Central banking or, at least, effective central banking relies on the central bank having command over an appropriate set of tools, a clear set of objectives, and the independence to operate in accordance with best practice. Throughout the history of central banking, John Wood informs us, one or more of these conditions were routinely violated.

Wood notes that when the bill to establish the Federal Reserve system was debated in Congress, it became clear that there was little sense of appropriate tools or targets. As debate continued, Oscar Callaway, a Democratic representative from Texas bemoaned that: “We are told to ask no questions; have faith, simple faith … faith in man, fallible man, swept by all the passions, prejudices, and ambitions, mental misgivings, shortsightedness, and misconceptions of man” (p. 172). In reviewing the early histories of the Federal Reserve and the Bank of England, Wood skillfully highlights the many instances when misconceptions and shortsightedness ruled.

Two themes emerge over and again throughout the book. First, Wood believes that we will not understand the actions of central bankers or, at least, the actions of central bankers prior to 1960 or so, without appreciating that they saw the world differently than monetary economists. Second, he explodes the myth that central banking ever was or ever will be politically independent.

Wood notes that observers of the banking system and, especially, central banking discuss the actions of central banks as inherently monetary. Banks, after all, provide money. But bankers themselves do not see the world in this way and do not concern themselves so much with money as with credit. Incoming Federal Reserve Chairman Ben Bernanke's (“Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression,” American Economic Review 73:3 (June 1983), 257–76) now classic article highlights how these differences in focus lead to different policy implications, and Bodenhorn's State Banking in Early America (New York: Oxford University Press, 2003) reinterprets early U.S. banking history from the credit rather than the monetary perspective. The credit approach is enlightening because it captures the essence of banking from the viewpoint of everyday bankers. Wood correctly maintains that this approach also provides insights into the machinations and motivations of central bankers (p. 182).

Wood marches us through the history of central banking at a brisk pace. In chapter 2 he highlights the debates between the Bank of England's directors and David Ricardo during the 1810 Bullion Committee hearings. Ricardo and the bankers were clearly speaking two different languages. Chapter 3 discusses the debates over resumption in 1821, during which the Ricardo debate reemerged, mostly unresolved. Chapter 4 focuses on the Currency School–Banking School debate. Chapter 5 introduces Bagehot's rule, but the Bank of England balked at viewing itself as a central bank. It remained firmly committed to stability and convertibility and little else. Chapter 6 discusses the nineteenth-century U.S. experience with central banking, such as it was. Chapter 7 introduces the Federal Reserve, which brings us, in chapter 8, to the Fed's most spectacular failure: what Friedman and Schwartz (A Monetary History of the United States, 1867–1960, Princeton, NJ: Princeton University Press, 1963) labeled the Great Contraction.

Wood's focus on motivation leads him to argue that, given the makeup of the Board of Governors, the Fed's actions were predictable a priori. The Fed acted like a group of bankers; that is, commercial, not central bankers. The board focused on financial rather than money markets, and many members believed that only mass liquidation would quell the speculative frenzy. Recession and unemployment simply did not enter into their calculus. From Wood's description of the Fed circa 1929, Bagehot may as well have never written anything, much less the prescription for central bankers facing the predicament the Fed then faced.

Later chapters highlight the Fed's and the Bank of England's learning, but these chapters emphasize the second of Wood's themes, namely shattering the myth of central banking independence. As all monetary historians are acutely aware, the monetary authority of any country ultimately reverts to the sovereign, whether that sovereign be a noble or a democratically elected government. The sovereign defines money and can alter its definition almost at will. Anyone who doubts this should refer to the U.S. Currency Act of 1862, the Specie Resumption Act of 1875, the Silver Purchase Act of 1890, the Gold Standard Act of 1900, Roosevelt's dollar devaluation and demonetization in 1934, and the United States's 1971 abandonment of Bretton Woods. “The job of central banks,” writes Wood, “is to facilitate [monetary] regimes established by governments” (p. 267).

At a Federal Reserve Bank of New York conference in 1982, J. S. Fforde, an executive director and later historian of the Bank of England, explained that Great Britain was a parliamentary democracy in which macroeconomic policy was established by the executive branch. It was the duty of the treasury and the central bank to carry out the executive's policies. Thus, the Bank of England was best viewed as a central banking component of a centralized macroeconomic executive (p. 386). But former central bankers were not the only ones who thought this way. In Congressional hearings in 1964, several academic luminaries, including Paul Samuelson, recommended the subordination of monetary policy to the executive branch (pp. 344–46).

Central bank independence emerged only in the 1980s when electorates around the world, but most notably the in United States and Great Britain, grew increasingly intolerant of inflation. President Carter appointed Paul Volcker as Fed chairman not because he was the same sort of team player Arthur Burns was for Nixon, but because he was Wall Street's candidate who would bring some credibility to the fight against accelerating inflation. The new contract between the polity and the central bank stipulated that central bankers pursue policies consistent with financial and price stability. Wood argues that this new contract brought us back to the beginning. The sovereign originally entered into a contract with the Bank of England because he needed financial stability to reduce funding costs. The convertibility clause imposed a measure of price stability. The new contract has replaced gold convertibility with convertibility into a broad basket of goods. We shall see how long this particular contract lasts.

Wood has produced a fine volume for those with a passing familiarity with the history of central banking. By its nature the book faces competing demands of breadth and depth. It sacrifices the latter for the former, but usually to good effect. This is fine so far as the target audience is not specialists, who may legitimately inquire into the value added. But for all us nonexperts, the book is a reminder that central banking remains more art than science, and like all art forms it has had more pedestrian practitioners than true trailblazers.