[This review was published in the Fall 2015 issue of The Journal of Social, Political and Economic Studies, pp. 302-308.]


Book Review


The Shifts and the Shocks: What We’ve Learned – and Have Still to Learn – from the Financial Crisis

Martin Wolf

Penguin Press, 2014


          The Great Recession has given rise to a vast literature of high quality, which makes it all the more extraordinary for us to suggest that this book by Martin Wolf ranks among the more important.  Its significance lies in the fact that Wolf, a prominent economic commentator, has written a book that can serve as a bridge between the main flow of post-crisis thinking, which seeks ways to reform (while essentially perpetuating) the existing financial system, and a body of thought that calls for radical monetary and financial reconstruction.  The latter, centered on “the Chicago Plan” which we will explain later here, has stayed “under the radar,” hardly acknowledged by mainstream thought, even though it enjoys a remarkably distinguished pedigree.  If the reconstruction it calls for continues to be ignored even after the world’s recent economic cataclysm, that will be an intellectual and policy default of historic significance.  By raising the subject and taking it seriously, Wolf is leading the way toward bringing such reconstruction into the light for what hopefully will be serious consideration.

          Wolf, a British journalist, is the associate editor and chief economic analyst for the London-based international newspaper Financial Times.  He earned his “master of philosophy in economics” degree from Nuffield College at Oxford in 1971.  Although he preferred a life of journalism over academia, and thus chose not to go for a doctorate, his merit as an economist has been such as to earn him honorary doctorates.  After graduation from Nuffield, he joined the staff at the World Bank, where he quickly rose in rank to senior economist.  Wolf has been with the Financial Times since 1987, producing a large body of financial writing, both in books and articles.  Lawrence Summers, a former U.S. Treasury Secretary, calls Wolf “the world’s preeminent financial journalist.”  It is precisely Wolf’s preeminence that makes this book so meaningful a bridge to the body of thought that until now has been submerged.

          The Shifts and Shocks is by no means devoted solely, or even primarily, to the Chicago Plan.  It gives insights into the economic foundations of the recent crisis which, by stressing a “savings glut and associated imbalances,” differ from the analyses found in so many other commentaries. The Eurozone is also a subject that receives considerable attention.  Nevertheless, it is Wolf’s recognition of the need to question the entire existing system of world finance and to find a much more satisfactory foundation for a market economy that makes this book stand out.

          His discussion of that issue is based on two premises.  The first is his awareness, which he shares with so many others, of the extraordinary dangers that hang over the global economy.  Wolf joins the others in seeing that it is “a world that is hugely crisis prone.”  The threat of catastrophe is, in effect, “the elephant in the room,” not to be forgotten as the world picks up the pieces after what is now called The Great Recession.  Wolf’s second premise is that, out of the intellectual crisis that now exists in economic thought and especially in “conventional macroeconomics,” the time has come to see the “need for a new kind of system.”  It won’t be enough, he says, simply to tinker with the existing financial structure.  The reforms that are coming into place are so complex that it is “virtually inconceivable that [they] will work.”  People operating within banks and other financial institutions will be overwhelmed by the resulting complexity, not knowing or understanding what is required of them.  A “new orthodoxy” has come into being that “gives enormous discretionary power to bureaucrats” to manage finance.  Wolf sees that this is not the sort of re-thinking that is so imperative.  Something much better is needed to assure the success, and with it even the long-term legitimacy, of capitalism.

          This is the thinking that brings Wolf to his discussion of the Chicago Plan, which was formulated by six economists centered around the University of Chicago in the 1930s calling for a thorough reconstruction of both banking and the monetary system.  The ideas were first expressed in a memorandum issued by the six economists in March 1933, and resulted in the draft proposal “A Program for Monetary Reform” in July 1939.   The original memo was signed by economist Frank Knight, a second by economist Henry Simons.  The proposal in 1939 was written by Irving Fisher, Paul Douglas, Frank Graham, Earl Hamilton, Willford King and Charles Whittlesey.  Economists from both the left and right joined in its support, resulting in approval by 235 economists from 157 universities and colleges.   The plan was never put into effect, however; it incurred stout opposition from the banking industry, and American attention became absorbed by the war clouds of World War II.

          This Journal ran a detailed article by this reviewer entitled “Capitalism’s Deepening Crisis: the Imperative of Monetary Reconstruction” in our Fall 2011 issue.[1]  There, we saw that the plan consists of two main elements.  The first would abolish what is called “fractional reserve banking,” installing a “full reserve” system in its place.  This would change the nature of banking as people know it.  The banks would no longer lend money they have received through demand deposits, but instead would lend only such money as they have received from sources that have given up immediate claim to its use.  Thus, there would be no “money creation” through the making of a loan of the sort where a bank does not have the full amount in reserve.  Under the banking system we are accustomed to, banks are the principal source of the creation of money.  It is a system that is prone to massive expansions and contractions of the amount of credit outstanding, and that accordingly is a major cause of the business cycle.  The second element of the Chicago Plan would establish an independent governmental monetary authority (which Irving Fisher called a “Currency Commission”), which would be the sole source of money-creation, acting under a legally defined standard about the extent of monetary issuance.  Money would come into being as an act of sovereignty, with the law making it legal tender.

          In recent years, the plan has been promoted vigorously by Stephen A. Zarlenga, author of The Lost Science of Money, and the American Monetary Institute (AMI) which he heads.[2]  There is an additional element in the AMI version that calls for putting the money that is created by the monetary authority into circulation through government expenditures and loans for a number of purposes thought to be desirable.  In his article in this Journal, this reviewer, who considers himself a “neo-classical liberal,” preferred a use of the money that would not lend itself to governmental activism.  He would have the money fund some governmental programs, but primarily go toward building a “shared market economy.”   That idea involves putting the money into an independent agency that would invest it in index mutual fund shares so that it would finance business and industry across the entire market.  The profits from those shares would then be paid to citizens as a recurring dividend.  This will provide people with incomes, which will be needed as jobless or job-reducing technology makes well-remunerated employment increasingly a thing of the past for tens of millions of people.  The dividend will be money that people can spend as they wish.  Their spending will create demand for the products of the increasingly technical and productive economy, which will find itself stunted unless there is a broad middle class able to buy what is produced.  The dividend to individuals will also center the society’s focus on the choices made by the people themselves rather than by government.  

          Wolf discusses a question that comes to mind about the Chicago Plan: “what would finance lending to the economy?”  The answer under the plan was that investment trusts would come into being that would sell shares, taking in money not from depositors but from investors.  The trusts would then channel the money to business enterprises.  We know, of course, that under the “shared market economy” variant just discussed enormous sums would go to business on a continuing basis from the public trust investing in index mutual funds.  The result of all this would be that business would receive a lion’s share of its operating funds from equity investment.  And although banks wouldn’t be passing along funds received from demand deposits, businesses could still issue bonds or other debt instruments to lenders who would be giving up their current use of the money.

          Irving Fisher, one of the world’s leading economists in the 1920s and ’30s, is cited by Wolf as pointing to four advantages from the plan: to stop the business cycles arising out of credit expansion and contraction; to do away with bank runs; to have government finance itself rather than borrow and pay interest; and to decrease enormously the amount of private debt.  To these can be added, Wolf says, “a dramatic reduction in taxes.”

          Although Wolf calls the Chicago Plan “the ideal way” and writes that it (or a form of it) “is definitely an experiment worth making” [his emphasis], he argues for incremental steps.  “It would be too disruptive and risky to make a massive shift… without first trying more limited reforms” (which would in themselves be seen as radical departures from the existing system).  He would like to see other, most likely smaller, countries go first.  As to the United States, there are measures that can constitute a “halfway house.”  A step he especially favors is to “force banks to fund themselves with equity to a far greater extent than they do today.”  He sees this as offering “greater stability to the banking system” while also “being relatively simple.”  For the present, he says, the most that can realistically be hoped for is “a pragmatic amalgam.”

          For this review, because we have focused on Wolf’s book as a bridge to a reinvigorated study of the Chicago Plan, we are making only brief mention of his economic analysis as it relates to the causes of the financial crisis and to the Eurozone.  Nevertheless, we encourage readers to delve deeply into his insights as a leading economic commentator.  As with virtually all the literature on the crisis, the book is both learned and easily readable.

          Notwithstanding this recommendation, it isn’t out of line to point out what seems to us a strange tunnel vision in Wolf’s thinking.  His discussion is almost entirely about the world of money and finance, ignoring fast-changing developments in the “real economy.”  Although one factor that is mentioned is “ageing,” no attention is given to the displacement of workers and firms, the progressive decline in remunerated employment, the flood of imports and immigrant labor, the marvelous new technologies (of which 3-D printing is just one of the revolutionizing examples), and other emergent realities.  These and many other developments make it “a whole new world out there.”  It’s a world that one would hardly know exists simply by reading a book entirely absorbed with finance. 

An example of the preoccupation with finance comes when Wolf finds himself able to speak in terms of “low productivity growth.”  Here, he has to be looking at things solely through a monetary prism as measured by the sort of economic statistics that, though inexplicably remaining in common use, are now radically obsolete.[3]  How is it possible to think of low productivity?  A recent news report tells how Tom Vilsack, the U.S. Agriculture Secretary, praises “farmers for their productivity.  They are 12 times more productive than in 1950… That means Americans spend just 10 percent of their income on food versus 15 to 20 percent or more in other countries.”  It wasn’t long ago that a review like this one, once typed, had to be mailed to the editor, who used “priority mail” to send the hard copy back for proofreading, with this then being followed by another use of priority mail to return it, with a few days’ delay, to the editor.  Now, it’s all done quickly and without postage with a couple of clicks of a computer mouse.  Since “gross domestic product” is a tabulation of money transactions, none of this would show up as increased productivity.  As a matter of fact, it would count as a decrease.  Surely it’s time for economists to bring their thinking abreast of such realities. 


Dwight D. Murphey

[1]  This article is available, with no charge, at www.dwightmurphey-collectedwritings.info as Article 105 (i.e., A105).

[2]   Surprisingly, Wolf makes no mention of Zarlenga (other than to list his book among the References), the American Monetary Institute, or this reviewer’s article.  These omissions limit the effect of his book as a “bridge” between the hitherto submerged discussion and the mainstream of current economic thinking.  A complete literature review would worthwhile.  Among the present-day economists who support the Chicago Plan and 100% reserve banking are Paul Craig Roberts, former Assistant Secretary of the Treasury under President Ronald Reagan; Herman Daly, emeritus professor at the University of Maryland School of Public Policy; and Stephen Goodson of South Africa, author of A History of Central Banking. 

[3]  For this reviewer’s critique of many types of economic statistics, see his article “Today’s Economic Statistics: Poorly Suited When Put Forward as Measures of Well-Being,” in the Fall 1997 issue of this Journal, pp. 345-374.  The article is available free of charge on the website mentioned in Footnote 1 here as Article 72 (i.e., A72).