Robert C. Hockett’s book recommends a reform of the Fed in order to bring the Fed closer to its initial mission. Hockett, professor of law at Cornell Law School, traces the intellectual origins of the Federal Reserve System and argues that the Fed has moved away from its initial mission.

The first three chapters of the book are historically oriented. In chapter 1, Hockett explains that the Federal Reserve was created in order to offer an elastic money supply, a money supply that adapts to the needs of the economy. The lack of an elastic currency and a uniform monetary system was a persistent issue in the US until the creation of the Fed. A uniform currency was created during the US Civil War when the Union printed a dollar note to finance the war, the so-called greenback. The US, however, still lacked an elastic money supply. The creation of the Fed solved this issue by offering an elastic currency, i.e., a currency that was “not inflating or deflating” (p. 10).

The creation of the Fed also aimed to solve another issue: the sectional disparities of the US economy. As Hockett explains in chapter 2, the regional branches of the Fed were meant to promote the integration of US sections by financing local productive industries rather than speculation or “bubble-inflating” enterprises (p. 18). The regional branches of the Fed discounted bills of local enterprises, while also providing communication with a “nationwide Fed ‘System’” (p. 17). In addition, the composition of a regional Fed’s board further enhanced US integration by bringing together representatives of local and national interests. Nonetheless, after the 1929 crash, the Fed moved away from its focus on providing a uniform and elastic currency, as Hockett explains in chapter 3.

Hockett then introduces his theoretical approach to the role of a central bank in chapters 4 and 5. For Hockett, the central bank needs to modulate and allocate the money supply to avoid financial crises. Financial crises emerge from the incorrect allocation of money between speculative and productive enterprises. Hockett’s key theoretical assumption is the distinction between speculative and productive enterprises. Hockett defines the speculative market as the “secondary and tertiary securities and derivatives markets, as distinguished from the productive primary markets focused on the ‘real’ economy” (p. 25). I think that this definition needs to be further explained and justified, given its centrality in the author’s theory. For Hockett, commercial banks acting on their own and their clients’ interest can fuel a financial bubble instead of financing productive endeavors. Adopting an endogenous approach to money creation, Hockett argues that the central bank will need to act counter-cyclically to avoid the creation of financial bubbles. The central bank will also need to make sure that credit is in priority directed towards the primary market, instead of the secondary and tertiary markets, in order to avoid “credit-fueled asset price bubbles” (p. 44).

Hockett then introduces his own real bills theory, which is a revised version of the Fed’s real bills doctrine (chapter 5). The latter is the original theoretical framework behind the Federal Reserve System, which states that any money creation based on the discount of real bills will not be inflationary. The Fed’s real bills doctrine ignored “rehypothecation risk,” the risk that the goods related to a real bill can give place to numerous commercial bills if the goods are resold multiple times or if “assets are rehypothecated” (p. 48). Rehypothecation can lead to the creation of an excessive amount of money that becomes inflationary. Hockett also explains that the Fed’s real bills doctrine ignored the possibility of money supply changes due to exogenous causes. To address those two errors, Hockett introduces his own real bills doctrine. Hockett still thinks that allocation and modulation are necessary, but that they are not sufficient means to prevent financial crises. In addition to allocation and modulation, central banks need to be attentive to the “rehypothecation” risk that can be resolved by applying the right discount rate to the multiplied real bills (p. 51). The central bank also needs to be attentive to the overall money stock as a national aggregate and act counter-cyclically.

Hockett continues by explaining how the Fed abandoned its effort to allocate credit to productive endeavors in the post-1935 era (chapter 6). The government filled the gap by creating the Reconstruction Finance Corporation, imposing “restrictions on interstate banking and branching” that “kept banking local,” and the Glass-Steagall Act. But little by little those regulations were left aside and cannot be used now to prevent a new crisis (p. 63).

Hockett suggests policy recommendations that can help prevent new financial crises (chapters 7 and 8). Reflecting the book’s title, he suggests a more regional Fed. He thinks that some of the decisions that are now made by the New York Federal Reserve Bank should be left to the regional Fed banks. The regional Fed banks can hold “town hall” sessions to connect with the relevant officials in their regions. In addition, Section 13 emergency lending facilities could also be redistributed to all relevant regional Feds instead of housing them entirely in New York City.Footnote ¹ Third, more Fed branches could be opened for the “larger cities that lack their own Regional Feds” and new regional Federal Reserve Banks could be opened (p. 83). Those banks should assist in funding productive primary market investments by buying commercial paper and lending directly to productive local firms. They could also give loans to productive local firms via commercial banks that can borrow through the “Section 13 Discount Window” (p. 85). Hockett also suggests directing lending towards regional “labor-owned or/and codetermined firms” with a conditionality of goods and services production, not speculation (p. 86).

The Fed should collaborate with other government organizations to maintain the price level of critical goods, e.g., wheat, energy, and housing (chapter 7). Hockett considers those goods as structurally important because they are consumption and production goods, they are “capital assets and hedging vehicles,” and they “are particularly vulnerable to short-term exogenous shocks” (p. 101). The Fed should limit speculation on those critical products by the creation of a “new Fed commodity facility” that will collaborate with the “Department of Agriculture’s Commodity Credit Corporation (CCC) and the Department of Energy’s Strategic Petroleum Reserve (SPR)” (p. 104)—institutions that keep physical reserves of critical products. The Fed should trace the prices of critical commodities. If the prices of critical goods are volatile, the Fed should investigate whether this volatility is due to speculation or to a change in fundamentals. If the change in the prices of the critical products is due to speculation, then the Fed should try to counteract the price volatility. The Fed and the institutions that manage the physical stocks should then cooperate to keep the supply of those goods stable. Hockett suggests the creation of “strategic stockpiles of adequate size” (p. 109). In the case of overproduction, the relative departments can buy the surplus material, and in case of underproduction, they can sell those products. This will also stabilize prices (p. 114). The central bank can follow a similar practice for derivative markers via the Chicago Fed.

The book concludes with additional policy recommendations. Here are the three that seem more important to me. First, the author calls for the creation of a council that would formulate a “National Development Strategy” (pp. 135–136). Second, the Federal Financing Bank should be allowed to invest in “sub-federal units of government, and public-private development partnerships, as well as in federal agencies” (p. 136). Third, the TreasuryDirect system (an account system with the US Treasury open to both citizens and companies) should be used to stock dollars as well as Treasury Securities. It would be a way to pay directly for the development programs as well as solve the problem of unbanked households in the US.

This is an interesting policy-oriented book that calls for more collaboration between departments of the government and the Fed. In times of economic instability, relying on a policy mix can allow for better management of potential financial and economic crises. The book is also interestingly rooted in the economic history of the United States. As such, it sets an example for historians of economics of how historical work can be used for formulating policy recommendations. By situating the Fed within its history, Hockett proposes a reform of the current Fed that corrects previous errors, while bringing it closer to its initial mission.