I happened to come across this quote from an old Milton Friedman interview, where he blames the Austrian school for encouraging the poor government response to the Great Depression:
Now, I know you’d disagree, probably with a great deal of fury. This thread isn’t to debate whether Friedman is right or wrong.
I’m mentioning this because I was wondering: Have Austrian economists held Milton Friedman in great contempt for his acceptance of Keynesianism and the statements above, or do they let it go because he’s mostly anti-government?
Also, after the Great Depression, did a lot of Austrian economists become Monetarists? I ask that because they tend to share the same political view and very similar economic views, but Monetarism is still taught in mainstream economics. So, I would think that with the rise of Monetarism and the fall of Austrian economics, that’s exactly what happened.
I’m basically just curious about the relations between the Monetarists and the Austrians, both modern and historical. Are they positive? Are they hostile?
When scientists get together and chat, they tend to focus on things they disagree on. You don’t make much progress if you constantly preach to the choir. For this reason, I believe the Austrian school and the Chicago school always seem to disagree strongly, but it is mostly just over monetary issues.
Yeah. BTW, if anyone here says that Friedman misrepresented his views, I’d agree.
A Monetarist in another forum I shared this with said, “But wait, read the rest of the interview!!”
He then posted a quote where Friedman said he wanted to “abolish” the Federal Reserve.
If you don’t oppose fiat, you can’t “abolish” the Federal Reserve. You’d just change its name and given it less power. You’d still have a central banking committee looking at statistics each week, deciding on whether to expand the money supply and by how much. Right? It’s just that they’d be deciding strictly based upon the Monetarists’ simplistic view of how money works instead of Keynesianism.
In one of the audio files I remember hearing Rothbard tell a funny story about how he attended a conference where Friedman was scheduled to give a lecture on price controls. But when he saw Rothbard in the audience Friedman abandoned his prepared lecture and spent the entire time criticizing America’s Great Depression.
On the other hand I read somewhere (I think it was in Brian Doherty’s book) that in the mid 50’s Friedman wrote a letter to Rothbard encouraging him to take a post-graduate fellowship at the University of Chicago.
Also Joseph Salerno and Richard Timberlake debated Rothbard’s account of the depression in a couple of articles in Ideas on Liberty in the early 90’s. I’m sure you could find it on FEE’s site.
So in the instances where the bottom did drop out the depressions were relatively short lived yet when the government stepped in save the system you end up with a nearly decade long worldwide Great Depression.
But Keynes was there to save the day…Hooray…
Didn’t Bernake (jokingly) accept responsibility for the Great Depression on behalf of the Fed anyway? Or maybe I’m confusing it for the depression he is inducing with his incessant ‘liquidity injections’ since I guess the job didn’t come with his own personal helicopter…
Bernanke accepted responsibility for not doing what Friedman suggested they should’ve done during the Depression – liquidity injections to stop the bank runs.
Lastly, how do open market operations cause Bernanke or any banker to profit? How does the Fed buying and selling securities from its member banks put money in Bernanke’s pocket?
Instead of baiting these people, I woud suggest finding the answers by reading Austrian Business Cycle theory. You could also read “History of Money and Banking in the US,” and “What has Government done to our Money?”
I read that a while ago, and from the best I can tell its mostly slander. For example, Friedman came out against anti-trust legislation at least as soon as Free to Choose.
Although I have no idea if that evidence is true (I haven’t researched it in full), it wouldn’t be surprising to me if it was. I don’t see how allowing a massive monetary expansion followed by a massive contraction (which is what happened in the Depression) is somehow any smarter than allowing a massive expansion followed by no contraction (simply leveling-off the monetary growth). What was dumb about the 19th and early 20th centuries to me is not the massive contractions and bank failures, but that the banking institutions which kept failing over and over remained in place, and were later made part of government (and therefore nigh-immortal) when the Federal Reserve was created. Although the USA really wasn’t on the gold standard before or during the Depression, they just sort of claimed they were.
I really don’t understand how people can blame it on the gold standard itself, though. Switzerland was on a gold standard up until when, 1999? They didn’t had any serious problems that I know of.
Edit: That paper calls the gold standard the "antithesis of the gold standard. Thats certainly not true of the sort of gold “standard” Austrians advocate (which isn’t really a gold standard at all, its just free market money). Friedman’s main critique of the gold standard was that you have to have people dig it out of the ground only to put it back into underground vaults for storage. It didn’t make any sense to him, and it doesn’t make any sense to me either. If we go back to free market money, I hope people choose something other than gold as a medium of exchange.
Claiming that a gold standard is responsible for bank runs is especially amusing. If you print more bank notes than you have specie to back it up, who is going to be surprised when the bank notes decrease in value? And with a fixed exchange rate between notes and gold, who is going to be surprised if people run on banks to redeem their notes for gold? Assuming something like that would be even dumber than the bimetalic standard, which is what the USA was on at the time (I don’t think we ever had a “real” gold standard).
I have no personal issues with Friedman. According to Mark Skousen, Friedman later recanted his views on gold and admitted he was wrong on money. He even admitted that von Mises ought to have won the Nobel Prize. For those interested in the relationship between Vienna and Chicago, I suggest picking up the homonymous title by Skousen. It has its imperfections (Skousen is no expert on methodology), but it’s illuminating in several regards.
I’ve tried to read “What has Government Done to Our Money”? I got stuck at this part. I don’t know what Rothbard is trying to say.
He seems to falsely assume that supporters of fiat don’t believe fiat is embedded in previous assets. This isn’t exactly the case. While fiat is created by decree and not backed by any particular assets, it’s not necessarily an arbitrary decree if it increases the supply of money up to the point of the demand for money (totally ignoring Keynesian theories about aggregate demand’s affect on the money supply, for sake of clarity and simplicity)
And also, increasing the supply of money by selling government bonds doesn’t put stolen money in anyone’s pockets or necessarily create a false claim on assets, because banks only profit from the difference between the savings interest rate and the loaning interest rate. But both move in the same direction, when the money supply shifts, and unexpected inflation actually hurts banks. It’s deflation the banking conspirators would want.
Finally, if the government is selling tons of government bonds not backed by any economic growth, people won’t expect to get a return, so there won’t be any market for such bonds. If they substantially increase the money supply well above the demand for money, there isn’t going to be any market for such a government’s bonds and they will have to resort to literally printing money. But America’s ever done that – and if that’s your worry, you should be attacking the U.S. mint, not the Fed. Even without the Fed and even with a gold standard, the government can engage in counterfeiting its own currency.
I’m glad to hear something that sounds intelligible, here.
Grant, I remember seeing a thread recently claiming that fractional reserve might exist naturally due to market forces. What’s your opinion of that?
There are certainly specific problems with using gold, but there are even worse problems with using other types of commodity money, and as I’ve said before, I thought that gold could never account for the value of all tangible assets.
To maybe explain myself better, here’s a Venn digram:
The gold circle represents the maximum potential value of the gold supply. The red circle represents the maximum potential value of the entire economy, in the sense of tangible assets. Since the gold supply only represents a fraction of the whole economy, even assuming subjective value is true, if all money has to be backed by gold (or ANY commodity), the supply of money is permanently kept at disequilibrium below the demand for money. This is why there’s deflation under a gold standard and not fixed prices (no nominal inflation\deflation). Because as economies grow, the red circle keeps getting bigger and bigger, the gold circle may grow, but not as quickly as the red. As a result, fiat can be used to increase the supply of money without causing an excess supply of borrowers or lenders… Because under a gold standard, the amount of available lenders are already kept artificially low (in the sense of money to be lent, not literal people).
I suppose you could address this problem by having a currency that’s only partially backed by a basket of goods, but why would that be preferable to fiat and fractional reserve?
Steady inflation happens for various other non-monetary reasons.
As I understand it, the only time you’ll see the effects Austrians predict would be if governments hyperinflate the money supply – that is, if they turn the gold circle into a green one (paper dollars), then expand it to a size even larger than red. You follow? If the Fed does nothing and just lets the money supply contract, as it did during the Great Depression, you end up with a banking crisis.
If any and all barriers to alternative currencies were repealed tomarrow, what sort of currency would you rather use, government or private money? It really comes down to a matter of trust, and I think its possible for a private institution to be trusted more than than the government is, because a private instutition has no political pressure to inflate, and much less monopoly power to abuse (which would be nigh-impossible in a private, electronic setting, since people could switch currencies extremely easily). I think if it were allowed to happen, private money would gradually replace government-backed money. I’ve also seen arguments of how fiat money can arise independent of government, as nothing more than trust between two or more people. Google the Ripple project for more information on that.
I know you don’t think the US government really just prints money to finance things, but consider how the Fed increases the size of the money supply. They do it by buying government debt. But what happens when the government over-spends? They have to sell more bonds, driving the interest rate up slightly. The Fed, with its interest rate target, then has to buy some of these bonds using freshly-printed dollars.
More than they’d want an institutionalized banking system that is nigh-immune to competition and bank failures? I’m not so sure about that, especially in the modern, information age where the opportunity for innovation abounds.
If I could own and use shares in the S&P500 as currency or use a fractional-reserve bank, I wouldn’t even think about the bank. If the S&P was used as a currency its price would fluctuate much less, and I think it would still appreciate in value at a far greater rate than any savings account.
I think the most likely private currencies to arise would be managed indexes of stocks, commodities and maybe even futures options (by using options as currency, you are actually guarenteed future purchasing power, try that with fiat!), or a combination thereof. I don’t think monetary issues would be a problem if, for example, every piece of currency was a small bit of ownership most of the world’s economy. The possibilities are really endless. I don’t think anyone can claim to know what sort of currency would arise, but I think anything would be better than government price-setting the cost to borrow money.
With electronics doing all the exchanges, I’m not even sure if we really need a common medium of exchange at all.
That really depends on the commidity used. Gold tends to deflate in value relative to other goods, although it does very slowly increase in quantity. Computer chips, on the other hand, would be a terribly inflationary currency.
at some yield, lenders will always come out of the woodwork. by way of extreme example, zimbabwe still issues treasury bonds (though there is substantial political interference in the process). the country can be going to hell in a handbasket, but government bonds are backed by the tax base, and only insurrection would threaten the taxing powers of the government. even the possibility of regime change may not totally freeze up the bond market. there will always be sophisticated investors prepared to take a punt on renegotiating old debt with an incoming revolutionary government. that is, pay us back for the last regime’s bonds, or we’ll block your access to new credit. typically, dud countries merrily print money and issue bonds right up to the moment when the imperial palace is stormed.
let me put it this way, if i owned a modigliani or a picasso, would it be worth any less for hanging in my toilet as opposed to the guggenheim museum? would it help if you imagined the bank vault gold worn as necklaces instead? it’s the rarity factor that counts.
I’m aware of the laws of supply and demand. My point was more directed towards a government-mandated gold standard, which is what Friedman talked about.
Does anyone know if he ever commented on the possibility of denationalizing money? I know he was more of a realist than Hayek, and seemed focused on reducing government intervention in areas where it was actually politically possible to do so. I’m guessing he simply didn’t bother discussing the possibility of private money since the likelyhood of it ever coming about (in the USA) was slim to none while he was alive.
I don’t have any preference for either government or private currency. But it’s important to note that a currency monopoly is inevitable, because it allows for trade to happen on an incalculably broader scale. Now, would I prefer a government currency or a privately monopolized currency? I don’t really see that big of a difference… Having a currency established by a stable, long-standing institution like the U.S. would make me more confident than in whatever private currency monopoly pops up, that might end up engaging in exactly the same kind of monetary manipulation you accuse the Fed of.
Since they’d be a monopoly, they’d have just as much ability as government to engage in that kind of behavior.
Nigh-immune to competition? Why do you think that the Federal Reserve’s member banks don’t compete with one another, anymore than you’d claim investors in a corporation don’t compete with one another, in the stockmarket?
Banks go bankrupt all the time. An up-to-date list is on the Fed’s website.
As for bank failures, surely you must see how avoiding those is a good thing?
And the information age is just as relevant to electronic fiat under America’s current central bank as it would be under your central bank created by the market.
Wait, I’m confused. In the absence of a money supply, what would you use to begin with, to buy shares in the S&P 500? And isn’t the stockmarket extremely volatile? I’ve seen it jump up and down hundreds of points, sometimes on a daily basis. You’d be ending up with unexpected inflation and deflation, from day-to-day. Prices would be all over the place.
Also, you can use a fractional-reserve bank, can’t you?
What would these be purchased with? Or are you saying that you think a future currency should be based on the stocks you’ve bought with fiat currency now?
If so, that basically admits Rothbard’s original point above is wrong. Because if such a future currency is going to be backed by private assets, which were bought with fiat, then that basically means that the strength of fiat does to some degree represent the real assets of a nation. Hence, prosperous economies’ currencies perform well and poorly performing economies’ currencies go down.
No, I meant steady inflation happens in fiat because of other non-monetary reasons..
Commodity money is going to be deflationary in the long-run, because no commodity can grow faster than the economy as a whole forever, or else it’d eventually overtake it and we’d all just be buying and selling gold or computer chips or whatever.
of course gold could represent the full potential of the economy at any time. it just means dividing all the assets in the economy by the quantity of gold to determine the relationship. yes, this does mean, the price of gold would rise.
doesnt W Block have an article about this. where he talks about atoms of gold etc.? i found that amusing
This assumes that gold and only gold would circulate as a medium of exchange in a free market for currency. I highly doubt this would be the case.
The deflation of which you speak is the market correcting prices after removing government interference. So maybe we could also describe it as commodity money regaining its lost value.