Book Reviews

266 BOOKS Monetary Policy in the United States: An Intellectual and Institutional History by Richard Timberlake University of Chicago Press. 1993 • 502 + xxv pages. $28.95 paper. $65.00 cloth Reviewed by Steven Horwitz B oth the public and most economists have generally agreed that of all the sectors of the economy, the production of money and financial services requires a significant amount of government interven tion in order to work "properly." The common view is that, more than any other industry, supposed laissez-faire has failed consistently in banking and has been re sponsible for various crises, panics, and difficulties throughout American history. This trend has begun to reverse itself in the last twenty years, however, as more econ omists and bankers are beginning to under stand how regulations can destabilize the banking system and how various free market alternatives might provide monetary order.

Richard Timberlake's study is sure to push this debate to the next level. In a com prehensive and readable book, he carefully scours the history of American banking from Colonial times to the early 1990s to document the increase in government inter vention and its deleterious effects on both the banking industry and the economy more broadly. His book is a perfect complement to the more technical and statistical work of Milton Friedman and Anna Schwartz and will likely, like their work, be considered a classic of monetary history. Two themes form the backbone of Tim berlake's historical story. The first is the way in which increased government inter vention has occurred not because laissez faire has failed, but because various inter ventions served the revenue-raising interests of the political sector. Timberlake care fully documents how each of those interventions led to further crises and fail ures, resulting in calls for even more gov ernment regulation and more problems down the road. Although he does not men tion it explicitly, the story he tells is a perfect historical example of what Ludwig von Mises called the "logic of interventionism. "

Timberlake's second theme is that this increasing encroachment by government has moved us away from the rule of law in the monetary realm, to the rule of all-too fallible humans. Each successive interven tion undermined the Constitution's attempts to prevent government from doing any more than stipulating the gold or silver content of the medium of exchange, leaving the pro duction of money to the private sector. As earlier systems and now the Federal Re serve System have led to increased govern ment power, the quantity of money and the range of financial services available have become the products of intentional human designed policy, rather than the more auto matic and unintended consequences of the market. The danger in this shift is that when human policymakers are unable to provide rational solutions, they will turn to those policies that work to their own self-interest, or the interests of the political actors to whom they answer. As Timberlake's histor ical story reveals, one of the primary pur poses of various bank regulations and other government powers has been to facilitate growing government deficits and the vote seeking of elected officials.

For example, one of the regulations of the National Banking System (1863-1914) forced banks to purchase federal govern ment bonds to serve as collateral for the currency they created. This law provided the federal government with a captive mar ket for its bonds, both to finance the Civil War and other government expenditures. The result was a lack of flexibility in the currency supply leading in turn to the peri odic panics during the late 1800s and early 1900s. Many would ascribe these crises to the failure of the market, but as Timberlake and others have demonstrated, the prob lems of the system were the result of mis taken, and politically self-interested, regu lations. A second example Timberlake notes is the Fed's acquisition of open market powers in the mid-1930s. The Fed increases the supply of bank reserves by buying government debt in the open market. Having this power enables the Fed to purchase, ifit so chooses, any level of debt Congress creates. Without such powers, debt creation is limited to the amount the public willinglypurchases. With open market operations, the Fed can always buy any amount of debt the public does not voluntarily wish to hold. Congress was more than happy to give the Fed open market powers so that it could finance the debt of both the New Deal and World War II.

These are only two examples of the kind of historical evidence that Timberlake has documented. Some of his best work is on the 1960-1990 period, particularly the inflation of the late '70s. He also effectively demol ishes the myth that monetarism was tried and failed in the 1979-82 period as well as un"maskingthe confusion that underlay most Fed policy since World War II. Of particular importance is his discussion of the final nail in the coffin of the gold standard-the closing of the international gold window in 1971. Franklin Roosevelt had ended the American public's ability to exchange Federal Reserve Notes for gold in 1934, but foreign holders of U.S. currency could redeem them for gold at a stipulated price. This process put some limits on the Fed's ability to increase the money supply. However, as Timberlake argues, President Johnson's decision to finance the Vietnam War and the Great Society through infla tion forced the end of even international redemption.

As the money supply grew in the mid and late 1960s, more foreign recipients of U.S. dollars began to return them to the Fed, leading to a significant outflow of gold. Rather than lose the gold or reduce inflation, President Nixon ended international re demption in 1971. Since then'the U.s. dollar has been a complete fiat currency. Once 267 again, the spending proclivities of the fed eral government drove monetary policy in directions that benefited the political pro cess at the expense of the general public. Timberlake's book is sure to quickly be come a genuine economic classic. Unlike many such books, however, it is readable by the nonspecialist and of important relevance for current events. As Washington is debat ing the consolidation of bank regulatory agencies, and the possibility of a new reg ulatory push, a careful examination of the history of bank regulations, and their role in causing monetary disorder and economic disaster, could not be more important. Rich ard Timberlake has given us just such an analysis, and a masterful one at that. D Dr. Horwitz is an assistant professor ofeconom ics and Flora Irene Eggleston Faculty Chair at St. Lawrence University, Canton, New York.

Cities without Suburbs by David Rusk Johns Hopkins University Press, A Woodrow Wilson Center Book, 1993 • 130 pages. $13.95 paper. $29.00 cloth Reviewed by Dean Stansel W atch out, suburbanites. New, multibillion-dollar federal program proposed to solve America's urban crisis by putting public housing projects in the suburbs. Though we haven't seen that headline yet, it's not because the idea does not exist. For decades America's cities have been in de cline, in mocking defiance of the explosion of new government-spending programs de signed to save them. Nevertheless, many urban advocates still seem to think some elusive new government program will mi raculously reverse the cities' decline. One such person is David Rusk, former mayor of Albuquerque and the author of a new book entitled Cities without Suburbs. Rusk says the solution to the urban crisis lies in "regional governance." That is, he wants cities to annex their thriving suburbs-with 268 THE FREEMAN • MAY 1994 or without their consent-or consolidate with their counties, thus creating "cities without suburbs." According to Rusk, that will transform declining cities into booming cities by forcing suburbanites to pay what he feels is their "fair share" of the costs of urban decline.

Though some cities-most notably, Nashville, Indianapolis, and Jacksonville have successfully annexed their suburbs or consolidated with their counties, the politi cal and legal obstacles are usually prohibi tive. So Rusk suggests other ways-short of suburban annexation or city-county consol idation-to reduce the racial and economic segregation that he thinks is "the heart of America's 'urban problem.' " One such plan would put public housing projects in the suburbs. Rusk argues that this would integrate the underclass into mainstream society, exposing them to the positive role models therein. However, having subsidized housing in their neighborhoods is nearly as objection able to most suburbanites as is annexation. Therefore, Rusk suggests the provision of federal "incentives" to get suburbs to co operate. That's the catch. (Even Rusk ad mits that " 'incentives' is a euphemism for federal money.' ') According to Rusk, the so-called "incentives" would cost federal taxpayers $23 billion a year.

Though touted as a new approach, Rusk's proposal is just another big spending pro gram. To make matters worse, his expen sive proposals have support in high places. Speaking at a Spring 1993 conference on urban policy sponsored by President Clinton's favorite think tank (the Progres sive Policy Institute), Secretary of Housing and Urban Development Henry Cisneros explicitly endorsed Rusk's proposal, say ing, "If we cannot open up suburban com munities to subsidized housing. . . ,we will not succeed." Since then, Cisneros has proposed a mas sive expansion of' 'Moving to Opportunity" (MTO), a program created by his predeces sor Jack Kemp. MTO will be tested in six major cities over the next two years, moving 6,200 households from inner-city public housing units to suburban ones, at a cost of $234 million. While Rusk contends that "in any con stitutional sense, the federal government has no role" to play, he advocates imple-.

menting these types of programs through either the provision of federal dollars or "new requirements on federal grants in aid." In further contradiction, Rusk calls for larger, more centralized governments, while gushing that' 'in many ways the belief that 'smaller government is better government' resonates emotionally within me" (empha sis added). He even muses that larger gov ernment "may be less efficient and less responsive as a deliverer of services than smaller governments." Rusk is correct about that. Studies have consistently shown that large, centralized governments have significantly higher unit costs of providing public services than small, decentralized governments. Never theless, Rusk insists that larger, more cen tralized governments are the answer, listing as "key goals: unification of the tax base and centralization of planning and zoning au thority . . . under a dominant local govern ment" (emphasis added).

Only in America do you still hear argu ments such as Rusk's for larger, more cen tralized government. The last few years have witnessed a worldwide revolution. People have been throwing off the yoke of big, centralized government with rampant enthusiasm. Rusk ignores that reality, or perhaps he was too busy researching and writing his book to notice. Rusk states that his primary motivation in creating cities without suburbs is the elim ination of economic and racial segregation. He cites statistic after statistic to "prove" that cities that have annexed their suburbs are less segregated than those that have not. But what does that really mean? Few would disagree that redrawing the borders of a central city to include its suburbs will create a new "city" that has a greater proportion of middle-and upper-class whites than the old central city. Thus, by definition, Rusk's solution does indeed reduce measured seg regation in "the city."

However, isn't that just semantics? After all, "the city" is no longer the central city. It is now the central city plus its suburbs. There is no reason to believe that creating cities without suburbs will in any way re duce the racial and economic disparities between the central city and what used to be the suburbs. Rusk's so-called solution to what he sees as the "heart of the urban problem" -racial and economic segrega tion-is, to be kind, a sham. As Rusk himself says, his real goal in creating cities without suburbs is "tapping a broader tax base." He further states that "sustained success requires . . . moving dollars from relatively wealthy suburban governments to poorer city governments." Although Rusk uses the term "suburban governments," it is suburban taxpayers who will take the hit. Could Rusk's rhetor ical chicanery be intended to camouflage the fact that his plan is simply a Robin Hood esque effort to take from the suburbanites and give to the city dwellers? And what about the phrase "moving dollars"? Most people would call that stealing.

Furthermore, Rusk's proposals are im bued with the traditional left-wing notion that the solution to the problems of the inner city (or any problem for that matter) is more government spending. However, that argu ment rests on the assumption that the cities simply have not been spending enough. Nothing could be further from the truth. In 1960the average city government spent $470 per resident (in inflation-adjusted dol lars). By 1991 that amount had more than doubled, rising to $1,070. Few city residents would argue that the quality of municipal services has doubled. Most would say just the opposite. Twenty-five years ago Harvard's John Kenneth Galbraith said that there was noth ing wrong with New York City that doubling the city's budget wouldn't solve. Appar ently, New York City's leaders took him to heart; since then their budget has nearly tripled (in real terms). Surely, no one be lieves that New York City is in better shape today than it was twenty-five years ago. In fact, the recent efforts of the boroughs of BOOKS 269 Queens and Staten Island to secede from the city are damning evidence to the con trary.

Rusk admits that" cities, in the battle over middle-class America, have lost to their suburbs." To many, the central question of the "urban crisis" is why. Why are Amer icans voting with their feet by fleeing the inner cities in such large numbers? Rusk seems to realize that higher taxes and spending are part of the problem, not the solution, saying, "Many middle-class fam ilies ... went to the suburbs to flee high city taxes" (emphasis added). However, Rusk then goes on to say, "Admittedly, some factors in suburban growth in the early postwar decades were nonracial ... [but] racially motivated 'White flight' was unde niably a major factor in suburban growth" (emphasis added). While racial prejudice certainly exists, the idea that it is a major factor in the decline of America's cities smacks of a conspiracy theory. Besides, it is no longer just whites who are fleeing the inner city; middle-class blacks have been leaving in droves as well.

Does Rusk really contend that suburban exiles from declining cities such as Oakland, New Orleans, and Birmingham are more racist than their same-state neighbors in the more prosperous cities of San Diego, Baton Rouge, and Mobile? Or could it be that the high tax burdens in declining cities-often twice as high as in booming cities-are simply forcing middle-class Americans to flee to areas with lower taxes? Many urban advocates argue that Amer ica's large, declining cities cannot cut their taxes without slashing crucial municipal services. However, one reason taxes are so high in those cities is that the per unit cost of providing municipal services is often twice as high as in smaller cities. The underlying problem is that most city governments are simply too big and central ized. They are too far from the people they govern. As a result, residents of large, centralized cities have relatively little ability to influence their leaders and to control how well their government is run. In contrast, public employee unions have substantial 270 THE FREEMAN • MAY 1994 influence in such cities. For example, in New York City, some public employees get as many as 51 days off a year. That means they work the equivalent of a four-day work week. Such generous spending of city tax payers' dollars on members of public em ployee unions is well documented in other large cities as well. It is a major factor driving up the cost of providing municipal services in large cities.

Rusk's solution would create more waste ful centralized governments. Thus, the cost of providing public services such as trash collection and police protection in Rusk's cities without suburbs would be even higher than it is now. Those higher costs would require still higher taxes.' Since tax hikes cause residents and businesses to leave, Rusk's solution would only perpetuate the downward spiral of America's cities. It is the exact opposite of what should be done. Cities should move, instead, toward more decentralized governments and seek to pri vatize municipal services. That would en able them to enact the pro-growth tax cuts necessary to make the cities places where the middle class and businesses again want to, and can afford to, live and work. Ignoring that centralization leads to inef ficiency and higher costs, and that taxes have consequences, Rusk's "solution" to the urban crisis is ultimately just an elabo rately constructed house of cards. He fails to even consider the possibility that many suburban businesses and residents, faced with higher taxes after being annexed by their central city, would simply choose to move farther and farther away from the inner city to avoid those tax hikes. Perhaps Rusk plans to build a Berlin Wall around the new cities without suburbs to ensure that businesses, people, and capital cannot es cape. Without such police-state restrictions, Rusk's proposal is doomed to failure. His house of cards willinevitably come crashing down.

Nevertheless, given the huge amount of tax dollars at stake and Rusk's powerful supporters, at a short 130 pages, Cities without Suburbs is a worthwhile read especially for suburbanites. The proposals it contains are a haunting harbinger of things to come. If Rusk, Cisneros, and Clinton have their way, we will all soon be living in cities without suburbs. So start forming your grassroots organizations now, suburban ites. And hold onto your wallets. The tax man cometh. D Mr. Stansel is a fiscal policy researcher at the Cato Institute in Washington, D.C., and co author ofa recent Cato study entitled "The Myth of America's Underfunded Cities." The Fortune Encyclopedia of Economics: 141 Top Economists Explain the Theories, Mechanics, and Institutions of Money, Trade, and Markets edited by David R. Henderson Warner Books, Inc.• 1993 • 876 pages. $49.95 Reviewed by Raymond J. Keating I nitially, one mightthink that reviewing an economics encyclopedia would be an ar duous task-slogging through esoteric the ories, statistical models, and academic prose. However, The Fortune Encyclopedia of Economics successfully dispels such commonly held concerns. The 157 essays in this collection, as well as an appendix of short biographies on a variety of econo mists, are well written, clear, and often lively. Considering the fact that economists are not generally known as engagingwriters, this amounts to nothing less than a momen tous achievement for editor David R. Hend erson.

No less of an achievement is the fact that this tome weighs in heavily with essentially free-market views. With a few exceptions, the issues addressed in this encyclopedia are examined from a sound, market-based perspective. Henderson has largely ban ished hyperbole in favor of well-grounded economic reasoning. This combination of style and substance makes The Fortune Encyclopedia of Eco nomics invaluable to a wide variety of readers. For example, students and professors should find that this collection serves as an excellent supplement to various texts and courses in economics, while also as a reli able desk-top reference book when re searching and writing, or for those occa sional moments when the mind falters and a refresher on certain issues is in order. Both business executives and government poli cymakers also should find this volume a good resource in helping to sort through the jargon of economics as well as often con flicting economic news reporting.

As for the topics addressed in this one volume, oversized encyclopedia, the editor has cut a wide swath through the economics discipline. Included are such basic topics as efficiency, profits, opportunity cost, fiscal policy, investment, inflation, and property rights, as well as more specialized areas like privatization, deposit insurance, the gold standard, recycling, natural gas regulation, public schools, and sportometrics. While such a book really is not designed to be read from cover to cover-but rather to serve as a reference or educational guide with each essay standing alone-the format does allow one to read straight through if he so desired. In fact, it offers a much smoother read than many economics textbooks. While the essays that stand out will vary from reader to reader, depending on one's particular interests, I found several worth mentioning here. Armen A. Alchian offers a good essay on how private property rights "protect individual liberty." Thomas W.

Hazlett writes an interesting and informa tive piece on apartheid and how it developed in South Africa. Deborah L. Walker and Robert Hessen supply good summary es says on Austrian economics and capitalism, respectively. Also, Allan H. Meltzer's arti cle on monetarism includes a good evalua tion of recent monetary policy in Great Britain. Supply-side economics is given fair treatment by James D. Gwartney, as well as by Alan Reynolds in a piece focusing on marginal tax rates. Also, William Niskanen presents one of the more balanced views of Reaganomics that one is apt to find. David Ranson's essay on inflation regisBOOKS 271 ters as an outstanding piece, as he illustrates that: "Inflation has tended to increase in periods of slow growth or recession and decrease in periods of expansion," -a fun damental point missed by most economists. John Cogan offers an interesting essay on the federal budget, noting that spending growth accelerates the more decentralized the federal budget process.

The growing field of free-market environ mentalism is introduced well by Richard Stroup, while Jane S. Shaw supplies an essay on recycling that needs to be distrib uted to any policymaker or elected official dealing with the issue. In a similar vein, the Pat Buchanans and Ross Perots of the world should be supplied with Alan Blinder's con tribution on free trade. Individuals perpet uating myths about so-called shortsighted ness of American business and the destructive effects of junk bonds need to read Steven L. Jones and Jeffry M. Netter's article on efficientcapital markets and Glenn Yago's piece onjunk bonds. Also of note are Mark Casson's essay on entrepreneurship, George Gilder's piece on the computer in dustry, John Chubb's overview of public schools and educational choice, John Har ing's contribution on telecommunications, as well as editor Henderson's essays on the true sources of economic growth in post World War II Japan and Germany.

More disappointing are Blinder's attempt to defend Keynesian economics, James To bin's archaic essay on monetary policy, and Kevin D. Hoover's equally archaic article on the Phillips Curve. In addition, Joseph J. Cordes' piece on capital-gains taxes offers a workmanlike analysis of the "lock-in" effect of high capital gains taxes, as well as the effect of inflation on capital gains, but nothing substantial on such critical issues as the effects of such taxes on incentives and the tradeoff between risks and potential rewards. On the whole, however, this is a stellar collection of essays by some of the world's most knowledgeable economists. While it might seem strange to those who view economics as a dismal science, a lucid, market-oriented encyclopedia of economics 272 THE FREEMAN • MAY 1994 is worth getting excited about. The Fortune Encyclopedia of Economics is an astound ing feat. 0 Mr. Keating is New York State Director of Citizens for a Sound Economy.

Playing the Field by Charles Euchner The Johns Hopkins University Press. 1993 • 205 pp.•$24.95 Reviewed by Jeff A. Taylor C ities across America are caught in a headlong rush to land a professional sports franchise. Five cities-Memphis, Jacksonville, St. Louis, Baltimore, and Charlotte-recently ended a competition to entice the National Football League into their towns. When it was over, the tab for public financing of playing fields had climbed into the hundreds of millions of dollars. Charles Euchner, a political science professor at Holy Cross, provides insight on why cities do this and why it is a bad deal for local taxpayers. Euchner has studied several cities' at tempts to woo teams and finds much of the competition centers on which locality can provide the biggest cut of public money to team owners. Owners, in turn, make the most of this situation by actively pitting cities against one another with threats to move the franchise to more lucrative envi rons.

In 1988, the Chicago White Sox effec tively used a threat to move to Florida to win public funding for a new baseball park built literally on top of the existing one. The White Sox's spurned suitor, St. Petersburg, is stuck with an empty Suncoast Dome for which Euchner estimates local residents pay $7.7 million a year in debt service. Euchner makes the case that franchise owners have adroitly played upon officials' political fears of "losing" a franchise to win backing for stadium upgrades. The big payoff for the owners is control of stadium skyboxes-Iuxury suites which can sell for hundreds of thousands of dollars apiece. The Houston Astrodome originated the sky box in 1965, but they now number in the hundreds for each new stadium built. Euchner notes that if building stadiums was such a good business venture, more private entities would be willing to step forward and build them. And in fact, where the facilities are privately owned cities earn money rather than spend it. The hugely successful Dodger Stadium in Los Angeles pays $400,000a year in property taxes.

The oft-repeated mantra that sports fran chises generate economic growth is also disputed by numerous studies collected by Euchner. One local official compared the decision on NFL expansion to "whether or not the railroad was coming to your town in the Old West." But, as the evidence shows, fillinga stadium eight times a year does not have the same economic impact as a many fold increase in transportation capacity. By definition, dollars spent on sporting events are highly disposable and would likely be spent on other forms of entertainment movies, plays, participatory sports-absent the franchise. The difference is that all the economic activity doesn't occur on a single day, at a single site. Euchner also argues that when compared to other forms of social spending, such as job training, government subsidies for sports teams lag behind in generating a return. However, that line of argument is dangerous: it could entice local officials to graft a "job training" element into their stadium building plans rather than eschew the endeavor outright. It also overlooks the cost of taking of resources from the private sector in the first place.

There is every sign the frenzy for sports franchises is intensifying. The state of New York recently authorized funds to help com munities keep and attract minor league base ball teams while two Chicago suburbs now spar over a farm team. Officialsfrom every city, town, and hamlet would do well to listen to Euchner's warnings lest they get sucked into a game they cannot win. D Jeff Taylor is National Political Reporter for Evans & Novak in Washington, D.C.