A key thesis in Thomas M. Humphrey and Richard H. Timberlake’s Gold, the Real Bills Doctrine, and the Fed begins with Milton Friedman and Anna Schwartz’s Monetary History of the United States 1867–1960 (Princeton: Princeton University Press, 1963). In attributing the Great Depression to monetary forces, Friedman and Schwartz placed blame squarely on the Federal Reserve (Fed) for allowing the money supply and banking system to collapse. Friedman and Schwartz argued that the Fed had a markedly superior monetary policy in the 1920s when New York Fed governor Benjamin Strong effectively ran policy, but that the officials who took charge following Strong’s death in 1928 lacked his experience or understanding. Humphrey and Timberlake agree that Strong had led a highly successful monetary policy from 1922 to 1928 and that the flawed policies of his successors “so constricted bank credit that the banking industry was in shambles, and the economy was in the most disastrous depression imaginable” (p. 115). Humphrey and Timberlake then depart from Friedman and Schwartz by attributing the Fed’s failures of 1929–1933 to policymakers’ acceptance of the Real Bills Doctrine and strong antipathy toward financial speculation, as well as to the absence of a “true” gold standard.

As the authors explain, the Real Bills Doctrine holds that a nation’s money stock “can never be excessive or deficient when issued in the form of loans against short-term, self-liquidating commercial bills arising from real transactions in goods and services” (p. 1). The Doctrine’s advocates strongly condemned financial speculation as inflationary and a source of economic instability. The book’s first five chapters describe the intellectual history of the Real Bills Doctrine and its relationship to the gold standard and how both were embedded in the Federal Reserve Act. The authors point out numerous flaws with the Real Bills Doctrine, including that it would cause the money stock and prices to move procyclically and thereby exacerbate fluctuations in output.

Although Friedman and Schwartz and others have noted the influence of the Real Bills Doctrine on the Fed System’s policymakers during the Great Depression, Humphrey and Timberlake argue that the Doctrine’s most extreme proponents within the Fed controlled monetary policy from 1929 through the early years of the Depression. Those individuals, led by Federal Reserve Board member Adolph Miller, obsessed about financial speculation and were willing to put the economy through the wringer to eliminate it. They pushed the Fed to adopt a highly contractionary policy in 1929 to stem the flow of credit to the stock market; they then resisted calls to ease policy after the market crashed and the economic contraction took hold, lest speculation reappear.

The book’s strengths are its descriptions of the Real Bills Doctrine, its influence on the Fed, particularly in 1929, and its demonstration that the quantity theory of money was a viable and credible alternative to the Real Bills Doctrine. Some readers may question the authors’ claim that Benjamin Strong was “at least a 95 percent quantity theorist” (p. 72) or that continuation of Strong’s policies would have avoided the Great Depression. Some of Strong’s writings and statements suggest a quantity theory bent and clearly indicate that he opposed draconian policies to curb stock market speculation such as the “direct pressure” policy adopted in 1929. But Strong also relied on nominal interest rates and the level of borrowing by New York City banks at the Fed’s discount window as policy guides, neither of which would have given a good signal during the Depression. In emphasizing a hard-core Real Bills influence on policy in the Depression, Humphrey and Timberlake mostly ignore differences in views among Fed officials or how they shaped policy in 1930–1933, unlike Friedman and Schwartz and other Fed historians, such as Allan Meltzer (A History of the Federal Reserve, Vol. 1, Chicago: University of Chicago Press, 2003).

Other chapters describe monetary policy views among contemporary academic economists, the influence of the gold standard, and U.S. monetary policy in the second half of the 1930s. The authors are particularly adamant that “Without question … the gold standard was completely innocent of having any responsibility for the Great Contraction” (p. 115). Noting that the interwar gold exchange standard involved a heavy dose of government and central bank management, they argue that “A ‘gold standard’ that is ‘managed’ is not and cannot be a true gold standard” (p. 170). Further, they contend that the Fed was never constrained from pursuing expansionary monetary policy by a lack of gold reserves and, therefore, it is simply wrong to blame the gold standard for the Great Depression. Others take a different view about the gold standard’s influence on Fed policy in the Depression, however, including Peter Temin (Lessons from the Great Depression. Cambridge, MA: The MIT Press, 1989). Temin argues that Fed officials were paralyzed by a fear of what would happen if they violated the System’s legal gold reserve requirement or abandoned the gold standard altogether. Humphrey and Timberlake’s defense of the gold standard puts them in the minority, of course, and they acknowledge that returning to gold anytime soon is unlikely. Their next best alternative—adoption of a monetary policy rule to pursue price stability—is, however, very much in today’s mainstream thinking about how central banks should operate.