Larry White


Larry White is Professor of Economics at George Mason University. He specializes in the theory and history of banking and money, and is best known for his work on free banking. He received his A.B. from Harvard University and his M. A. and Ph.D. from the University of California, Los Angeles. He previously taught at New York University, the University of Georgia, and the University of Missouri - St. Louis.

Professor White is the author of The Clash of Economic Ideas (Cambridge, forthcoming); The Theory of Monetary Institutions (Basil Blackwell, 1999); Free Banking in Britain (2nd ed., Institute of Economic Affairs, 1995; 1st ed. Cambridge, 1984), and Competition and Currency (NYU, 1989). He is the editor of F. A. Hayek, The Pure Theory of Capital (Chicago, 2007); The History of Gold and Silver (3 vols., Pickering and Chatto, 2000); Free Banking (3 vols., Edward Elgar, 1993); The Crisis in American Banking (NYU, 1993); William Leggett, Democratick Editorials (Liberty Press, 1984); and other volumes. His articles on monetary theory and banking history have appeared in the American Economic Review, the Journal of Economic Literature, the Journal of Money, Credit, and Banking, and other leading professional journals.

In 2008 White received the Distinguished Scholar Award of the Association for Private Enterprise Education. He has been Visiting Professor at Queen's University of Belfast, Visiting Fellow at the Australian National University, Visiting Research Fellow and lecturer at the American Institute for Economic Research, visiting lecturer at the Swiss National Bank, and a visiting scholar at the Federal Reserve Bank of Atlanta. He co-edits a book series for Routledge, Foundations of the Market Economy. He is a co-editor of Econ Journal Watch, and hosts bi-monthly podcasts for EJW Audio. He is a member of the board of associate editors of the Review of Austrian Economics and a member of the editorial board of the Cato Journal. He is a contributing editor to the Foundation for Economic Education's magazine The Freeman and lectures at the Foundation's annual seminar in Advanced Austrian Economics. He is an adjunct scholar of the Cato Institute and a member of the Academic Advisory Council of the Institute of Economic Affairs.


Krugman: Irresponsible money-printing and the meaning of the word "is"

by Larry White August 10th, 2014 2:58 pm

Paul Krugman has noticed the sound money movement. In yesterday's NYT blog post he writes:

In other words, libertarianism is a crusade against problems we don’t have, or at least not to the extent the libertarians want to imagine. Nowhere is this better illustrated than in the case of monetary policy, where many libertarians are determined to stop the Fed from irresponsible money-printing — which is not, in fact, something it’s doing.

This is a very artful choice of verb tense. Notice what he doesn't say: that irresponsible money-printing is "not, in fact, something it has done."

I'm reminded of Bill Clinton's famous response when asked whether his lawyer had spoken a falsehood when he said that "there is" no sexual relationship of any kind between the President and Monica Lewinsky: "it depends on what the meaning of the word "is" is." It would be another matter, Clinton allowed, if the lawyer had said "is and never has been." Similarly, the problem of the Fed engaging in irresponsible money-printing has not disappeared even if, by Krugman's (unspecified) criteria, this month's monetary policy is okay. Because irresponsible money-printing is a recurrent problem that we do have, it makes perfect sense to be determined to stop it even if (for the sake of argument) it were the case that it isn't happening this month.

Gandhi is supposed to have said: "First they ignore you. Then they laugh at you. Then they fight you." Krugman seems to be somewhere between the 2nd the 3rd steps.


David Wessel on low inflation

by Larry White June 17th, 2014 5:32 pm

Ex-Fed chair Ben Bernanke is currently a resident fellow at the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution. The Center’s director, David Wessel, appeared on NPR’s Morning Edition yesterday to express views on inflation and deflation that are essentially indistinguishable from Bernanke’s.

In particular, like Bernanke, Wessel spoke as though inflation below 2% per annum, and a fortiori deflation, is always bad.

Asked to explain why it should be bad to have less of a bad thing like inflation, Wessel first responded: “I mean it sounds appealing, prices going down, people paying less at the store. But when inflation is low that means wages are going up very slowly too. That's of course not very popular.“ This sort of answer would earn an undergraduate a poor grade from any instructor who emphasizes the distinction between real and nominal variables. Workers should not applaud rising nominal wages per se; what matters for them is their real wages. When inflation is low, so too are nominal wage increases ordinarily. But that says nothing about the path of real wages, which in the long run are not determined by monetary policy.

Wessel continued: "There are a couple of problems with too little inflation. It can be a symptom of a lousy economy, one in which demand for goods and services and workers is anemic."

A key word here is symptom. A condition that can be a symptom of a problem is not the problem itself, and can also appear under healthy conditions. Wessel failed to note that low inflation need not be a symptom of a lousy economy, because he spoke only of variation in the aggregate demand for goods and services. Low inflation (or even deflation) can instead be the benign result of abundant growth in the real supply of goods and services. Under the gold standard, as Atkeson and Kehoe (2004) have reported, periods of lousy economy (recession) were not more common during deflation periods, nor vice-versa.

If the Fed were today targeting the path of nominal income, because the growth rate of nominal income is the sum of the inflation rate and the real income growth rate, low inflation would be a sign of a healthy economy with high real economic growth. Thus Wessel would have provided a more accurate analysis if he had spoken of problems with growth in nominal aggregate demand being weaker than anticipated, not inflation being below its target. (In terms of dynamic AD-SRAS analysis, unexpectedly low growth in AD moves the economy below the natural rate of output.)

Wessel’s second concern is harder to interpret favorably. Low inflation, he said, "can make it hard for the Fed to spur borrowing because it's hard for them to get the interest rate below the inflation rate." Two responses: (a) The Fed should not be trying to “spur borrowing.” Fed efforts to spur borrowing helped to fuel the housing bubble. (b) The Fed is not in fact currently finding it hard to get the interest rate below the inflation rate. The interest rate on 1-year T-bills has been below the CPE inflation rate for more than four years, since 2009’s dip into deflation (in that case due to weak demand for goods following the financial crisis).

Wessel went on the cite the problem of rising real debt burdens in deflation. That can indeed be a problem in an unanticipated deflation (Wessel never distinguished anticipated from unanticipated), but again, only to the extent that the deflation is driven by unexpectedly weak aggregate demand growth and not by robust aggregate supply growth. In the latter case, borrowers have more real income with which to repay.

In his answer to the interviewer’s last question, Wessel declared: “So it used to be that economists believed that a central bank can always create inflation by printing more money. But lately it's been -seems harder to do that than the textbooks had told us.” But what is the evidence that expanding the stock of money does not still generate inflation the way the old textbooks tell us? Surely not the experience of the Fed undershooting its target of 2.0% growth in the PCE by 0.4%, which only implies that the broad money growth rate was 0.4% lower than the rate that would have hit the target. Fortunately or unfortunately, it remains the case that the Fed can always raise the PCE inflation rate by engineering a higher rate of broad money growth, just as the textbooks explain.

By the way, today’s announced number for the May CPI raises year-over-year CPI inflation to 2.1%. The increase of 0.4% over April’s CPI, compounded twelve-fold, implies an annual rate of 4.9%. At this rate the “problem” of an undershooting PCE-deflator inflation rate will be “solved” before long.

(HT to David Boaz)


New working paper on Bitcoin

by Larry White June 16th, 2014 10:24 am

Will Luther and I have a brief new SSRN working paper entitled "Can Bitcoin Become a Major Currency?"


The Federal Reserve System at 100

by Larry White December 23rd, 2013 12:28 pm

Today is the 100th anniversary of the Federal Reserve Act. In this talk I discuss how the Fed has done over the past century.


"Can the Monetary System Regulate Itself?"

by Larry White September 28th, 2013 10:44 pm

Here's audio of a talk I gave at CEVRO Institute in Prague earlier this month.


Krugman on Friedman, Hayek, and Liquidationism

by Larry White August 12th, 2013 4:31 pm

In a blog post yesterday, entitled “Friedman and the Austrians” , Paul Krugman quotes Milton Friedman’s charge that in the “London School (really Austrian) view,” i.e. the view held by F. A. Hayek and Lionel Robbins,

the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by “easy money” policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.

Krugman then remarks:

I have, incidentally, seen attempts to claim that nobody believed this, or at any rate that Hayek never believed this, and that characterizing Hayek as a liquidationist is some kind of liberal libel. This is really a case of who are you gonna believe, me or your lying eyes.

One of the "attemps" Krugman may be referring to is my June 2008 article in the Journal of Money, Credit, and Banking, “Did Hayek and Robbins Deepen the Great Depression?” (Ungated pre-publication version here). Or he may be referring to subsequent discussion of the question on Brad DeLong’s blog -- if you follow this link, please scroll down to see my comments on DeLong’s post.

In either case Krugman’s remarks call for a reply.

In the 2008 article I point out that Hayek enunciated a monetary policy norm of stabilizing nominal income (aka nominal aggregate demand, or MV in the equation of exchange) in the face of a declining money multiplier or declining velocity of money. Under a gold standard, a high price level driven unsustainably high (by the boom-creating inflationary policies that Friedman references) needs to return to the sustainable level, but there is no virtue in “secondary” deflation going beyond that point. Thus, according to Hayek, the central bank should expand its liabilities H to offset an increased bank reserve ratio or public hoarding that reduces M/H or V. In yet other words, it is better to remedy an unsatisfied excess demand for money balances by supplying the called-for money balances than by putting a burden of downward price adjustment on the economy.

Overlooking Hayek’s stable-MV norm, Friedman and others have mischaracterized Hayek as prescribing only “to let the depression run its course.” Hayek did oppose cheap-money policies that distort the economy, and did counsel policy-makers not to obstruct the process of correcting the mistaken investments made during the boom. But quoting such statements doesn’t show that he said nothing else about depression policy.

It’s a question of who you gonna believe, a one-sided quoting of only some bits of Hayek by people unaware of the rest, or the full story of what Hayek wrote about depression policy?

I’m sorry that Krugman didn’t call me out by name. It prevents his readers from finding and reading the other side of the debate.

I might also mention that my article treats the question of what Hayek really said as a matter of getting the intellectual history right. I do not suggest that mischaracterization of Hayek’s position is limited to left-liberals. Indeed, as Krugman’s blog post does, my article prominently quotes Milton Friedman’s criticism of Hayek for supposed liquidationism. Friedman is no left-liberal. Thus I would never call it “some kind of liberal libel.”


Hugh Rockoff on free banking history (podcast)

by Larry White April 4th, 2013 7:06 pm

I interviewed Prof. Hugh Rockoff of Rutgers University for the latest installment of the Econ Journal Watch Audio podcast. We chat about his research on episodes of lightly regulated banking, and his take on others' research. Along the way we discuss Milton Friedman's views on free banking, and the recent banking debacle in Cyprus.
Listen or download here.


How not to rethink money

by Larry White February 10th, 2013 10:51 pm

I have a book review now up on of Bernard Lietaer and Jacqui Dunne's Rethinking Money: How New Currencies Turn Scarcity Into Prosperity. I wanted to like the book more, because I too like alternative currencies. Unfortunately Lietaer and Dunne make some very crankish arguments, suggesting that the phenomenon of a positive interest rate creates problems for the economy, and that a proliferation of free currencies will ameliorate those problems.


The real problem today is not so much nominal

by Larry White September 23rd, 2012 10:28 pm

Scott Sumner told us in September 2009 that "the real problem was nominal," that is, the recession and its high unemployment were primarily due to an unsatisfied excess demand for money (combined with real effects on debt burdens of nominal income being below its previous path). In AS-AD terms, the AD curve (representing combinations of M times V equal to a given level of nominal income Py) had shifted inward, and the economy was sliding down the SR aggregate supply curve. The price level had not yet adjusted enough to clear the market of unsold goods corresponding to deficient money balances. This was a reasonable – almost inescapable – diagnosis in 2009, when the price level and real income were both falling.

Market Monetarists who have been celebrating the Fed’s recent announcement of open-ended monetary expansion ("QE3') seem to believe that Sumner’s 2009 diagnosis still applies. But what is the evidence for believing that there is still, three years later, an unsatisfied excess demand for money? Today (September 2012 over September 2011) real income is growing at around 2% per year, and the price index (GDP deflator) is rising at around 2%. If the evidence for thinking that there is still an unsatisfied excess demand for money is simply that we’re having a weak recovery, then as Eli Dourado has pointed out, this is assuming what needs to be proved. Dourado writes (I take his “in the short run” to mean “in a situation of unsatisfied excess demand for money”):

So what is the evidence that we are still in the short run? I think a lot of people assume that because unemployment remains above 8 percent, we must be in the short run. But this is just assuming the conclusion. There are structural hypotheses for higher unemployment, but even if unemployment is cyclical, it doesn’t mean that monetary adjustment has failed to occur—real sector recalculation may just take longer than monetary recalculation.

… If we view the recession as a purely nominal shock, then monetary stimulus only does any good during the period in which the economy is adjusting to the shock. At some point during a recession, people’s expectations about nominal flows get updated, and prices, wages, and contracts adjust. After this point, monetary stimulus doesn’t help.

While saluting Sumner 2009, like Dourado I favor an alternative view of 2012: the weak recovery today has more to do with difficulties of real adjustment. The nominal-problems-only diagnosis ignores real malinvestments during the housing boom that have permanently lowered our potential real GDP path. It also ignores the possibility that the “natural” rate of unemployment has been hiked by the extension of unemployment benefits. And it ignores the depressing effect of increased regime uncertainty.
To prefer 5% to the current 4% nominal GDP growth going forward, and a fortiori to ask for a burst of money creation to get us back to the previous 5% bubble path, is to ask for chronically higher monetary expansion and inflation that will do more harm than good.


How much dodgy debt will the ECB buy?

by Larry White September 7th, 2012 2:38 pm

The European Central Bank yesterday, in the words of The Washington Post, "announced that it would buy the bonds of struggling governments without limit" (emphasis added). But that can really only mean “without an announced limit.” There is an implicit limit so long as ECB sticks to its also-announced promise to neutralize the monetary-base-expanding effects of its struggling-government bond purchases by selling, euro for euro, other bonds from its portfolio, because its current portfolio is finite and only some of it is not already struggling-government debt. It is difficult to discover exactly what this implicit limit is in billions of euros.

The Eurosystem (the ECB plus the eurozone’s national central banks) can purchase bonds of the struggling GIPSI (Greece, Ireland, Portugal, Spain, or Italy) governments in two ways: directly, or indirectly by making additional loans to commercial banks that purchase GIPSI bonds (and collateralize said loans with said bonds). To sterilize purchases of either kind, the ECB will have to sell its non-GIPSI bonds (or shrink its loans to banks collateralized by non-GIPSI bonds). The Eurosystem’s reported balance sheet shows €3085 b in total assets. It does not reveal what percentage of its current assets are in GIPSI sovereign debts and GIPSI-collateralized loans. We can assume that the €279b of securities acquired under the ECB’s two “covered bond purchase programmes” consists entirely of GIPSI bonds. For the sake of argument let’s assume that gold assets (€434b) and foreign-currency assets (€312b) won’t be touched. We can break the largest asset category, “Lending to euro area credit institutions related to monetary policy operations denominated in euro” into two parts: what was on the balance sheet two years ago (€592b) and what’s been added in the last two years (€618b). Assume that half of the former and one-fourth of the latter is neither GIPSI debt nor the debt of borderline-struggling sovereigns like France and Belgium, but is debt that could be sold for sterilization purposes. That gives us a total of €450b as the upper limit of ECB purchases of the bonds of struggling governments under a policy of full sterilization.

This number is purely a guesstimate. But it probably isn’t off by a factor of two. If the ECB finds itself wanting to make €1000b of GIPSI bond purchases, it is clear that the ECB will have to switch from sterilization to some other strategy for keeping M2 from ballooning, like the Fed’s QE1 strategy of paying higher interest on reserves. Note that the ECB is already paying interest on reserves, and has been since its beginning, whereas the Fed started at zero.

For as long as it lasts, sterilization means that as the ECB buys more GIPSI sovereign debt, it will be shrinking Eurosystem credit to other borrowers, namely to private borrowers and to less-irresponsible sovereign borrowers. Starve the productive and the relatively prudent to lend to the unproductive and imprudent. That is not what anyone could consider a prudent mix of Eurosystem assets, nor a promising way to promote economic growth.

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