92, 3 (September 1998):702-3.

The International Origins of the Federal Reserve System. By J. Lawrence Broz. Ithaca, NY: Cornell University Press, 1997. 269p. $35.00.

Andrew J. Taylor, North Carolina State University

For J. Lawrence Broz, the sources of the Federal Reserve Act of 1913 can be found in the internationalization of the American economy. Rather than suggest that the Fed's foundation furthered solely the interests of the money center banks, Broz argues that, to a large extent, the Federal Reserve System provided critical public goods in the form of a stable payments infrastructure that was to make regular financial panics a thing of the past. This is not to say that New York banks were conspicuously absent during the formation of the Federal Reserve Act. Indeed, Broz does not question the conventional wisdom that such banks did the heavy lifting in the policy process. But he does reject James Livingston's influential argument (Origins of the Federal Reserve System, 1986) that rent-seeking Wall Street forced the legislation on Congress so as to increase the entry barriers for state-chartered banks that wished to be competitive. Broz shows, for example, that the act neither altered the right of banks to choose between state and national chartering nor removed the extant statutory obstacles to branch banking that were so ferociously protected by the small banks.

Why, then, did the big national banks work so hard? The answer, Broz writes, is that the Federal Reserve Act unleashed the process of internationalizing the dollar. The U.S. dollar already had the potential to be one of the few currencies of international commerce in 1913. The U.S. economy and share of world trade were growing rapidly. There existed, however, critical domestic institutional impediments to internationalization. The establishment of the Fed removed these barriers by (1) iterating the nation's commitment to price stability through adherence to the gold standard and (2) creating more sophisticated discounting and entirely new rediscounting mechanisms that were to provide the requisite liquidity in U.S. financial markets. New York banks especially benefited from internationalization of the dollar by collecting the commissions and fees that go along with the issuance of international currency and by saving the transaction costs that accompany the conduct of international commerce in foreign money. This story is, for the most part, quite new.

Broz wraps his argument in a theoretical approach that borrows heavily from the thinking on collective action by Mancur Olson. Whereas Livingston, for instance, conceptualizes the Federal Reserve Act as an example of the "privileged group" model of policymaking, Broz talks of a "joint products" approach. The latter framework better explains the legislation because, "by conjoining private benefits with the production of public goods, central bank charters internalized a portion of societywide benefits within a subset of the community, creating incentives for these individuals to demand and supply institutions that had wider social benefits" (p.246).

The book unfolds in six substantive chapters that, among other things, describe the content of the Federal Reserve Act, explain the internationalization of currencies, mark the growth of the U.S. economy, reveal how banking interests lobbied for the legislation, and apply the theoretical framework to the founding of other central banks, such as the Bank of England. A detailed explanation of Broz's theory in an introduction and summary act as bookends to these chapters.

This is all intelligent and interesting stuff. There seem to me, however, to be two major weaknesses. The first is that Broz is too enthusiastic about the theoretical contribution of the book. The "joint products" model is advertised as qualitatively different from the usual exchanging of specifically targeted rents for pressure exerted by a self-interested and narrow private concern. But is this really the case? The difference between the two approaches could easily be seen as one merely of degree. Broz's story could be construed as the empirical vindication of a variation on the "privileged group" theory-the very theory he rejects. Here, the "public good" of a stable payments system could be interpreted as part of the rents received by large private banks because it is inextricably linked to the pay-off of the internationalization of the dollar. Just because others benefit from policy change does not mean that it cannot be viewed primarily as favoritism to a particular sector. After all, tax breaks and subsidies to individual industries also benefit those members of the public who happen to be their customers. No one is particularly puzzled to find out that consumers did not lobby for the industry's special treatment, however. What is more, I do not think the model is particularly unique. Economic actors will often support government policy aimed at promoting the public interest-perhaps literacy or an antihunger program. Their support is often linked to desired rents through a process of logrolling with other interests or politicians. Healthy public relations, as well as the received rents, make it worthwhile to internalize costs unrelated to private gain. All this makes me feel that Broz's most valuable contribution is empirical rather than theoretical. The international connection is of most interest in this book, not the spin on Olson.

My second criticism is that Broz's explanation for the Federal Reserve Act is far too sociocentric. In many ways, therefore, this is another dig at his theoretical approach. To be sure, chapter 5 describes the statute's experience through the tortuous legislative process in Washington, but for the most part Broz has a "black box" understanding of American government. The burgeoning political development literature surely provides new avenues by which to explore theoretically interesting explanations of the Fed. How did the legislation fit into the systematic expansion of federal administrative practices that was occurring at the time it was passed? It seems to me that the Fed is an integral part of this pattern. Instead, Broz revisits the well-trodden path of political change propelled by private interest. He also fails to examine the important issue of delegation. Why did Congress decide to create an agent-and a fairly autonomous one at that-to make critical monetary policy? I wonder if it is possible to answer such provocative questions with Broz's "international" argument.

All in all, The International Origins of the Federal Reserve System is an extremely interesting, assiduously researched, and well-written book. It uncovers valuable and new information connected to the establishment of the Fed. I recommend it unequivocally for all students of international and American political economy as well as those who are interested in the creation and development of political institutions.