AN EARLIER VERSION of this book was ready in second draft as long ago as 1966, as the authors Milton Friedman and Anna Schwartz, henceforth F-S, tell us in their Preface. But that version was restricted entirely to the United States. A National Bureau reading committee suggested that its scope be enlarged to cover the United Kingdom. Extending the coverage of the study to encompass the UK proved much more time consuming than had been expected. F-S now question whether the inclusion of the UK, the new material and the lengthened data period, were adequate recompense for the extra effort and long delay. They may be correct in this doubt, even though the inclusion of the UK is especially interesting for British readers. Since F-S began work on this book, much that was challenging and original in their approach, for example the relationship between monetary growth and interest rates, has been absorbed into the mainstream of economic thought. That is, of course, no criticism of the analysis, but it does mean that the book does not have quite the same punch and excitement that its publication, say, in 1966 would have engendered. Moreover, knowing that F-S were working on UK monetary data, I had been hoping for a repetition of that magical combination of historical and institutional understanding, statistical thoroughness and overall analytical brilliance that enabled F-S to illuminate the episodes of A Monetary History of the United States, but this time for the United Kingdom also. However, this was never intended to be that kind of book. It is not historical and episodic at all, strictly statistical. There is virtually no comment on the actual flesh and blood developments of British (or American) monetary history. Instead F-S have gathered together a small number of key economic series, on incomes, prices, money stock (M2 definition), interest rates, and put these series through a statistical/econometric mangle. As Thomas Mayer has indicated, this uncompromising devotion to statistical duty, unleavened by episodic and historical commentary, makes heavy reading. Nevertheless, besides compelling respect for the scholarship and thoroughness of the research, the book contains many new, important and provoking findings and analytical judgments, several of * See p. 1528, above, for publication information.

Bank equity capital can play several roles; for example as a buffer against (unexpected) loss, as protection for other creditors in bankruptcy, and as ‘skin in the game’. There was never sufficient discussion of which role(s) the BCBS capital adequacy requirements (CARs) were meant to play, and whether they did so satisfactorily. In practice they did not. I discuss what principles should lie behind CARs if we could design these from scratch. I argue that there should be a minimum intervention point triggering official action to depose management and shareholders, and then move to resolution, with an increasingly penal ladder of sanctions as equity capital falls towards this point. A similar approach should also be applied to liquidity requirements.

You asked me to review this book for you, and try to digest what lessons it might hold for you. I can well understand why you delegated this exercise to me. You were, no doubt, already aware that Alex Cukierman (AC) is an eminent theoretician, who has been applying, currently fashionable, game theoretic modeling techniques to the study of monetary policy; and you may have had some concerns whether you would find the book user friendly. In the rest of this review, following both your instructions and my own inclinations, I shall concentrate primarily upon the lessons and light that his work provides for monetary issues in general, and for the conduct of Central Banking in particular. Neither you, nor I, have either the interest, or the mathematical competence, to assess how far this book represents an advance in the application, or technical procedures, of game theory as such. In that respect, the author will no doubt regard this as only a partial and one-sided review of his work. Nevertheless, AC hopes that you, and other practitioners, will read at least some part of the book, and he has gone to considerable lengths to try to structure the book into modules of differing levels of technical difficulty and abstraction, so that you will read the easy bits. Thus,

Alvaro Almeida, Charles Goodhart, Richard Payne, The Effects of Macroeconomic News on High Frequency Exchange Rate Behavior, The Journal of Financial and Quantitative Analysis, Vol. 33, No. 3 (Sep., 1998), pp. 383-408