An Economist in a Class of his Own
On the theoretical questions, Kemmerer appears to be in a class of his own. From his 1903 doctoral thesis published in its revised form in 1907, to his last work in 1944, Kemmerer consistently defended the GS system and the QTM.
However, he also advocated certain principles of the real bills doctrine and believed that money issuing and credit allowance should meet the needs of trade. One of Kemmerer’s first professors of economics, Willard Fisher, was one of the major American bimetallists, and like most bimetallists, defended QTM. Jeremiah Jenks, Kemmerer’s PhD adviser, was a monometallist and quantity theorist. He strongly influenced Kemmerer who continued to work on the QTM as his PhD thesis topic, developing a statistical test to prove its long-term validity in the United States between 1879 and 1901.In his thesis, Kemmerer introduced a concept that was to recur throughout his work, that of business confidence. High business confidence enables a bank’s money supply to meet the needs of trade in the long term, and stabilizes the ratio of a bank’s money supply to the primary money supply (coins and bank notes) in the short term. When there is business confidence, the QTM is verified: the fluctuation of the ratio between money supply and commodity supply matches the fluctuation of the general level of prices, except over the periods characterized by a business distress.
In an attempt to prove that money value is determined just like any other product, Kemmerer wrote the exchange equation yielding the value of money as an equilibrium condition between money supply and money demand. He drew on John S. Mill to define the concept of money demand, but moved away from him for the concept of money supply. He defined money supply as a stock of money, including bank money, multiplied by its rapidity of circulation. As underlined in Gomez Betancourt (2010a), the concept of money demand used by Kemmerer does not anticipate that developed by Cambridge School. Indeed, it refers to money to be spent rather than to be kept.
Kemmerer does not by any means anticipate liquidity preference theory or any other reasons accounting for money retention. Rather, he remains at odds with what will become the Keynesian Revolution.After being named Financial Adviser to the US Philippine Commission (from 1904 to 1906) when only 28 years old, he became a professor at Cornell University (1906-12) and then at Princeton University until he retired emeritus in 1943. In 1906 Kemmerer was already known as an international “money doctor” and was capable enough to advise on behalf of the US government. Kemmerer’s contribution to the creation of the Federal Reserve System is significant but not sufficiently acknowledged (Gomez Betancourt 2010b). As early as 1909, he started a study on the variation of short-term interest rates on the money market of the main American cities. This study revealed the weaknesses of the National Banking System in place since 1863, and advocated in favour of a more elastic money and credit issuing system that would allow farmers greater access to liquidity. According to him, a central bank system for the US was needed in order to ensure the elasticity of money and credit, as well as the liquidity of the money market. In exchanging bank notes for real bills, the central bank puts an end to the considerable and often erratic fluctuation of the interest rate. Kemmerer was not a strong supporter of the currency board, but rather envisioned the central bank as a lender of last resort. Kemmerer, who was a member of the Progressive Party from 1912, played an important political part in supporting the reforms proposed, on the one hand, by bankers and Republican groups, and, on the other, by the Democratic administration of the period, followed by the signature of the Federal Reserve Act on 23 December 1913.