Today Leland Yeager is turning 90. Happy birthday!
Leland Yeager is an amazing scholar. My friend Peter Kurrild-Klitgaard put it very well in a comment on Facebook:
“Such a good scholar and a very nice man. Who speaks Danish. And 10-20 other languages.”
Yes, Pete is right – Yeager speaks an incredible number of languages – but I of course mostly appreciates Yeager’s contribution to monetary thinking.
I consider Yeager (with Clark Warburton) to have been one of the founding father of what we could call Disequilibrium Monetarism and I think that Yeager has written the best ever monetarist “textbook”. As I have put it earlier:
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 (Keynes’) 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.
Yeager not only provides very good insight into understanding the monetary transmission mechanism, but he also in my view provides a key insight to understanding what happened in 2008. This is from The Fluttering Veil: (David Beckworth has earlier used the same quote)
Say’s law, or a crude version of it, rules out general overproduction: an excess supply of some things in relation to the demand for them necessarily constitutes an excess demand for some other things in relation to their supply…
The catch is this: while an excess supply of some things necessarily mean an excess demand for others, those other things may, unhappily, be money. If so, depression in some industries no longer entails boom in others…
[T]the quantity of money people desire to hold does not always just equal the quantity they possess. Equality of the two is an equilibrium condition, not an identity. Only in… monetary equilibrium are they equal. Only then are the total value of goods and labor supplied and demanded equal, so that a deficient demand for some kinds entails and excess demand for others.
Say’s law overlooks monetary disequilibrium. If people on the whole are trying to add more money to their total cash balances than is being added to the total money stock (or are trying to maintain their cash balances when the money stock is shrinking), they are trying to sell more goods and labor than are being bought. If people on the whole are unwilling to add as much money to their total cash balances as is being added to the total money stock (or are trying to reduce their cash balances when the money stock is not shrinking), they are trying to buy more goods and labor than are being offered.
The most striking characteristic of depression is not overproduction of some things and underproduction of others, but rather, a general “buyers’ market,” in which sellers have special trouble finding people willing to pay more for goods and labor. Even a slight depression shows itself in the price and output statistics of a wide range of consumer-goods and investment-goods industries. Clearly some very general imbalance must exist, involving the one thing–money–traded on all markets. In inflation, an opposite kind of monetary imbalance is even more obvious.
This is exactly what happened in 2008 – dollar demand rose sharply, but the Federal Reserve failed to ensure monetary equilibrium by not sufficiently increasing the supply of base money. That caused the Great Recession.
Finally I would also note that Yeager in his article (with Robert Greenfield) Money and Credit confused: An Appraisal of Economic Doctrine and Federal Reserve Procedure explained the very crucial difference between money and credit.
In a great tribute (published yesterday) to Yeager Bill Woolsey – Market Monetarist and student of Yeager – explains:
Yeager was certainly aware that a banking system might respond to depressed economic conditions by reducing the quantity of money rather than holding it steady. This points to an additional major emphasis of his work–the distinction between money and credit. For Yeager, money is the medium of exchange. The quantity is the amount that exists and the demand is the amount that people would like to hold. Credit, on the other hand, involves borrowing and lending. Banks can lend money into existence, expanding the quantity of money even if there is no one who wants to hold the additional balances. And those wishing to hold additional money balances have no directly reason to show up at a bank seeking to borrow. The interest rate that clears credit markets does not necessarily keep the quantity of money equal to the demand to hold it. It is the price level for goods and services, along with the prices of resources, including nominal wages, that must adjust to keep the real quantity of money equal to the demand to hold it.
One could only hope that the central bankers in Frankfurt would study Yeager (and Woolsey!) to understand this crucial difference between money and credit and then we might get monetary easing – to ensure monetary equilibrium rather than the numerous odd credit policies we have seen in recent years. The problem is not a “broken transmission mechanism”, but monetary disequilibrium. No one explains that better than Leland Yeager.
I could – and should – write a lot more on Leland Yeager (for example on his contribution to international trade and international monetary theory), but I will leave it for that for now.
But you shouldn’t stop reading yet. Kurt Schuler over at freebanking.org has collected a number of excellent tributes to Leland Yeager from a number of his friends, colleagues and former students. Here is the impressive list: