Financial Crises, Sound Policies and Sound Institutions: An Interview with Michael Bordo

Article excerpt

How did you come to do advanced studies in economics and to focus your research on financial crises?

I started my university education at McGill University in Montreal. I was always interested in history and political science and I developed an interest in economics. In a course in my first year at McGill, Frank Cyril James gave a spectacular course on global economic history, with the culmination of the course being the 1931 Financial Crisis. I just loved this course, and eventually took Honours [in] economics and political science at McGill. The teachers we had were excellent. I knew I wanted to go to graduate school, I knew I wanted to be a professor. I decided to apply to the London School of Economics, and not really knowing what I was going to do, I signed up for public finance. I later switched to advanced economic theory. Being in the Masters programme at LSE was a very enjoyable time for me. There, I met Bill Phillips.

When you went to the LSE, were you aware that Phillips was an important character and that he'd done very important research?

Yes, but not that much--I was still green in the profession. I was impressed with Lionel Robbins and gave a paper in his seminar. That was really a very exciting event for me. There were other great people at LSE and Phillips was one of them, but he wasn't really on my radar screen. I knew about the Phillips Curve, but it's not something that was dominating our thinking. We were being taught very Keynesian-type macro, as anybody who went to university in England or Canada at the time was getting.

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Was Phillips himself a Keynesian?

Well, I'm giving you my impressions as a graduate student at 21 years old. He gave a series of lectures and demonstrated how his machine could explain the circular flow of income in a very simple Keynesian model. He had a concept of the economy as a control system, in today's sense. You know, a control system whereby the central bank and the treasury together would push policy levers and regulate the circular flow of income, offsetting negative injections with positive injections. His model was a Keynesian model, so that's what I mean when I say he was a Keynesian--he had a very simple Keynesian framework.

He also talked about the Phillips Curve, but it wasn't called the Phillips Curve then. He discussed the empirical relationship he found between the rate of change in money wages and the level of unemployment in Great Britain from 1857 to 1951. He fitted the line through it and then discussed how it was hard to interpret--he did not give us a theory. We got the theory from Richard Lipsey. Lipsey had the story of how the Phillips Curve was picking up excess demand in a very simple Keynesian-cross type of model, but Phillips didn't talk about that.

Was Phillips a good lecturer?

He was very nice, charming, modest, funny--he had this really strong New Zealand accent.

After the LSE, you went to Chicago to do your PhD and ended up with Milton Friedman as your supervisor. Why did you choose Chicago?

I got interested in Chicago from talking to my instructors at LSE, especially Ed Mishan, who was my advisor in the second year. He had done his PhD at Chicago and was a student of Milton Friedman. He wrote a strong letter for me and Harry Johnson arranged everything for me. Mishan just wrote a letter on one of those old-fashioned blue aerograms and shipped it off to Harry and, bang, I got in with a full scholarship.

The thing about Chicago was that I was always fascinated by the Chicago School and Friedman and Stigler. At LSE they were really anti-Friedman, and I sort of went along with it, but I was always curious. I wanted to find out what the Chicago School was all about, and when I got there I was assigned Milton Friedman as my advisor. He was extremely nice to me and said, 'You were at LSE, you've had a British education and studied in Canada--you've got a lot of advantage over the other students from the United States--and I'm really happy that you could be with me'. …