e x c h a n g e r a t e c h a n g e w e r e n e c e s s a r y .
Williamson's preferred o p t i o n is not fixed ex-
F E D E Rfor
A L FRASER
R E S E R V E B A N K O F ATLANTA
Digitized
sometimes
Are Fixed Exchange Rates Feasible Tod a y ? Are t h e r e any e x a m p l e s of s u c c e s s f u l
limits on exchange rate m o v e m e n t s in recent
11
years? Rolnick and W e b e r (1990) point to the
United States under the Federal Reserve System, which ensures that a fixed, one-to-one
e x c h a n g e rate p r e v a i l s b e t w e e n d o l l a r s in
each of the twelve Federal Reserve districts.
I n d e e d , this system has b e c o m e so s t a b l e
that it is taken for granted, although earlier in
U.S. history, currency from o n e region was
treated as "foreign" m o n e y in other regions;
that is, if you took an Atlanta dollar to Chicago and tried to exchange it for local Chicago
money, you would get not a full dollar back,
but perhaps 97 cents. 1 3 However, t h e example of the Federal Reserve is not entirely applicable to t h e group of major industrialized
countries b e c a u s e , while all regions of t h e
United States h a v e t h e s a m e national gove r n m e n t a n d i n d i v i d u a l states gave u p t h e
power to print m o n e y decades ago, each ind u s t r i a l i z e d country is still a sovereign nation.
The European Monetary System (EMS) is a
better example, in t h e sense that the way it
o p e r a t e s p r o b a b l y m o r e closely approximates what a new system of fixed or quasifixed e x c h a n g e rates w o u l d look l i k e t h a n
d o e s t h e U.S. Federal Reserve System. Under
t h e EMS, various European g o v e r n m e n t s
agreed to k e e p their bilateral exchange rates
within narrow target zones while continuing to
have flexible rates with o u t s i d e currencies,
such as t h e U.S. dollar, J a p a n e s e y e n , a n d
British p o u n d . Accordingly, m o v e m e n t s of
t h e French f r a n c - D e u t s c h e m a r k rate h a v e
b e e n l i m i t e d , w h i l e m o v e m e n t s of t h e
Deutschemark-dollar a n d franc-dollar rates
have remained flexible. 14
The E M S was e s t a b l i s h e d in D e c e m b e r
1978 by t h e m e m b e r s of the European Econ o m i c C o m m u n i t y (EEC), which at that t i m e
consisted of West Germany, France, Italy, the
United Kingdom, Belgium, the Netherlands,
L u x e m b o u r g , D e n m a r k , and Ireland. The
h e a r t of t h e s y s t e m is t h e E x c h a n g e R a t e
Mechanism, which was i n t e n d e d to k e e p bilateral exchange rates of m e m b e r countries
within narrow b a n d s . Exchange rate targets
(or parities) were set, and governments were
o b l i g a t e d t o i n t e r v e n e in t h e foreign exchange markets to prevent market rates from
moving more than 2.25 percent a b o v e or below t h e parity rates.
12
Although it was a m e m b e r of t h e EEC in
1978, t h e United Kingdom chose not to join
the Exchange Rate Mechanism; hence it continued to have floating exchange rates for the
p o u n d . 1 5 Italy insisted on somewhat greater
flexibility for its exchange rate than the other
countries w a n t e d ; t h e b a n d for t h e lira allowed it to m o v e as much as 6 percent above
or below its target rate.
Although t h e objectives of t h e EMS have
always b e e n s o m e w h a t v a g u e , it is fairly
clear that t h e m a i n goal was to r e d u c e the
volatility of exchange rates within E u r o p e to
p r o m o t e the EEC's e c o n o m i c integration and
to p r o v i d e a stable unit of account for EECwide programs like t h e C o m m o n Agricultural
Policy (see G e o r g Rich 1990). T h e system
was not i n t e n d e d to b e completely rigid; the
w i d t h of t h e target b a n d s p r o v i d e d s o m e
flexibility, a n d in a d d i t i o n changing economic circumstances were e x p e c t e d to l e a d to
occasional realignments in which t h e memb e r g o v e r n m e n t s w o u l d agree t o alter t h e
parity rates. 1 6
T h e i m p e t u s for e s t a b l i s h i n g t h e EMS
came largely from political leaders, especially
Chancellor Helmut Schmidt of West Germany
a n d President Valérie Giscard d ' E s t a i n g of
France. M o s t e c o n o m i s t s were cool t o t h e
i d e a , t h i n k i n g that t h e system w o u l d soon
collapse because of differences between lowinflation W e s t G e r m a n y a n d high-inflation
France and Italy. 17 The German Bundesbank
was so negative on the EMS that an unpreced e n t e d visit by C h a n c e l l o r S c h m i d t to the
B u n d e s b a n k Council was necessary to overcome t h e o p p o s i t i o n (see Michele Fratianni
a n d Juergen von Hagen 1990). The Bundesbank's position is ironic, considering that various observers recently have described the
EMS as having b e c o m e a system by which the
Bundesbank controls monetary policy in the
other m e m b e r countries. 1 8
Despite the skepticism, the EMS has now
survived for more than a d e c a d e . How have
exchange rates b e t w e e n m e m b e r countries
b e h a v e d ? C o m p u t a t i o n s of six-month percentage changes as were d o n e for Tables 1-3
show that the franc-Deutschemark exchange
rate h a d t h r e e e p i s o d e s d u r i n g t h e 1970s
w h e n it m o v e d m o r e t h a n 10 p e r c e n t b u t
n o n e since the EMS was established. Indeed,
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
since the major realignment of EMS currencies in 1982, the franc-Deutschemark rate has
rarely m o v e d m o r e t h a n 6 p e r c e n t in six
m o n t h s . 1 9 C l e a r l y , its v o l a t i l i t y h a s b e e n
much less in recent years than t h e p o u n d d o l l a r ' s , D e u t s c h e m a r k - d o l l a r ' s , or y e n dollar's, and it is reasonable to attribute that
lower volatility at least partially to t h e effectiveness of the EMS.
a b o u t whether t h e EMS could survive given
the differences in policy preferences a m o n g
France, W e s t G e r m a n y , a n d Italy was expressed in t h e early days of the EMS, yet it
s e e m s to b e thriving after more than a
d e c a d e of existence.
Critics of t h e EMS e m p h a s i z e the disruptions caused by realignments of the EMS currencies, as well as the costs of capital controls
that France a n d Italy have e m p l o y e d to h e l p
maintain their currencies within the EMS target zones. In addition, Fratianni and von Hagen (1990) a r g u e t h a t w h i l e t h e E M S h a s
m a d e s i g n i f i c a n t p r o g r e s s in r e d u c i n g exchange rate uncertainty a m o n g m e m b e r currencies, it may h a v e increased uncertainty
about rates between m e m b e r s and nonmembers, such as t h e Deutschemark-U.S. dollar
rate. Even so, t h e costs are a p p a r e n t l y not
too great—the original m e m b e r s have chosen
to remain members, a n d additional countries
have joined as well.
Conclusion
C o u l d t h e U n i t e d States, Japan, a n d Europe work together to form an EMS-style exc h a n g e rate s y s t e m for t h e e n t i r e g r o u p ?
Skeptics like Dornbusch (1986) a n d Stanley
Fischer (1986) think not, arguing that the differences in policy preferences are too great,
and that in any e v e n t t h e U.S. g o v e r n m e n t
would never accept the constraints on its fiscal policy that would b e necessary to m a k e
the system work. However, similar skepticism
As the p r o b l e m s of t h e Bretton W o o d s system m o u n t e d in the 1960s and early 1970s, a
m o v e to flexible exchange rates was widely
t o u t e d as a s i m p l e a n d e l e g a n t solution to
those problems. The experience with flexible
rates since 1973 indicates, however, that t h e
present system has its own problems, including high volatility of exchange rates, little ins u l a t i o n from foreign shocks, a n d little
pressure on g o v e r n m e n t s to p u r s u e s o u n d
long-term policies. As a result, t h e r e is renewed interest in proposals to i m p o s e limits
on exchange rate m o v e m e n t s . The European
Monetary System's experience indicates that
limits on exchange rate movements are feasible in principle but that such limits imply that
participating g o v e r n m e n t s give u p s o m e of
their a u t o n o m y with respect to economic policy. Whether the governments of the United
States, Japan, a n d t h e major nations of Europe would b e willing to accept such limits on
their freedom of action in order to reduce exchange rate volatility remains an o p e n question.
Notes
1
For a m o r e e x t e n s i v e d i s c u s s i o n of c h a n g e s in t h e in-
p r o b a b l y f i n d it a d v a n t a g e o u s t o p e g its c u r r e n c y to
ternational m o n e t a r y s y s t e m from t h e g o l d s t a n d a r d of
t h a t of a large country, s u c h as its m a i n t r a d i n g partner,
the late n i n e t e e n t h century t o t h e Bretton W o o d s sys-
t h e r e b y s t a b i l i z i n g t h e p u r c h a s i n g p o w e r of t h e s m a l l
tem of t h e 1950s a n d 1960s, s e e Y e a g e r (1966).
country's currency in t e r m s of t h e w i d e array of g o o d s ,
2
T h e h u g e l i t e r a t u r e on p u r c h a s i n g p o w e r parity is re-
services, a n d assets a v a i l a b l e in t h e large country. S e e
3
A u s e f u l c o n t e m p o r a r y d i s c u s s i o n of t h e p r o b l e m s of
v i e w e d in Officer (1976).
J o h n s o n (1972, 206).
7
the Bretton W o o d s s y s t e m is c o n t a i n e d in M u n d e l l a n d
using the
dollar-pound
rate.
8
P r i o r to t h e c h a n g e in 1967, t h e d o l l a r - p o u n d e x c h a n g e
q
F o r e x a m p l e , British i m p o r t e r s w h o h a d s i g n e d con-
in J o h n s o n (1972, 353-61) a n d S o l o m o n (1977, 176-215).
' A d v o c a t e s of flexible rates i n c l u d e d F r i e d m a n (1953),
6
is m e a s u r e d
c h a n g e in t h e n a t u r a l l o g a r i t h m of t h e
S w o b o d a (1969).
'The i n t e r n a t i o n a l m o n e t a r y crisis of 1971 is d i s c u s s e d
S o h m e n (1969), H a b e r l e r (1970), a n d J o h n s o n
T h e s i z e of t h e d e v a l u a t i o n
rate h a d b e e n e s s e n t i a l l y u n c h a n g e d since 1949.
(1972,
tracts d e n o m i n a t e d in d o l l a r s suffered an u n e x p e c t e d
198-222).
loss w h e n Britain d e v a l u e d b e c a u s e t h e cost of t h e im-
T h e a d v o c a t e s of f l e x i b l e e x c h a n g e r a t e s r e c o g n i z e d
ports in t e r m s of British p o u n d s s u d d e n l y w e n t u p as a
that a s m a l l a n d narrowly s p e c i a l i z e d e c o n o m y w o u l d
c o n s e q u e n c e of t h e d e v a l u a t i o n , e v e n t h o u g h t h e price
F E D E R A L R E S E R V E B A N K O F ATLANTA
13
in d o l l a r s was u n c h a n g e d . As a result, s o m e d e a l s exp e c t e d to b e profitable s u d d e n l y b e c a m e
l4
F r a t i a n n i a n d von H a g e n (1990) review t h e first d e c a d e
l5
A f t e r years of d e b a t e t h e British g o v e r n m e n t b r o u g h t
unprof-
i t a b l e . At t h e s a m e t i m e , British e x p o r t e r s w h o h a d
of o p e r a t i o n s by t h e E M S .
s i g n e d contracts d e n o m i n a t e d in d o l l a r s e x p e r i e n c e d
t h e p o u n d sterling i n t o t h e E M S b u t with w i d e , 6 per-
w i n d f a l l gains.
10
The
dates
c e n t b a n d s , o n O c t o b e r 8, 1990.
and
sizes
of
large
changes
the
l6
D e u t s c h e m a r k - d o l l a r a n d y e n - d o l l a r e x c h a n g e rates
w e r e e l e v e n r e a l i g n m e n t s d u r i n g t h e first d e c a d e of
t h e E M S ; t h e d a t e s were S e p t e m b e r 24, 1979; Novemb e r 30, 1979; March 23, 1981; O c t o b e r 5, 1981; Febru-
1,
ary 22, 1982; ) u n e
'This a r g u m e n t was p r e v a l e n t at t h e t i m e of t h e Bretton
12
A c c o r d i n g t o F r a t i a n n i a n d v o n H a g e n (1990), t h e r e
were f o u n d u s i n g t h e s a m e p r o c e d u r e s t h a t were u s e d
in a n a l y z i n g t h e p o u n d - d o l l a r rate for T a b l e
1
in
14, 1982; M a r c h
1985; A p r i l
b e e n r e v i v e d by W i l l i a m s o n (1983), Marris (1985), a n d
1987. In a d d i t i o n , t h e r e was a m i n i - r e a l i g n m e n t t h a t in-
K r u g m a n (1985, 1989).
v o l v e d a d e v a l u a t i o n of t h e I t a l i a n lira's p a r i t y rate
By contrast, M u s s a (1985) a r g u e s t h a t u n d e r p l a u s i b l e
7, 1986; A u g u s t
21, 1983; July 22,
W o o d s a g r e e m e n t ; s e e N u r k s e (1945). It has r e c e n t l y
4, 1986; a n d J a n u a r y
12,
a g a i n s t t h e D e u t s c h e m a r k o n l a n u a r y 5, 1990.
l7
a s s u m p t i o n s t h e dollar's v a l u e in 1985 was n o t at a lev-
S e e t h e c o m m e n t s by B r y a n t , C o h e n , a n d F e l l n e r in
Trezise (1979), as well as K o r t e w e g (1980) a n d V a u b e l
el t h a t i m p l i e d m a r k e t irrationality.
(1980).
' ^ S u c h d i s c o u n t s on n o n l o c a l d o l l a r bills w e r e c o m m o n
d u r i n g t h e free b a n k i n g era prior t o t h e Civil War; s e e
18
Rockoff (1975). T h e r e w e r e d i s c o u n t s or p r e m i u m s on
l9
S e e , for e x a m p l e , D o r n b u s c h (1986) a n d Fischer (1987).
A c t u a l l y , t h e r e w e r e t w o r e a l i g n m e n t s d u r i n g t h e first
n o n l o c a l f u n d s d u r i n g t h e n a t i o n a l b a n k i n g era as well.
half of 1982; as a result, d u r i n g t h e six-month p e r i o d
T h e s i z e of t h e d i s c o u n t or p r e m i u m c o u l d
e n d i n g in A u g u s t 1982 t h e f r a n c - D e u t s c h e m a r k
become
rate
large d u r i n g financial crises such as t h e Panic of 1907;
m o v e d a b o u t 9.8 p e r c e n t , t h e largest six-month c h a n g e
s e e N a t i o n a l M o n e t a r y C o m m i s s i o n (1911, 209-28).
since t h e E M S was e s t a b l i s h e d .
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F E D E R A L R E S E R V E B A N K O F ATLANTA
15
Lenders of the Next-to-Last Resort:
Scrip Issue in Georgia during the
Great Depression
The most recent scrip issue in the
Reserve System, which technically
scrip issues in Georgia during the
the country's financial history with
United States occurred during the 1930s, after the establishment of the Federal
was the lender of last resort. The author reports on his ongoing project to describe
Great Depression. Hi's account provides a detailed look at a transitional period in
possible implications for private moneylike instruments in today's economy.
William Roberds
oday, t h e term cash money means exactly o n e thing to residents of t h e
United States: Federal Reserve
notes. These notes constitute a type of currency known as fiat money, the d o m i n a n t if
n o t sole t y p e of currency circulating in t h e
world today. O n e reasonable definition describes fiat m o n e y as "a form of credit where
the issuing party is the state and the recourse
of an individual creditor is negligible against
the state, b u t by the law of the state the fiat
m o n e y must b e accepted in p a y m e n t to extinguish other d e b t s " (John Eatwell, Murray
M i l g a t e , a n d Peter N e w m a n 1987, 317). In
s h o r t , f i a t m o n e y is m o n e y b e c a u s e a
sovereign government d e e m s it so.
T
T h r o u g h o u t m o s t of o u r n a t i o n ' s history
other forms of cash have circulated either in
place of or alongside fiat currency. Until 1933
t h e U n i t e d S t a t e s was ( m o r e or less) on a
16
gold standard, meaning that the value of the
U.S. dollar was legally d e f i n e d as a certain
weight in gold. 1 While the gold standard was
in effect, both gold a n d silver coins circulate d as m e a n s of cash payment. In addition to
coinage, bank notes, which promised to pay a
specified a m o u n t in coin on d e m a n d , were
widely used as m o n e y during t h e gold standard era. To guard against overissue of such
notes, their issuance was generally restricted
by law to banks chartered by t h e federal or
various state governments. Notes were also
issued by the federal government itself.
D u r i n g m u c h of t h e g o l d s t a n d a r d era,
m o n e y for everyday transactions was often in
short s u p p l y . This shortage was particularly
acute in the rural South a n d West. Studies by
Richard H. Timberlake (1978, 1981) attribute
the currency shortage to a n u m b e r of factors,
a m o n g these the natural scarcity of gold and
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
the official valuation of monetary silver below its market price. But the most important
factor c o n t r i b u t i n g to t h e m o n e y shortage
was t h e stringency of legal restrictions on
the issue of p a p e r money. A congressional
act of 1865 i m p o s e d a prohibitive 10 percent
tax on bank notes by state-chartered banks
and practically e n d e d their issue (A.T. Huntington and Robert J. Mawhinney 1910, 362).
The same act required that national banks
m a i n t a i n strict reserve a n d collateral req u i r e m e n t s against their n o t e issue. Congressional acts of 1873 a n d 1875 e x t e n d e d
the 10 p e r c e n t tax on circulating notes to
those issued by n o n b a n k entities. 2 The most
onerous restrictions were reserved for smalld e n o m i n a t i o n currency, reflecting t h e curio u s n i n e t e e n t h - c e n t u r y v i e w t h a t strict
control over the issue of notes in small denominations was necessary for a sound currency. U n f o r t u n a t e l y , s m a l l - d e n o m i n a t i o n
currency was sorely n e e d e d in a c o u n t r y
where per capita annual income was well below $1,000.
were printed in smaller d e n o m i n a t i o n s and
circulated generally as a form of emergency
currency. In Georgia alone, the 1908 report of
the U.S. Comptroller of the Currency estimated that roughly $2.5 million in certificates was
issued by clearinghouse associations in Atlanta, Augusta, M a c o n , a n d S a v a n n a h a n d
n o t e d that m a n y of t h e s e certificates were
given general circulation.
Ironically, the very stringency of these restrictions on private money created a powerful incentive to d i s o b e y t h e m . The chronic
shortage of circulating cash offered a tremendous profit opportunity to anyone who could
convince others to take his own manufactured
currency in return for goods and services. In
the nineteenth century, such issue of unauthorized currency by private firms, towns,
and, in some cases, even states was a common practice. These unauthorized notes, often known as "scrip" or "shinplasters," took
the form of tokens, railroad tickets, "tax redemption certificates," and so forth. 3
These scrip issues merit serious study for
at least three reasons. The first is that the depression scrip represented a form of privately
issued m o n e y that received relatively w i d e
use. In this sense, many forms of depression
scrip resemble more modern forms of money
such as money market mutual funds. The second reason is that the depression issues represent the most recent examples of scrip in
the United States. Depression scrip does not
seem as remote from t h e m o d e r n world as
nineteenth-century issues or those associated with the 1907 panic. The third reason for
studying the depression scrip issues is that
little d e t a i l e d information is available concerning scrip issues during this period. Scrip
issues during the Great Depression t e n d e d
to b e very localized and short-term in nature
Historical evidence suggests that the use
of scrip declined as both coin and official paper money became more widely available toward t h e e n d of t h e n i n e t e e n t h c e n t u r y .
During the 1907 panic, there was a brief but
important resurgence of scrip issue, particularly in the form of "clearinghouse loan certificates." At t h a t t i m e , f e d e r a l b a n k i n g law
allowed clearinghouse associations of banks
in a given city to issue such certificates for
purposes of interbank settlements or settlements between a clearinghouse association
and a given bank. During the 1907 crisis, however, a large n u m b e r of t h e s e certificates
FEDERAL R E S E R V E B A N K O F ATLANTA
The last major occasion of scrip issue in
t h e United States occurred during the Great
D e p r e s s i o n of t h e 1930s. This p e r i o d presents o n e of the most unusual e p i s o d e s of
scrip issue in our nation's monetary history,
particularly because it took place after t h e
founding of the Federal Reserve System. In
its role as a l e n d e r of last resort t h e Fed
c o u l d have, given congressional a p p r o v a l ,
theoretically m e t all emergency n e e d s for
currency ( a n d d i d e v e n t u a l l y m e e t m o s t
such n e e d s ) . N o n e t h e l e s s , n u m e r o u s issues of "depression scrip" circulated locally
as money, especially during the 1932-35 period.
The author is a senior economist in the macropolicy section of the
Atlanta Fed's research department. He is grateful to many people
for their help in this project, including Carl Anderson,
Anne
Bourne, Charles Downey, Doug Fleming, Clifford Kuhn,
Shira
Lewin, and Roy Luttrell, jr., as well as the staffs of the libraries of
Atlanta-Fulton
County, the Atlanta Historical Society,
Emory
University, Georgia State University, and the University of Georgia. The author claims full responsibility for any errors.
17
a n d were often found in rural areas. For various reasons, these issues were until recently
seen as s o m e t h i n g of an embarrassment for
everyone involved. It is rare to find any mention of depression scrip in local c h a m b e r of
commerce-type histories, a n d monetary hist o r i e s of t h e G r e a t D e p r e s s i o n g e n e r a l l y
mention scrip only briefly if at all. A fortunate
exception is Joel W. Harper's (1948) nationwide survey of depression scrip. More recently, an excellent numismatic survey has been
c o n d u c t e d b y R a l p h A. M i t c h e l l a n d N e i l
Shafer (1984).
With t h e goal of augmenting knowledge of
the depression scrip episode, this author has
undertaken a project to identify a n d describe
scrip issues in Georgia during the Great Depression. In t h e case of each scrip issue, the
research begins with identifying a particular
issue, the total a m o u n t of its circulation, and
its duration. The second s t e p is to ascertain
the "moneyness" of t h e issue by considering
historical evidence on market valuation of the
scrip relative to its face value, t h e general acc e p t a b i l i t y of t h e s c r i p as a t r a n s a c t i o n s
m e d i u m , a n d t h e v e l o c i t y or rate of t h e
scrip's turnover. The third a n d final step is to
relate each scrip issue's "moneyness" to the
circumstances associated with its issue. The
present article is a progress report on this ongoing research project. It contains a brief history of t h e s c r i p i s s u e s t h a t h a v e b e e n
studied thus far and a summary of the conclusions that might b e drawn from the depression scrip e p i s o d e a p p l i c a b l e to present-day
or future monetary institutions.
The Banking Holiday of 1933 and the
Issuance of Clearinghouse Scrip
O n e of the most important causes of scrip
issue in Georgia during t h e early 1930s was
t h e s e q u e n c e of events leading u p to the nat i o n w i d e b a n k i n g h o l i d a y of March 1933. In
fact, t h e period from the stock market crash of
1929 through t h e first half of 1933 was t h e
most turbulent in the nation's banking history. The n u m b e r of banks nationwide d r o p p e d
from about 24,500 at midyear 1929 to roughly
15,000 by midyear 1934. During the same pe-
18
riod deposits fell from $58 billion to $46.5 billion (Board of Governors of t h e Federal Res e r v e S y s t e m 1943, 24-25). T h e b a n k i n g
situation in Georgia mirrored the nation's, as
the n u m b e r of b a n k s operating in t h e state
fell from 420 in 1929 to 322 in 1934 and deposits fell from $342 million to $300 million
(Board of Governors of t h e Federal Reserve
System 1943, 26-27).
As e m p h a s i z e d in S u s a n E. K e n n e d y ' s
(1973) study, the banking crisis of 1933 was a
complex s e q u e n c e of events that cannot b e
u n a m b i g u o u s l y attributed t o a single cause.
What is clear, however, is that the culmination
of the crisis was the national banking holiday
of March 6-12. President Franklin D. Roosevelt
ordered this one-week closing of all banks on
Monday, March 6, u n d e r t h e doubtful authority of t h e T r a d i n g w i t h t h e E n e m y Act, a
wartime emergency measure dating from the
First World War. Roosevelt's first term h a d
begun only two days earlier, and the closing
of the banks was his administration's first significant act. Such an e x t r e m e m e a s u r e was
necessitated by a banking crisis that had begun to take on the character of a nationwide
bank run.
A c h a i n r e a c t i o n of s t a t e w i d e b a n k i n g
moratoriums h a d b e e n set in m o t i o n when,
on February 14, the governor of Michigan declared a s t a t e w i d e b a n k i n g h o l i d a y t o prevent t h e total collapse of the state's largest
b a n k s . 4 T h i s m o r a t o r i u m s e t off m o r e
statewide banking holidays as depositors, ant i c i p a t i n g t h e s p r e a d of t h e b a n k closings,
frantically tried to withdraw their deposits at
banks that were still o p e n . By Friday, March 3,
more than 5,000 banks had closed their doors
a n d thirty-six states h a d d e c l a r e d at least
p a r t i a l r e s t r i c t i o n s on b a n k w i t h d r a w a l s
( K e n n e d y 1973, 147). In Georgia b a n k holid a y s in n e i g h b o r i n g s t a t e s f o r c e d n e w l y
e l e c t e d G o v e r n o r E u g e n e T a l m a d g e t o declare a bank holiday on March 3.5
Roosevelt's closing of the banks was a bold
and well-conceived gesture that did much to
break the panic that had gripped the nation's
banking system. However, in his proclamation
declaring t h e bank holiday Roosevelt did not
p r o p o s e any detailed plan for e n d i n g the crisis a n d reopening the banks—apparently because no detailed plan existed at the time of
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
the a n n o u n c e m e n t (Helen M. Burns 1974, 4249; Kennedy 1973, 173-75). Instead, t h e bank
holiday declaration touched off a furious debate a m o n g t h e new administration's members a b o u t how to best deal with the crisis.
Amazingly, o n e of t h e p r o p o s a l s Roosevelt
considered called for instantaneous monetization of all U.S. government b o n d s then outs t a n d i n g , in t h e a m o u n t of $21 b i l l i o n .
Fortunately for the nation, this plan raised as
many eyebrows then as a similar plan might
now, a n d t h e p r e s i d e n t was p e r s u a d e d t o
abandon it (Kennedy 1973, 173-74).
A n o t h e r p l a n , g e n e r a l l y f a v o r e d by t h e
larger city banks, called for t h e issuance of
clearinghouse scrip on a n a t i o n w i d e basis. 6
The p l a n finally a g r e e d on was historically
significant in that it gave broad powers t o t h e
Federal Reserve b a n k s t o a d v a n c e cash to
m e m b e r banks on virtually any collateral and
a l l o w e d cash a d v a n c e s t o a n y i n d i v i d u a l ,
partnership, or corporation against collateral
of U.S. government securities. This plan was
written into law by the passage of the Emergency B a n k i n g Act on March 9, 1933, a n d
banks furnished with new infusions of Federal
Reserve notes began to reopen in t h e twelve
Federal Reserve cities, including Atlanta, on
Monday, March 13 (Kennedy 1973, 180).7
For many Georgians, however, t h e reopening of the banks u n d e r the Emergency Banking Act came too late. Cash had b e e n scarce
to nonexistent in most communities since the
imposition of the statewide banking moratorium on March 3. The imposition of t h e nationwide moratorium a n d t h e s u b s e q u e n t delay
in t h e r e o p e n i n g of t h e b a n k s m e a n t that
even the reserve city of Atlanta was virtually
without cash for ten days, a n d towns in t h e
southern part of t h e state went without cash
for two weeks or longer.
The economic hardship caused by the loss
of p a p e r currency was m u c h g r e a t e r t h a n
might result from a similar event today. Georgia in 1933 was a poor state by both modern
and contemporary standards. Per capita personal income in Georgia in 1929 has b e e n estimated at about $350, e q u a l to about half the
U.S. average at the t i m e and a b o u t ten times
that a m o u n t in 1990 dollars. 8 Although checks
did circulate during the bank holiday, checking accounts were much less c o m m o n than toDigitized
F E D for
E R AFRASER
L R E S E R V E BANK O F ATLANTA
day. Particularly hard hit by t h e cash shortage
were workers in t h e cotton mills a n d o t h e r
blue-collar workers in u r b a n c e n t e r s , w h o
were a c c u s t o m e d to receiving their weekly
pay in the form of cash.
O n e factor that mitigated t h e economic impact of the bank closings in Georgia was that
a significant portion of the state economy was
accustomed to operating without cash, even
in 1933. In rural areas, tenant farming for store
credit was a c o m m o n practice if not t h e norm
(see, for example, Michael S. H o l m e s 1974).
A n d according to oral accounts recorded by
C l i f f o r d M . K u h n , H a r l o n E. J o y e , a n d E.
Bernard West (1990), it was still not uncomm o n for mill workers to b e p a i d in c o m p a n y
scrip, store credit, or c o m m o d i t i e s . In these
sectors of t h e e c o n o m y , it s e e m s d o u b t f u l
that the bank holiday would have caused any
significant disruption of normal activity.
In 1990 it would b e difficult for most of us
to imagine a financial crisis such as occurred
in early 1933 not b e i n g m e t with i m m e d i a t e
federal government intervention. In 1933 the
equally common presumption appears to
have b e e n that t h e cash shortage would b e
dealt with by issuance of clearinghouse scrip.
As m e n t i o n e d in t h e i n t r o d u c t i o n , Georgia
h a d a strong tradition of scrip issue d u r i n g
the latter half of the nineteenth century, a tradition reinforced by t h e w i d e s p r e a d use of
c l e a r i n g h o u s e scrip d u r i n g t h e 1907 p a n i c .
The p r o s p e c t of c l e a r i n g h o u s e scrip i s s u e
during t h e 1933 b a n k h o l i d a y was generally
seen as a retreat by banks to a conservative,
time-tested solution to the m o n e y shortage. 9
At the onset of the bank holiday, even federal
a n d state officials s e e m e d resigned t o t h e
l i k e l i h o o d of scrip issue. T h e p r e s i d e n t i a l
proclamation e s t a b l i s h i n g t h e b a n k h o l i d a y
e m p o w e r e d t h e secretary of t h e treasury to
"permit issuance of clearing house certificates
or other evidences of claims against assets of
b a n k i n g i n s t i t u t i o n s . " 1 0 In Atlanta, Federal
Reserve Bank Governor Eugene R. Black declared that t h e bank holiday was "a fine and
constructive measure a n d will h e l p to bring
a b o u t normal business conditions through
the issuance of scrip." 11 O n e of the most ent h u s i a s t i c p r o p o n e n t s of s c r i p i s s u e was
Georgia's G o v e r n o r T a l m a d g e , w h o v i e w e d
scrip issue as a useful means of increasing the
19
circulation of funds. On March 14, Talmadge
vetoed an emergency banking measure hastily passed by t h e Georgia legislature at least
partly because, in his words, it "would annul
Iscrip] issues already m a d e in the state." 12
Clearinghouse associations in Atlanta, Augusta, C o l u m b u s , Macon, a n d Savannah began p r e p a r a t i o n s for scrip issues a l m o s t as
soon as t h e n a t i o n a l b a n k h o l i d a y was ann o u n c e d . In Atlanta, an u n p r e c e d e n t e d $20
million issue of clearinghouse certificates was
p l a n n e d by the Atlanta Clearing House Association. S o m e i d e a of t h e m a g n i t u d e of this
issue can b e o b t a i n e d by n o t i n g that total
January 1933 d e p o s i t s of A t l a n t a C l e a r i n g
H o u s e b a n k s a m o u n t e d t o o n l y $104 million. 1 3 Upon receiving authorization from the
secretary of the treasury, t h e association began stockpiling the scrip for use by its member banks. At least $3 million in $1 notes had
b e e n printed a n d delivered by the time t h e
plan was called off on March 9. 14 The reopening of t h e Atlanta Clearing H o u s e banks on
March 13, a n d the s u b s e q u e n t reopening of
other "licensed" banks, seems to have eliminated the n e e d for clearinghouse scrip in Atlanta and in nearby communities in northern
Georgia. 1 5 However, clearinghouse scrip d i d
find its way i n t o circulation in t h e southern
part of the state. Below are specific instances
of clearinghouse scrip issue a n d t h e scrip's
impact on the communities in which it circulated.
Clearinghouse Scrip Issue during the
National Bank Holiday, by City
A u g u s t a . As soon as President Roosevelt
o r d e r e d t h e national b a n k holiday, t h e Augusta C l e a r i n g H o u s e A s s o c i a t i o n (January
1933 deposits of $9 million) announced plans
to print a n d circulate clearinghouse certificates. 1 6 interestingly, t h e story in the Augusta
Chronicle carrying t h e a n n o u n c e m e n t of t h e
scrip issue also p o i n t e d out that in the opinion of o n e local banker, t h e scrip notes were
subject to a 10 percent federal tax. This mention of the bank note tax is the only o n e (that
this author is aware of) in contemporary accounts of clearinghouse scrip issue.
20
By March 10, a $5 million scrip issue had
b e e n authorized a n d delivered to t h e cleari n g h o u s e b a n k s . O n M a r c h 11, r o u g h l y
$200,000 of scrip was paid out by t h e clearinghouse banks, much of it for t h e p u r p o s e of allowing manufacturers t o m e e t their weekly
payrolls. This scrip constituted the only circulating m o n e y in the city until the banks were
r e o p e n e d on March 14. N e w s p a p e r reports
suggest that the scrip generally circulated at
p a r a n d was a c c e p t e d by a l m o s t all retail
merchants other than national chain stores.
The par valuation of t h e scrip was n o d o u b t
encouraged by threats from the city solicitor
t o p r o s e c u t e any p e r s o n s f o u n d t o b e discounting the scrip. 17
The Augusta Clearing H o u s e scrip issue
was short-lived. By March 16, two days after
normal banking activity resumed in the city,
Augusta banks were recalling the scrip. Of the
$5 million in scrip printed, less than $300,000
ever circulated. 1 8 Still, the arrival of even this
small a m o u n t of scrip c a m e at a timely mom e n t in t h e banking crisis. The circulation of
scrip on March 11 meant that manufacturers'
employees, who had already missed one
week's pay b e c a u s e of t h e banking holiday,
could receive their weekly wages a n d that local m e r c h a n t s c o u l d carry o u t b u s i n e s s on
something resembling normal terms.
C o l u m b u s . T h e i s s u e of c l e a r i n g h o u s e
scrip in C o l u m b u s in m a n y respects paralleled the Augusta issue. Shortly following the
a n n o u n c e m e n t of the national b a n k holiday,
t h e C o l u m b u s C l e a r i n g H o u s e Association
(January 1933 deposits of $11 million) sought
and received permission for a $1 million scrip
issue. "Over $100,000" of t h e scrip was paid
out on March 10 to m e e t manufacturers' payrolls, a n d , according to Mitchell a n d Shafer
(1984, 64), t h e e n t i r e $1 m i l l i o n issue was
eventually circulated. As was t h e case with
Augusta, scrip apparently was t h e only money
circulating in t h e city until March 14. Welc o m e d by most merchants, t h e scrip generally circulated at par. There is even o n e report
of a m e r c h a n t o f f e r i n g a p r e m i u m for t h e
clearinghouse scrip. 19
Two unusual aspects of the C o l u m b u s scrip
experience bear mention. The first is that the
scrip a p p a r e n t l y c o n t i n u e d t o circulate for
s o m e t i m e after t h e b a n k i n g crisis had
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
p a s s e d , a l t h o u g h exactly h o w l o n g is n o t
clear. In the weeks i m m e d i a t e l y following the
b a n k h o l i d a y , t h e b a n k s in t h e C o l u m b u s
Clearing H o u s e Association d i d not p u b l i s h
any notice that the scrip was being withdrawn
from circulation. Mitchell a n d Shafer (1984,
64) p u t t h e d u r a t i o n of t h e scrip i s s u e at
t w e n t y - s e v e n d a y s , b u t t h e m e m o i r s of
an e m p l o y e e of t h e clearinghouse, W. Roy
Luttrell, Sr., suggest that the scrip continued
to circulate locally for a period of a b o u t three
months. 2 0 The second unusual feature of the
C o l u m b u s scrip was that it circulated concurrently with a n o t h e r t y p e of scrip, t h a t is,
scrip printed a n d circulated by Phenix City,
Alabama. The Phenix City scrip and other municipal scrip issues will b e discussed in a later section.
M a c o n . The experience with clearinghouse
scrip in Macon was also very similar t o t h e
Augusta e p i s o d e , although less d e t a i l e d information concerning the scrip issue is availa b l e in c o n t e m p o r a r y n e w s p a p e r accounts.
Scrip i s s u e d by t h e Macon Clearing H o u s e
Association (January 1933 deposits of $7 million) began circulating in t h e city on March 10.
Approximately $100,000 in scrip was issued
on March 10 a n d 11 t o m e e t manufacturing
payrolls. The clearinghouse banks r e o p e n e d
their doors for normal operations on March 14,
and much of the scrip was immediately withdrawn from circulation. Newspaper accounts
indicate that the scrip was welcomed by city
merchants and largely circulated at par. 21
Savannah a n d Valdosta. Savannah, the
second largest b a n k i n g center in t h e state,
did not escape having to use clearinghouse
scrip during the bank holiday. Contemporary
newspaper accounts indicate that the Savannah Clearing House Association (January 1933
deposits of $66 million) printed at least $1.5
million in scrip, though probably only a fract i o n of t h i s a m o u n t a c t u a l l y c i r c u l a t e d .
Mitchell a n d Shafer (1984, 65) p u t t h e total
amount of the issue at $1 million, of which only $535,000 is s u p p o s e d to have circulated.
The scrip began circulating on March 10 a n d
apparently circulated at par. Local banks began r e o p e n i n g on March 14, a n d t h e p u b l i c
was urged by t h e p r e s i d e n t of t h e clearinghouse association to r e d e e m t h e scrip
promptly. 2 2
F E D E R A L R E S E R V E B A N K O F ATLANTA
An unusual feature of t h e Savannah scrip
issue is that s o m e of the scrip printed by the
S a v a n n a h c l e a r i n g h o u s e a l s o c i r c u l a t e d in
V a l d o s t a . A l t h o u g h V a l d o s t a h a d its own
c l e a r i n g h o u s e a s s o c i a t i o n at t h e t i m e , t h e
small size of its banking market (January 1933
d e p o s i t s of $1.9 million) m a d e it more conv e n i e n t t o use t h e S a v a n n a h scrip t h a n to
print a separate issue. Issue of the Savannah
scrip in Valdosta was no d o u b t facilitated by
the presence of branches of the Citizens a n d
S o u t h e r n National Bank ( h e a d q u a r t e r e d in
Atlanta) in b o t h cities. The S a v a n n a h scrip
was first issued in Valdosta on March 11 a n d
apparently circulated until at least March 29,
when a general a n n o u n c e m e n t withdrawing
t h e scrip was p u b l i s h e d . As was the case with
t h e C o l u m b u s scrip issue, the clearinghouse
scrip apparently continued to circulate after
t h e Valdosta banks' r e o p e n i n g on March 14
and also circulated alongside scrip issued by
the city of Valdosta. Research has uncovered
n o mention of t h e clearinghouse scrip's being
circulated at par in Valdosta, though the lack
of evidence to the contrary and the par valuation of t h e s a m e scrip in S a v a n n a h suggest
that it d i d circulate at face value. 2 3
Other Cities. In addition to the cities listed
a b o v e , a n u m b e r of others in G e o r g i a h a d
clearinghouse associations in 1933. The Rand
McNally Bankers Directory for 1933 lists clearinghouse associations at Albany, Brunswick,
Elberton, Griffin, Newnan, and Rome. Reflecting t h e p o p u l a t i o n of t h e c o m m u n i t i e s they
s e r v e d , t h e s e a s s o c i a t i o n s were relatively
small in size, each having c o m b i n e d deposits
of its m e m b e r banks totaling less than $4 million. Of these associations, only Brunswick's
has b e e n investigated at this point; the possibility of scrip issue by t h e o t h e r associations remains to b e investigated.
C o n t e m p o r a r y n e w s p a p e r accounts indicate that c l e a r i n g h o u s e scrip c i r c u l a t e d in
Brunswick beginning on March 11, 1933. The
exact a m o u n t of t h e scrip issue is not ment i o n e d . N u m e r o u s accounts report the scrip
circulating at par and, in o n e case, even at a
10 p e r c e n t p r e m i u m , s u g g e s t i n g t h a t t h e
Brunswick clearinghouse scrip was as readily
accepted as were similar issues in the cities
listed above. A general call for redemption of
the scrip was p u b l i s h e d on March 23. 24
21
On the whole, contemporary accounts indicate that the March 1933 clearinghouse scrip
issues in Georgia were highly successful as
emergency local currency. Apparently these
issues e n j o y e d t h e full s u p p o r t of t h e local
business establishments (perhaps in part because of the reluctance of chain stores to acc e p t t h e scrip) a n d were by m o s t accounts
circulated at or a b o v e par. Two important factors reinforced t h e success of t h e clearinghouse scrip issues. The first of these was the
virtual certainty, t h a n k s to t h e E m e r g e n c y
Banking Act passed on March 9, of b e i n g able
t o exchange t h e scrip for F e d e r a l Reserve
notes in the near future. The second was the
positive experience with clearinghouse scrip
issues following the Panic of 1907. Any positive assessment of these scrip issues must b e
t e m p e r e d , h o w e v e r , b y t h e fact that m o s t
contemporary accounts reflect the opinions of
c o m m u n i t y leaders a n d not the mill workers
a n d small merchants who were the most likely recipients of the scrip.
Scrip Issues by Local Governments
Clearinghouse associations by n o m e a n s
h a d a m o n o p o l y on scrip issue d u r i n g t h e
Great Depression. In n a t i o n w i d e surveys of
depression scrip, Harper (1948) and Mitchell
and Shafer (1984) list issues m a d e by private
businesses, self-help groups, business
g r o u p s , a n d local g o v e r n m e n t s . To t h e author's k n o w l e d g e , in G e o r g i a only t h e last
t y p e of s c r i p w a s i s s u e d in s i g n i f i c a n t
amounts. Harper's survey lists seven issues of
d e p r e s s i o n scrip b y local g o v e r n m e n t s in
Georgia. Since the scrip issued by the city of
Valdosta (see below) is not listed by Harper,
it seems safe to conclude that this list is not
c o m p l e t e . Mitchell a n d Shafer's survey only
lists issues by t h e city of Atlanta.
O n e factor that makes t h e municipal scrip
issues difficult t o identify is that t h e reasons
for i s s u i n g t h e scrip t e n d e d t o vary from
c o m m u n i t y to c o m m u n i t y rather than b e i n g
tied t o a single national e v e n t such as t h e
national banking holiday. The most c o m m o n
reason for issuing scrip, according t o Harper,
s e e m s t o h a v e b e e n a c o m b i n a t i o n of rev-
22
e n u e shortfalls a n d t h e inability of the local
g o v e r n m e n t s t o o b t a i n f i n a n c i n g by m o r e
conventional means. But other m o t i v e s d i d
influence the decision by municipalities to issue scrip. The general shortage of circulating
cash d u r i n g t h e early d e p r e s s i o n years led
many community leaders to feel that issuing
scrip would provide their communities with a
much-needed circulating currency. As shown
in Timberlake (1981), the widespread use of
m u n i c i p a l scrip in t h e n i n e t e e n t h century
p r o v i d e d a m p l e p r e c e d e n t for t h i s sentiment. At least o n e scrip issue in the state was
m a d e for the explicit p u r p o s e of putting the
u n e m p l o y e d b a c k t o work. B e l o w are described the experiences of a n u m b e r of Georgia c o m m u n i t i e s with scrip i s s u e d b y local
governments during the 1932-35 period.
Local Government Scrip Issues,
by City or County
City of Atlanta. The most prolific issuer of
depression scrip in t h e state appears to have
b e e n t h e city of Atlanta. Although no exact
e s t i m a t e is c u r r e n t l y a v a i l a b l e , t h e t o t a l
a m o u n t of scrip issued by the city from 1930
through 1936 can b e placed at more than $2.5
million, only a fraction of which circulated as
m o n e y . A t o t a l of f o u r t e e n i s s u e s w e r e
p l a n n e d , and at least eight of t h e m were dist r i b u t e d to m u n i c i p a l e m p l o y e e s . W h a t is
currently known about these issues is summarized in Table 1.
The cause of t h e Atlanta scrip issues can
b e traced directly t o t h e city's rapid population growth during t h e 1920s. Between 1920
a n d 1930 t h e p o p u l a t i o n of A t l a n t a grew
from a b o u t 212,000 to roughly 270,000, a n d
t h e city's school p o p u l a t i o n grew from
33,000 t o 6 5 , 0 0 0 . 2 5 By 1930 m u n i c i p a l finances were severely pressured by t h e obligation t o p r o v i d e city services, particularly
schooling, to t h e swelling p o p u l a t i o n a n d by
t h e loss of tax revenue caused by a faltering
e c o n o m y . F i n d i n g itself short of f u n d s for
D e c e m b e r 1930 salaries, t h e city e n t e r e d int o an a g r e e m e n t with R i c h ' s d e p a r t m e n t
store to issue scrip to city schoolteachers in
lieu of D e c e m b e r salaries. The scrip c o u l d
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
Table 1.
City of Atlanta Scrip, 1930-36
Date of
Resolution
Interest
Rate
Date of
Issue
Amount of
Issue
Corporate
Sponsorship
Date of
Redemption
?
?
12-18-30
$200-238K
Rich's
01-01-31?
12-15-32
6%
12-20-32
$380-400K
Rich's 3
01-27-33b
02-07-33
6%
02-15-33
$280-300K
Rich's
05-20-33
04-03-33
4%
?
?
?
"During 1933'
04-19-33
4%
*
*
*
"During 1933'
11-20-33
6%
?
$260K
?
05-01-34
01-12-33
2%
?
$500K
Coca-Cola
05-19-34
11-05-34
4%
12-05-34
$200K
Rich's
05-01-35
12-07-34
?
?
$400K
Coca-Cola
?
02-04-35
4%
?
?
?
?
11-04-35
4%
?
$800K
Trust Co.
05-13-35b
01-20-36
3%
?
?
?
"During 1936'
05-04-36
3%
?
?
Trust Co.?
10-30-36?b
11-02-36
?
?
?
?
?
a
Rich's offered to give half cash and half store credit for the notes of this issue. See text, page 25.
b
Actual payment dates from Mitchell and Shafer (1984).
* Probably not issued because of early payment of property taxes by Atlanta Clearing House banks. See
Atlanta Constitution, May 22, 1933, or Atlanta Clearing House Association (1950, 60).
Source: Resolution dates and interest rates are from Atlanta City Council Minutes. Dates of issue, amounts,
and corporate sponsors are from reports in the Atlanta newspapers or Mitchell and Shafer (1984). Redemption dates are either the dates cited in the enabling resolutions (scrip was callable before the indicated dates) or actual payment dates from Mitchell and Shafer.
FEDERAL R E S E R V E BANK O F ATLANTA
23
t h e n b e r e d e e m e d at Rich's for its full face
value. 2 6 A 1934 newspaper account reported
t h a t Rich's a b s o r b e d a total of $238,000 in
scrip. 2 7
A l t h o u g h little, if any, of t h e D e c e m b e r
1930 issue circulated as money, it is nonetheless of interest because it set t h e pattern for
s u b s e q u e n t issues. As a m e a n s of borrowing
m o n e y the issue of scrip seems unnecessarily
costly a n d elaborate. An unresolved question
is why t h e city d i d not borrow t h e m o n e y directly from Rich's or other firms in Atlanta's
business community. Perhaps Rich's a n d other corporate "sponsors" of the city's scrip issues preferred t h e issue of scrip as a m e a n s
of increasing p u b l i c awareness of their role in
shoring u p the city's finances. Another possib l e explanation is that t h e city charter's restrictions may have led local leaders to prefer
the issue of scrip. Chapter 12 of t h e 1924 Atlanta City Charter d i d not allow t h e "annual
expense of the City . . . to exceed the annual
income." Given the longstanding use of scrip
as an emergency currency in the South, its issue may have s e e m e d less in contradiction t o
that clause than a direct loan. A third possib i l i t y is t h a t t h e i s s u e of scrip m a y h a v e
served as a m e a n s of effectively signaling to
t h e business community that the city i n d e e d
lacked t h e m e a n s to pay its employees.
The city's fiscal situation continued to deteriorate in 1931 and 1932. The assessed value of t h e city's property tax rate rose b y a
scant 2 percent in 1931 and fell by more than
10 percent in 1932.28 By February 1932 Mayor
James L. Key a n d t h e city council h a d imp o s e d stringent economizing measures in an
effort to bring t h e city's finances under control. Municipal e m p l o y e e s other than teachers were given pay cuts of 10 p e r c e n t a n d
ordered to take payless vacations. The labor
u n i o n r e p r e s e n t i n g m a n y Atlanta teachers,
the Atlanta Public School Teachers Association, voted to accept even d e e p e r pay cuts,
ranging u p t o 16 percent on a sliding scale. In
spite of these measures, by N o v e m b e r 1932
t h e city found itself short of funds to m e e t its
payroll. Negotiations between the city a n d local b a n k s t o o b t a i n e m e r g e n c y l o a n s were
b r o k e n off w h e n t h e two p a r t i e s c o u l d n o t
agree on t h e size of t h e city's 1933 b u d g e t
(Melvin W. Ecke 1972, 236-37).
24
In 1932 t h e issue of scrip t o cover the city's
payroll s e e m e d to b e t h e natural, though reluctantly a p p l i e d , solution to this d i l e m m a .
City e m p l o y e e s d i d in fact receive their pay
for N o v e m b e r a n d D e c e m b e r in t h e form of
scrip. The N o v e m b e r payroll a m o u n t e d to
s o m e $400,000, a n d scrip in this a m o u n t was
i s s u e d o n D e c e m b e r 20, 1932. T h e scrip
p r o m i s e d to pay to the bearer interest
e q u i v a l e n t t o 6 percent p e r a n n u m u p o n red e m p t i o n on or before March 1, 1933. The
D e c e m b e r 1932 payroll a m o u n t e d to $300,000
a n d was not issued until February 15, 1933.
The smaller size of the latter issue was m a d e
possible by imposing two-week payless vacations on city teachers a n d t h u s halving the
size of t h e school system's payroll for that
month. The February 1933 scrip issue was re-
"The ICity of Atlanta]
issue of scrip may
have served as a means of effectively signaling to the business community that the city
indeed lacked the means to pay its employees."
d e e m a b l e o n M a y 20, 1933, a n d a g a i n
promised to pay 6 percent annualized interest u p o n r e d e m p t i o n . 2 9
In contrast t o t h e clearinghouse scrip issues described above, t h e Atlanta city issue
d i d not always circulate at par, d e s p i t e its
rather generous interest rate. The city d i d not
a n d could not legally require that t h e scrip
b e accepted at par. Nor is there any evidence
to suggest that Atlanta's b a n k s (which h a d
their own set of p r o b l e m s at t h e time) were
willing t o cash either the D e c e m b e r 1932 or
February 1933 city scrip issues. Although contemporary newspaper accounts d o not mention any explicit discounting of t h e city scrip,
newspaper statements by prominent Atlanta
retailers suggest t h a t p a r v a l u a t i o n of t h e
scrip was far from universal. For example, the
Atlanta Retail Merchants' Association initially
r e c o m m e n d e d to its m e m b e r s that n o more
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
than 25 percent of t h e scrip's face value b e
given in change for any purchase m a d e with
scrip. 30 Apparently Rich's d e p a r t m e n t store,
which had offered to cash the 1930 scrip, was
not in a position to absorb t h e entire December 1932 issue. It d i d offer m o r e g e n e r o u s
terms than most merchants a n d promised to
exchange t h e scrip for half cash and half store
credit. Rich's also offered to cash t h e February 1933 issue outright. 31
Oral history accounts recorded by Kuhn,
Joye, and West (1990, 144-45, 201) confirmed
discounting of the Atlanta city scrip. O n e Atl a n t a t e a c h e r r e c a l l e d t h a t " m o s t of t h e
stores, they w a n t e d a p e r c e n t a g e for it, for
cashing that scrip." S o m e idea of the prevailing rate of d i s c o u n t is p r o v i d e d in t h e (unp u b l i s h e d ) r e c o l l e c t i o n s of a city f i r e m a n
"Some idea of the prevailing
rate of discount is provided in the (unpublished)
recollections of a city fireman whose large
savings allowed him to carry out a small
Business in cashing scrip at 95 percent of
face value."
whose large savings allowed him to carry out
a small business in cashing scrip at 95 percent of face value. This rate of discount would
have p u t the annualized yield on the scrip at
close to an unheard of rate of 27 percent, giving an idea of t h e public's lack of confidence
in the city's finances. Even higher rates of discount a n d d o w n r i g h t n o n a c c e p t a n c e of t h e
scrip were also c o m m o n , according to the oral
history accounts. An Atlanta policeman curtly
s u m m a r i z e d t h e situation in o n e s e n t e n c e :
"Nobody wanted that scrip." 32
Fortunately for Atlanta municipal employees, the statement was not literally true. The
city itself was willing to take t h e scrip at par
for p a y m e n t of taxes and utility bills b u t refused t o give a n y c h a n g e for p a y m e n t s in
scrip. 33 In oral history accounts, Rich's offers
to redeem t h e scrip were recalled as crucial
to t h e s c r i p i s s u e s ' s u c c e s s . O n e A t l a n t a
F E D E R A L R E S E R V E B A N K O F ATLANTA
teacher recalled, "You could go to Rich's and
just put the scrip u p on the counter a n d say,
'I'd like to get this scrip cashed.' You d i d n ' t
have to s p e n d anything." In the opinion of another teacher, Rich's acceptance of the scrip
"saved our lives. It saved the p u b l i c school
system." A school a d m i n i s t r a t o r n o t e d that
b e c a u s e of its r e a d y a c c e p t a n c e of scrip,
Rich's was heavily p a t r o n i z e d by t h e city's
grateful teachers for years afterward (Kuhn,
Joye, and West 1990, 144-45, 201).
Atlanta's fiscal crisis of late 1932 was to b e
r e p e a t e d , t o a s o m e w h a t lesser d e g r e e , in
1933, 1934, and 1935. The city's tax base fell
by a b o u t 12 percent in 1933 from an already
d e p r e s s e d 1932 level, a n d it c h a n g e d relatively little from 1933 to 1936 (see Douglas L.
Fleming 1984, 203). Because the generally improved financial condition of Atlanta's corporate c o m m u n i t y somewhat offset t h e effects
of the reduced tax base, it was easier for the
city to find sponsors for its scrip issues than it
had been in 1932.
In N o v e m b e r 1933 t h e city f o u n d itself
again u n a b l e to m e e t its payroll, and $260,000
in scrip bearing 6 percent interest was printe d . The N o v e m b e r 1933 scrip apparently was
not backed by any corporate sponsor and
may not have b e e n issued. 3 4 The remainder
of the city's financing n e e d s for 1933 was covered by a s u b s e q u e n t $500,000 scrip issue.
However, t h e latter issue p r o b a b l y d i d not
circulate since it was r e d e e m a b l e , at par, at
several of the larger Atlanta banks who in turn
resold t h e scrip t o t h e Coca-Cola C o m p a n y
under an agreement with t h e city. This scrip
issue bore a much-reduced interest rate of 2
percent.
In N o v e m b e r 1934 the city tried to negotiate a loan for its year-end cash n e e d s from a
group consisting of the city's banks and CocaCola. When these negotiations broke off, the
city p l a n n e d scrip issues to m e e t payrolls for
the last half of N o v e m b e r and all of December. City e m p l o y e e s were paid the issue for
the last half of N o v e m b e r 1934, amounting to
$200,000, on D e c e m b e r 5. Rich's immediately
offered to r e d e e m all t h e scrip in cash, a n d
presumably most of this issue e n d e d u p with
Rich's a n d d i d n o t circulate as m o n e y . An
a g r e e m e n t b e t w e e n t h e city a n d t h e CocaCola C o m p a n y was a n n o u n c e d D e c e m b e r 7,
25
w h e r e b y Coca-Cola a g r e e d t o a b s o r b t h e
$400,000 scrip i s s u e n e e d e d t o m e e t t h e
city's D e c e m b e r payrolls. As in 1933, the scrip
was still p a i d o u t t o city e m p l o y e e s , w h o
were a b l e to cash t h e scrip at various local
b a n k s . B e c a u s e of t h e s p o n s o r s h i p of t h e
1934 i s s u e s b y Rich's a n d Coca-Cola, it is
doubtful that much, if any, of these issues circulated as cash.
According to City of Atlanta records, and to
Mitchell and Shafer (1984), five more scrip issues were authorized and printed in 1935 and
1936. At the present time it is unclear how many
of t h e s e actually circulated. C o n t e m p o r a r y
newspaper accounts indicate that Trust Company Bank of Georgia was willing to cash the entire $800,000 a m o u n t of t h e N o v e m b e r 1935
issue. 35 A photograph of a canceled May 1936
scrip note in Mitchell and Shafer (1984, 64) also
bears the Trust Company Bank logo, implying
that the issue was absorbed by that bank.
Atlanta's experience with municipal scrip
issue suggests that such issues worked better
as vehicles for emergency municipal financing
than they d i d as circulating money. The ina b i l i t y of A t l a n t a ' s g o v e r n m e n t t o o b t a i n
emergency financing for its cash n e e d s d i d
little to enhance the fungibility of its scrip. Individuals or firms who had accepted the scrip
also h a d an incentive to hold on to the scrip
t o receive t h e p r o m i s e d interest p a y m e n t .
Little in the historical evidence suggests that
the Atlanta city scrip was widely used for any
more than a single transaction.
Still, t h e scrip d i d prove useful in avoiding
a c o m p l e t e shutdown of city services during
the fiscal crises brought on by the Great Depression. The fact that the Atlanta scrip was
often d i s c o u n t e d suggests that the interest
rate paid by t h e city was probably lower than
what t h e city w o u l d have p a i d for financing
t h r o u g h m o r e t r a d i t i o n a l c h a n n e l s . In t h i s
sense, t h e scrip issue may have served as a
politically acceptable m e t h o d of i m p o s i n g a
temporary pay cut on municipal employees;
it forced t h e m to a b s o r b t h e difference between the nominal (that is, face) and market
valuation of the scrip issue.
Valdosta a n d Phenix City. Atlanta's experience with municipal scrip was repeated on
a smaller scale in o t h e r cities in t h e state.
T h e City of V a l d o s t a i s s u e d "less t h a n
2 6
$10,000" in scrip on March 7, 1933, to meet its
payroll while the banks were closed. 3 6 Apparently the Valdosta scrip bore no interest and
was r e d e e m a b l e on or before July 1, 1933, at
t h e o p t i o n of t h e city. N e w s p a p e r accounts
d o not indicate whether the city's scrip circulated at par, b u t n u m e r o u s exhortations by
civic leaders to " k e e p t h e city scrip circulating" i n d i c a t e that t h e city's scrip was less
p o p u l a r than t h e s i m u l t a n e o u s l y circulating
Savannah Clearing House scrip. 3 7
L i k e w i s e u n p o p u l a r was t h e m u n i c i p a l
scrip issued by Phenix City, Alabama, which
circulated in C o l u m b u s , Georgia, during the
b a n k i n g h o l i d a y a l o n g s i d e scrip i s s u e d by
t h e C o l u m b u s Clearing House. A particularly
unattractive feature of t h e Phenix City scrip
was its " s t a m p i n g " or "self-liquidating" req u i r e m e n t . As originally issued, t h e Phenix
City scrip notes required with each use the
cancellation of a c o u p o n on t h e back of the
note, each cancellation costing the note holder t h r e e cents. The scrip c o u l d n o t b e red e e m e d until thirty-five c a n c e l l a t i o n s had
b e e n performed or, at the latest, on March 18,
1935. The self-liquidating scheme was a comm o n feature of depression-era scrip issues,
according to Harper (1948), who traced its origins to t h e Freiwirtscfiaft
m o v e m e n t of early
twentieth-century Germany. Early versions of
t h e stamping scheme required periodic cancellation of the scrip coupons, whether it had
b e e n used in a transaction or not. The basic
idea b e h i n d stamping was to stimulate business activity by i m p o s i n g a tax on h o l d i n g
money. However n o b l e the scheme's original
intentions may have b e e n , in practice it usually a m o u n t e d to little more than a backhanded way of imposing a tax on transactions. The
unpopularity of t h e Phenix City scrip led to
several attempts to weaken the stamping requirement, as well as early retirement of the
scrip issue. 3 8 According to Harper's (1948) accounts, such experiences characterized scrip
issues with the stamping requirement.
Other Cities. In addition to the cities ment i o n e d a b o v e , Harper (1948) lists issues of
d e p r e s s i o n scrip b y Americus, D u b l i n , Macon, Sparta, a n d T h o m a s v i l l e . 3 9 O t h e r than
the fact that the last two cities' scrip required
stamps, relatively little information is availa b l e at t h e current time about these scrip is-
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
sues. According to Mitchell and Shafer (1984),
the A m e r i c u s i s s u e was a u t h o r i z e d on
February 1, 1933, in an a m o u n t not to exceed
$10,000. M u n i c i p a l e m p l o y e e s received 40
percent of their pay in scrip for an unspecified period of time. William B. Williford (1975)
notes that t h e Americus m u n i c i p a l scrip
served as an emergency currency during the
1933 bank holiday. Nancy B. Anderson (1979)
states that Macon paid its e m p l o y e e s in scrip
for a period of about o n e year. Though technically not a municipal issue, s o m e scrip was
issued by t h e Sea Island C o m p a n y d u r i n g
the 1933 b a n k holiday to serve residents of
the resort as an emergency currency. 40 Details
concerning the amounts, duration, and valuation of these issues are being investigated.
Fulton County. Harper (1948) also lists a
scrip issue by Fulton County. The scrip issue
was small and of short duration, b u t a n u m b e r
of interesting circumstances surrounded the
county's d e c i s i o n to issue scrip. The proximate cause of the issue was a demonstration
at the Fulton County courthouse on June 30,
1932, in which almost o n e t h o u s a n d p e o p l e
participated. Local C o m m u n i s t s o r g a n i z e d
the demonstration in response to the Fulton
County commissioners' decision to cut relief
e x p e n d i t u r e s in t h e face of falling tax revenues (Kuhn, Joye, and West 1990, 206).41
O n July 1 t h e c o m m i s s i o n e r s v o t e d t o
spend $6,000 on a program "to support paupers." An additional $2,000 was voted to this
program on July 29, a n d the program was continued until S e p t e m b e r 21, 1932.42 Contemporary newspaper accounts indicate that this
relief effort largely c o n s i s t e d of e m p l o y i n g
jobless m e n to h e l p maintain county parks.
The m e n were p a i d in scrip, which was red e e m a b l e in food staples at a county commissary. W o m e n a n d d i s a b l e d m e n w e r e
given t h e scrip w i t h o u t b e i n g r e q u i r e d t o
work. 43 It is not known whether any of the Fulton County scrip ever circulated. Given that
the scrip was issued in bearer form, it seems
reasonable to assume that s o m e of it did. To
the author's knowledge, Fulton County's was
the only scrip issue in the state m a d e for the
explicit purpose of providing relief to the une m p l o y e d , although Harper (1948) lists five
municipalities in other states that had similar
relief programs.
FEDERAL R E S E R V E BANK O F ATLANTA
Some Lessons from Georgia's
Depression Scrip Experience
M o n e t a r y systems h a v e historically consisted of a combination of private and p u b l i c
money, s o m e t i m e s called "inside" a n d "outs i d e " m o n e y . The U.S. m o n e t a r y system in
1990 is no exception: outside m o n e y such as
cash circulates alongside inside m o n e y such
as m o n e y market mutual funds. This pattern
is l i k e l y t o c o n t i n u e , a l t h o u g h
some
economists have considered the possibility
of an entirely private monetary system (for
example, Lawrence H. White 1989). In a quantitative sense, private or inside m o n e y has in
recent years b e c o m e increasingly important
in our economy. The impact of deregulation
a n d technological innovation has been to create a large new set of financial instruments
that possess s o m e degree of "moneyness."
In such an e n v i r o n m e n t , t h e d e p r e s s i o n
scrip experience in Georgia, a n d in the Unite d States more generally, provides s o m e int e r e s t i n g l e s s o n s as t o t h e u s e f u l n e s s of
certain forms of private money. The depression scrip issues essentially represented att e m p t s t o c r e a t e forms of p r i v a t e m o n e y
whose acceptability would match that of cash,
at least in t h e community where they were issued. Given the current pace of technological
change in the financial services industry, it is
conceivable that private instruments of a similar nature c o u l d circulate s o m e t i m e in t h e
foreseeable future. 44
T h e m o s t o b v i o u s i m p l i c a t i o n of t h e
e p i s o d e s d e s c r i b e d a b o v e is that t h e real
b i l l s d o c t r i n e was as a p p l i c a b l e in 1930s
Georgia as anywhere else; that is, scrip notes
issued in excess of the value of their backing
were likely to b e d e e p l y discounted or simply not a c c e p t e d as p a y m e n t for g o o d s or
services. The c l e a r i n g h o u s e scrip issues of
1933 largely circulated at par because of the
virtual certainty of b e i n g a b l e to exchange t h e
scrip for Federal Reserve notes, usually after
a few days or weeks from the date of the scrip
issue. The clearinghouse certificates were in
e s s e n c e b a c k e d b y t h e p r o v i s i o n s of t h e
Emergency Banking Act that drastically liberalized collateral r e q u i r e m e n t s for a d v a n c e s
from t h e d i s c o u n t w i n d o w s at t h e district
27
Federal Reserve banks. By contrast, the municipal issues studied thus far were often discounted or simply not accepted as payment.
The public's reluctance to accept the municipal scrip reflected the fact that these issues
were backed only by the uncertain flow of fut u r e p r o p e r t y tax r e c e i p t s a n d w e r e red e e m a b l e only after a period of months or
even years. The very issue of the municipal
scrip, particularly in the case of Atlanta, signaled an unusual disruption in the flow of tax
receipts. U n d e r such circumstances, s o m e
discounting of the municipal issues would be
expected to get p e o p l e to bear t h e risk of
holding scrip that might not be promptly redeemed.
A second lesson that can be gleaned from
the municipal scrip issues is that their riskiness severely l i m i t e d t h e i r u s e f u l n e s s as
transactions instruments. The risk associated
with the municipal issues could and often d i d
result in a high rate of return for those who
accepted the scrip at a discount and held it
until the promised date of redemption. The
presence of such high returns effectively divided the public into those p e o p l e willing to
accept the risk of holding the scrip at the going rate(s) of discount and those who were
not willing to h o l d t h e scrip. O n c e an exchange took place between members of the
two groups, further use of the scrip in transactions was unlikely.
A third implication can be drawn from the
experience with stamped or self-liquidating
scrip issued by Phenix City, A l a b a m a , that
was used in Columbus. The unpopularity of
this issue, relative to the scrip issued by the
C o l u m b u s Clearing House Association, suggests such self-liquidating instruments will
not b e used when alternative means of payment are available. Given that the only real
backing behind such an issue was a claim to
tax receipts generated by its own use, it is
not surprising that the public preferred to use
scrip that did not require the payment of this
tax. By using the clearinghouse scrip (or cash)
instead of the stamped municipal scrip, residents of Columbus were able to avoid the tax
on t r a n s a c t i o n s i m p o s e d by t h e s t a m p e d
scrip as well as any uncertainty concerning redemption of the municipal issue.
Research to this point has provided only a
t h u m b n a i l sketch of Georgia's experience
with scrip m o n e y during t h e Great Depression. Many more details are n e e d e d to better
evaluate the success of the scrip issues described a b o v e , a n d no d o u b t other issues
have not yet been discovered. O n e important
area that needs to b e addressed is the legal
status of the various scrip issues. The clearinghouse scrip issues of 1933 were issued under authority of the secretary of the treasury,
b u t t h e c o n d i t i o n s u n d e r which t h e issues
were approved are not known. It is also not
known how or why the depression scrip issues were able to avoid the restrictions imposed by federal banking law on bank note
issue. A n o t h e r area t h a t n e e d s t o b e addressed is the possible use of scrip issued by
textile mills a n d other private firms during
the 1933 banking holiday. Future research by
the author in this area will aim to provide a
m o r e c o m p l e t e p i c t u r e of this fascinating
e p i s o d e in U.S. monetary history. 45
Notes
'To b e m e a n i n g f u l , this legal standard
had to
be
2
b a c k e d b y t h e w i l l i n g n e s s of t h e U.S. Treasury a n d pri-
Article I, s e c t i o n 10 of t h e C o n s t i t u t i o n p r o h i b i t s t h e
v a t e b a n k s to e x c h a n g e g o l d for p a p e r m o n e y . P e r i o d s
w h e n h o l d e r s of e i t h e r g o v e r n m e n t or p r i v a t e b a n k s '
states t h e m s e l v e s from issuing p a p e r m o n e y .
i
n o t e s w e r e u n a b l e to carry o u t this e x c h a n g e w e r e gen-
"soap wrappers" a n d "doololly."
4
convertibility that occurred u n d e r the gold standard
h a v e b e e n i g n o r e d . Also, t h e " b i m e t a l l i c " s t a n d a r d of
the late ninetenth century has b e e n
ignored.
See
T h e r e w e r e a l m o s t as m a n y n a m e s for s c r i p as t h e r e
w e r e issues. Two of t h e a u t h o r ' s p e r s o n a l favorites are
erally referred to as " s u s p e n s i o n s of c o n v e r t i b i l i t y . " For
p u r p o s e s of t h i s s u r v e y , t h e v a r i o u s s u s p e n s i o n s of
S e e H u n t i n g t o n a n d M a w h i n n e y (1910, 379 a n d 424).
S e e K e n n e d y (1973, c h a p t e r 4) for a d e t a i l e d a c c o u n t
of t h e M i c h i g a n crisis.
5
6
Atlanta ¡ournal,
March 3, 1933.
S e e Burns (1974, 44-45). H a r p e r (1948, 90-92) n o t e s that
F r i e d m a n a n d Schwartz (1963) o r T i m b e r l a k e (1978) for
Professor Irving Fisher was a m o n g t h e m o s t enthusias-
an i n t r o d u c t i o n to t h e s e topics.
tic s u p p o r t e r s of a n a t i o n w i d e scrip issue.
2 8
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
7
8
Atlanta journal,
See also
March 13, 1933.
Atlanta Constitution,
2 6
F i g u r e s for 1929 a r e from U.S. B u r e a u of t h e C e n s u s
(1975, 243). A d j u s t m e n t to 1990 d o l l a r s u s e s t h e Con-
Atlanta
28
of inflation o v e r l o n g t i m e p e r i o d s .
"Scrip M e a n s G o o d
or
11,
March 6, 1933.
3 1
For T a l m a d g e ' s f a v o r a b l e view of scrip, s e e
Macon Tele-
32
M a r c h 13, 1933; a l s o L e m m o n (1952, 148). For
T a l m a d g e ' s v e t o of t h e s t a t e b a n k i n g bill, s e e
Constitution,
S e e K u h n e t ai. (1990, 144-45 a n d 201); a l s o u n p u b -
S e e A t l a n t a C l e a r i n g H o u s e A s s o c i a t i o n (1950, 36-47).
33
A l m o s t all of t h e e n a b l i n g r e s o l u t i o n s in T a b l e 1 h a v e a
34
S e e Atlanta City C o u n c i l M i n u t e s , N o v e m b e r 20, 1932,
are from R a n d M c N a l l y (1933, 57-58).
c l a u s e t o this effect.
T h e A C H A c a l l e d off t h e s c r i p i s s u e w h e n it b e c a m e
a n d M i t c h e l l a n d Shafer (1984, 62), T h e
c l e a r t h a t c o n g r e s s i o n a l p a s s a g e of t h e
tion,
Emergency
B a n k i n g Act w o u l d a l l o w all cash n e e d s to b e m e t in
Atlanta Constitution
on
March 10 for p u r p o s e s of m e e t i n g p a y r o l l s a n d o t h e r
s u c h " e m e r g e n c i e s . " J u d g i n g from t h e e x p e r i e n c e of
G e o r g i a c o m m u n i t i e s w h e r e scrip was i s s u e d , t h e early
a v a i l a b i l i t y of t h i s " e m e r g e n c y " currency was p r o b a b l y
Valdosta Times,
Valdosta Times,
36
3 7
Chronicle, March 7, 1933.
Augusta Chronicle, March
Columbus
38
Augusta Chronicle,
March 22, 1933; April 5, 1933. Accord-
H o l m e s (1974, 326) m e n t i o n s t h e u s e of m u n i c i p a l scrip
Brunswick News,
March 7, 1933.
41
S e e a l s o t h e m i n u t e s of t h e F u l t o n C o u n t y B o a r d of
42
M i n u t e s of t h e Fulton C o u n t y Board of C o m m i s s i o n e r s
C o m m i s s i o n e r s , June 25, 1932.
March 16, 1933, p u t s t h e circula-
on t h e i n d i c a t e d d a t e s .
tion at a r o u n d $200,000. M i t c h e l l a n d Shafer (1984) p u t
4 3
t h e circulation of t h e A u g u s t a issue at a b o u t $275,000.
44
Columbus Enquirer,
Enquirer,
in A m e r i c u s a n d T h o m a s v i l l e .
t h e scrip m e a n s t h a t p r i c e s p a i d b y h o l d e r s of s c r i p
The
March 16, 1933; March 23, 1933; March 25,
was retired b y J u n e 26, 1933.
4 0
were t h e s a m e as c u s t o m a r y cash prices.
March 7, 1933; March 8, 1933.
ing t o M i t c h e l l a n d S h a f e r (1984, 30), t h e e n t i r e issue
Augusta
11-14, 1933. "Par" v a l u a t i o n of
N o v e m b e r 5, 1935; N o v e m b e r 7,
1933.
39
"Local C l e a r i n g H o u s e Perfects Cash Program,"
Constitution,
1935.
an i m p o r t a n t factor in t h e Atlanta b a n k s ' d e c i s i o n n o t
to issue scrip.
Constitu-
b u t n o r e p o r t of its issue has b e e n f o u n d .
indicated
that the clearinghouse b a n k s were already o p e n
Atlanta
N o v e m b e r 21, 1933, m e n t i o n s p r i n t i n g of t h e scrip
Atlanta
Federal R e s e r v e n o t e s .
A March 13 r e p o r t in t h e
McDonald,
cal Society.
14
l8
D e c e m b e r 20, 1932; F e b r u a r y 16,
L i v i n g A t l a n t a Oral History C o l l e c t i o n , Atlanta Histori-
March 14, 1933.
January 1933 figures on t h e c l e a r i n g h o u s e a s s o c i a t i o n s
1 7
D e c e m b e r 16, 1932.
l i s h e d p o r t i o n s of an i n t e r v i e w with H u g h
Atlanta
13
16
Decem-
1933.
graph,
15
Atlanta Constitution,
F e b r u a r y 16-20, 1933.
Atlanta Constitution,
Atlanta Constitution,
"Ibid.
12
19, 1932; J a n u a r y 2, 1933; F e b r u a r y 3, 1933;
b e r 13-20, 1932; J a n u a r y 29, 1933; F e b r u a r y 7, 1933;
3 0
Atlanta Constitution,
A t l a n t a City C o u n c i l M i n u t e s , D e c e m b e r 15, 1932; DeF e b r u a r y 6, 1933. S e e a l s o
1933.
1 0
16,
F l e m i n g (1984, 203) p r e s e n t s f i g u r e s t h a t p u t t h e as-
cember
Atlanta journal, M a r c h 7, 1933,
Business," Columbus Enquirer, March
D e c e m b e r 20, 1932; F e b r u a r y
1930, $425 m i l l i o n for 1931, a n d $381 m i l l i o n for 1932.
29
S e e , for e x a m p l e , " B u s i n e s s Q u i c k l y R e s t o r e d b y Atl a n t a S c r i p in 1907,"
journal,
s e s s e d v a l u e of t h e city's tax b a s e at $418 m i l l i o n for
p r o b a b l y a b o v e t h e 1933 level, a n d t h e inflation of this
9
Atlanta
14, 1930;
1933; D e c e m b e r 5, 1934.
of t h e u s e of t h e 1929 p e r s o n a l i n c o m e figure, w h i c h is
figure u s i n g t h e CPI, which t e n d s to o v e r s t a t e t h e rate
Constitution,
27
s u m e r Price I n d e x (CPI). T h e e s t i m a t e in 1990 d o l l a r s is
p r o b a b l y b e s t t h o u g h t of as an u p p e r b o u n d b e c a u s e
December
D e c e m b e r 18-19, 1930.
Atlanta Constitution,
As
noted
July 12-14, 1932.
in W h i t e
(1989), t h e c r e a t i o n
of
par-
19
See
20
L u t t r e l l s e r v e d as secretary t o t h e C o l u m b u s C l e a r i n g
lake (1978) n o t e s t h a t U.S. travelers c h e c k s o f t e n serve
H o u s e A s s o c i a t i o n for t h e d u r a t i o n of t h e scrip issue.
as a quasi-currency in foreign markets.
M a r c h 7-14, 1933; a l s o L u t t r e l l
a c c e p t a n c e a u t o m a t i c t e l l e r m a c h i n e (ATM) n e t w o r k s
(no d a t e , 11).
c o n s t i t u t e s a significant s t e p in t h i s d i r e c t i o n . T i m b e r -
Macon Telegraph, March 7-15, 1933.
Savannah Evening Press, March 8-14, 1933.
Valdosta
Times, M a r c h 7-29, 1933; Brunswick
45
2 1
22
23
2 4
25
News,
The author would welcome any information concerning
d e p r e s s i o n scrip i s s u e s in G e o r g i a a n d n e a r b y s t a t e s
from p e o p l e w h o h a d p e r s o n a l e x p e r i e n c e with scrip.
M a r c h 7-23, 1933.
P l e a s e c o n t a c t t h e a u t h o r at: R e s e a r c h
Brunswick
F e d e r a l R e s e r v e B a n k of A t l a n t a , 104 M a r i e t t a Street,
News, March 7-23, 1933.
Department,
P o p u l a t i o n a n d school e n r o l l m e n t e s t i m a t e s are t h o s e
N.W., Atlanta, G e o r g i a 30303-2713; t e l e p h o n e 404/521-
r e p o r t e d in R a c i n e (1969).
8970.
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30
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
Federal Reserve Bank of Atlanta, through its p u b l i c
information d e p a r t m e n t , produces a variety of publications a n d other materials d e a l i n g with e c o n o m i c a n d
financial topics. These materials a p p e a l to a wide audience, from s t u d e n t s a n d teachers of e c o n o m i c s to
bankers, business p e o p l e , and professional economists.
A recently p u b l i s h e d Publications brochure details t h e
many types of information a v a i l a b l e from t h e Atlanta
Fed, from p a m p h l e t s on electronic f u n d s transfer to
videos on the evolution of money. All are offered free or
at m i n i m a l cost.
To order the Publications brochure write to the Public Information Department, Federal Reserve Bank of Atlanta,
104 Marietta Street, N.W., Atlanta, Georgia 30303-2713, or
call 404/521-8788.
Inflation and the Dollar Index
Karen R. Hunter
n 1986 the Atlanta Fed first p u b l i s h e d
its dollar index to provide an u p d a t e d
summary measure of the dollar's global
value. Recently, a few of the eighteen countries within t h e Atlanta Fed trade-weighted
dollar index have been experiencing inflation
that is higher than the U.S. rate, prompting
concern that the Atlanta Fed dollar index may
have become a less accurate measure of the
dollar's real value. The Atlanta Fed dollar index, as well as a host of other new and existing indexes, was specified as an aggregate
measure, a summary statistic of the dollar's
average value against the currencies of the
world. The recent proliferation of currency indexes may b e a product of the emergence of
large bilateral trade imbalances since 1982.1
Because trade imbalances are often attributed to over- or undervalued currencies, a sin-
I
Ai the time this article was written, the author was an economic analyst in the macropolicy section of the Atlanta Fed's research department. She is grateful to Mary Rosenbaum, Sheila
Tschinkel,
Frank King, and Steve Feinstein for helpful comments and to Mike
Chriszt and leff Watson for research assistance.
3 2
gle statistic c a p a b l e of tracking t h e dollar's
value could b e helpful in exploring trade issues.
The Atlanta Fed dollar index is constructed
using nominal exchange rates weighted by a
country's share of U.S. trade. Because each
c o m p o n e n t country's exchange rate is not
a d j u s t e d for inflation, o n e of the important
criteria when considering whether to include
a country in t h e i n d e x is that its inflation
track U.S. inflation fairly closely. Otherwise,
changes in exchange rates would reflect relat i v e price m o v e m e n t s b e t w e e n countries
in a d d i t i o n to changes in real, or inflationadjusted, value. If all the countries in an index are nearly price-stable or are inflating at
similar rates, then a nominal index such as
the Atlanta Fed's index behaves like a real, or
price-deflated, index. If inflation rates diverge a m o n g countries in an index, t h e n a
nominal index may be distorted or biased in
its representation of changes in real value
among currencies. The purpose of this article
is to examine whether or not the nominal Atlanta dollar index remains a reasonable proxy
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
for t h e d o l l a r ' s a v e r a g e real v a l u e , g i v e n
changes in t h e rate of price change in several c o u n t r i e s i n c l u d e d in t h e i n d e x . This
study is also an examination of t h e i m p a c t
of inflation differentials on various regional
s u b i n d e x e s into which t h e Atlanta F e d index is d i v i d e d .
Japan have b e e n d e f i n e d . See Table 1 for a
list of the eighteen countries, weights, and the
c o m p o s i t i o n of t h e s u b i n d e x e s . Charts 1-5
show t h e m o v e m e n t of t h e n o m i n a l Atlanta
F e d i n d e x a n d s u b i n d e x e s s i n c e 1981. It
should be noted that the scale of the charts is
not uniform.
Currency Fluctuations
Inflation Rates
Since the 1973 conversion to a floating exchange rate system, currencies have not only
f l u c t u a t e d w i d e l y in v a l u e b u t a l s o h a v e
moved by disparate margins against the dollar. For example, the yen depreciated roughly
14.7 percent and the Deutschemark declined
43.8 percent in value versus t h e dollar from
1982 to 1985, while the Canadian dollar depreciated 16.1 percent against the dollar over
the s a m e p e r i o d . Clearly, any o n e bilateral
exchange rate is an unsuitable measure of the
dollar's overall international value. It is, however, possible to c o m b i n e , or average, bilateral e x c h a n g e rates t o g e t an i d e a of t h e
dollar's average m o v e m e n t .
Giving each currency within this average
equal weight w o u l d b e i m p r u d e n t since individual fluctuations in each exchange rate
are n o t of e q u a l i m p o r t a n c e t o t h e U.S.
economy. Within the Atlanta Fed index t h e
currencies are weighted by their respective
p r o p o r t i o n of t r a d e (exports p l u s i m p o r t s )
with the United States in 1984. For e x a m p l e ,
C a n a d a , t h e U n i t e d States' largest t r a d i n g
partner, has t h e highest weight, 0.288, of t h e
currencies in t h e index. Japan, t h e nation's
second largest trading partner, has a weight
of 0.213. W h e n t h e index shows that t h e dollar a p p r e c i a t e d 28.8 p e r c e n t a g a i n s t t h e
eighteen currencies in t h e Atlanta Fed dollar index from 1982 to 1986, it is u n d e r s t o o d
that t h e dollar d i d not rise uniformly against
all currencies b u t that, on average, it appreciated by 28.8 percent.
The Atlanta Fed dollar index is also divided into regional s u b i n d e x e s since countries
within a particular region may h a v e similar
trading patterns with a third country and their
currencies often m o v e together. S u b i n d e x e s
for Europe, Canada, Asia, and Asia excluding
FEDERAL R E S E R V E BANK O F ATLANTA
From the beginning, the countries included in the nominal Atlanta Fed trade-weighted
index were chosen to cover the largest
a m o u n t of U.S. trade p o s s i b l e (roughly 80.0
percent) while limiting the n u m b e r of currencies according to certain criteria. 2 Although an
index might ideally encompass all U.S. trading partners, inclusion of either countries with
high inflation relative to that of t h e United
States or d e v e l o p i n g countries that e m p l o y
m u l t i p l e exchange rates w o u l d i n t r o d u c e a
bias. 3 A country such as Mexico, the United
States' third-largest trading partner, has b e e n
excluded from the index because of its historically high inflation rates a n d the tiered exc h a n g e rate in e f f e c t d u r i n g m u c h of t h e
1980s. Creating the Atlanta Fed index so that
the average inflation rate of t h e countries in
t h e index a p p r o x i m a t e d that of t h e U n i t e d
States generated an index that could function
as a r e a s o n a b l e proxy for a real aggregate
d o l l a r index, with t h e a d d e d a d v a n t a g e of
timeliness. Because nominal exchange rates,
which are a v a i l a b l e daily a n d i m m e d i a t e l y ,
are e m p l o y e d in t h e index, it is p o s s i b l e to
g e n e r a t e a d a i l y A t l a n t a Fed d o l l a r i n d e x .
Timely, high-frequency price data necessary
for a d e f l a t e d , or real dollar, index are less
available.
Several countries, primarily those included
in the Asian subindex, have experienced accelerating inflation in the late 1980s. Although
comparatively high, these inflation rates, with
the exception of China's, have been generally
in line with those found in other industrialized countries. For e x a m p l e , in 1989, prices
increased 7.6 percent in Australia, 9.7 percent
in Hong Kong, and 7.8 percent in the United
Kingdom, compared with an inflation rate of
a r o u n d 4.5 p e r c e n t for m o s t i n d u s t r i a l i z e d
33
Table 1.
Atlanta Fed Trade-Weighted Currency Index and Subindexes*
Country
Exports
Imports
Sum
Percent
of Total
Canada
Japan
United Kingdom
West Germany
Taiwan
Korea
France
Italy
Hong Kong
Netherlands
Saudi Arabia
Belgium
Singapore
Australia
China
Switzerland
Spain
Sweden
46,524
23,575
12,210
9,084
4,775
5,983
6,037
4,375
3,062
7,554
5,564
5,301
3,675
4,793
3,004
2,563
2,561
1,542
66,911
60,371
15,044
17,810
14,772
10,027
8,516
8,504
8,899
4,329
4,009
3,287
4,121
2,899
3,381
3,199
2,628
3,427
113,435
83,946
27,254
26,894
19,547
16,010
14,553
12,879
11,961
11,883
9,573
8,588
7,796
7,692
6,385
5,762
5,189
4,969
28.768
21.289
6.912
6.820
4.957
4.060
3.691
3.266
3.033
3.014
2.428
2.178
1.977
1.951
1.619
1.461
1.316
1.260
152,182
242,134
394,316
Totals
100.00
European Subindex
United Kingdom
West Germany
France
Italy
Netherlands
Belgium
Switzerland
Spain
Sweden
12,210
9,084
6,037
4,375
7,554
5,301
2,563
2,561
1,542
15,044
17,810
8,516
8,504
4,329
3,287
3,199
2,628
3,427
27,254
26,894
14,553
12,879
11,883
8,588
5,762
5,189
4,969
Totals
51,227
66,744
117,971
23.102
22.797
12.336
10.917
10.073
7.280
4.884
4.399
4.212
100.00
* Trade weights reflect total trade in 1984. Each weight is defined as a country's total trade with the United
States (exports plus imports) divided by total trade of the United States with the eighteen countries. Exports
and imports are given in millions of U.S. dollars.
Source: Direction of Trade Statistics, International Monetary Fund, 1984; Federal Reserve Bank of Atlanta.
3 4
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
Table 1 (continued)
Country
Exports
Imports
Sum
Percent
of Total
54.746
12.748
10.441
7.800
5.084
5.016
4.164
Asian Subindex
Japan
Taiwan
Korea
Hong Kong
Singapore
Australia
China
23,575
4,775
5,983
3,062
3,675
4,793
3,004
60,371
14,772
10,027
8,899
4,121
2,899
3,381
83,946
19,547
16,010
11,961
7,796
7,692
6,385
Totals
48,867
104,470
153,337
100.00
Asia-excluding-Japan Subindex
Taiwan
Korea
Hong Kong
Singapore
Australia
China
Totals
4,775
5,983
3,062
3,675
4,793
3,004
14,772
10,027
8,899
4,121
2,899
3,381
19,547
16,010
11,961
7,796
7,692
6,385
25,292
44,099
69,391
28.169
23.072
17.237
11.235
11.085
9.201
100.00
countries. In China prices a d v a n c e d 16.3 per-
Nominal-Real Differential
cent last year.
To m e a s u r e i n f l a t i o n ' s d i s t o r t i o n of t h e
and
T h e level of t h e real Atlanta Fed d o l l a r in-
s u b i n d e x e s are c o n s t r u c t e d . M o r e specifi-
n o m i n a l d o l l a r i n d e x , a real i n d e x
dex i n d i c a t e s what t h e v a l u e of t h e n o m i n a l
cally, t h e n o m i n a l d o l l a r i n d e x is d e f l a t e d
index w o u l d b e w i t h o u t t h e p r e s e n c e of infla-
by t h e r e l a t i v e rate of c o n s u m e r p r i c e in-
tion. A p o s i t i v e difference b e t w e e n t h e nom-
creases, a c a l c u l a t i o n t h a t g e n e r a t e s a real
inal a n d t h e real d o l l a r i n d e x i n d i c a t e s t h a t
dollar i n d e x . 4 The various exchange rates
c u m u l a t i v e average inflation in t h e e i g h t e e n
that c o n s t i t u t e t h e t r a d e - w e i g h t e d
countries has b e e n a b o v e U.S. inflation a n d
index
a n d s u b i n d e x e s are d e f l a t e d b y t h e infla-
that t h e n o m i n a l i n d e x has b e e n p u s h e d up-
tion d i f f e r e n t i a l b e t w e e n t h e U n i t e d S t a t e s
w a r d b y t h e p r e s e n c e o f i n f l a t i o n (in t h e
a n d t h e c o u n t r y in t h e b i l a t e r a l c o m p a r i s o n .
countries in t h e index) in excess of U.S. infla-
These m e a s u r e s h a v e p r o d u c e d b o t h a
tion. A negative nominal-real
n o m i n a l a n d real i n d e x a n d s u b i n d e x for
m e a n s t h a t c u m u l a t i v e a v e r a g e i n f l a t i o n in
each p e r i o d c o v e r e d b y t h e o r i g i n a l nomi-
t h e e i g h t e e n countries has b e e n b e l o w U.S.
nal i n d e x a n d s u b i n d e x e s .
inflation and that the nominal index
F E D Efor
R A LFRASER
R E S E R V E B A N K O F ATLANTA
Digitized
differential
has
35
b e e n p u l l e d d o w n by d i s p a r i t i e s in price
pressures. Alternatively, if all the countries
in t h e i n d e x h a d t h e s a m e i n f l a t i o n rate,
even if it were not zero, t h e n o m i n a l a n d
real indexes would b e identical and the correlation b e t w e e n t h e two measures w o u l d
b e 1.0.
Chart 1 shows that while the nominal and
real indexes have moved together, the nominal
i n d e x r e m a i n e d a b o v e t h e real i n d e x for
much of the 1980s, when the weighted average of inflation for the eighteen currencies in
the Atlanta Fed index exceeded that of the
United States. Charts 2-5 show the experie n c e for t h e s u b i n d e x e s , which is m i x e d .
Since both the real and nominal dollar indexes are averages of currency movements, it is
to b e expected that the individual subindexes, b o t h real a n d n o m i n a l , will experience
more variability than the aggregated indexes
(see Charts 6 and 7).
1986 the greatest regional inflation outliers
were in Europe. The chief culprits were Italy
and France, where inflation averaged 9.4 perc e n t a n d 5.2 p e r c e n t , r e s p e c t i v e l y , well
above that of West Germany (Economist Intelligence Unit 1989, 191). Since 1986 closer
alignment of European economic policies has
b e e n reflected in the uniformly lower inflation rates in these countries, a tendency reinforced by their continued participation in the
Exchange Rate Mechanism of the European
Monetary System (EMS). More recently, inflation in the United Kingdom has exceeded the
EMS average by margins substantial enough
to skew the European index. The average inflation rate for EMS countries is currently
around 4.0 percent annually. 5
The largest differentials between the real
and nominal subindexes occur in the Europ e a n subindex (see Chart 2). From 1982 to
3 6
Of t h e four s u b i n d e x e s , o n l y t h e real
Asian subindex lies a b o v e its nominal counterpart, reflecting the large weight of Japan
(roughly 55 percent of the total; see Chart 3),
which has had very low inflation relative to
t h e U n i t e d S t a t e s o v e r t h e p e r i o d . The
Japanese influence on the Asian s u b i n d e x
Chart 1.
Atlanta Fed Dollar Index
(1980=100)
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
Chart 2.
Atlanta Fed Dollar European Subindex
F E D E R Afor
L RFRASER
E S E R V E B A N K O F ATLANTA
Digitized
(1980=100)
Chart 3.
Atlanta Fed Dollar Asian Subindex
(1980=100)
37
38
Chart 4.
Atlanta Fed Dollar Asia-excluding-Japan Subindex
(1980=100)
Chart 5.
Atlanta Fed Dollar Canadian Subindex
(1980=100)
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
Chart 6.
Atlanta Fed Dollar Canadian and European Subindexes
(1980=100)
Chart 7.
Atlanta Fed Dollar Asian and Asia-excIuding-Japan Subindexes
FEDE
R AFRASER
L R E S E R V E BANK O F ATLANTA
Digitized
for
(1980=100)
39
is c l e a r w h e n t h e A s i a - e x c l u d i n g - J a p a n
subindex is considered (see Chart 4). Unlike
the Canadian and European averages in the
past three years, the divergence of inflation
d i f f e r e n t i a l s in t h e Asia-excluding-Japan
subindex has widened, undoubtedly because
of the increased inflationary pressures in Australia, Hong Kong, a n d China. According to
the Asian and Asia-excluding-Japan subindexes, inflation rates in Japan have also b e e n
substantially lower than inflation rates in other Asian countries.
The n o m i n a l - r e a l g a p on t h e C a n a d i a n
subindex is considerable since Canada has a
large cumulative inflation differential against
the United States (see Chart 5). This gap app e a r s in part b e c a u s e C a n a d a is t h e s o l e
country within its subindex so that, unlike the
other subindexes, no other countries balance
out Canada's higher inflation.
Of the four subindexes, three show large
p o s i t i v e d i v e r g e n c e s from t h e U.S. retail
price history. Over t h e p e r i o d as a whole,
t h e E u r o p e a n , C a n a d i a n , a n d t h e Asiaexcluding-Japan prices d i d not always move
p r o p o r t i o n a t e l y with U.S. price d e v e l o p m e n t s . The c u m u l a t i v e d i v e r g e n c e a b o v e
t h e total U.S. c o n s u m e r price i n d e x from
1981 to 1989 is roughly 6.5 percent for the
E u r o p e a n , 12.9 p e r c e n t for t h e C a n a d i a n ,
and 7.0 percent for the Asia-excluding-Japan
countries. The cumulative inflation differential for the countries in t h e Asian subindex
was actually 9.3 percent below total U.S. inflation for the period.
The difference between the levels of the
overall real and the nominal dollar index is
the amount of aggregate bias introduced by
using the nominal dollar index to approxim a t e a real dollar index. According to t h e
real dollar index, the dollar's appreciation
from January 1981 to t h e March 1985 peak
a n d its s u b s e q u e n t d e s c e n t were n o t as
large as p o r t r a y e d by t h e n o m i n a l index.
Since mid-1986 the difference b e t w e e n
these two indexes has decreased markedly,
indicating that inflation rates in the eighteen
countries covered by the index have t e n d e d
to converge toward U.S. rates and have eliminated much of the cumulative inflation discrepancy reflected in the difference between
the indexes.
4 0
Comovement of Indexes
For the purposes of this study the comovem e n t of t h e real a n d n o m i n a l indexes and
subindexes is of greater interest than the differences between levels of the nominal and
real indexes (and subindexes) or the changes
in the aggregate real index. The comovement,
or correlation, of the indexes indicates the
degree to which changes in the nominal index
( s u b i n d e x ) reflect c h a n g e s in real values.
Since it is changes in the exchange value of
the dollar that are thought to b e important in
explaining movements in international trade,
the correlation of the changes in the indexes
are of particular interest, and the strength of
that correlation is a measure of the nominal
index's resilience to inflation differentials.
The higher the correlation, the better is the
nominal index at capturing real m o v e m e n t s
and the smaller is the inflation distortion of
the nominal index.
U s i n g c o r r e l a t i o n s of first d i f f e r e n c e s
(changes) of levels shows that t h e nominal
d o l l a r i n d e x c l o s e l y s h a d o w s t h e real or
price-deflated dollar index. (See Table 2 for
Table 2.
Correlation Coefficients between
Changes in Nominal and Real
Dollar Indexes
(monthly data, January 1981 to
December 1989)
Index or Subindex
Correlation
Coefficient
Nominal Atlanta Index,
Real Atlanta Index
0.987
Nominal European,
Real European
0.996
Nominal Asian,
Real Asian
0.977
Nominal Asia-excluding-Japan,
Real Asia-excluding-Japan
0.923
Real Canada,
Nominal Canada
0.941
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
correlations.) This result c o u l d b e inferred
from reference to Chart 1, which shows close
comovement during 1981 and from mid-1987
to D e c e m b e r 1989. The close correlation of
the first differences over t h e entire s a m p l e
p e r i o d (1981-89), 0.987, i n d i c a t e s t h a t t h e
nominal index remains a reasonable proxy for
the real dollar index. 6
Two inflation outliers serve as case studies
for examining t h e sensitivity of the n o m i n a l
Atlanta Fed dollar index to exceptions to the
i d e a l criterion of u n i f o r m i n f l a t i o n a m o n g
countries in the index. Canada, which has the
single largest weight of any country in the index, experienced inflation that was moderately b u t persistently a b o v e the U n i t e d
States' for most of the 1980s. China, which has
a very small weight, showed a much larger inflation d i f f e r e n t i a l t h a n t h e U n i t e d S t a t e s
over the s a m e period.
T h e C a n a d i a n i n f l a t i o n rate p e a k e d in
1982 a n d since then has b e e n relatively stable, although consistently a b o v e U.S. rates.
The level of t h e n o m i n a l C a n a d i a n s u b i n d e x
diverged markedly from t h e level of t h e real
Canadian s u b i n d e x starting in late 1983, a n d
the divergence persisted a n d grew over the
next t h r e e years, p e a k i n g in late 1986 a n d
shrinking slightly thereafter. The n o m i n a l real s u b i n d e x differential has b e e n relatively steady since mid-1988.
D e s p i t e t h e large a n d persistent differential in t h e s u b i n d e x levels, c h a n g e s in t h e
real C a n a d i a n dollar s u b i n d e x a n d t h e nominal C a n a d i a n s u b i n d e x t e n d e d t o m o v e together. The c h a n g e s in t h e s e i n d e x e s are
highly correlated from 1981 through 1989, at
0.941. This figure suggests that t h e change
in t h e n o m i n a l i n d e x is a r e a s o n a b l y g o o d
m e a s u r e of t h e c h a n g e in t h e real i n d e x ,
notwithstanding t h e difference in their levels. In t h e case of C a n a d a , a m o d e r a t e b u t
l o n g - s t a n d i n g i n f l a t i o n d i f f e r e n t i a l in an
important trading partner causes a w i d e n i n g
gap b e t w e e n the n o m i n a l a n d real s u b i n d e x .
The n o m i n a l a n d real s u b i n d e x e s c o n t i n u e
to m o v e together, however, since t h e inflation g a p d o e s not worsen. In this way, t h e
usefulness of t h e n o m i n a l i n d e x is not badly c o m p r o m i s e d b y t h e d i f f e r e n t i n f l a t i o n
e x p e r i e n c e s of t h e U n i t e d S t a t e s a n d
Canada.
F E D Efor
R A LFRASER
R E S E R V E B A N K O F ATLANTA
Digitized
C h i n a is a c o n t r a s t i n g case. B e c a u s e its
trade weight in the overall Atlanta Fed index
in t h e A s i a n s u b i n d e x e s is q u i t e s m a l l
(0.0162), a very large i n f l a t i o n d i f f e r e n t i a l
w o u l d b e r e q u i r e d b e t w e e n China a n d t h e
United States to drive t h e n o m i n a l a n d real
i n d e x e s a n d s u b i n d e x e s apart. The C h i n a U.S. inflation differential has b e e n substantial
over the last several years, although high inflation is relatively new to China. During t h e
thirty years prior to 1980, the Chinese governm e n t was a b l e to hold inflation to a b o u t 3.0
percent per year, excluding a brief period in
the 1960s.7 Stable inflation was achieved by
regulating supply a n d d e m a n d through quotas, rationing, a n d price controls.
In the late 1970s, t h e Chinese government
d e c i d e d t h a t a slow m o v e t o w a r d a m o r e
market-oriented economic system would
help promote growth. In D e c e m b e r 1978 China began a program of e c o n o m i c liberalizations that raised real national income by an
a n n u a l average of 9.9 percent in t h e 1980s
(see Cheng 1988a, b and Bank of Japan 1989).
The e c o n o m i c reform occurred in two segments: the rural liberalizations begun in 1978
a n d t h e urban industrial liberalizations imp l e m e n t e d in 1984. U n d e r t h e s e reforms,
farms a n d b u s i n e s s e s were a l l o w e d to sell
a n y t h i n g p r o d u c e d over-and-above official
production q u o t a s at "market" prices, which
were generally higher than state-set prices.
Production increased dramatically, but at the
s a m e t i m e t h e practice of allowing firms t o
determine their own financing n e e d s kindled
inflation. The result was a wave of d o m e s t i c
borrowing that greatly increased t h e m o n e y
supply. A by-product of reform has b e e n increased inflationary pressures. Retail prices
s o a r e d , increasing 8.8 p e r c e n t in 1985, 6.0
percent in 1986, 7.3 percent in 1987, 18.5 percent in 1988, and around 16.0 percent in 1989,
with even higher rates in urban centers.
The rising inflationary pressures in China
were of particular concern since the exchange
rate was fixed for a l o n g p e r i o d after mid1986. 8 Unlike free-floating exchange rates,
fixed exchange rates often d o not reflect domestic economic and political policies. Count r i e s fix e x c h a n g e r a t e s for a v a r i e t y of
r e a s o n s such as c o u n t e r i n g t h e effects of
high d o m e s t i c inflation, protecting nascent
41
m a n u f a c t u r i n g sectors, or d i s c o u r a g i n g imports. In a country with fixed rates, devaluation is often regarded as an indication of the
government's inability to manage t h e economy effectively. As a result, governments frequently wait until exchange rates are grossly
out of line before devaluing or revaluing, and
they d o so in large strokes. Thus China develo p e d t h e characteristics—high inflation a n d
use of unofficial exchange rates—that earlier
h a d led to t h e exclusion of other important
trading partners (Mexico, for e x a m p l e ) from
the Atlanta Fed's dollar index. The exchange
rate r e m a i n e d u n c h a n g e d at 3.341 yuan per
dollar for roughly four years. This exchange
rate was m a i n t a i n e d from mid-1986 through
1989 d e s p i t e accelerating price pressures,
yielding an effective or "real" appreciation of
the yuan. Much later, in D e c e m b e r 1989, a 21
percent devaluation was a n n o u n c e d .
China is an example of a clear inflation outlier. However, its very slight w e i g h t in t h e
weighted overall dollar index m i n i m i z e d the
effect of its large d e v a l u a t i o n (after several
years of high inflation) from having a large impact on the overall Atlanta Fed index or on
t h e Asia and Asia-excluding-japan subindexes. The cumulative divergence in the real a n d
nominal indexes is not large, a n d the correlation between changes in the nominal and real
indexes is high—0.977 for t h e Asian subindex
a n d 0.923 for t h e A s i a - e x c l u d i n g - j a p a n
subindex.
Conclusions
Given that t h e average inflation rates for
t h e e i g h t e e n c o u n t r i e s i n c l u d e d in t h e Atlanta Fed dollar index are still roughly in line
with U.S. inflation rates a n d that t h e difference between the nominal and real dollar index is relatively modest, t h e nominal Atlanta
Fed trade-weighted dollar i n d e x remains a
reasonable proxy for a real or price-deflated
dollar index. The i n c i d e n c e of substantially
higher inflation in China a n d of a sustained
moderate inflation differential in Canada, for
example, has b e e n balanced by the inclusion
of low-inflation countries within t h e Atlanta
Fed d o l l a r i n d e x a n d b y China's relatively
small weight in the index. It should b e noted,
however, that there is no feature in the comp o s i t i o n of t h e i n d e x which ensures that it
will remain free of distortions arising from inflation disparities in these or other countries.
The presence of inflation outliers naturally has
a larger impact on the subindexes because of
the larger weight of individual countries in the
subindexes. Within the Asia-excluding-japan
subindex China has a weight of 10 percent. If
a country's weight in b o t h t h e total a n d the
subindex were relatively large a n d it continued to inflate excessively, it would b e reflecte d in a divergence of t h e real a n d n o m i n a l
indexes and in a decline in the measures of
comovement.
Notes
1
For e x a m p l e , t h e M o r g a n i n d e x , t h e F e d e r a l
Reserve
4
2
e a c h offer a different r e p r e s e n t a t i o n of t h e dollar's lev-
exchange rates b e c a u s e s o m e n o n t r a d e d g o o d s that are
el a n d variability.
i n c l u d e d in c o n s u m e r or retail price i n d e x e s m a y skew a
T h e m o s t i m p o r t a n t criterion is t h a t t h e a v e r a g e infla-
real or d e f l a t e d d o l l a r index (Harberger 1986). However,
tion rates of t h e c o u n t r i e s i n c l u d e d a p p r o x i m a t e t h a t
c o n s u m e r price i n d e x e s were u s e d as t h e inflation mea-
of t h e U n i t e d S t a t e s , s o t h a t t h e i n d e x will c o v e r t h e
sure b e c a u s e t h e y are generally a v a i l a b l e a n d
l a r g e s t p r o p o r t i o n of U . S . t r a d e p o s s i b l e
closely c o m p a r a b l e a m o n g c o u n t r i e s . W h o l e s a l e p r i c e
without
s k e w i n g t h e i n d e x by i n c l u d i n g large inflation
R o s e n s w e i g (1987).
more
m e a s u r e s were u n a v a i l a b l e for t w o of t h e countries with-
out-
in t h e i n d e x — S a u d i Arabia a n d H o n g Kong.
l i e r s or c o u n t r i e s w i t h m u l t i p l e e x c h a n g e rates. S e e
3
It has b e e n s u g g e s t e d that a m e a s u r e of w h o l e s a l e prices
rather than c o n s u m e r or retail prices b e u s e d to d e f l a t e
B o a r d of G o v e r n o r s i n d e x , a n d t h e D a l l a s F e d i n d e x
5
C o u n t r i e s in t h e E M S b u t n o t in t h e d o l l a r i n d e x are
An e x c h a n g e rate is t h e price of o n e currency in t e r m s
D e n m a r k a n d Ireland. E u r o p e a n c o u n t r i e s in t h e d o l l a r
of a n o t h e r currency.
i n d e x b u t n o t in t h e E M S are t h e U n i t e d K i n g d o m , Swe-
This relative price is d e t e r m i n e d
n o t o n l y b y e c o n o m i c f u n d a m e n t a l s — i n f l a t i o n , growth,
d e n , a n d S w i t z e r l a n d . S p a i n , which is a l s o in t h e index,
a n d monetary p o l i c i e s — b u t also by political
h a s o n l y recently b e c o m e an E M S m e m b e r .
events
a n d m a r k e t e x p e c t a t i o n s . In t h e c a s e of m u l t i p l e exc h a n g e rates it is difficult to c h o o s e t h e o n e m o s t repr e s e n t a t i v e of a f r e e m a r k e t r a t e . S e e
(1987) a n d H e r v e y a n d Strauss (1987).
4 2
Rosensweig
6
O b j e c t i v e criteria for g o o d n e s s of fit in t h i s correlation
h a v e n o t b e e n e s t a b l i s h e d . H o w e v e r , criteria for o t h e r
e c o n o m i c t i m e s series s u g g e s t t h a t c o r r e l a t i o n s a b o v e
0.90 are c o n s i d e r e d strong.
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
7
LOW inflation is s e e n as o n e of t h e a c c o m p l i s h m e n t s of
8
A f t e r b e i n g i n c l u d e d in t h e A t l a n t a F e d d o l l a r i n d e x ,
the C o m m u n i s t g o v e r n m e n t s i n c e t h e h y p e r i n f l a t i o n of
C h i n a s o o n b e g a n to fix t h e e x c h a n g e rate of t h e y u a n ,
the late 1940s c o n t r i b u t e d to t h e d o w n f a l l of t h e Nation-
s e t t i n g it at a g i v e n n u m b e r to t h e dollar.
alist g o v e r n m e n t ( H a r d i n g 1987, 279).
References
Bank of J a p a n . " R e c e n t D e v e l o p m e n t s in t h e C h i n e s e
Hervey, lack L., a n d Strauss, W i l l i a m . " T h e N e w D o l l a r In-
E c o n o m y : E c o n o m i c R e f o r m , Its S u c c e s s a n d Prob-
d e x e s Are N o Different from t h e O l d O n e s . " F e d e r a l
lems." S p e c i a l P a p e r no. 176, April 1989.
R e s e r v e B a n k of C h i c a g o
Cheng, H a n g - S h e n g . "Inflation in C h i n a . " F e d e r a l R e s e r v e
B a n k of S a n F r a n c i s c o
Weekly
Letter,
N o v e m b e r 4,
Perspectives
11
International
Monetary Fund.
World Economic
Outlook.
W a s h i n g t o n , D C . : I n t e r n a t i o n a l M o n e t a r y F u n d , 1990.
1988.
. " M o n e t a r y Policy a n d Inflation in C h i n a . " In
tary Policies in Pacific Basin Countries,
401-27.
Mone-
Boston:
E c o n o m i s t I n t e l l i g e n c e Unit.
Structure and Analysis.
European Community-.
Economic
L o n d o n : T h e E c o n o m i s t Intelli-
g e n c e Unit, 1989.
Economic Adjustment
in Developing Countries, e d i t e d b y
and
Exchange
S a b a s t i a n Ed-
w a r d s a n d L i a q u a t A h a m e d , 371-423. C h i c a g o : T h e
University of C h i c a g o Press, 1986.
H a r d i n g , Harry.
M o r e G l o b a l P e r s p e c t i v e . " F e d e r a l R e s e r v e B a n k of
Economic Review
71 (June/July 1986): 12-22.
. " C o n s t r u c t i n g a n d Using Exchange R a t e I n d e x e s . "
F e d e r a l R e s e r v e B a n k of A t l a n t a
Economic Review
72
( S u m m e r 1987): 4-16.
Harberger, A r n o l d . " E c o n o m i c A d j u s t m e n t a n d t h e Real
E x c h a n g e R a t e . " In
R o s e n s w e i g , Jeffrey A. "A N e w D o l l a r Index: C a p t u r i n g a
Atlanta
Kulwer A c a d e m i c P u b l i s h e r s , 1988.
Rates
Economic
d u l y / A u g u s t 1987): 3-22.
W e i l , G o r d o n . " E x c h a n g e Rate R e g i m e S e l e c t i o n in Theory a n d Practice." M o n o g r a p h S e r i e s in F i n a n c e a n d
E c o n o m i c s 1983-2. S o l o m o n Brothers C e n t e r for t h e
S t u d y of F i n a n c i a l I n s t i t u t i o n s , G r a d u a t e S c h o o l of
B u s i n e s s A d m i n i s t r a t i o n , N e w York University, 1983.
China's Second Revolution: Reform after Mao.
W a s h i n g t o n , D.C.: T h e B r o o k i n g s I n s t i t u t i o n , 1987,
F E D E for
R A LFRASER
R E S E R V E B A N K O F ATLANTA
Digitized
43
Book Review
The Making
of an
Economist
by Arjo Klamer and David Colander.
Boulder, Colo.: Westview Press, Inc., 1990.
216 pages. $50.50 (cloth). $16.95 (paper).
T
he newly m i n t e d economist quickly
discovers that his or her choice of
profession can b e a social handicap.
The four-word phrase "I am an economist" will
in most cases bring a punch-bowl conversation to a predictable, a n d often s u d d e n ,
e n d . Those conversationalists not i m m e d i ately s i l e n c e d b y t h e m e n t i o n of t h e word
" e c o n o m i s t " are a l m o s t always r e d u c e d t o
such shopworn questions as "are you a Keynesian or a Monetarist?" or "just where d o you
t h i n k t h e e c o n o m y is h e a d i n g ? " T h e ine v i t a b l y t h r e a d b a r e responses are, in turn,
m e t by sullen stares or, more likely, furtive
glances in search of t h e next r o u n d of hors
d'oeuvres. It takes no more than a few such
experiences for the novice economist to realize that, in the m i n d of the general public, the
subject of economics enjoys a murky status
akin to that of alchemy or druidism.
G i v e n this l a m e n t a b l e i n f o r m a t i o n g a p ,
e c o n o m i s t s a n d n o n e c o n o m i s t s alike m u s t
welcome t h e publication of The Making of an
Economist, by Arjo Klamer a n d D a v i d Colander. The b o o k is a revealing snapshot of the
a c a d e m i c segment of t h e economics profession in the late 1980s. This picture illustrates
44
what t h e a u t h o r s s e e as p r o b l e m s in their
profession a n d provides a backdrop for their
c o m m e n t a r y on h o w a c a d e m i c e c o n o m i c s
should change.
Even though t h e authors are economists,
is written in a style
that s h o u l d b e accessible t o the layperson.
P e r h a p s m o r e i m p o r t a n t l y , t h e b o o k contains n o graphs or e q u a t i o n s . The authors d o
afford themselves t h e frills of thirteen tables
a n d six pages of e n d n o t e s , but these could
b e b y p a s s e d without losing the book's message. M o s t of w h a t K l a m e r a n d C o l a n d e r
have t o say is said in the main text, in plain
English.
The Making of an Economist
The Making of an Economist is d i v i d e d into
three major sections. The first offers a brief
introduction to t h e economics profession of
the "encyclopedia-entry" type and then presents t h e results of a survey d i s t r i b u t e d by
t h e authors at six l e a d i n g graduate schools.
The second section consists of e d i t e d transcripts of interviews with s o m e of the graduate students who c o m p l e t e d the survey. The
last a n d most thought-provoking section offers an e s s a y b y e a c h of t h e c o a u t h o r s in
which they interpret t h e survey results and
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
the interviews. Each of t h e book's three parts
is fairly self-contained, and each has its own
strengths a n d weaknesses.
To a noneconomist, t h e most informative
part of t h e b o o k may b e t h e first c h a p t e r ,
which reports such basics as w h o all t h e s e
economists are, how much formal education
they have, where they work, a n d how much
m o n e y they make. To u p d a t e a few figures
from the book, the latest statistics I can find
suggest t h a t a b o u t 165,000 p e o p l e in t h e
United States call t h e m s e l v e s e c o n o m i s t s ,
about 35,000 more than reported by Klamer
and C o l a n d e r . 1 O f t h e s e 165,000, a b o u t 22
p e r c e n t h a v e d o c t o r a t e s . The m a j o r i t y of
economists (62.5 percent) work in private ind u s t r y ; t h e r e m a i n d e r w o r k p r i m a r i l y in
academia (20.5 percent) a n d the federal government (7.8 percent). This year, the 800-odd
new Ph.D.'s in economics will find jobs paying
on average about $45,000 a year, the majority
of them at colleges and universities. The focus of The Making of an Economist is on a small
s u b s e t of t h e s e P h . D . - e c o n o m i s t s - t o - b e ,
namely doctoral students at an elite group of
u n i v e r s i t i e s — C h i c a g o , MIT, Harvard, Stanford, Columbia, and Yale. Many of these students will no d o u b t b e very influential in the
academic e n d of t h e profession for years to
come. They will b e hired by the elite schools and
will publish extensively in academic journals.
To b e t t e r g a u g e t h e a t t i t u d e s of t h e s e
graduate students toward the economics profession a n d toward their g r a d u a t e training,
the authors circulated a survey at the schools
listed above. The survey results, which were
first p u b l i s h e d several years ago in a professional journal, constitute most of t h e book's
first section. The results of the survey probably would not surprise most economists but
may b e of m o r e interest to readers o u t s i d e
the profession. It came as no surprise to m e
or any of m y c o l l e a g u e s , for e x a m p l e , that
these doctoral s t u d e n t s find preparation in
m a t h e m a t i c s m o r e i m p o r t a n t in m a s t e r i n g
economics than preparation in sociology, nor
did it c o m e as a shock that s t u d e n t s at t h e
University of Chicago t e n d e d t o p u t m u c h
more credence in the paradigms of classical
economics than did the other students.2
These findings accord well with t h e folklore
that e c o n o m i s t s h e a r r e p e a t e d c o n s t a n t l y
F E D E R A L R E S E R V E B A N K O F ATLANTA
over t h e lunch t a b l e or b e t w e e n presentations at professional meetings.
Nonetheless, Klamer a n d Colander's survey was widely discussed in t h e profession
when its results were first reported, since it offered t h e first publicly available data of this
type. Of course, interpretation of the results
varied according to the graduate school that
the reader had attended. Following tribal loyalties, former students at Chicago and allied
schools pointed to various results in the survey as evidence of the insincerity of students
at the Ivy League institutions, while former Ivy
League students found confirmation of their
suspicions that Chicago t e n d s to p r o d u c e a
group of ranting "free market" ideologues.
The b o o k ' s authors are also m e m b e r s of
t h e e c o n o m i c s profession a n d , as might b e
expected, have pronounced views about the
results of the survey. Professors Klamer (Ph.D.,
Duke) and Colander (Ph.D., Columbia) d o not
approve of the current state of the economics
profession, particularly at t h e University of
Chicago, a n d much of this b o o k is m e a n t to
support their opinions about how t h e profession should change. Although their arguments
are not m a d e explicit until the third chapter,
t h e book's critical t o n e is set early on. Acad e m i c economics at t h e graduate level, in t h e
authors' view, has b e c o m e t o o s p e c i a l i z e d ,
too mathematical, too e n a m o r e d of computer
simulations, too removed from the real world,
and too disrespectful of other social sciences.
As e v i d e n c e of t h e professional malaise ind u c e d by such overspecialization, o n e would
expect to find considerable frustration a m o n g
e v e n t h e brightest g r a d u a t e s t u d e n t s , a n d
this is what the authors are looking for.
No d o u b t there are many p e o p l e both ins i d e a n d o u t s i d e t h e e c o n o m i c s profession
who share the authors' opinions on academic
economics, and these p e o p l e will find in The
Making of an Economist a well-articulated confirmation of their views. Yet even p e o p l e with
differing ideas about the profession will find
t h e b o o k interesting reading, particularly the
s e c o n d s e c t i o n . This section p r e s e n t s t h e
transcripts of interviews of graduate students
c o n d u c t e d b y t h e a u t h o r s at f o u r of t h e
schools—MIT, Harvard, Columbia, a n d Chicag o — t h a t were surveyed. While a n u m b e r of
t h e interview questions are slanted in t h e di-
45
rection of t h e authors' biases ("How important is mathematics?" "Would you like to see
m o r e e m p h a s i s on p o l i c y ? " a n d so forth),
there are enough open-ended questions and
answers t o g i v e v e r i s i m i l i t u d e t o t h e students' descriptions of their graduate school
experiences.
The s e c o n d s e c t i o n of The Making of an
Economist is r e m i n i s c e n t of Klamer's earlier
book, Conversations with Economists, for which he
interviewed professors rather than students.
In my opinion, the interviews in The Making of
an Economist c o m p a r e very f a v o r a b l y with
those in the earlier work. The students' views,
while not articulated as fluently as their professors', are n o t i c e a b l y less o s s i f i e d a n d
more frankly offered. O n e learns, for example,
that at least two s t u d e n t s c h o s e Harvard's
e c o n o m i c s g r a d u a t e school b e c a u s e "they
wanted t o rule t h e world." And, 1 must confess, 1 felt more than a twinge of Schadenfreude
upon reading that students still find my thesis advisor's lectures utterly incomprehensible.
Although such juicy tidbits a b o u n d , there
is m o r e t o t h e b o o k ' s s e c o n d section than
academic gossip. The interviews are lengthy
e n o u g h (about twenty pages each) to allow
readers to get s o m e feel for t h e essence of
economics graduate school, as well as for the
different character of each graduate school.
As was the case with the survey, the attitude
of t h e students at Chicago is noticeably diff e r e n t from t h a t of s t u d e n t s at t h e o t h e r
s c h o o l s . A l m o s t all of t h e s t u d e n t s interv i e w e d c o m p l a i n a b o u t t h e v o l u m e of t h e
work load as well as the extremely technical
n a t u r e of their classes. Except for t h o s e at
Chicago, most of t h e s t u d e n t s seem to feel
that much of this technical classwork bears
little relevance to the real world. The Chicago students, by contrast, a p p e a r to b e very
comfortable with the relevance of what they
are taught, even though they complain about
t h e difficulty of u n d e r s t a n d i n g t h e mathematics used in presenting the course material. The non-Chicago s t u d e n t s show a
generally stronger interest in policy issues
and seem t o regret that these issues are not
d i s c u s s e d m o r e in their courses a n d seminars. On the other hand, the Chicago students
feel that too much attention to policy issues
46
w o u l d b e distracting t o a serious economic
theorist.
The disparities between Chicago a n d the
other g r a d u a t e p r o g r a m s are h i g h l i g h t e d
even more sharply in the book's third and final section. In his summarizing essay, Klamer
l a m e n t s t h e a p p a r e n t l y w i d e s p r e a d "cynicism" and "loss of intellectual vigor," particularly a m o n g t h e i n t e r v i e w e d g r a d u a t e
s t u d e n t s o u t s i d e t h e University of Chicago.
The Chicago program itself garners a mixed
review. Even t h o u g h Klamer feels that the
m e t h o d o l o g i c a l focus of Chicago's graduate
program is inappropriate, he admires t h e fact
that t h e program d o e s n o t foster cynicism
a m o n g its students.
C o l a n d e r , h o w e v e r , in his s u m m a r i z i n g
essay, d e p r e c a t e s e v e n this marginally ad-
"Almost all of the students
interviewed
complain about the volume of the work
load as well as the extremely technical nature of their classes. . . . [M|ost of the students seem to feel that much of this
technical classwork bears little relevance to
the real world."
m i r a b l e f e a t u r e of t h e C h i c a g o p r o g r a m .
The p r o g r a m ' s u n d e r l y i n g p r o b l e m , as he
s e e s it, is a c a d e m i c e c o n o m i c s ' positivist
m e t h o d o l o g i c a l f o u n d a t i o n . This positivist
orientation a s s u m e s that k n o w l e d g e in the
field is " a d v a n c e d b y e m p i r i c a l t e s t i n g of
well-specified p r o p o s i t i o n s . " In Colander's
view, this a p p r o a c h has n o t b e e n fruitful.
E c o n o m i c theorists h a v e not p r o v e d a d e p t
at p r o d u c i n g u n a m b i g u o u s h y p o t h e s e s
a b o u t e c o n o m i c behavior, nor have econom e t r i c i a n s i n s p i r e d m u c h c o n f i d e n c e in
their ability t o sort o u t c o m p e t i n g hypotheses on t h e basis of statistical c o m p a t i b i l i t y
with real-world d a t a . C o l a n d e r ' s a p p r a i s a l
of t h e current situation in t h e field of economics, t h e n , is that " o n e is left with a wide
range of r e a s o n a b l e h y p o t h e s e s from which
o n e cannot select on t h e basis of empirical
testing."
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
B e c a u s e of his v i e w s of a c a d e m i c economics' limitations, Colander is not surprised
that so many of even t h e elite graduate students are discouraged a b o u t the profession.
Their professors are in effect "telling t h e m to
do what can't b e d o n e . " At Chicago, where
this malaise is not prevalent, Colander sees
students a n d faculty alike as engaging in a
sort of mass delusion, in which empirical evid e n c e u n f a v o r a b l e t o e c o n o m i c t h e o r y is
d e a l t with b y a c o n s p i r a c y of s i l e n c e . H e
claims that t h e economics profession sorely
needs a new set of methodological conventions, less w e d d e d t o m a t h e m a t i c a l constructs, m o r e oriented toward k n o w l e d g e of
economic institutions, a n d less rigidly positivistic in its assertions a b o u t what constitutes " g o o d " economic research.
. « • • • • • • ^ • • ^ • • • • • • • • • • • • • • H B i
"Although the academic elite profiled in the
book command a certain respect from other
economists, the exclusive focus on this segment of the profession tends to give an exaggerated
notion
of these
academics'
influence on the profession as a whole."
The criticisms a n d prescriptions set forth
in Colander's essay constitute t h e most serious a n d a m b i t i o u s part of The Making of an
Economist, a n d 1 b e l i e v e that Colander's crit i q u e n e e d s t o b e taken seriously. His antipathy towards abstract constructs is easy
to u n d e r s t a n d . The p a r a d i g m s of e c o n o m i c s
rival t h o s e of physics in t e r m s of abstract i o n , yet t h e y a r e m e a n t t o a p p l y n o t t o
s u b a t o m i c particles b u t t o p a t t e r n s of behavior that most p e o p l e e n c o u n t e r in their
daily lives. A n y o n e w h o has p u z z l e d over
"indifference curves" a n d "the s u b s t i t u t i o n
effect" in an introductory e c o n o m i c s course
can testify that mastery of e v e n t h e m o s t
basic e c o n o m i c p a r a d i g m s requires an ext e n s i v e c a p a c i t y for s u s p e n s i o n of o n e ' s
d i s b e l i e f . But 1 also t h i n k t h a t C o l a n d e r ' s
critique calls for s o m e i m p o r t a n t qualifications.
F E D E R A L R E S E R V E B A N K O F ATLANTA
The first of these is that the focus of Colander's essay, a n d The Making of an
Economist
generally, is unnecessarily narrow. Although
t h e a c a d e m i c e l i t e p r o f i l e d in t h e b o o k
c o m m a n d a certain r e s p e c t from o t h e r
economists, the exclusive focus on this segm e n t of t h e profession t e n d s to give an exaggerated notion of these academics' influence
on the profession as a whole. As n o t e d in t h e
first chapter, the majority of economists currently working in t h e U n i t e d States d o n o t
have doctorates and d o not teach at a college
or university. The work d o n e by economists
o u t s i d e a c a d e m i a is typically n o n t e c h n i c a l
a n d institutional in nature. The s a m e might
b e said for many a c a d e m i c economists outside the elite focus of this book. O n e cannot
d e n y t h a t n o n m e m b e r s of t h e b o o k ' s socalled elite such as Paul Craig Roberts, Arthur
Laffer, or Paul Volcker have had a powerful influence on all s u b c u l t u r e s of t h e e c o n o m i c
p r o f e s s i o n . Still, t o say t h a t n o n f o r m a l i s t ,
real-world-oriented economics is widely pract i c e d in t h e U n i t e d S t a t e s t o d a y d o e s n o t
confront C o l a n d e r ' s strong a r g u m e n t s that
more of this type of analysis ought to find its
way into t h e elite g r a d u a t e programs. I believe that to address this argument properly
o n e m u s t h a v e s o m e i d e a of w h a t r o l e
academia should play in t h e economics profession more generally; Colander's essay prov i d e s n o clues. His failure to a d d r e s s this
issue u n d e r m i n e s the arguments in his essay
a n d in t h e rest of t h e book.
For a more specific i d e a of this concern,
o n e may consider this example. After working
a few years for the Federal Reserve System,
many economists d e v e l o p a detailed knowle d g e of the Fed's o p e n market operations, of
t h e c o m p o n e n t s of t h e various monetary aggregates, of t h e laws t h a t p e r t a i n t o b a n k
h o l d i n g c o m p a n i e s , a n d so forth. Are t h e s e
t h e sorts of topics these economists s h o u l d
h a v e l e a r n e d m o r e a b o u t in g r a d u a t e
s c h o o l ? To r e q u i r e t h a t n e w l y d e g r e e d
e c o n o m i s t s have s o m e k n o w l e d g e in t h e s e
areas s e e m s reasonable. Yet it seems doubtful that any academic training could provide
a k n o w l e d g e of such institutional details as
c o m p l e t e a n d as c u r r e n t as t h a t g l e a n e d
during a year or two on t h e job in a setting
that d e m a n d s such expertise. In a d d i t i o n , an
47
unpleasant insularity is i m p l i e d by the idea
of i n s t i t u t i o n s o u t s i d e a c a d e m i a b e i n g
s t a f f e d by e c o n o m i s t s w h o h a v e m o s t l y
studied only the past behavior of such institutions. Certainly Klamer and Colander's concern for the relevance of academic economic
research is a l e g i t i m a t e one. However, for
this research to b e useful to the world outs i d e a c a d e m i a , its relevance n e e d s to b e
balanced by a certain degree of detachment
from t h e day-to-day m a n a g e m e n t of economic institutions. Otherwise, there may b e
great difficulty in d i s t i n g u i s h i n g a professional viewpoint from a viewpoint motivated
by financial or political gain.
This t e n s i o n b e t w e e n t h e a p p l i c a b i l i t y
a n d the integrity of intellectual pursuits is
hardly a new concern. One of the best summaries of this issue is an essay by the historian Richard Hofstadter, in which he notes that
t h e c o m p l e x i t y of m o d e r n s o c i e t y o f t e n
presses academicians into positions where
they wield considerable power. 3 That is, society often calls on "experts" to assist in making complex decisions, such as those faced
by corporate executives or government policymakers. At the same time, academicians'
close involvement in such decision-making
processes tends to undermine the independence that led to their developing an "expert
knowledge."
There is an inherent conflict in any acad e m i c field b e t w e e n t h e roles of "expert"
and "researcher," irrespective of the profession's methodology. Given that such conflict
is virtually inevitable, it becomes difficult to
e v a l u a t e t h e criticisms of a c a d e m i c economics voiced in Tfie Making of an Economist.
Klamer a n d Colander effectively m a k e t h e
p o i n t that e c o n o m i c researchers are often
frustrated by the difficulty of applying their
hard-won academic expertise to real-world
situations. The authors fail to consider, however, that the profession may be well served
by an academic elite who guard against intellectual stagnation—who are, in Hofstadter's
words, "capable of stepping mentally outside
their society and looking relentlessly at its
assumptions, in sufficient n u m b e r and with
sufficient freedom to make themselves felt."
But there is also a danger in too much det a c h m e n t for d e t a c h m e n t ' s sake. The economics profession would not benefit should
its elite members degenerate into what Hofstadter describes as a group of "willfully aliena t e d i n t e l l e c t u a l s m o r e c o n c e r n e d with
maintaining their sense of their own purity
than with making their ideas effective." Although reaching a m i d d l e ground on this issue clearly requires a fine balance, Klamer
a n d C o l a n d e r s e e m t o a p p r o a c h t h e task
wielding a single-bladed ax.
P h i l o s o p h i c a l differences a s i d e , I think
provides a readable
a c c o u n t of w h a t a c a d e m i c e c o n o m i c s is
currently all about, as well as s o m e thoughtprovoking ideas a b o u t what directions acad e m i c economics should b e taking.
Nonetheless, if the authors are planning additional books profiling the economics profession, I h o p e they will consider branching
out beyond this book's narrow focus. If economics' academic elite are not being trained
to d o t h e i r j o b s , t h e n a b e t t e r d e f i n i t i o n
must b e provided as to what their job is and
how t h e i r r o l e as a c a d e m i c e c o n o m i s t s
should differ from that of economists outside
academia.
The Making of an Economist
William Roberds
The reviewer is a senior economist in the macropolicy section of the
Atlanta Fed's research department.
Notes
c e p t p e r h a p s N o b e l Prize a c c e p t a n c e s p e e c h e s ) h a v e
'U.S. D e p a r t m e n t of C o m m e r c e , B u r e a u of t h e C e n s u s ,
Statistical Abstract of the United States,
2
A q u i c k g l a n c e at recent i s s u e s of a n y " n o n m a t h e m a t i cal" e c o n o m i c s j o u r n a l , s u c h as
The American
Economic
Review, will reveal t h a t a l m o s t all p u b l i s h e d articles (ex-
48
e q u a t i o n s in t h e m .
1989, s e c t i o n 20.
3
S e e Richard Hofstadter, "The Intellectual: Alienation
a n d C o n f o r m i t y , " c h a p t e r 15 in
American Life
Anti-lntellectualism
in
(New York: R a n d o m H o u s e , 1962).
E C O N O M I C R E V I E W , S E P T E M B E R / O C T O B E R 1990
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