Two Harvard Economists on

Monetary Economy:

Lauchlin Currie and Hyman Minsky

Ivan VelasquezBSc. Economics - Universidad Nacional de Colombia

M.A. in Economics – University of Missouri–Kansas City

In November of 1987, Hyman Minsky

visited Bogota, Colombia, after being invited

by a group of professors who were

interested, at that time, in Post Keynesian

economics. There, Minsky delivered four

lectures, and in one of those lectures he met

Lauchlin Currie at the National University

of Colombia.

Ad in El Tiempo (a

Colombian newspaper)

on Minsky’s conferences

about “Financial Instability”

November 20th, 1987

Thus, both alumni from the Economics

Ph.D. program at Harvard University had a

kind of debate in Bogota. Unfortunately,

there are no formal records about this.

The question then is:

What could be the topics of debate

between Lauchlin Currie and Hyman

Minsky?

Why I’m Interested on this topic?

Lauchlin Currie had significant influence in

the departments of economics at National

University of Colombia and Los Andes

University in Bogota.

He can be considered the master of masters

in Colombia since he taught in both

universities and his students became in our

professors.

Lauchlin Currie and Hyman Minsky

Lauchlin who?

Lauchlin Bernard Currie

• Born on October 8th, 1902, West Dublin, Nova Scotia, Canada

• Died on December 22nd, 1993, Bogota, Colombia.

• (1920-1922) studied at St. Francis Xavier’s University.

• (1923-1925) studied at the LSE and got his BSc in economics

• (1926-1931) Studied at Harvard University where he met Allyn Young.

• 1931 he was awarded his PhD for a thesis on banking theory.

• Stayed at Harvard until 1934. There he was assistant of:

• Ralph Hawtrey, John H. Williams, and Joseph Schumpeter.

• He constructed the first money supply and income velocity series for the USA. And attacked the “Commercial Loan Theory” (real bills doctrine).

• 1934 became US citizen

and joined Jacob Viner’s

“Freshman Brain Trust”.

• Later that year he became

Marriner Eccles’ adviser at

the Federal Reserve Board.

• 1934 published The Supply

and Control of money.

• 1935 drafted the 1945

Banking Act.

• 1939 became Franklin

Delano Roosevelt’s adviser.

• 1941 FDR sent Currie on a

mission to China.

• 1943-1945 closely involved in

preparations for the 1944

Bretton Woods Conference.

• 1949 went to Colombia to

head a comprehensive country

survey for WB.

• Due to McCarthyism he stayed

in Colombia the rest of his life

and became an adviser of

Colombia’s presidents.

Hyman Minsky

• Born on September 23rd,

1919, Chicago.

• Died on October 24th,

1996, New York.

• (1937-1942) Studied at

University of Chicago.

• 1941 earned his BSc in

Mathematics.

• 1942 went to Harvard

University.

• Inter WWII period.

• 1947 got his M.P.A

• 1954 got his PhD in

Economics.

• He wrote his dissertation

on “the relations between

market structure,

banking, the determinants

of aggregate demand,

and business cycle

performance.”

• 1975 published his book

John Maynard Keynes.

• 1986 published his book

Stabilizing and Unstable

Economy.

A point of coincidence

We can see that both authors have a point

of convergence. That is, their similar

dissertation topics: Banking and Business

Cycles.

Minsky and Currie on Crises

In his dissertation, Currie found that the causes of the crisis of 1929 were due to the triumph of the “banking or commercial loan principle” (real bills doctrine).

Thus, Currie’s explanation of the process that led the United States to the 1929 crisis is closer to the latter interpretation made also by Friedman and Schwartz that would later be labeled in the 1960’s as “Monetarism”.

However, Frank Steindl (1995) is very clear in

showing that Currie did not share the whole

monetarist framework in his explanation of the

crisis and, moreover, he then set himself apart

from the idea that the central bank can control

the supply of money.

When Currie explains the causes of the 1937 crisis, his argument is different from the one put forward by the Monetarist school. On this topic, Currie’s position is very similar to the position that Post Keynesians will later address on the subject of economic crises.

He points out that the causes of this crisis were the “lower level of the Government’s expenditures and the higher level of tax receipts” (Currie, 1937, p. 1)

In the review of Keynes’s General Theory

that Currie wrote for Eccles and the FED’s

board in 1937, he sates: “At a time when the

national income is shrinking the Government

is seeking to raise revenues and cut

expenditures. This merely intensifies the

deflationary trend” (1937, pp. 2–3)

• Then, it is possible to say that Currie was

in favor of what Minsky would later call

“Big Government,” which fits with the idea

that Currie labeled as Net Government’s

contribution; that is, government

expenditures that help increase the

national income and stabilize the economy

(Currie, 1935).

In a Colombian newspaper Currie was asked about the crisis of October, 1987. For him, there where internal factors related to the financial sector, specifically mutual funds, in the United States and the possibility that the amount of external credit in developing countries was not paid. The latter caused American banks to adopt measures that hurt external economies and the mutual funds tried to sell their market shares. This led to the creation of a deflationary process in the market (Currie, November 16, 1987).

Minsky explained the 1987 crisis as follows:

“Over October 19 and 20, even as money managers were trying to sell securities, the block traders were both reluctant and increasingly unable to take positions [buy assets]. Furthermore because the losses of October 19 had comprised the equity of some position takers (these organizations mark their holding to market at the end of every business day) on October 20 banks to withdraw credit from block traders as well as from floor specialists.” (1988, p. 12)

Currie, then, in a less elaborated argument

gave a similar explanation to Minsky.

Minsky will explain the business cycle

through his financial instability theory, going

a step forward from Currie on this aspect.

Another point of coincidence

Although the approach that Currie had in the

early 1930’s was different from Minsky’s

viewpoint, Currie’s later approach was closer

to a Post Keynesian interpretation of crises

and the ways this problem can be solved by

strategic government intervention.

Currie and Minsky on Fiscal Policy

Minsky used the term “Big Government” as

a way to label the role of the treasury in the

stabilization of the economy after the Great

Depression. For Minsky the role of the

treasury (Big Government) and the central

bank (Big Bank) are essential for the

performance of capitalism since they do not

let it goes down.

It is interesting that both elements, which

Minsky considered important for the right

performance of the economic system were

proposed, in some way, by Currie.

For example, in his paper “Federal income-

increasing expenditures, 1932-1935”

“The argument for Government deficit spending … may be summarized as follows. After a drastic decline in business activity it is questionable whether sufficient new investment will take place “naturally” to offset the current disinvestment and current saving [aggregate monetary income minus community expenditures on consumer goods]. Broadly, speaking, increased expenditures wait on increased demand, and increased demand waits on increased expenditures.” (Currie, 1935)

Therefore, “a Federal spending program …

should be compensatory in both directions.

We must be as prepared to adopt activity-

depressing measures at certain times [such

as facing an inflationary process] as are to

adopt activity-stimulating measures at others

[such as facing a deflationary process]”

(Currie, 1992, p. 308).

For Currie there is no such thing as

crowding out or an inflationary process as a

consequence of the Federal income-

increasing spending policy. For him this is “a

powerful weapon to combat evils of

economic instability in the future” (Currie,

1992, p. 309). Just like Minsky, Currie did

not see the economy as a stable process.

Minsky asked for the implementation of a Job Guarantee policy as an element of the Big Government’s policies against poverty.

Similarly, in his review of Keynes’s General Theoryto Eccles, Currie openly calls for a public jobs program policy:

“Three lines of attack on this problem [insufficient volume of investment] are suggested. These are monetary policies affecting the rate of interest, a policy of ‘socially-controlled investment’ (a permanent public works program?), and, finally, policies designed to stimulate consumption.” (2016, p. 64)

Another point of coincidence

The role of the Big Government in stabilizing

the economy and fighting the poverty

through public jobs.

Currie and Minsky on Central Bank

Currie was one of the proponents of the 100% reserves plan or also known as “The Chicago Plan” in the 1930’s, at that time he asked for more control over the supply of money.

Currie supported Open Market Operations instead of the Discount Window as a measure to control the banking sector.

Minsky wasn’t reticent to this proposal as

can be seen in his foreword to Phillips’

(1995) book.

“[a] sophisticated view of the significance of

government debt as an asset and of

government deficits as income-maintaining

devices lay behind the 100 per cent money

schemes.”

Which, as we said above, is very close to

Currie’s ideas of federal increasing-income

and also of his proposal for a 100% reserve

plan.

However, as it was said before, Minsky did not agree on the use of Open Market Operations (OMO) as a fundamental part of the “Chicago Plan”

He notes, according to Phillips (1995), that “To date the Federal Reserve System is a lender of last resort to a commercial bank in distress. It is not a lender of last resort to the money market.” (p. 172)

But Currie wasn’t naïve about the abolition

of the discount window. He saw the abolition

of this privilege as a way to push the banks

to control their reserves. However, he knew

that the abolition of the discount window was

not politically practicable.

The later Currie developed, what he called, “A new theory of demand of money: the ‘accounting’ motive of banks” (1992) based on his experience in Colombia.

In this paper Currie presents a definition of money that fits into the exogenous theory of money, since for him, “… a clearer distinction between money and non-money is necessary, and money must be something that whose supply can be limited and controlled” (1992, p. 392).

However, this theory does not fit into the mainstream theory where banks are just organizations that save and lend money. On the contrary, banks have a profit motive; they are not neutral players.

Also for Currie, the introduction of administrative innovations would reduce the cost that banks face, also competition among banks would be translated into less costs to the borrowers

Therefore, regarding this aspect, we have a point of divergence between both authors. That is, the role of financial innovations and the perspective of money credit.

For Minsky, by following Schumpeter, the innovations in the financial system bring instability to the economy (stability causes instability). On the contrary, Currie’s idea of banking innovation would bring less costs to the borrowers since it is true that it could be easier to get money lending.

The problem is that this financial innovations without an accurate regulation could hurt the economy.

A point of divergence

The role of Open Market Operations and the

Discount window in monetary policy. And the

outcomes of financial innovations in the

banking sector. For Currie those innovations

would be positive, meanwhile for Minsky

they could bring problems without accurate

regulation.

Conclusion

We can see that there are some points of

convergence between the ideas of Minsky

and Currie overall on the topics related to

the role of government expenditures and the

importance for society of public jobs for

fighting poverty.

There is, however, a point of divergence.

This point is related to the way that the

central bank should operate in a monetary

economy and the effects of financial

innovations in the economy.

Is this just important as HET?

No, we could see that both authors have

points in common which can be

complementary. Currie’s theory of the

Leading Sector and Minsky’s Employer of

Last Resort are compatible and give us the

opportunity to explore a theory of

endogenous growth in a Minskyan scheme.

Acknoledgments

I want to thank Dr. Roger Sandilands and Dr.

Randall Wray for their help in understanding

the works of Lauchlin Currie and Hyman

Minsky and the information they provided

me. Also to Dr. Mario García-Molina and Dr.

Fernando Tenjo who answered questions I

asked about Minsky’s conference in Bogota

in 1987.

Two Harvard Economists on

Monetary Economy:

Lauchlin Currie and Hyman Minsky

Ivan VelasquezEmail: idvwg@mail.umkc.edu

idvelasquezg@gmail.com