A History of the Federal Reserve, Volume II
Allan Meltzer, RIP
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Our hearts are heavy with the news that Allan Meltzer, a world-renowned economist and long time AEI visiting scholar, has passed away at the age of 89. A man of many accomplishments, Allan led a distinguished career and contributed enormously to the field of economics. He authored groundbreaking and influential research in many fields: monetary policy and history, tax and budget issues, international finance, and financial services. His contributions continue to shape the economic policy conversation today.
Allan brought tremendous practicality to his work. Early in his career, in 1963, the House Banking Committee hired him as an advisor. With his trademark boldness, he proceeded to interview the Federal Reserve Chairman and Vice Chairman. Afterwards, he noted that, “the System’s analysis was very loose and lacked coherence or supporting evidence. I was frankly surprised at how small was the role of economic analysis.” As one of its officials claimed, rather than rely on economic indicators, the Fed instead played a role analogous to managing the flow of a river, always trying to keep the water from overflowing its banks. Another Fed official, Allan would recount with a grin, argued in the next interview that the water should be allowed to flow over the banks so as to irrigate the fields. It was as if they were regulating the wrong banks. Allan and his lifetime collaborator Karl Brunner then spent their careers identifying economic models and tangible indicators that central bankers could use while formulating monetary policy.
What central bankers should do and what they actually do, can be, of course, different things. Allan would know: he spent no less than fourteen years writing the two-volume tome, “A History of the Federal Reserve.”Sweeping in its detail, incisive in its analysis, this contribution of Meltzer’s earns its place on the shelf next to the greatest texts in economic history. But even this only scratches the surface of Meltzer’s legacy to economics.
Allan and Brunner founded the Shadow Open Market Committee, to keep the Federal Reserve on its toes with independent analysis. The two started the Carnegie Rochester Conference on Public Policy, an enormously influential semi-annual event that recruited top economists from around the world, and encouraged them to focus their talents on policy matters.
His academic work touched almost every corner of economics, and was always ahead of its time. He and his coauthor Scott Richard published, in 1981, a full equilibrium model of an economy that accounts for the influences of voting and variation in the distribution of income over time. In 2015, retrospective empirical analysis found that this model does an uncanny job of predicting the ebb and flow of politics. Voters, just as the model predicted in 1981, voted at times to increase redistribution to benefit themselves. But only to a point. The redistribution they enacted eventually slowed the economy. Acquiring a taste for growth rather than redistribution, voters then swung to the right. Drawing on this work, Allan crafted an insightful and widely cited response to Thomas Piketty’s book, “Capitalism in the 21st Century”.
Allan’s 1988 book, “Keynes’s Monetary Theory: A Different Interpretation”, sharply refocused the debate concerning the contributions of John Maynard Keynes to macroeconomics. The modern conception of Keynesian economics, Allan carefully documents, has wandered far astray from the writings of Keynes himself. Allan was hardly a Keynesian, but the book contains a major surprise: even the most strident of free market economists cannot finish it without a newfound appreciation of the brilliance of Keynes.
A visiting scholar beginning in 1989, Allan was a close friend of the Institute. He would drive from his home in western Pennsylvania to spend two days in his AEI office almost every week. He refused to fly, and loved the drive, since it gave him time to think without interruption. When he arrived, he always had lots of new things to talk about.
He was the first ever recipient of AEI’s Irving Kristol award in 2003. His speech, stressing the importance of capitalism in lifting people out of suffering, resonates deeply today:
It was only after the beginning of modern capitalism, democratic capitalism, that growth in living standards, increased longevity, improved health care and education could be purchased with the proceeds of economic development… democratic capitalism, the market system, and an economy open to trade and exchange give opportunities to individuals.
Increasingly in recent years, he saw the free market system under attack, and he responded by becoming an astonishingly effective producer of informative popular writing. His book “Why Capitalism”, which he wrote at the age of 84, became an international sensation and is the best place to start for someone who wants to understand where prosperity came from.
Allan brought humor, warmth and energy with him every day, rain or shine. He thought that economists often fail because they lack humility, having too much faith in their own models. “Forecasters do as well as a human being can,” he loved to remind us, citing Jacob Viner, “except for those who remain silent.” Like his friend and colleague Herb Stein, he created countless pithy phrases that will likely achieve immortality. “If a bank is too big to fail,” he once said, “it is too big.”
If, on the day he was born, one could have looked at a list of Allan’s forthcoming accomplishments, it would have seemed “too big” for one human lifetime, too implausible that any one man could accomplish so much.
We extend our deepest condolences to Allan’s wife, Marilyn, and to his children and grandchildren.