The end of Prohibition and two great monetary thinkers

Today it is 80 years ago that US alcohol prohibition was ended. Interestingly enough two of my favorite monetary thinkers of the time – Irving Fisher and Clark Warburton – had strong views on prohibition.

Hence, Irving Fisher was a strong advocate of prohibition, while Clark Warburton was strongly against prohibition.

I would especially encourage everybody to have a look at Clark Warburton’s empirical work on prohibition in his Ph.D. dissertation, which was published as The Economic Results of Prohibition in 1932 – one year ahead of the end of prohibition

Fisher and Warburton had very similar – monetarist – views on monetary policy and theory, but they certainly did not agree on prohibition.

Later an other monetarist – Milton Friedman – picked up on a similar theme and he was very outspoken against the US War on Drugs.

As I noted in my previous post I believe that an end to the War on Drugs would be a quite positive supply shock to the US economy and would improve US public finances. The end of prohibition in 1933 likely had a similar positive effect on the US economy, but unfortunately other regulations such are the National Industrial Recovery Act (NIRA) had much more negative supply effects. Said in another way Roosevelt was right on alcohol and money, but wrong on nearly everything else.

Prohibition Dec 5 1933I

I stole this picture from Cato Institute. Here is what Cato’s David Boaz has to say about the day to day.

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Leland Yeager wrote the best monetarist (text)book

In my recent post about Keynes’ “A Tract on Monetary Reform” I quoted Brad Delong for saying that Tract is the best monetarist book ever written. I also wrote that I disagreed with Brad on this.

That led Brad to respond to me by asking: “What do you think is a better monetarist book than the Tract?”

I think that is a very fair question, which I tried to answer in the comment section of my post, but I want to repeat the answer here. So here we go (the answer has been slightly edited):

One could of course think I would pick something by Friedman and I certainly would recommend reading anything he wrote on monetary matters, but in fact my pick for the best monetarist book would probably be Leland Yeager’s “Fluttering Veil”.

In terms of something that is very readable I would clearly choose Friedman’s “Money Mischief”, but that is of course a collection of articles and not a textbook style book. Come to think of it – we miss a textbook style monetarist book.

I actually think that one of the most important things about a monetarist (text)book should be a description of the monetary transmission mechanism. The description of the transmission mechanism is very good in Tract, but Yeager is even better on this point.

Friedman on the other hand had a bit of a problem explaining the monetary transmission mechanism. I think his problem was that he tried to explain things basically within a IS/LM style framework and that he was so focused on empirical work. One would have expected him to do that in “Milton Friedman’s Monetary Framework: A Debate with His Critics”, but I think he failed to do that. In fact that book is is probably the worst of all of Friedman’s books. It generally comes across as being rather unconvincing.

Finally I would also mention Clark Warburton’s “Depression, Inflation, and Monetary Policy; Selected Papers, 1945-1953″. Again a collection of articles, but it is very good and explains the monetary transmission mechanism very well. I believe Warburton was a much bigger inspiration for Friedman than he ever fully recognized – even though Warburton is mentioned in the introduction to “Monetary History”.

So there you go. I recommend to anybody who wants to understand monetarist thinking to read Yeager and Warburton. Yeager and Warburton’s books mentioned above will particularly make you understand three topic. 1) The monetary transmission (and why interest rates is not at the core of it), 2) The crucial difference between money and credit and finally 3) Why both inflation and recessions are always and everywhere monetary phenomena.

I will surely return to these books when I continue the reporting on my survey of monetary thinkers’ book recommendations in the coming days and weeks.

PS Leland Yeager’s “Fluttering Veil” is a collection of articles edited by George Selgin. George deserves a lot of credit (if not money!) for putting it together. It is a massively impressive book, which unfortunately have been read by far too few economists and even fewer policy makers.

From the Christensen book collection: Yeager and Warburton:

Yeager Warburton 2

Clark Warburton: A much overlooked monetarist pioneer

When I started this blog it was my plan to write a lot about Clark Warburton. I must admit I have failed to do this, but I still hope to be able to give Clark Warburton the attention he deserves.

Nearly no economists know of Clark Warburton and everybody knows about Milton Friedman. However, the fact is that a lot of what Milton Friedman said about monetary policy had been said by Clark Warburton 10-20 years earlier. Unfortunately nobody wanted to listen to Warburton.

In the introduction to Milton Friedman’s and Anna Schwartz’s “Monetary History” they wrote:

“We owe especially heavy debt to Clark Warburton. His detailed and valuable comments on several drafts have importantly affected the final version. In addition, time and again, as we came to some conclusion that seemed to us novel and original, we found he had been there before.”

Said in another way – Warburton might has well have written “Monetary History” – and to some extent he did.

In the articles “The Volume of Money and The Price Level Between the World Wars” (1944) and “Monetary Theory, Full Production and the Great Depression” (1945) Warburton basically presented the monetarist explanation of the Great Depression – almost 20 years before Friedman and Schwartz (1963).

Scott Sumner has recently tried to argue why the fiscal multiplier is zero if the central bank is targeting any nominal target. For those interested in this discussion should read Warburton’s 1945 article on “The Monetary Theory of Deficit Spending”. Read it and you should pretty fast become convinced that Scott is right – of course Warburton knew that in 1945. My own view that there is no such thing as fiscal policy (and everything is monetary policy) is also clearly inspired by Warburton.

Warburton’s main contribution to American monetary history and theory are collected in the book “Depression, Inflation and Monetary Policy” (including the above mentioned articles). Anyone who wants to understand monetary theory should read this book. The book, along with Leland Yeagers “The Fluttering Veil” are the two most important books in relation to the understanding of the monetarist branch, we could call disequilibrium monetarism (DM). DM is in many ways between the Austrian school and more traditional monetarists like Milton Friedman, Karl Brunner and Allan Meltzer. DM has undoubtedly had a major influence on Free Banking theorist such as George Selgin, but also on modern Austrian economists like Steven Horwitz. As such DM pioneers like Leland Yeager and Clark Warburton are also important from Market Monetarist perspective.

I hope to write more on Warburton in the future. He work surely deserves a lot more attention.

For a good introduction to Warburton’s work see Michael Bordo’s and Anna Schwartz’s article “Clark Warburton: Pioneer Monetarist”

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