Friedman on the Great Depression – the Youtube version

Obviously anybody interested in monetary theory and monetary history should read Milton Friedman’s and Anna Schwartz’s great book “A Monetary History of the United States, 1867-1960”, but you could also have a look at the youtube version of the story.

See also my post on Scott Sumner’s account of the Great Recession on Youtube.

Recommend reading for aspiring Market Monetarists

The Market Monetarist school has emerged in the blogosphere as a clear competitor to mainstream Keynesians as well as to the Austrian school thinking. However, Market Monetarists have really not been very clear about their intellectual heritage.

In my recent paper on Market Monetarism I identify two overall Market Monetarist principles:

  1. Money matters.
  2. Markets matter.

These principles have some origin in economic literature. Here I present a short reading list that should get aspiring Market Monetarists up to date with the background on Market Monetarist thinking. The list is highly incomplete and I encourage others to pitch in with reading material, which is or should be important for the intellectual development of Market Monetarism.

Money Matters

Of course Milton Friedman is mandatory reading for anybody. Read everything Friedman wrote, but I think Money Mischief is an excellent introduction to a lot of Friedman’s thinking. Here you will learn why inflation is always and everywhere and monetary phenomenon, why it is highly unlikely that a fiat central bank would find itself in a liquidity trap liquidity trap, and of course why low interest rates is not the same as easy monetary policy.

It’s not possible to understand the concept of monetary disequilibrium and the monetary transmission mechanism without having read Leland Yeager and Clark Warburton. The Fluttering Veil is a collection of Yeager’s papers and Depression, Inflation and Monetary Policy is an excellent collection of Warburton’s research.

Concerning the monetary transmission mechanism you course have to read Brunner and Meltzer, but its complicated and not nearly as exciting as Warburton and Yeager.

Scott Sumner loves Mishkin’s textbook on monetary theory, but frankly I find it somewhat boring compared to reading Yeager and Warburton.

Markets Matter

Yes, we all know Sumner’s and Woolsey’s NGDP futures ideas so there is no reason to tell you too much about that (Ok you should read Scott’s The Case for NGDP Targeting). However, the use of market pricing as a tool for the conduct of monetary policy is not a new concept! It enjoys a rich intellectual history. Literature regarding Swedish monetary policy during the 1930′s – Cassel and Wicksell is a great place to start. Berg and Jonung’s 1998 paper Pioneering Price Level Targeting: the Swedish Experience 1931-37 is another excellent resource. For a more contemporary discussion of market-based approaches to monetary policy, check out Johnson’s and Keleher’s excellent book Monetary Policy, A Market Based Approach, from 1996.

An often-forgot kinship is the relationship between the Market Monetarists and the Free Banking Theorists. David Glasner’s and George Selgin’s books on Free Banking are mandatory reading. Both tell the story about how basically a perfect competition Free Banking world will end up has having a fully elastic money supply and as a consequence effectively have Nominal GDP targeting. This should in my view be the welfare theoretical foundation for the Market Monetarists’ focus on NGDP targeting. Another excellent “free banking” book regarding targeting the price level is Selgin’s nice little book Less than Zero (that will also remind you that Market Monetarists are not inflationists).

Reading on Current Events

The leading Market Monetarists have told a very valid and impressive story on why the Great Recession happened and how the Federal Reserve failed in doing something about it. However, in my view the story told by Scott Sumner and Robert Heztel among others is far from complete. Hence, in my view the explanation for the crisis is far too US-centric as it ignores the massive increase in European dollar demand in late 2008 and 2009 and later again in 2011. This explanation clearly has something in common with the increase in gold demand leading up to the Great Depression (Scott Sumner could tell you all about that!). Obviously Barry Eichengreen has a lot to say about that in Golden Fetters (who will write the book “Green Fetters” about excessive demand for dollars as a cause for the
Great Recession??). However, remember when you read Eichengreen that a central bank that is doing its job (ie calibrating its policy instruments such that it expects to hit its target), “fiscal stimulus” is redundant at best. Also, have a look at Douglas Irwin’s excellent working paper Did France cause the Great Depression? – just the title of the paper makes it worth having a look doesn’t it?

And then of course both Robert Hetzel and Scott Sumner have books in the pipeline – I am sure they will be worth reading. These guys are at the core of the Market Monetarist movement – so gentlemen please get your books out asap!

Sex, flowers and Friedman

Milton Friedman quote of the day:

“Monetary policy is like a Japanese garden. It is esthetic unity born of variety; an apparent simplicity that conceals a sophisticated reality; a surface view that dissolves in ever deeper perspectives. Both can be fully appreciated only if examined from many different angles, only if studied leisurely but in depth. Both have elements that can be enjoyed independently of the whole, yet attain their full realization only as part of the whole.” (The Optimum Quantity of Money, 1969)

And then the quote of the day about Milton Friedman:

“Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers.” (Robert Solow)

Bob Murphy is anti-market (monetarism)

Bob Murphy has a comment on Market Monetarism on the Ludwig von Mises Institute website. Bob has been a fierce critic of Market Monetarism for some time and his views clearly deserves attention.

I will not go into a detailed discussion of Bob’s comments, but one thing I have always found rather puzzling about the Austrian view of monetary policy is to what extent it is anti-market. Bob and other Austrians are claiming that the present US monetary policy is highly inflationary. However, that is not what the financial markets are saying.

Bob Murphy’s big hero (and one of my big heroes as well) Murray Rothbard teaches us in Man, Economy and State that we can only observe people’s preference through their actions – what Rothbard terms demonstrated preferences. In a similarly way we can talk about a demonstrated expectations of monetary policy. Said, in another way market pricing is demonstrating to us whether monetary policy is loose or tight.

If there really was a massive risk of US hyperinflation (as the Austrians basically are arguing) then US bond yields should explode and the dollar should collapse. Furthermore, if investors truly were afraid about inflation then they would certainly not hold dollars. However, investors have basically never hoarded dollars like no time before. Hence, market participants are telling us that the US is not facing hyperinflation, but rather disinflation.

Either the markets are wrong or Bob Murphy’s analysis is wrong. I trust the markets…

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