I have promised to write an article about monetary explanations for the Great Depression for the Danish libertarian magazine Libertas (in Danish). The deadline was yesterday. It should be easy to write it because it is about stuff that I am very familiar with. Friedman’s and Schwartz’s “Monetary History”, Clark Warburton’s early monetarist writings on the Great Depression. Cassel’s and Hawtrey’s account of the (insane) French central bank’s excessive gold demand and how that caused gold prices to spike and effective lead to an tigthening of global monetary conditions. This explanation has of course been picked up by my Market Monetarists friends – Scott Sumner (in his excellent, but unpublished book on the Great Depression), Clark Johnson’s fantastic account of French monetary history in his book “Gold, France and the Great Depression, 1919-1932” and super star economic historian Douglas Irwin.
But I didn’t finnish the paper yet. I simply have a writer’s block. Well, that is not entirely true as I have no problem writing these lines. But I have a problem writing about the Austrian school’s explanation for the Great Depression and I particularly have a problem writing about Murray Rothbard’s account of the Great Depression. I have been rereading his famous book “America’s Great Depression” and frankly speaking – it is not too impressive. And that is what gives me the problem – I do not want to be too hard on the Austrian explanation of the Great Depression, but dear friends the Austrians are deadly wrong about the Great Depression – maybe even more wrong than Keynes! Yes, even more wrong than Keynes – and he was certainly very wrong.
So what is the problem? Well, Rothbard is arguing that US money supply growth was excessive during the 1920s. Rothbard’s own measure of the money supply apparently grew by 7% y/y on average from 1921 to 1929. That according to Rothbard was insanely loose monetary policy. But was it? First of all, money supply growth was the strongest in the early years following the near-Depression of 1920-21. Hence, most of the “excessive” growth in the money supply was simply filling the gap created by the Federal Reserve’s excessive tightening in 1920-21. Furthermore, in the second half of the 1920s money supply started to slow relatively fast. I therefore find it very hard to argue as Rothbard do that US monetary policy in anyway can be described as being very loose during the 1920s. Yes, monetary conditions probably became too loose around 1925-7, but that in no way can explain the kind of collapse in economic activity that the world and particularly the US saw from 1929 to 1933 – Roosevelt finally did the right thing and gave up the gold standard in 1933 and monetary easing pulled the US out of the crisis (later to return again in 1937). Yes dear Austrians, FDR might have been a quasi-socialist, but giving up the gold standard was the right thing to do and no we don’t want it back!
But why did the money supply grow during the 1920s? Rothbard – the libertarian freedom-loving anarchist blame the private banks! The banks were to blame as they were engaging in “pure evil” – fractional reserve banking. It is interesting to read Rothbard’s account of the behaviour of banks. One nearly gets reminded of the Occupy Wall Street crowd. Lending is seen as evil – in fact fractional reserve banking is fraud according to Rothbard. How a clever man like Rothbard came to that conclusion continues to puzzle me, but the fact is that the words “prohibit” and “ban” fill the pages of Rothbard’s account of the Great Depression. The anarchist libertarian Rothbard blame the Great Depression on the fact that US policy makers did not BAN fractional reserve banking. Can’t anybody see the the irony here?
Austrians like Rothbard claim that fractional reserve banking is fraud. So the practice of private banks in a free market is fraud even if the bank’s depositors are well aware of the fact that banks do not hold 100% reserve? Rothbard normally assumes that individuals are rational and it must follow from simple deduction that if you get paid interest rates on your deposits then that must mean that the bank is not holding 100% reserves otherwise the bank would be asking you for a fee for keeping your money safe. But apparently Rothbard do not think that individuals can figure that out. I could go on and on about how none-economic Rothbard’s arguments are – dare I say how anti-praxeological Rothbard’s fraud ideas are. Of course fractional reserve banking is not fraud. It is a free market phenomenon. However, don’t take my word for it. You better read George Selgin’s and Larry White’s 1996 article on the topic “In Defense of Fiduciary Media – or, We are Not Devo(lutionists), We are Misesians”. George and Larry in that article also brilliantly shows that Rothbard’s view on fractional reserve banking is in conflict with his own property right’s theory:
“Fractional-reserve banking arrangements cannot then be inherently or inescapably fraudulent. Whether a particular bank is committing a fraud by holding fractional reserves must depend on the terms of the title-transfer agreements between the bank and its customers.
Rothbard (1983a, p. 142) in The Ethics of Liberty gives two examples of fraud, both involving blatant misrepresentations (in one, “A sells B a package which A says contains a radio, and it contains only a pile of scrap metal”). He concludes that “if the entity is not as the seller describes, then fraud and hence implicit theft has taken place.” The consistent application of this view to banking would find that it is fraudulent for a bank to hold fractional reserves if and only if the bank misrepresents itself as holding 100percent reserves, or if the contract expressly calls for the holding of 100 percent reserves.’ If a bank does not represent or expressly oblige itself to hold 100 percent reserves, then fractional reserves do not violate the contractual agreement between the bank and its customer (White 1989, pp. 156-57). (Failure in practice to satisfy a redemption request that the bank is contractually obligated to satisfy does of course constitute a breach of contract.) Outlawing voluntary contractual arrangements that permit fractional reserve-holding is thus an intervention into the market, a restriction on the freedom of contract which is an essential aspect of private property rights.”
Another thing that really is upsetting to me is Rothbard’s claim that Austrian business cycle theory (ABCT) is a general theory. That is a ludicrous claim in my view. Rothbard style ABCT is no way a general theory. First of all it basically describes a closed economy as it is said that monetary policy easing will push down interest rates below the “natural” interest rates (sorry Bill, Scott and David but I think the idea of a natural interest rates is more less useless). But what determines the interest rates in a small open economy like Denmark or Sweden? And why the hell do Austrians keep on talking about the interest rate? By the way interest rates is not the price of money so what do interest rates and monetary easing have to do with each other? Anyway, another thing that mean that ABCT certainly not is a general theory is the explicit assumption in ABCT – particularly in the Rothbardian version – that money enters the economy via the banking sector. I wonder what Rothbard would have said about the hyperinflation in Zimbabwe. I certainly don’t think we can blame fractional reserve banking for the hyperinflation in Zimbabwe.
Anyway, I just needed to get this out so I can get on with writing the article that I promised would be done yesterday!
PS Dear GMU style Austrians – you know I am not talking about you. Clever Austrians like Steve Horwitz would of course not argue against fractional reserve banking and I am sure that he thinks that Friedman’s and Schwartz’s account of the Great Depression makes more sense than “America’s Great Depression”.
PPS not everything Rothbard claims in “America’s Great Depression” is wrong – only his monetary theory and its application to the Great Depression. To quote Selgin again: “To add to the record, I had the privilege of getting to know both Murray and Milton. Like most people who encountered him while in their “Austrian” phase, I found Murray a blast, not the least because of his contempt for non-Misesians of all kinds. Milton, though, was exceedingly gracious and generous to me even back when I really was a self-styled Austrian. For that reason Milton will always seem to me the bigger man, as well as the better monetary economist.”
PPPS David Glasner also have a post discussing the Austrian school’s view of the Great Depression.
Update: Steve Horwitz has a excellent comment on this post over at Coordination Problem and Peter Boettke – also at CP – raises some interesting institutional questions concerning monetary policy and is asking the question whether Market Monetarists have been thinking about these issues (We have!).
Bill Woolsey
/ February 11, 2012For a small open economy, including open capital markets, the natural interest rate is determined by the world supply of saving and the world demand for investment. Well, this is true for a large open economy too, it is just that for a small one, its national savings or investment demand are being defined to have no noticiable effect on these things where for a large one, things that happen domestically have effects on world conditions that are similar to what would happen if it is a closed economy.
If world market interest rates are equal to the world natural interest rate, then for a small open economy, a market interest rate different from the natural interest rate is a domestic interest rate different from world interest rates. Probably not a serious problem, especially with fixed exchange rates.
On the other hand, if the world market interest rate is below the world natural interest rate (say because of what the large open economies aer doing,) then our small open economy would tend to end up with malinvestment, I think.
I agree with the problems associated with thinking about “the interest rate” in this context.
Lars Christensen
/ February 11, 2012Bill, I think I am generally skeptical about the natural interest rate as a concept. In my view interest rates play are a rather small role in the monetary transmission mechanism – or at least it is just one of many asset prices which can be distorted by monetary policy. One might as well speak of the natural rate of exchange rate or the natural rate of the equity prices.
By talking about interest rates we fall into the Austro-Keynesian trap that low interest rates and easy monetary policy is the same thing. Rather I share the view of Friedman and Scott that low interest rates normally is a reflection that monetary policy has been tight and inflation expectations are low.
Greenspan’s bond market “conundrum” back in 2005 is a very good example of mis-reading the signals from the market.
Alex Salter
/ February 11, 2012ABCT does not, a priori, say anything about the length of the downturn other than making the (perfectly reasonable, it seems to me) claim that the magnitude of the downturn IN A PERFECTLY UNHAMPERED MARKET is directly proportional to the size of the malinvestment. The important takeaway is that monetary policy in the 1920’s was sufficiently loose to force a wedge between the natural (Wicksellian) interest rate and the market interest rate. The Fed unexpectedly put on the brakes in the late 1920’s (the key word is “unexpectedly!”) and set the stage for the stock market collapse. This itself contributed to a massive excess demand for money, leading the money supply to collapse by a third, etc. etc.
Nobody (aside from 100% reserve bankers, and recently, Stiglitz, who now has some weird farm productivity story) disagrees with Friedman’s explanation of the LENGTH and SEVERITY of the Depression. Indeed, a sophisticated understanding of both ABCT and monetary equilibrium theory shows ABCT and Friedman dovetail.
It’s one of the greatest misconceptions related to Austrian economics that ABCT can’t “explain the Great Depression.” This might be Rothbard’s fault, but I think a fair share of blame lies with his less-than-open-minded readers, too. ABCT explains the bubble; Friedman (and, on the political side, Higgs) explains the severity and the duration.
Steve Horwitz
/ February 11, 2012Alex said some of what I would say. I would just add that it’s certainly true that even if the excess money supply were limited to the 1925-27 period, that would not be enough to account for the bust that followed. That is precisely why you need other stories to explain the depth and length of the Great Depression.
I think it’s a plausible story to see some degree of excess money supply in the 1920s as leading to an unsustainable boom that broke in 1929. Had the response been similar to that of 1920, we would have had another recession, perhaps sharp, but certainly not of the depth and length of the GD.
When the response to the bust is the Hoover high-wage policy, Smoot-Hawley, and the Fed-caused deflation, it should be no surprise that a garden-variety recession quickly becomes a very deep recession/depression. Then tack onto that the various problematic policies of the FDR era that lead to Higgsian regime uncertainty and you can explain not just why it was so deep, but lasted for so long.
The ABCT is NOT a theory of recessions/depressions, it’s a theory of the unsustainable boom. The exact process by which that boom proceeds (e.g., why it might go into the housing market) and the exact way in which the bust unfolds, including its length and depth, cannot be explained by ABCT alone. Yes, it suggests that minimizing intervention during the bust is a good idea so that the required reallocation of resources can happen quickly and effectively (cf. Kling’s PSST stuff), but it says nothing by itself about the shape and length of the bust.
I think that’s important because sometimes people INCLUDING SELF-PROCLAIMED AUSTRIANS argue that it’s a comprehensive theory in some way. It’s not. All it does is explain the unsustainable boom and why it contains endogenous processes that will lead to a bust.
Lars Christensen
/ February 11, 2012Alex,
I would tend to agree with you. Austrian style analysis could explain the “boom” or the bubble (if there indeed was one…) and Friedmanite analysis would explain the downturn. Said in another way that is pretty much how Selgin would explain it – I don’t think that is ABCT as Mises or Rothbard understood it.
I am skeptical that there really was a bubble in the 1920s – much in the same way as I am skeptical was a bubble in the US economy prior to 2008. There might or might not have been. However, it would all perfectly within a market monetarist model of the world – which I guess is pretty similar to how for example Steve Horwitz would view the world. Rothbard however certainly would not have agreed.
And I am not sure what Hayek would have said – at least during the 1930s his views was not Friedmanite, but rather Rothbardian. I am of course aware that he to some extent changed his view as he grew older and maybe wiser.
spiritsplice
/ February 22, 2012You don’t think there was a bubble when housing prices doubled in 6 years and then crashed? What else would you call it? Why would there be a crash if there was not a false expansion? And why are there so many words missing in your sentences?
Lars Christensen
/ February 11, 2012Steve, thanks for dropping by my blog. I do agree that ABCT can be seen as a perfectly good theory of a unsustainable bust and that is also what I take away from your research. However, To me Mises-Hayek-Rothbard saw their version(s) of ABCT as a general theory. At least it is 100% certain that that was the way Rothbard was seeing it. Furthermore, Rothbard goes out of the way to justify secondary deflation. That in my view certainly is not sound. I of course is well-aware that you do not defend that position.
Steve Horwitz
/ February 11, 2012Further thoughts here: http://www.coordinationproblem.org/2012/02/what-the-austrian-business-cycle-theory-can-and-cannot-explain.html
Nicolas Cachanosky
/ February 11, 2012Also might be of interest this short piece by Anthony Evans: Evans, A. J. (2010). What Austrian Business Cycle Theory Does and Does not Claim as True. Economic Affairs, 30(3), 70-71.
I agree with Salters and Horwitz (and have vey little to add to their comments). The ABCT does not claim neither to be the only business cycle theory nor to explain all the relevant situations of a business cycle. But to explain why a certain kind of distortion is unsustainable and will eventually correct itself. Process than can happen in parallel to other distortions or political interference, etc.
I would add to things. First, the ABCT does not happen in a vacuum under ceteris paribus. Opposite forces may work in the same period of time, or they may have different forces in different times. This makes the empirical assessment of these theories very difficult.
Second, I doubt that the correct interpretations of the theory is that the offers a general explanation. Maybe Rothbard’s AGD offers that reading, but I wouldn’t generalize what the theory says from one book. Rothbard’s might be a famous book, but I doubt it is the best one on the matter. Bet even if that were the position of Mises and Hayek as well, I wouldn’t discard a theory because it is being wrongly interpreted, but I’d discard it when I’m convinced is theoretically wrong.
Lars Christensen
/ February 11, 2012Nicolas, I don’t think we have any major disagreements. However, I would stress that even though modern day Austrians like Steve (Anthony) does not buy into the Rothbard’s version of ABCT it nonetheless remains a fact that at the time the Austrians – Hayek especially – favoured deflation (including secondary deflation) as a cure.
That might of course not be the view of modern day Austrians of Steve’s type, but I am sure Bob Murphy would have a very different view – as would Hans Herman Hoppe and de Soto. They are Rothbardians and in my view very wrong about both the Great Depression and the Great Recession.
Tom G. Palmer
/ February 11, 2012This is a very useful and interesting clearing of the air on the applicability of a theory to historical events.
I’d be interested in further responses on the issue of whether “the idea of a natural interest rates is more less useless.”
Lars Christensen
/ February 11, 2012Tom, thanks for dropping by.
My reference to uselessness of the natural interest rates mostly concerns my view that the level of interest rates does not tell us anything about the price of money. The price of money is determined by the demand and supply for money, while interest rates is is the price of credit – Friedman or Yeager happily would teach us.
Furthermore, in terms of understanding the monetary transmission mechanism I would not spend much time looking at interest rates – even though central bankers seem obsessed with it (as do some Austrians…).
See also my story about “Ben Volcker” and the transmission mechanism: http://marketmonetarist.com/2011/10/30/ben-volker-and-the-monetary-transmission-mechanism/
Steve Horwitz
/ February 11, 2012Lars,
What do you make of this (from 1975, h/t Greg Ransom)?
“It does not follow [from the fact that a disequilibrium generating inflation cannot be allowed to expand forever] that we should not endeavour to stop a real deflation when it threatens to set in. Although I do not regard deflation as the original cause of a decline in business activity, a disappointment of expectations has unquestionably tended to induce a process of deflation — what more than 40 years ago I called a ‘secondary deflation’ — the effect of which may be worse, and in the 1930s certainly was worse, than what the original cause of the reaction made necessary, and which has no steering function to perform.”
– F. A. Hayek, “Full Employment at Any Price?”, 1975.
Lars Christensen
/ February 11, 2012Steve, I know that quote. I think Hayek grew wiser – a lot wiser, but that does not change the fact that Hayek – as our friend David Glasner would tell us – in the 1930s did really warn against deflation. But I certainly do agree that Hayek’s view of deflation changed. He came to understand the difference between good and bad deflation/inflation. Rothbard near learned that – or at least he never seemed to care.
Said, in another way why did Hayek not join forces with Cassel and Hawtrey? He should have if he had had the views he expressed in 1975.
And what would he do today? Advocate monetary easing? I would have hope he would have argued in favour on nominal spending target, but I am less sure about that than for example Larry White is.
Biill Woolsey
/ February 11, 2012Lars:
I think of the interest rate as a price that coordinates saving and investment. Perhaps this is wrongheaded. I know it is rather abstract.
However, it is not just an apendage of monetary equilibirum/disequilibrium theory. It is about relative prices and the allocation of resources.
Because money is always an asset, and inside money is also debt to someone, I think tying money supply and demand to saving and investment provides insight.
Lars Christensen
/ February 11, 2012Bill,
In terms of the interest rate making sure that I=S I have no objections. However, without sounding too much like Scott I don’t think that monetary policy should be understood in terms of saving and investment but rather demand and supply for money. That said, I don’t think we disagree.
Biill Woolsey
/ February 11, 2012Steve:
I know I have said this before, but I think one thread that ties a good bit of Mises together is an effort to prove that social reforms aimed at abolishing interest income will lead to disaster. The ABCT explains how using monetary policy to that end will have disaster. While abolishing interest income by monetary policy seems insane on its face, some have taken that view. We libertarian monetary econonomists should be especially aware of this, given the free banking theories of the individualist anarchists. If you start with the assumption that everyone thinks it will work, really to give the proposal the benefit of the doubt, then you have the theory of the unsustainable boom. The crazy project of abolishing interest income must be given up or else the economy will collapse in a hyperinflationary disaster. There are still plenty of additional assumptions needed for malinvestments, but it seems plausible enough.
But when we don’t have this sort of crazed plan and are not giving anyone the benefit of the doubt, malinvestment requires the assumption that entrepreneurs foolishly project short term interest rates into the indefinite future. Certainly, Taylor-rule policies suggest no such thing. Maybe there were people who might take a modest decrease in the Fed’s discount rate in 1927 to mean that interest rates will be lower forever, but that would be pretty unreasable as well.
The more reasonable approach would be to say that interest rates below the natural rate (due to an excess supply of money) cannot be maintained. Any investments made that are only profitable if those interest rates are wronglyl projected into the future will turn out to be malinvestments. When we keep in mind that the natural interest rate sometimes actually falls, how is this different from the statement that any investment made that is only profitable if a decrease in the interest rate is persistent, will turn out to be a malinvestment if the decrease in the interest rate is temporary?
Bob Murphy
/ February 11, 2012Lars: I am tied up with “day job” stuff and have to be brief. But c’mon, no Austrian says that the 1929-1933 depression was because of the inflationary boom. Remember, the whole reason Austrians like the 1920-21 episode is that it shows how quickly the economy can bounce back even from severe deflationary policies, if there is relative laissez-faire.
(I know there is a market monetarist and a Keynesian response to that argument, I’m just clarifying that nobody is advancing the view you are trying to knock down in your post.)
The reason 1929-1933 was so awful, according to Rothbard and I suspect most other Austrians, is that the Hoover Administration tried to “help” and, among other things, propped up wages.
Lars Christensen
/ February 11, 2012Bob welcome…I was thinking when I wrote the post: “Now Bob will jump into the discussion and I don’t have time because I need to write other damn article”…I didn’t know I would be saved by your day-job stuff (I know the feeling…).
By the way I agree on NIRA…that was evil and undoubtedly did a lot of harm. We all agree on that.
Bob Murphy
/ February 11, 2012So just to be crystal clear: According to a generic Rothbardian, the 1920s inflationary boom explains the need for a massive bust, which we saw in the 1929 crash. But if Hoover were actually the do-nothing guy portrayed in the textbooks, then (according to a generic Rothbardian) the economy would have hit rock bottom and begun growing again by say 1931.
Now here’s my point (meaning I don’t know how many other Rothbardians would agree with it): Yes, given that the government has empowered unions etc. and makes it hard for nominal wages to fall, then sticking to the gold standard will make the recovery from a massive bubble really painful. And in the midst of such an adjustment–especially if the feds are busy socializing huge sectors of the economy–it might give a short-run boost to employment to go off gold and give the green light to the printing presses.
But it would hardly be right to conclude from this that, “The gold standard caused a catastrophe in the early 1930s.”
By analogy, if the government let the Post Office charge whatever it wanted for first class mail delivery, that would be a bad idea, given the monopoly it enjoys. But surely we shouldn’t conclude, “Price fixing from DC is a good idea. Letting supply and demand determine prices harms consumers.”
Lars Christensen
/ February 11, 2012Bob…that is open-minded and it might get you into trouble. But I agree there is no doubt that the policies of FDR in terms of the labour markets were extremely damaging. The question is what would have happened if we had not had NIRA and FDR had stayed on gold? I still think the depression would have been the worst crisis in the century.
But damn, I think we are having a problem here – we are a little too much in agreement. I hope you will write something to set me strait;-)
Eric Dennis
/ February 11, 2012Market monetarists’ analysis of conditions in the 1920’s seem largely focused on rebutting positive arguments made by others (e.g., Rothbard) that the period was inflationary, pointing out the inadequacy of money supply growth (when money demand is unknown) or market interest rate levels (when the natural rate[s] are unknown) as indicators. These are legitimate points, but there is an indicator that is adequate: the NGDP trajectory over the period. And this indicator is clearly inflationary, as I show here:
http://centerforindustrialprogress.com/2011/12/01/causes-of-the-great-depression/
In a certain sense, one which seems to animate Lars, interest rates are not some sui generis phenomenon uniquely expressive of monetary disequilibrium when it does occur. Of course interest rates are just some prices among many others. Still not all prices are equally important. Rates — as an entire class of prices — are special, because they encode the inter-temporal aspect of supply and demand, an aspect increasingly important as an economy gets more advanced and employs longer and more integrated production processes.
One ought not wield monetary disequilibrium theory at a perpetually abstract level. One ought apply it by discerning the affects of a disequilibrating monetary policy on specific prices that are important for a given cycle. All such prices are pushed away from their natural levels, even though we cannot easily or precisely measure what those natural levels are. And the deviation of market rates from their natural levels usually has a big explanatory role: how else can we understand the huge malinvestments in home loans during the 2000’s, for example?
Lars Christensen
/ February 11, 2012Eric, thanks for your comment.
Frankly speaking I think it is very hard based on your graphs to make the argument that there was any “bubble” in NGDP in the 1920s in the US.
We are basically not out of the 1920-21 crisis in terms of NGDP before mid-1920s so we can hardly talk about any trend in the following years. Obviously that can be test statistically and that might of course be what we really should do.
Furthermore, I have not argued that monetary policy did not become too easy but rather that it hard to argue that it was easy “enough” to have led to massive malinvestments that would lead to the mother of fall economic downturns. I find that very hard to believe.
Eric Dennis
/ February 11, 2012Lars,
The 1920/21 NGDP spike (especially when WWI-related government spending is excluded) is quite sharp, so there was probably not enough time for a lot of nonsubstitutable capital to be built up on expectations of that spending trend being continued. I don’t see the relevance of the top of this peak as a reference level for evaluating the rest of the decade.
I agree, though, that the NGDP trend over the 20’s does not explain the length or depth of the depression — only the necessity of *some* subsequent contraction. A ten year depression clearly depends on other factors (including a sharp NGDP contraction).
Jonathan M.F. Catalán
/ February 11, 2012Lars,
Have you read Peter Temin’s Did Monetary Forces Cause the Great depression? If so, what do you think of it?
Lars Christensen
/ February 12, 2012Jon, No I have not read Temin’s book, but I know of it and its conclusions. Given that I think believe that the Great Depression was caused by monetary factors I naturally disagree with Temin’s conclusions in his book. But I most of course stress that I did not read the book.
I have however read other things that Temin have written and I think he is one of the foremost knowledgable historians of the Great Depression.
I should of course stress that even though I think a monetary contraction caused the Great Depression I also think a lot of other forces were at played. Most important in the US was NIRA which had tremendously negative impact on the US economy. Scott Sumner has a very good account of this in his unpublished book on the Great Depression as do of course Vedder’s and Gallaway’s “Out of Work”.
PS I have no clue why nobody has published Scott’s book yet…
Mike Sax
/ February 12, 2012Lars, interesting stuff. So what you found hard was the idea that the Austrains could have been more wrong than Keynes? The fact is that Keynesians always follow you on the idea of monetary stimulus-I know you personally don’t like to call it stimulus though Sumner does-the just don’t see it as the be all and end all.
Still it’s clear that the Monetarists feel much more sympathy to the Austriians then Keynesians. Which suggests to me the common enemy is fiscal stimulus.
Interstingly though Hayek wasn’t even allowed to teach economics when he was at the University of Chicago, even if years later Friedman lionized him after his death.
As far as being opposed to fractional reserve banking this has always been an Austrian position-certainly Rothbard always consdiered it a great evil. Even in the 90s he was still fantasizing over a “100% gold dollar.” For the record I am at least somewhat sympathetic to Occupy Wall Street but have no interest in ending fractional reserve banking. I certianly doubt Keynes would be against it.
Friedman in 1960 was the polar opposite of Rothbard-he called for 100% reserve banking.
Steve Horwitz
/ February 12, 2012Can I quickly note that the vast majority of Austrian economists producing professional literature in economics reject the Rothbardian view of fractional reserve banking? I think it is inaccurate when describing, at least practicing professional Austrian school economists, to call 100% reserve banking “the” Austrian view. It is “an” Austrian view, and a minority one among that group at that.
Lars Christensen
/ February 12, 2012Mike, generally Market Monetarists and Austrians have much more in common than Market Monetarists and Keynesians. MM’ers and Austrians are generally pro-market and skeptical about government intervention. Furthermore, money is at the core of the understanding of the macroeconomy for both MM’ers and Austrians and they also agree that monetary policy should not be discretionary and instead be rule based.
However, concerning the Great Depresion and the Great Recession MM’ers and Keynesians agree that the main problem is lack of domestic demand. In fact some Austrians like Steve Horwitz tend to agree with that view. Therefore, I would for example argue that my view of the present crisis is pretty similar to the that of Steve, while still think I am miles away of thinking of the world as Paul Krugman do.
And yes, Friedman used to be in favour of 100% reserve banking – as well as deposit insurance schemes.
Mike Sax
/ February 12, 2012As far as your trouble with his opposition to fractonal reserve banking-I don’t share it either-I would say that he and ABCT more generally see it as somehow an “unnatural” distortion of a true makret economy.
As we talked about before on some level Monetarists see money as “the root of all evil” in the sense that it’s the distortions of money which distort the proper workings of the market economy, I guess Rothbard sort of saw fractional reserve banking in the same way.
Lars Christensen
/ February 12, 2012Steve,
Ok I will give you that. The Rothbardian view of fractional reserve banking is only “an” Austrian view and other more reasonable views are also represented.
I know it is not fair, but at least in the US it seems like the “Austrian School” has become political rallying cry for some on the political right. These people to me represent a Rothbardian position rather than what I would term GMU Austrianism. This is of course very unfortunate as it make other thing that Austrian economists are all crackpots. They are not.
Mike Sax
/ February 12, 2012I agree they are both libetarian systems. However Keynesianism and Monetarism both believe in intervention of a sort-only Austrians truly believe in no intervention, even on the monetary side.
Can you or anyone else explain why Hayek was persona non grata at Chicago?
Lars Christensen
/ February 12, 2012Mike, I think that you might jump to conclusions here. Some of us are at least are non-interventionist as the Austrians and remember Friedman ended up arguing that the Fed should be abolished – and I would not argue against that. However, MM’ers do accept that there is a central bank – for now – and then we have a view on what central banks should do if they do exist. Scott Sumner, however, is not in favour of Free Banking. I am certainly more open to that idea.
Mike Sax
/ February 12, 2012I guess it depends on how you define intervention. I get that your conceptualy against the idea of intervention. Some, however, including the Austrains see even monetary poicy as “intervention.”
The old liquidationists would not see Freidman as noninterventionist.
Don’t get me wrong I think you’re right to talk about the differences between Monetarism and Keynesianism. I’m no fan of “all cats are grey” analysis. either.
On a deeper level I think it goes back to the centuires old debate between the Metallists-represnted by today’s Monetarists- and the Chartalists-best today represented by the MMMT school.
Bill Woolsey
/ February 14, 2012Eric Dennis:
Do you have the ngdp figures you used to construct your chart?
Bill
mayorwoolsey@gmail.com
Eric Dennis
/ February 14, 2012Bill, The NGDP historical time series for that chart are from:
http://www.nber.org/data/abc/
crazedmonk
/ March 22, 2012In terms of fractional reserve banking being fraud, one may concede to your point that if customers consensually deposit at a bank knowing full well that their money is not fully backed at all times then no fraud has been committed.
One could thus argue another point, however, that fiat currency itself is fraud — as fiat currency is a claim to capital in society that does not currently exist, or a dilution of existing capital claims. If one can print money, then one can essential buy something for nothing. To illustrate the effects of this with regards to fractional reserve banking, there is an example from earlier US banking history.
I don’t remember all the details fully, but at the time there was a type of gold standard in effect. A certain town, town A let’s say, had a main bank called bank A which held gold in its vault and realized that it could print out more claim checks to the gold than it held and make more money as a result. In effect, reserve banking. The townspeople used the claim checks as paper money and prices began to rise in the town. Eventually, the claim checks from the bank in town A made it to a bank in town B and the bank in town B accumulated a lot of these checks. (Also, entrepreneurs noticed that goods in town A were becoming more expensive, and thus they could profit off of this asymmetry by bringing goods in, and they naturally didn’t all use the same bank) They then asked for delivery of the gold, but bank A was unable to fulfill its obligation because it had extended itself too far and so it collapsed.
In effect, this acts as a restraint against fractional reserve banking in a free market. A fiat currency system, on the other hand, is not representative of a free market as the government can create money on demand as needed (as in the case of hyperinflationary zimbabwe). This money may enter the economy through the banking system, or through any other interface by which the government connects to the economy and may cause a business cycle.
Jim Rose
/ September 3, 2014Reblogged this on Utopia – you are standing in it!.