I don't believe I've shared this lecture here, so I will remedy that. This is a talk I gave in December of 2009 at George Mason University in which I explore the history of banking in the US, the theoretical arguments against central banking, and then the free banking alternative. My theme was that critics of central banking need to have sound arguments from both theory and history and avoid falling into the stereotypical conspiracy theory claptrap. The talk is about an hour, and there's about 25 minutes of questions.
She was one of my intellectual heroes, Anna was--together with Milton and Leland, David Laidler, Sir Alan Walters, and Dick Timberlake. Old monetarists all, come to think of it. Now only three are left; and, no, they do not make them like that any more.
I met Anna at NYU. Back then the NBER occupied the 8th floor of 269 Mercer Street. NYU's economics department was on the 7th floor. Of course I went to meet her. She turned out to be very nice, so I got the bright idea to ask her to serve as an external member of my dissertation committee. I had the impression that I was one of very few NYU Ph.D. candidates to think of doing that, which struck me as odd. But then a lot of things about NYU, and about the economics business generally, struck me (and still strike me) as odd.
Anna gave me some good advice; indeed, apart from Larry White (who was my supervisor, and who I talked to almost daily) she was my most helpful adviser at NYU. Naturally I don't remember much about the particular advice she gave me. But I do distinctly remember her telling me that, once I got into the business, I had better write about stuff besides free banking if wanted to survive. I took Anna's advice, and still found it rough going. Had I not listened to her I'm sure I would have had to give up.
I'm also pretty sure that it was only thanks to Anna that some of the the free banking stuff that did make it into the better journals got through: she was one of the few persons who was both greatly respected by the editors of those journals and willing to give the free bankers a hearing. Indeed, Anna was more than sympathetic: she was, or she became, one of us. I am reasonably certain that she played a very large, if not crucial, part in encouraging Milton to revise his thinking on the topic, as he did when he and Anna published their 1986 JME paper "Has Government Any Role in Money?" . That Anna's views on the proper scope of government interference in banking became progressively more radical I have no doubt. For example, while in a 1995 Cato Journal article she and Mike Bordo took the conventional line that you couldn't have a stable banking system without some sort of deposit insurance, when I questioned her about this stand a few years ago Anna claimed that she had since rejected that view, having come to believe instead that the moral hazard arising from deposit guarantees ultimately caused such guarantees to do more harm than good.
I was lucky to be able to talk to Anna at length on several occasions during the last few years, thanks to Walker Todd, who arranged for her to visit the American Institute for Economic Research while I was there as a summer fellow. What I remember most about those conversations was how very candid and uncompromising they were: Anna never held a punch, and when she threw one, it landed square on target. Not that Anna wasn't generous with praise: it's just that, whatever she thought, she always came right out with it. She'd lived long enough, I suppose, to earn that. In any event it meant that talking to her was really a blast. (If only I could repeat all that I heard!)
Now, with all the dominoes lined-up from Greece to Brussels and beyond, and ready to start toppling at any moment, how I wish that this tough and uncompromising monetarist was still among us! No one can say just what she'd have made of it all; but whatever she made you can bet she would have served it up straight.
Richard Timberlake turns 90 on June 24; here is an appreciation I wrote of him (prefaced by some words not by me). His forthcoming book Constitutional Money: A Review of the Supreme Court's Monetary Decisions, scheduled for publication in about six months, will be of interest to many readers of this blog.
Anna Schwartz, Milton Friedman’s coauthor on the second most influential monetary book of the 20th century (after Keynes’s General Theory) died on June 21.
Gitta Sereny died on June 14. She was a journalist and historian, and the stepdaughter of Ludwig von Mises.
The right of making snarky comments on this post is reserved to those who have written a book as good as any of these three have.
In my Freeman column this week, I discussed the importance of monetary calculation in enabling entrepreneurs to know both what to produce and how to produce it. The ability to make use of money prices to formulate a forward-looking budget and to calculate backward-looking profits/losses is crucial to entrepreneurial planning and the learning process of the market. In that piece I didn't have the space to make an additional point that I'd like to note here.
For monetary calculation to be maximally effective, the monetary system matters. Specifically, the more sound that money is, the more reliable is monetary calculation. This is a point that Mises made in this 1920 article about economic calculation in the socialist commonwealth and one I developed in a HOPE paper in 1998. In an economy subject to periodic inflation and deflation, the reliability of money prices is reduced, and what we might call the "epistemic burden" on entrepreneurs is increased as they have to sort out whether a given price change is due to real or nominal factors. Where money is sound, price movements carry a less ambiguous message. They still require interpretation, but with one less major complicating factor than under inflation or deflation.
Given that different monetary regimes will be more or less likely to avoid inflation and deflation, the monetary system matters for the effectiveness of monetary calculation. If free banking is better than the alternatives at avoiding monetary disequilibria, then it is also better at creating a sound environment for monetary calculation. And, if so, it will be better at promoting economic growth.
Many of these ideas are at the core of my Microfoundations and Macroeconomics: An Austrian Perspective, which if you haven't read, you should!
Commenting on the appearance of the 100th issue of the Journal of Economic Perspectives, its founding editor, Joseph Stiglitz, remarks (page 22) that a diversity of perspectives is
“especially important in a field known for having certain orthodoxies—orthodoxies that dominate for a while and then fade, making the profession sometimes look less like a science than it would pretend to be. A case in point is the well-known and widely documented belief within the profession as the economy entered the Great Depression that markets were self-correcting and that government intervention would be a mistake. Another is the monetarist fad a half-century later.”
It takes a lot of chutzpah to offer the Great Depression as a counterexample to the claim that government intervention is a mistake. Thanks to the evidence and arguments made by the monetarists Stiglitz also derides, it is now generally accepted that the major fault for the Depression lies with the Federal Reserve System and the Bank of France, which as central banks were creatures of government intervention. (And here is the connection to free banking: the actual or plausible hypothetical behavior of free banks offers a standard of comparison to what central banks did, especially the massive accumulation of gold by the Federal Reserve and the Bank of France. Because gold earned no interest, it is implausible that free banks would have accumulated it on such a large scale, creating deflationary pressure. I know of no actual large-scale free banks that held such high ratios of gold reserves.)
I recommend for Stiglitz or anybody else who thinks as he does the sections on the Depression from the books below:
Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960 (this had better be a re-reading for any economist who is beyond graduate school)
Benjamin Anderson, Economics and the Public Welfare (an account of the period by a first-hand observer)
Richard Vedder and Lowell Galloway, Out of Work: Unemployment and Government in Twentieth-Century America (describes labor market interventions that kept unemployment high in the United States during the Depression)
H. Clark Johnson, Gold, France, and the Great Depression, 1919-1932 (the Bank of France’s role in the Depression)
Jim Powell, FDR’s Folly (a well-written popular survey of the multitude of regulations imposed during the Depression in the United States and how they impeded recovery)
And, David Glasner would add, Ralph Hawtrey, Trade Depression and the Way Out.
UPDATE: Now I know where Stiglitz gets his ideas on the Great Depression: he makes them up. In an interview broadcast on National Public Radio on June 17, I heard him claim that Herbert Hoover imposed austerity. Under Hoover, though, federal spending increased from 3.4 percent of GDP in fiscal 1930 (July 1929-June 1930) to 8.0 percent in fiscal 1933 (July 1932-June 1933). A budget surplus of 0.8 percent of GDP in fiscal 1930 turned to a deficit of 4.5 percent in fiscal 1933. (See page 24 of this. Remember that at the time, presidential terms began in March.) Hoover's decision to raise tax rates was an austerity-type decision. But here is Stiglitz saying in 2010 not to extend the Bush tax cuts, or in other words, to imitate Hoover. For more details, see a recent paper by Steve Horwitz.
In the current American Thinking, I have an article raising questions about the wisdom of our current policies for our financial infrastructure and compare with the inefficiencies, political favoritism and pork barrel spending on "internal improvements" such as our federal highway system. I concluded:
More broadly, we should take a step back and re-examine the road we're on with federal "internal improvements" for our financial infrastructure, too. With the federal government's use of the Federal Reserve, and Fannie and Freddie, to pave our financial paths, we need to see the continued political favoritism, inefficiencies and wasteful spending.
Something to ponder while stuck in rush-hour traffic, realizing that your financial situation has probably deteriorating 40%, in large part thanks to the popped housing bubble.
We've been playing this game for 200 years but don't seem willing to learn the lessons of this history. I'm sure throwing more dollars to study this question would give us more insight, right? <sarcasm>
Scott Sumner writes,
"I don’t object to people noting that Bretton Woods had some characteristics of the gold standard; I’ve made that argument myself. But I wish the gold bugs would get the story straight. Half of them seem to think the US monetary system of the 1920s wasn’t really a gold standard, and half seem to think Bretton Woods was. Which is it?"
The answer is "both" -- or "neither." Here's why.
The pre-World War I gold standard included the following characteristics: (a) On the eve of the war, world GDP was divided roughly 50-50 between countries that had central banks and those that did not. Most of the world outside of Europe did not have central banks, with the significant exception of Japan. (The U.S. Federal Reserve had been established by law, but did not become operational until shortly after war broke out in Europe.) (b) Most independent countries were on a gold or silver standard. (c) Significant exchange controls were rare. (d) Gold and silver coins were in widespread use.
The interwar gold standard differed from the prewar gold standard in each characteristic. (a) Central banking was the dominant monetary system. Free banking almost disappeared; currency boards, though they became more widespread in the period, existed mainly in colonies or League of Nations mandates. (b) The gold standard remained the ideal until the 1930s, but it was an ideal that more and more countries had difficulty adhering to. Among independent countries, the gold exchange standard, rare before the war, became widespread. Under the gold exchange standard, central banks held a large share of reserves in foreign securities that before the war they would instead have held in gold. (c) Exchange controls were widespread except for a stretch of several years in the 1920s. (d) Gold coins disappeared from use and silver coins became rarer.
Under the Bretton Woods system, the characteristics again changed. (a) Central banking was even more dominant than in the interwar period. (b) Member countries of the Bretton Woods system and their colonies were on a gold exchange standard in which the U.S. dollar was the only major currency exchangeable for gold during most of the life of the system. (c) Exchange controls were widespread for the whole life of the system. Even in the United States, the linchpin of the system, the dollar was only exchangeable for gold by central banks, not by private persons. (d) Gold coins were no longer minted except as collector’s items and silver coins disappeared from use almost everywhere, a sign that governments and the public did not expect the same durability of exchange rates under the Bretton Woods version of the gold standard as under the pre-World War I version.
Keeping the characteristics of each period in mind, it is not surprising that when referring to the interwar or Bretton Woods periods in a short phrase, some people consider them gold standards and others do not. Judged against the pre-World War I gold standard, the later periods retained some similarities but also introduced significant differences. Some people stress the factor of continuity that the monetary system continued to center on gold in one way or another; others, me included, stress the differences.
P.S. Where are the other contributors? If this threatens to become a single-author blog I will cease writing. Most of the interest of the blog lies in its having multiple contributors with varied interests.
Robert E. Keleher died on May 27 at the age of 67. His name will be previously known to few readers of this blog, but his ideas are highly important to the current world economic situation.
Bob’s most significant work was Monetary Policy, a Market Price Approach, a book he wrote with Manuel H. Johnson. Bob developed the ideas that led to it while working as Johnson’s adviser when Johnson was vice governor of the Federal Reserve Board. It was published in 1996, after they had left the Board. It is, to my knowledge, the only book-length treatment of the question, What indicators should a central bank with a floating exchange rate use to conduct a forward-looking monetary policy? This is, obviously, the question facing most major central banks in the world today, and the answer is vital to the well-being of billions of people.
None of the work I have seen on inflation targeting addresses the question in a fully satisfactory way. Using last month’s inflation reading to guide this month’s monetary policy is like driving using the rear-view mirror. Proponents of inflation targeting understand this point, and they advocate an emphasis on expected inflation, but they do not say enough about the particular indicators that an inflation targeting central bank should use. In practice, central banks do look at particular indicators using particular frameworks, but their procedures are tacitly embodied in institutional practice rather than explicitly articulated in the way Bob’s book does.
The market price framework rests on ideas that come from the Swedish economist Knut Wicksell, and it is therefore of interest to any current of thought influenced by Wicksell’s monetary theory—not just inflation targeting, but nominal GDP targeting, more discretionary approaches to central banking, and even free banking. Advocates of nominal GDP targeting say, “Target the forecast!” The market price framework can help the private sector make the forecast. If free banking were to take the form envisioned by Friedrich Hayek, with competing floating-rate currencies, the market price framework can help issuers of currency decide how much currency to issue.
The particular forward-looking market price indicators the framework recommends examining are broad indices of commodity prices; foreign exchange rates; and bond yields. No mechanical rule suffices for judging whether the central bank is supplying an equilibrium amount of the monetary base, so the book explains how to examine indicators jointly and extract signals from them.
Bob was raised in Chicago. He earned a Ph.D. in economics from Indiana University in 1976. He worked for First Tennessee National Corporation, a bank holding company; the Federal Reserve Bank of Atlanta; the President’s Council of Economic Advisers, where he was senior macroeconomist in 1985 and 1986; the Board of Governors of the Federal Reserve System; Johnson Smick International, a Washington, D.C. consulting firm; and the Joint Economic Committee of the U.S. Congress, where I was for a time one of his coworkers. Bob wrote more than 60 papers, many of which are available through Google Scholar. Besides Monetary Policy, he was also the coauthor of another worthwhile book, The Monetary Approach to the Balance of Payments, Exchange Rates, and World Inflation, with Thomas M. Humphrey (1982).
Bob had a deep reservoir of knowledge in monetary economics, spanning the theory and practice of the subject. It will be to our detriment if we fail to take advantage of the insights he developed in Monetary Theory, a Market Price Approach.