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A Review of the Economics of the Lost Cause by J. Dennis Chasse

Chasse starts with a review of monetary issues in the 1920's and 1930's.  The conventional wisdom at the time was that in times of panic or economic crisis a deflationary period was necessary to wring the system clean of problems.  Commons and others such as Fisher and Keynes were associated with a counter movement known as stable money.

In the 1920's Commons, better known as a labor economist, was thrust into the monetary arena serving as President of the National Monetary Association.  Commons recognized that monetary issues were critical to the future of labor and he needed to turn his attention to these issues as argued by Chasse.

One interesting point in Chasse's article was that commons was an originator of the idea that expectations play an important role in firm behavior related to monetary variables such as interest rates.  This is reflected in his concept of futurity.

In 1926, Commons was directly drawn into federal legislation regarding stable money.  Congressman James strong introduced a bill that would focus on stable money and a change in the Fed mandate.  The main rationale at the time amongst Fed policy makers was not they should not be interested or address issues related to economic or price conditions other than passively.  The other Benjamin Strong, governor of the New York fed, was interested in the ideas behind the bill but opposed the bill for a number of reasons Chasse explains.  Commons argument was that the federal reserve and its reserve banks were influencing price conditions without explicitly acknowledging it. He felt the Fed working rules were insufficient to address the business cycle and needed to be reformed.  He further argued that the fed had to act in the right way and at the right time and with the right frame of reference in mind.  In the last point, Commons felt that American farmers needed to be explicitly included in the Fed thinking.

A second "Strong bill" was introduced in 1927 and commons was again very involved including going to Washington DC and New York.  Strong went beyond commons changes in the Fed priority to include employment and other economic conditions.  It is important to note, as Chasse writes, that scholars such as Milton Freidman and Allan Meltzer felt that the second strong bill would have been a powerful antidote to the Great Depression.

Chasse writes that monetary policy was not critical in commons thinking overall, but these efforts and initiatives were important to commons overall thinking.  Commons came to some interesting conclusions, writes Chasse, that he felt Federal Reserve was better fighting inflation than deflation similar to the thinking of Keynes. He also argued that in a crisis Federal reserve must provide liquidity and money as private actors are unwilling or unable to act.

The concluding section is quite telling.  Commons modified and learned in his writing over time.  Commons did not go as far as Keynes and others but he did argue for a counter cyclical policy role for government in terms of monetary and fiscal policy. In his last book, Collective Action, Commons argued again that the Federal reserve policy needed to reflect a collective bargaining style arrangement and the interests of bankers, farmers, commerce and consumers needed to be represented.

Chasse has done a fine job of providing us a well needed understanding of commons activities and policy thinking around monetary policy.  This is a well documented paper that significantly advances our understanding of commons overall work.  Most importantly, Chasse argues that Commons ultimately reflected back on this institutional thinking and how the Fed should act.  This was an important advancement relative to the thinking of Keynes and others on monetary policy.

Chasse, J. Dennis. "The Economists Of The Lost Cause And The Monetary Education Of John R. Commons." Journal of the History of Economic Thought 36.2 (2014): 193-214.

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