Friedman for Government Intervention: The Case of the Great Depression
We've often heard that monetarists and Austrians agree that the government is to blame for the Great Depression. A deeper look shows that this is nothing but empty rhetoric.Here I debunk the popular view that Milton Friedman proved that the Great Depression was not a market failure and that Friedman made a very strong argument against interventionism. FULL ARTICLE
Bookmark/Share
|
Comments (53)
Comments (53)
David C
I had a great great uncle who came across a reasonable sum of money in the late 20's. He saw that they were lying to people about the value of their money, he saw all the lies and BS, and so avoided the stock market and placed it in gold. When the great depression hit, he became rich. He parternered with a bank and used that money to buy up bankrupt farms for pennies on the dollar.
So was he credited with saving the economy. No, he was credited for "exploiting" bankrupt farmers. So was he given recognition by the government for his prudent wisdom. Yes, he was taxed for the "new deal". So was he treated well for saving his resources in gold, no gold was confiscated. Even when I was a kid, people would pull stunts like moving onto remote areas of my grandfathers farm land, put up a home, and then threaten to kill his wife if he did anything about it, or they would do things like sue him for exploiting farmers during the great depression. (btw, he was the type that would just let them have the land cause he was that nice of a guy)
To some people the great depression and it's long drawn out recovery are a mystery. They sure as hell aren't to me. In addition, some people are confused about what the government's going to do during this current "condrum", but I'm sure as hell not. They have predestined themselves to make only one choice - print money like it's doomsday and blame the rich when things go to hell. Just one problem, I've learn't my lesson from observation. I'm ready for them, and I have no problem shooting people who take my property, not that I wouldn't give it to them, but because I've learnt that when one gives into thieves, they are just making themselves an accomplice by encouraging them to steal from someone else.
Published: January 23, 2007 9:09 AM
allendalton
There are fair critiques, there are unfair critiques, and then there is idiocy. This "critique" falls into the latter. Shame on you for letting this be posted.
Published: January 23, 2007 9:15 AM
Sterling
I must admit that most of what I know about Milton Friedman is from the "Free to Choose" series that were originally aired the year I was born (but are now fortunately posted on Google Video). However, this article does appear to be a gross misrepresentation of his ideas. As I understand, Dr. Friedman argued that one of the big factors contributing to the run on the banks was caused because the Fed had failed to keep its promises to the Bank of America when it needed money. This broken promise worried people and escalated the problem. So I would think that Dr. Friedman would have argued that the Great Depression was so Great because of failures in the government. This article merely describes one of the ways Dr. Friedman thought the government could have helped to alleviate the problem it created. It is by no means a convincing arguement that Milton Friedman was for government intervention, since he likely would have said that the problem wouldn't have existed without intervention in the first place.
Published: January 23, 2007 9:39 AM
Gabriel D
allendalton, please explain.
Published: January 23, 2007 9:40 AM
Arend
@allendalton:
Without any additional arguments given by you, your comment is like a boomerang hitting you in the face.
Published: January 23, 2007 9:43 AM
Alexander Villacampa
Nice article Mat. It was quite enjoyable.
Published: January 23, 2007 9:55 AM
T.G.G.P
I think his pro-New Deal quotes were explaining how he thought at the time, not his way of thinking when he was the Milton Friedman we are all familiar with.
From wikipedia:
In his autobiography, he comments on "how thoroughly Keynesian I was then." As Friedman grew older his views changed and in 2006 said, "You know, it's a mystery as to why people think Roosevelt's policies pulled us out of the Depression. The problem was that you had unemployed machines and unemployed people. How do you get them together by forming industrial cartels and keeping prices and wages up?"
Published: January 23, 2007 10:18 AM
N. Joseph Potts
I think it's a matter of record that Friedman became more anti-state as his LONG career wore on. Representing the policies of such a long and brilliant career as static or singular may not be a defensible simplification. That said, Friedman was, like many of us who have been thinking about these things for more than a decade, rather a statist at the outset. We WERE all raised that way, after all.
Nonetheless, I think the article was very informative as to SOME of Friedman's policies at CERTAIN times, and the views genuine anarcho-capitalists might take of such policies (regardless of whether Friedman held them).
These allegations as to Friedman's policies might have done with a bit more citation than was provided.
Allendalton, please don't clutter this site with empty invective. Your failure to provide particulars is simply insulting to the rest of us.
Published: January 23, 2007 10:49 AM
Dr. Mark Thornton
Matt's good article is more than of historical interest because Friedman was a very strong influence on Ben Bernanke. He will likely go to extreme measures never seen before to prevent a depression.
Published: January 23, 2007 10:57 AM
Dennis Sperduto
For the vast portion of his professional life, Milton Friedman supported the existence of the Federal Reserve, and central banking in general. His position is not hard to understand since he did not accept the Misesian (and Rothbardian) theory of money and banking, and just as importantly, Friedman rejected Austrian business cycle theory. Given these substantial theoretical disputes with Austrian School economists regarding monetary and business cycle issues, Friedman's disagreement with them regarding the causes of and appropriate responses to the Great Depression are more easily understood.
Arguably, Friedman's mistakes in analyzing the Great Depression are the result of his adherence to erroneous monetary and business cycle theory.
Published: January 23, 2007 11:10 AM
allendalton
It is a wonder that an explanation has to be given to Gabriel, Arend, and Joseph given that the Mises Institute has striven, at least in the past, to be an institution committed to academic integrity and reasoned discussion.
But, apparently (as represented by Matt's post) civility and fairness no longer count.
So let me try to briefly indicate my problems with Matt's post before I rush off to teach class.
There is exactly one quote from Friedman in the entire missive, and that, if one will read the interview from Commanding Heights, is taken out of context.
Second, Friedman is factually correct that the Fed acted perversely during the Great Depression, even from an Austrian viewpoint, since it failed to monetize gold inflows into the US (as I might note that it was legally required to do) that would have prevented the money supply from falling as disastrously as it did. This is government failure - preventing the market from working as it would.
Third, Hayek also took the position that the Fed should have prevented the "secondary deflation" of the money supply. Is Hayek, too, even for his correct analysis of the causes of the Depression, to be cited as a statist also?
Fourth, to use the sort of "examples" Matt does flies directly in the face of Friedman's clear statements on those exact cases.
Is that enough?
Published: January 23, 2007 11:32 AM
adi
My own critique against late professor Friedman is that he supposed that it's the governments monopoly duty to supply money. Of course his suggestion that we should let computer program to manage monetary policy is interesting if the monetary rule is clearly understood (for example let the M3 grow at the same rate as productivity + 2-3%). Then surprises cannot happen if all are committed to this rule.
Government and money dont mix together very well as we Austrians can see from the historical experience.
I dont think Friedman could have understood Austrian criticism against mainstream economics since almost all professional economists thought that Austrian capital and business cycle theories are without good foundations as Knight's and Kaldor's critiques seemed to imply.
Published: January 23, 2007 11:45 AM
Dennis Sperduto
Regarding the issue of civility and fairness, my understanding is that Friedman worked to prevent Mises, Hayek, and Rothbard from obtaining full-time, paid academic positions at U.S. universities in economics departments that granted doctorate degrees. Of course, integrity must preclude one from holding this against Friedman, but I believe his treatment of these economists, especially Mises, was anything but fair.
Published: January 23, 2007 11:50 AM
adi
Mr Dalton, it seems that Mises stated that it's also damaging to have a deflationary economic policy and so not only inflationary policies are important.
Do you remember some paper on Cato Institute which claims that this error on part of Fed was caused by their faulty understanding of monetary theory ? To be specific, it seems that RBD theory of money was reason for this.
Published: January 23, 2007 11:55 AM
Angelo
Nice, Matt. By the way, I just happened to be reading your article on international economics the other day.
Published: January 23, 2007 12:00 PM
Paul Marks
Austrian school people hold that the bust (in a boom-bust cycle) is caused by the credit money boom that happens before.
Monetarists hold that the bust is caused by the government failing to prevent a fall in the credit money supply.
This is indeed a very radical disagreement.
As for the Federal Reserve Board's failure to "monetarize gold inflows into the United States" - the traditional Constitutional view is that the gold IS the money (and there is no reason why gold from other nations should not be used to buy goods and services in the United States without being first "monetarized" into unconstitutional Dollar bills by the Fed or anyone else).
The power of Congress to "coin money" does not include the power to print money (otherwise America would be back to the "not worth a Continental" notes of the Continental Congress) and nor does it overule the Constitutional fact that legal tender in any State may only be "gold or silver coin".
Of course the confiscation of private gold (as
mentioned by the first person to comment on this thread) was clearly a criminal act, and the upholding of this act by the Supreme Court simply meant that the Supreme Court had decided to urinate on the Constitution of the United States.
All the above being said, there is still much to be said in support of Milton Friedman.
Whatever his opinions at one time may have been, for most of his life Milton Friedman opposed price and wage controls and import taxes.
The great difference between the bust of 1921 and the bust of 1929 lay in the reaction of the government to the bust.
In 1921 the Administration of President Harding did nothing (other than cut government spending) and the economy started to recover within six months.
In 1929 (contrary to what is taught) the Administration of President Hoover and Oongress made great efforts to prevent wages and prices adjusting to the bust - the result of their efforts was to turn the bust into the Great Depression.
Finally the great import tax increase of 1931 (and the counter moves by other nations in reply) as well as domestic tax increases were also an important factor.
I repeat, Milton Friedman (at least the mature Milton Friedman) would have opposed the efforts at price and wage rigging by the Administrations of President Hoover and F.D.R., and Milton Friedman would have opposed the trade war (the "beggar thy neighour" spirit of the 1930's) and the domestic tax increases.
Milton Friedman may have had his faults (according the Austrian way of looking at things), but his mature thought has nothing in common with the New Deal.
Published: January 23, 2007 12:45 PM
Eric
I believe Friedman's often used expression, "how do we get from here to where we want to be" somewhat explains his policies, such as the "replace fed with a computer" and "school vouchers".
Friedman did not think we could change something like the fed overnight, so instead of just promoting the FED's demise, he apparently tried to find a policy to "work within the system". I don't know what he thought about fractional reserve banking, but Rothbard clearly thought the entire apparatus was a fraud. But what good is Rothbard's solution if one can't even convice people that fraction reserve banking is bad. It's like trying to legalize all drugs when people still think drugs are like witches.
One item that has always confused me, however, is how in the 1920's there could be so much money creation when there was still a gold standard with complete redemption of notes for gold (or silver).
Published: January 23, 2007 1:20 PM
jimb
if i recall correctly, there really is little mention, even by rothbard, of the cross-country buildup of debt (lack of the need to settle growing debts in final currency / gold flows) which were suddenly made impossible to pay by the tariff. the central bank could probably have done little, as the government would have needed to deficit spend enough to avoid a deflation (and the fed to buy enough treasuries) - that would only have prevented secondary deflationary effects, and not the collapse of credit (after all, the fed cannot monetize ALL bad debts directly or indirectly because that would be inflationary).
the weight of government debt would be heavy on the upside. when faith is lost in u.s. treasuries, it's a fair bet that deflation will happen. nice to be the fed -- one can front run and control the value of their own reserves.
Published: January 23, 2007 1:49 PM
billwald
People who held marginal stock accounts created money just as people who use credit cards create money?
Published: January 23, 2007 1:52 PM
Brent
It was necessary that someone wrote this article.
It is very saddening that this article was necessary.
For all those who think they know Friedman's position on the Great Depression, read his work and the interviews he gave about his beliefs concerning the Great Depression. You can not interpret him to be saying anything but what Mat wrote in this article. Like Friedman, Bernanke says the same thing: "We (the fed reserve) have learned our lesson (from the Great Depression)... and we will never make that mistake again (failing to inflate the money supply in the face of a falling price level)."
Published: January 23, 2007 2:06 PM
Björn Lundahl
Friedman believed that it was a need to increase the money supply as fast as the average output of goods and services in an economy. This was based on faulty empirical observations; when economies did not expand the supply of money, recessions occurred and after a while also deflations. Conclusion: Increase the money supply as much as output, then recessions and deflations will not occur or, at least, not very severe ones.
Believers in Austrian economics reject empiricism as a methodological way of finding out causations in social sciences such as economics and want to replace it with rationalism.
Austrian economists believe that an increase of the money supply caused by fractional reserve banking and by the central bank will inevitably lead to a recession or a depression.
Friedman erroneously thought that the economy “needed” increases of the supply of money. If he did not believe so, his prescription would, probably, been very different.
Because of this fact, Friedman never wanted to go back to gold:
“Friedman and Schwartz's insight was that, if monetary contraction was in fact the source of economic depression, then countries tightly constrained by the gold standard to follow the United States into deflation should have suffered relatively more severe economic downturns. Although not conducting a formal statistical analysis, Friedman and Schwartz gave a number of salient examples to show that the more tightly constrained a country was by the gold standard (and, by default, the more closely bound to follow U.S. monetary policies), the more severe were both its monetary contraction and its declines in prices and output.”
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm
Björn Lundahl
Göteborg, Sweden
Published: January 23, 2007 3:26 PM
Mark Brabson
"People who held marginal stock accounts created money just as people who use credit cards create money?
Posted by billwald at January 23, 2007 1:52 PM"
billwald
Actually, you have it 100% backward. The creation of money has already occured and made possible the expansion of credit. People using credit cards and buying stocks on credit are using the credit already created. Credit cards and other credit are only symptoms of the credit expansion of the fed.
Published: January 23, 2007 4:11 PM
Daniel M. Ryan
I'm wondering, Björn, what would have happened had the then-mainstream of the economics profession taken a cue from Hayek (Pure Theory of Capital) in the 1940s and tried, in good faith, to attach complementary microeconomic supply and demand curve to what ended up being the Keynesian macro model....
Published: January 23, 2007 4:44 PM
allendalton
Dennis - evidence please.
Adi - perhaps there was a Cato paper that made this point, but Timberlake emphatically does in his history of the Fed.
Paul - the Fed soaked up gold inflows fleeing the rest of the world (primarily Europe), would not mint it into gold coinage, and would not issue Federal Reserve Notes upon their holdings of those gold reserves which they were legally obligated to do. In the absence of the Fed (and with ideally private coinage and non-centralized banking) these events would have helped to stave off the monetary deflation which worsened the depression. The Fed, had they been faithful to their charter, would have passively acted in support of these gold standard adjustments.
Except for some minor quibbles concerning the representation of Friedman's actual positions in the comments, at least they speak to positions Friedman actually held and try to understand with reasoned disagreement. That is not the tenor nor the import, however, of the original post.
If it all comes down to the sanctity of private property, one must ask: Are Humans made for Private property or Private property for Humans? (and no, I'm not arguing that property rights are distinct from human rights).
Published: January 23, 2007 5:54 PM
Dennis Sperduto
Allen,
I know of nothing in writing. My comment was based on remarks made to me by two younger Austrian School economists.
In particular, my impression is that many, if not most, economists regard Austrians as unscientific, even nonsensical, due to their opposition to the positivist methodology that dominates the economics profession. Thus, attempting to bar Austrians from significant university teaching positions, especially those with doctorate programs, is good for science and the economics profession.
And in no event is Milton Friedman the worse offender in this regard.
Published: January 23, 2007 7:27 PM
Eric
Björn,
When I read Friedman's chapter on inflation in his 1991 book "money mischief" I don't see that he believes it is necessary to keep increasing the money supply. In fact, this chapter sounds to me quite "Austrian", in how he describes the bad effects of inflation. At one place he says:
...discussion about a 10% per year inflation..."Zero inflation is a politically feasible objective; a 10 percent inflation is not". He does NOT go on to say that zero inflation would do harm. He always mixes the realities of politics with his economics.
In another section he says "there have been recent proposals for legislation requiring the Fed to aim at zero inflation. The objective is desirable, but such a requirment canot be effectively monitored or enforced". He then discussses some proposal by Robert Hetzel that he says might be more "feasible politically than my own earlier proposals for structural change".
In another section he compares the inflation created business cycle to an Alcholic (I've seen a few such analogies right here on mises.org) and he says: "The parallel between alcoholism and inflation carries over to the cure. The cure for alcoholism is simple to state: stop drinking." NOTE, he does not suggest the alcoholic sip beers. But he later states: "Moreover, many of us are not unhappy about inflation. ... One reason inflation is so destructive is because some people benefit greatly and others suffer; society is divided into winners and losers." So much for his ill-conceived helicopter analogy - he knows that inflation does not spread evenly.
In the earlier part of this chapter, he discuss why governments prefer inflation to taxes and borrowing. I interpret this to mean if you tell the wolf he can't have any sheep at all, then the wolf will probably just steal your entire flock, because he can. Friedman understands that no measure, including any Austrian School measure has stopped the Fed from inflating - because the Fed is the government and they LIKE to inflate. He recognizes that there's no stopping this criminal gang, only slowing it down is feasable. Experience over the last 90 years seems to bear this out.
My conclusion is that there is more in common between Friedman's chapter on inflation and Rothbard's writings than one would think from his early works. The main difference is that Friedman realizes who has the guns and going against them straight up is futile.
Published: January 23, 2007 9:31 PM
Björn Lundahl
Eric
What we want to believe and how things are, might not always go hand in hand. I think we can agree that this is true.
As I said, Friedman wanted that the money supply should increase at a steady pace and as much as total output. That might in the long run lead to no inflation at all (inflation defined as decreases of the purchasing power of money).
Friedman thought that the essence for economic stability was that the money supply increased “at a steady pace”.
This view contrasts fundamentally with the Austrian position. Austrian economists believe that “any” increases of the money supply caused by fractional reserve banking and by the central bank (and this even if the purchasing power of money do not decrease at all) will inevitably lead to recessions or depressions.
Björn Lundahl
Göteborg, Sweden
Published: January 24, 2007 2:12 AM
Sam
This discussion begs two questions:
1. Regarding the differences between the 1921 & 1929 crashes, what then about the 1987 stock market crash? It was worse than the 1929 crash yet had little effect and the world wasn't on any sort of a gold stardard.
2. So there are winners from inflation, espeically shareholders and lendees. If those who happen to benefit from inflation happen to inhabit the higher echelons of society why would they be wanting change?
3. And, David C's first blog, about armed squatters, isn't that mini-imperialism? Like or lump it, the various world-powers were built on imperialism. Would your grandfather argue about his property rights if a Native American tribe argued their ancestors occupied the land before him?
Published: January 24, 2007 2:16 AM
ktibuk
I think boom-bust cycles can be prevented Friedmans way, increasing the supply 2-3% by the help of a computer (actually computer here means no human whim changes the policy according to his whims since real computing is not that necessary).
But the theft would still go on, on a smaller scale that wouldnt effect economy that much. Inflation is a kind of taxation (theft). The difference is since it is a hidden tax, it tends to get out of hand and causes more problems to the economy than a simple tax, as ABC clearly explains.
The question is can you tolerate theft on a small level in given circumstances.
On one hand it is more difficult to get rid of the FED all together, so Friedmans way seems a reachable goal.
On the other hand, it is comprimise and we know if >FED operated the Friedman way tomorrow, sooner or later the policy would go back to the way it is since government tends to corrupt.
Published: January 24, 2007 4:43 AM
Stranger
Friedman's plan would not stop the trade cycle. Fractional reserve banking must be abolished in order to do that.
A 2-3% annual growth of money would return us to pre-Great Depression gold standard except we would now have a computer standard. If the banks excessively inflated the money supply, they would face a run and the central banks would either have to contract the money supply (a big no no for Friedman) or break the 2-3% target.
Published: January 24, 2007 6:00 AM
ktibuk
"Friedman's plan would not stop the trade cycle. Fractional reserve banking must be abolished in order to do that.
A 2-3% annual growth of money would return us to pre-Great Depression gold standard except we would now have a computer standard. If the banks excessively inflated the money supply, they would face a run and the central banks would either have to contract the money supply (a big no no for Friedman) or break the 2-3% target."
Friedmans plan implies that banks can not inflate on their own.
A very small and constant increase in money supply means banks reserve (fiat but still rezerve) requirements would be higher. Thus they can not inflate as much that would cause ABC.
Published: January 24, 2007 6:25 AM
Björn Lundahl
Murray Rothbard:
“Yet, Milton Friedman is a radical advocate of cutting all current ties, however weak, with gold, and going onto a total and absolute fiat dollar standard, with all control vested in the Federal Reserve System. Of course, Friedman would then advise the Fed to use that absolute power wisely, but no libertarian worth the name can have anything but contempt for the very idea of vesting coercive power in any group and then hoping that such group will not use its power to the utmost. The reasons that Friedman is totally blind to the tyrannical and despotic implications of his fiat money scheme is, once again, the arbitrary Chicagoite separation between the micro and the macro, the vain, chimerical hope that we can have totalitarian control of the macro sphere while the "free market" is preserved in the micro. It should be clear by now that this kind of a truncated, Chicagoite micro-"free market" is "free" only in the most mocking and ironic sense: it is far more the Orwellian "freedom" of "Freedom is Slavery.”
“There is no question about the fact that the present international monetary system is an irrational and abortive monstrosity, and needs drastic reform. But Friedman’s proposed reform, of cutting all ties with gold, would make matters far worse, for it would leave everyone at the complete mercy of his own fiat-issuing state. We need to move precisely in the opposite direction: to an international gold standard that would restore commodity money everywhere and get all the money-manipulating states off the backs of the peoples of the world.”
http://www.lewrockwell.com/rothbard/rothbard43.html
Björn Lundahl
Göteborg, Sweden
Published: January 24, 2007 6:38 AM
Sam
I was reading this article about gold being good and fiat money being bad at:
http://www.golddealer.com/caseforowning.html
and interestingly it said that gold mining was increasing the total gold storage at 1.5% to 2.5% a year. This would mean if we all used gold coins and gold weights we'd therfore still have 1.5% to 2.5% inflation. . .
Published: January 24, 2007 6:39 AM
Sam
In the question of a higher anarchic competition between nations, if everyone started to switch to, say, the Euro instead of the U.S. dollar and the U.S. economy went up #!@* creek, wouldn't this provide other governments with an incentive not to use their fiat currency willy-nilly? Or perhaps be a hard-way lesson to return to a gold standard?
Published: January 24, 2007 7:36 AM
ktibuk
"I was reading this article about gold being good and fiat money being bad at:
http://www.golddealer.com/caseforowning.html
and interestingly it said that gold mining was increasing the total gold storage at 1.5% to 2.5% a year. This would mean if we all used gold coins and gold weights we'd therfore still have 1.5% to 2.5% inflation. . ."
Yes that is true.
And free market money doesnt mean constant money supply. Money supply would eventually grow in anyt case.
As I mentioned above the problem is a moral one because in fiat money the created money is created out of thin air, as opposed to mining, and this gives the money creator and the first receiver of money an edge.
No cost associated with revenue, mainly interest revenue.
And the effect of this is, lowering the rest of the money holders purchasing power, and increasing the money creators purchasing power.
This means taking money from the money holders, and putting the money in the first recievers pocket.
Techincally, regarding the increase in money supply, friedmans and rothbards wasy are the same.
The difference is moral and the danger of trusting the fed for the future.
Published: January 24, 2007 8:11 AM
Daniel M. Ryan
With regard to your questions, Sam, here are some quick answers:
1. The difference between the 1987 crash and the 1929 one, as well as the 1920-1 depression, is that the Federal Reserve inflated pronto in '87 in order to prevent the liquidation process from starting. That's why there was no Great Liquidation in the 1990s.
2. People who get up on the top through using inflation won't want any change at all, of course. This may surprise you, as well as anyone who wasn't plugged in to the financial world in the 1960s, but back then it used to be held, seriously, that inflation was good for equities. (The rationale was Keynesian-based: companies who borrow pay back the money in fixed dollars, while the price of what they sell goes up with inflation.) The cohort who seriously believed that is now close to retirement, if not already retired. That idea might be coming back, though, with a different rationale. The old rationale assumed that bondholders were basically trust-fund suckers. This stereotype is far from accurate nowadays.
There are wealthy businesspeople, however, who have not become rich through inflation. The software industry, as of 1990, was like that. In the words of "Francis X. Cringely," "none of [those] companies [had] a dime in long-term debt." (Accidental Empires.) Entreprenurs who finance growth through issuing equity, not to mention through retained earnings, don't really benefit from inflation at all. The people who have done so in the software industry are now middle-aged.
3. The earlier invasion of native property rights you mentioned is already being addressed by the courts. Of copurse, there is a large fait accompli element to a lot of land-claim disputes, but the moral principle has been been recognized.
Published: January 24, 2007 9:28 AM
Ray Cogo
A Gold Standard cannot support "Creative Destruction" Another way of putting it, Gold cannot keep up with Usury. Milton Freidman always talked about Federal Reserve policy however; the Bank of International Settlements makes policy not the Federal
Reserve. The Federal Reserve is a member Bank. "Free-Trade" is not "Free-Enterprise" and Free Enterprise is not Free-Trade. Free-Trade is International, Free-Enterprise is National. The first responsibility of government is to "Protect" its people, its trade and commerce. You cannot protect its people by stealing their labor which is their private property and their right to free contract. Socialism is not possible without Capitalism, Capitalism is not possible without Inflation, and Inflation is not possible without Usury. Thank You Ray A Cogo gourmetgardens@tvli.net
Published: January 24, 2007 10:15 AM
Black Bloke
Daniel,
I'm sure you meant to write Robert X. Cringely.
Published: January 24, 2007 10:21 AM
jimb
lot of austrians confused here. money = item of ultimate settlement which is electronic and physical cash. all other transacations are credit. bank deposits are credit (in fact more reasonably it's a purchase of a 'basket of goods' where bank balance is redeemable by various access points - atm, check writing, etc - in base money in the future - it's an exchange of present goods for future goods).
Published: January 24, 2007 10:29 AM
Björn Lundahl
The purchasing power of money, the gold standard and fiat money
I quote from the book “Democracy The God That Failed”, by Hans-Hermann Hoppe, page 58:
“During the monarchical age with commodity money largely outside of government control, the “level” of prices had generally fallen and the purchasing power of money increased, except during times of war or new gold discoveries. Various prices indices for Britain, for instance, indicate that prices were substantially lower in 1760 than they had been hundred years earlier, and in 1860 they were lower than they had been in 1760. Connected by an international gold standard, the development in other countries was similar. In sharp contrast, during the democratic-republican age, with the world financial center shifted from Britain to the U.S. and the latter in the role of international monetary trend setter, a very different pattern emerged. Before World War I, the U.S. index of wholesale commodity prices had fallen from 125 shortly after the end of the War between the States, in 1868, to below 80 in 1914. It was then lower than it had been in 1800. In contrast, shortly after World War I, in 1921, the U.S. wholesale commodity price index stood at 113. After World War II, in 1948, it had risen to 185. In 1971 it was 255, by 1981 it reached 658 and in 1991 it was near 1,000. During only two decades of irredeemable fiat money, the consumer price index in the U.S. rose from 40 in 1971 to 136 in 1991, in the United Kingdom it climbed from 24 to 157, in France from 30 to 137, and in Germany from 56 to 116.
Similarly, during more than seventy years, from 1845 until the end of World War I in 1918, the British money supply had increased about six-fold. In distinct contrast, during the seventy-three years from 1918 until 1991, the U.S. money supply increased more than sixty-four-fold.”
Björn Lundahl
Göteborg, Sweden
Published: January 24, 2007 11:59 AM
Björn Lundahl
Increase of gold supplies does not either cause business cycles in a 100% gold reserve money standard.
America’s Great Depression:
“The potential range of such cyclical effects in practice, of course, is severely limited: the gold supply is limited by the fortunes of gold mining, and only a fraction of new gold enters the loan market before influencing prices and wage rates.”
Read the rest “Gold Changes and the Cycle”:
http://mises.org/rothbard/agd/chapter1.asp#problems_in_the_austrian_theory
Björn Lundahl
Göteborg, Sweden
Published: January 24, 2007 12:06 PM
Leonardo Baggiani
This is not a useful article:
anyone knows that monetarism is not so deeply pro-market as austrianism, hence episodes of supporting State interventionism may be naturally expected.
It is anyway deeply unjust to label any thinker as pro- or not-so-pro-(or even anti-)market by argumenting over one single sentence and the unwritten contrary: it is just an excellent exercise in Rhetoric but no sincere inquiry in anybody else's thought.
Friedman was pro-market. Accepting State-interventionism in an "extraordinarily difficult situation" (as in the fragment Machaj has quoted) surely position Friendman a step below the austrian orthodoxy, but it is poor argumentation for defining him as "interventionist".
It is like saying Bulgary is no longer socialist because let stock market write down its own rules: an exception does cannot change the whole perspective.
Shame on Machaj's "deaf" thinking
Published: January 24, 2007 1:21 PM
Daniel M. Ryan
Thanks for the correction, Black Bloke. My memory did prove to be unreliable with respect to the first name.
Published: January 24, 2007 3:57 PM
Jeff M. Weeks, CPA, SA Fin
Dear Maleusz Mackaj,
I read with as much curiosity as interest, your thought provoking anti ? article :-
anti ? " Friedman for Government Intervention : The Case of the Great Depression ".
Unfortunately the Great ( Worldwide ) Depression of 1930 - 33, touched if not affected directly for many Decades to come, many millions of Families & Friends ( both my Parents, as with a significant number of School - Children at the beginning of the Depression, were thrown into Adult Work responsibilities to try and assist in supporting their own Families ), & allowed unkindly Oppportunists to come to Power ( e.g. Stalin, Hitler etc. ).
freely elected democratic Governments are usually economic " moderators " ( as well as DISTRIBUTORS of Wealth ordinarily CREATED by " free Market Forces " / Private Enterprise System ) by way of :-
* Monetary Policies ( AUTOMATIC STABILISER interest rates & money supply usually in a INVERSE relationship, resulting in supposedly, desired foreign exchange rates & levels, or any variable/s combination / magnitude, thereof )
&/or
* Fiscal Policies ( Government spending & taxation, also affecting Household activity as well as Exports, Imports & various " leakages " there from ) not as much automatic & slow moving ;
I believe that the aim of present day Governments ( & consequently Reserve Bank Governors, who are often, now trained Economists ), is to safeguard by the above - mentioned AUTOMATIC STABILISER/S, their own particular INTERNAL Economies, from Macro to Micro ( inflation etc ) & therefore the welfare of their own Peoples ( employment etc ).
In contrast, the then 1929 USA Reserve Bank Governors, thought it was their duty to safeguard the foreign exchange rate/s of the time only, by increasing interest rates as BANKERS ( & not Economists ), causing credit as well as money supply to be decreased by 1 /3 as you have reported, instead of REDUCING interest rates & INCREASING credit & money supply respectively.
This trusted stewardship of a Country's economy, would often take into account at what stage of the Business / Trade, Cycle has been reached, & whatever economic stimulus ( or any combination, if any ) is required to be increased or decreased, at either, near the bottom or top, respectively, of any " Bust " ( under - stimulated ) or " Boom " ( over - stimulated ), Episode/s.
The Great Depression was on such a insidiuous but epic scale that Government " intervention " was ALSO required ( but unfortunately of the wrong kind &/or magnitude, in not dampening Public confusion, then disarray, then panic ), in the same way that " intervention " would be required for any Natural Disaster : fires, floods or famine ; storms & tempest ; earthquakes & tidal waves ; not to mention man - made Wars & conflicts, by mobilising & diverting scarce financial if not, human Capital where it is mostly needed as quickly as possible ;
or are these Cases too, best left to the ponderings of " free Market Forces " once again, & their " Captains of Industry " ??
Many thanks,
Jeff M. Weeks CPA, SA Fin
Owner / Manager, Operator / Admin.
Backpackers Travellers Hostel,
86 - 90 Railway Terrace, Peterborough, SA 5422, South Australia.
primary e - Mail : contacts@travellersoz.com.au
Owner / Manager, Operator / Admin. ; Web Master / Author / Designer / Developer ;
Website/s : www.travellersoz.com
Phone : ~ + 61 8 8651 2711
Mobile & SMS : ~ + 61 4 2888 2844
Published: January 25, 2007 2:28 AM
Björn Lundahl
Recessions and The Great Depression were caused by Government Interventions!
In a purely free market (without Government intervention), the rate of interest is determined by people’s “willingness to save and invest” (which is called people’s time preferences) for future use, as compared to how much they are “willingly to consume now”. If people change their “willingness to save” (time preferences) and want to save more, the additional savings will cause the rate of interest to fall (increased supply of savings), and businesses will borrow and invest these additional savings. When the Central Bank (for example The Federal Reserve) increases the money supply and expands bank credit (which Central Banks does everywhere and all the time and always “out of thin air”), it initially lowers the rate of interest and thereby misleads businessmen to act in a manner as if true savings have increased, which in turn leads businessmen to invests those supposed savings in capital goods. New projects that were not profitable before, will now suddenly with this lower interest rate, be profitable. While this process is working, the economy is in an inflationary boom phase (expansion). Capital goods such as stocks, real estate etc, will be more demanded and invested in, and prices of those will rise faster and more intensely in relation to consumption goods. As these supposed savings have worked their way through the economy, prices of goods, services and wages have generally increased to a height which prices for them would have not reached without these supposed savings.
As mentioned, people’s “willingness to save and invest” have not changed (people’s time preferences have not changed) for it was only the Central Bank that increased, out of thin air, additional “savings”. When supposed savings have worked their way through the economy and are received, finally, in increased wages, people still spend their real wages in the same manner as before. They save/ consume in real terms and in same proportion to each other, as before mentioned increase in supposed savings. Because of this, a lack of savings will occur and the rate of interest will rise. Projects that businessmen have invested in and that seemed to be profitable when the rate of interest was lowered are now revealed to be unprofitable. All those investments are revealed to be malinvestments. Businessmen will stop investing in those projects and lay off workers. Prices of capital goods, real estate, stocks etc, will fall sharply and relatively to the fall in prices of consumer goods. The economy is in a depression phase. When those investments are liquidated, the economy is adjusted to people’s “willingness to save and invest” and to consume. The economic structure corresponds to the ratio which people want to save and consume. The economy is now healthy again.
Now then, in the 1920s the Federal Reserve, in the US, increased the money supply and bank credit, which in the 30s resulted in The Great Depression. The same story goes with Japan during the 1980s, which during the 90s, resulted in a depression, go to; http://en.wikipedia.org/wiki/Japanese_asset_price_bubble
In Sweden we had banks lending out heavily during the late 80s, which also, led to a depression in the 90s. All business cycles are caused by the same phenomenon. Economic crisis can occur because of other factors such as wars, boycotts, oil prices etc, but pure business cycles have in common the same cause.
I have tried, in a very few words and in a easy manner, to explain Ludwig von Mises business cycle theory, which is also called the Austrian theory of the business cycle. All faults are mine.
Friedrich August von Hayek elaborated this theory and received in 1974 the Nobel Prize* for this. Go to;
http://nobelprize.org/nobel_prizes/economics/laureates/1974/
If you want to know more about this theory, go to;
http://mises.org/rothbard/agd/contents.asp
And to;
http://mises.org/money.asp
Björn Lundahl
Göteborg Sweden
* Information about the Nobel Prize in Economics, go to;
http://cepa.newschool.edu/het/schools/nobel.htm
Published: January 25, 2007 6:11 AM
Mateusz Machaj
I appreciate all the comments and opinions. Most of criticism, however, misses the mark. The response was that Friedman’s analysis is correct and policy solutions proposed by him should be appraised. Although elegantly stated, it is not a critique of my article – as I stated in the beginning of it I am not dealing with theoretical issues of Austrians and monetarists, and I am not deciding who is correct on this topic. My purpose was stated clearly and unfortunately some readers did not see this: the goal was to demonstrate that being against particular government policy does not make a person libertarian. Being libertarian means being in favor of private property rights, whereas being against particular government policy, one can easily be in favor of another form of government interventionism.
This is, for example, exactly the case of Joseph Stiglitz. In his book on globalization he criticizes the state for doing many things, which should have been avoided, but later on favors another type of government interventionism. Look carefully – I am not debating whether he is correct or incorrect. I am just merely stating he is not libertarian on this.
Similar example comes from Milton Friedman. He opposed the contraction of the money supply and suggested that Fed should have expanded it through open market operations and restriction of payments. Certainly he is anti-government of this one, since he was against what had been done. But, as I stated earlier, being anti-government does not mean being libertarian. This is the only point I wanted to make in this article. That is why it completely surprised me when I read the criticism stating Friedman is correct on what should have been done in the Great Depression. But I am neither arguing he is correct, nor arguing he is incorrect. I am merely stating the case he is not free market on this one.
Some people defend his analysis and argue that a proper solution was (as Friedman advocated) an increase in the money supply and bank holiday. This is an interventionist proposal, and I am not saying that just because it is an open monetary socialism it is automatically wrong. It might be correct, since even Keynesian analysis might be correct. Open and calm scientific debate should decide about this.
These issues were not part of my article and belong to some other series of discussions. My point was just to visibly demonstrate that in the case of a Great Depression Friedman, although anti-government, was definitely not pro-market, since he favored a different type of intervention. And one can agree with him, defend him, support him and I just wanted that person to know that he is agreeing, defending and supporting an interventionist proposal.
Mateusz Machaj
Published: January 25, 2007 7:00 AM
Matt Robare
It amazes me that Keynesians and Chicagoans claim that the Great Depression was unpredictable when Mises did, in fact, predict it.
Published: January 26, 2007 11:08 PM
Sam
Actually I hear that the roaring 20s was confined to a handful of sectors in the U.S. economy. Most other nations had only mild growth or stagnating. Doesn't that simply mean the Great Depression was caused by great malinvestment, a great crash and economic winter through protectionist policies of all nations?
Published: January 26, 2007 11:28 PM
Björn Lundahl
Milton Friedman blamed the Federal Reserve for not “doing their job properly” during the depression, but if his monetary “theory” was correct it was, really, the market that was to blame for the great depression as there was a need for a Federal Reserve “doing its job properly” in the first place.
Well, a pure free market would be a 100 percent gold reserve money standard:
I quote from America’s Great Depression, by Murray Rothbard:
Preventing Depressions
“Private banks, it is true, can themselves inflate the money supply by issuing more claims to standard money (whether gold or government paper) than they could possibly redeem. A bank deposit is equivalent to a warehouse receipt for cash, a receipt which the bank pledges to redeem at any time the customer wishes to take his money out of the bank's vaults. The whole system of "fractional-reserve banking" involves the issuance of receipts which cannot possibly be redeemed”.
And:
“But a 100 percent gold reserve requirement would not be just another administrative control by government; it would be part and parcel of the general libertarian legal prohibition against fraud. Everyone except absolute pacifists concedes that violence against person and property should be outlawed, and that agencies, operating under this general law, should defend person and property against attack. Libertarians, advocates of laissez-faire, believe that "governments" should confine themselves to being defense agencies only. Fraud is equivalent to theft, for fraud is committed when one part of an exchange contract is deliberately not fulfilled after the other's property has been taken. Banks that issue receipts to non-existent gold are really committing fraud, because it is then impossible for all property owners (of claims to gold) to claim their rightful property. Therefore, prohibition of such practices would not be an act of government intervention in the free market; it would be part of the general legal defense of property against attack which a free market requires.[28], [29] .”
http://mises.org/rothbard/agd/chapter1.asp#preventing_depressions
In other words, if there would be bank runs (which, naturally, would be extremely unlikely under 100% gold reserve money standard), the banks could meet any claims of the depositors.
Some consequences of not having a 100% gold reserve money standard:
• Panic of 1819 http://www.answers.com/topic/panic-of-1819
• Panic of 1837 http://www.answers.com/topic/panic-of-1837
• Panic of 1857 http://www.answers.com/topic/panic-of-1857
• Panic of 1873 http://www.answers.com/topic/panic-of-1873
• Panic of 1884 http://www.answers.com/topic/panic-of-1884
• Panic of 1890 http://www.answers.com/topic/panic-of-1890
• Panic of 1893 http://www.answers.com/topic/panic-of-1893
• Panic of 1896 http://www.answers.com/topic/panic-of-1896
• Panic of 1901 http://www.answers.com/topic/panic-of-1901
• Panic of 1907 http://www.answers.com/topic/panic-of-1907
Why should we have central banks and fractional reserve banks that mess things up in the first place? Why should we have business cycles and malinvestments just for the sake to please some perversive lust for power and fraudulent money? Do we really want to have malinvestments? Is unemployment that good? What is the justification?
An Animated Introduction to the Philosophy of Liberty:
http://www.isil.org/resources/introduction.html
The animation in full-sized window:
http://www.isil.org/resources/introduction.swf
Björn Lundahl
Göteborg, Sweden
Published: January 27, 2007 3:38 AM
allen dalton
Mr. Machaj--
You response is unresponsive to my concerns. The quote you used was taken out of context. That has nothing to do with your analysis, but your fairness.
Hayek also stated that if the money supply were falling (he erroneously believed that the Fed was inflating during the Depression) that they should prevent the decrease. But by your standards this would be an intervention since it would have required either a bank holiday or the Fed to add new reserves to the system. So, once again you were unresponsive to my question as to whether you regard Hayek "un-libertarian."
Your invoking of property rights is, frankly, ludicrous. The problem under a fractional reserve system is that MULTIPLE people have property rights in the same base money. The fact that some get to the bank "first" and are able to convert their demand deposits to cash (or metallic coin) does not invalidate the rightful claim of those who come later and find the cupboard bare. One might argue, that the Fed, by stepping in and supplying additional currency to take the place of demand deposits, while keeping the money supply constant, would be protecting proerpty rights. (And that is what we would expect in a free-banking fractional reserve system.) But of course, the Fed didn't even do that during the crash. So, yes, the type of intervention does matter, and not all intervention is necessarily a slap at property rights.
Sincerely,
Published: January 27, 2007 11:50 PM
Björn Lundahl
Mateusz Machaj
“My point was just to visibly demonstrate that in the case of a Great Depression Friedman, although anti-government, was definitely not pro-market, since he favored a different type of intervention.”
True, Friedman favoured a different type of intervention.
“One can always make statements like "the government is to blame for X", but this statement alone is not enough to indicate whether the person is pro-market or anti-market. The proper way to spot pro-market solutions is to concentrate on the basis of a free market — property rights. It is just that simple, and this simplicity is often lost in the myriads of modern policy discussions.”
Your conclusions are obviously correct and therefore, naturally, also fair.
Similarly, Hayek also favoured a lot of government interventions.
The Ethics of Liberty, by Murray Rothbard:
“Thus, we see that Hayek’s Constitution of Liberty can in no sense provide the criteria or the groundwork for a system of individual liberty. In addition to the deeply flawed definitions of “coercion,” a fundamental flaw in Hayek’s theory of individual rights, as Hamowy points out, is that they do not stem from a moral theory or from “some independent nongovernmental social arrangement,” but instead flow from government itself. For Hayek government—and its rule—of law creates rights, rather than ratifies or defends them. It is no wonder that, in the course of his book, Hayek comes to endorse a long list of government actions clearly invasive of the rights and liberties of the individual citizens.”
http://mises.org/rothbard/ethics/twentyeight.asp
Thank you for a very good article.
Björn Lundahl
Göteborg, Sweden
Published: January 28, 2007 4:29 AM
Sam
Hmmm Björn Lundahl your link reminded of the problem facing Buddhist rulers once upon a time. They needed capital punishment for certain crimes yet their religion forbade it. Mindful that murder is pro-active but refusal of life-giving services isn't, the solution became easy. Anyone faced with the death penalty was simply enforced by doing things such tying prisoners up and putting them in the desert or throwing prisoners down wells and then sealing them.
Published: January 28, 2007 8:54 AM
Björn Lundahl
Still it would be much better if a government would follow a monetarist economic policy than a Keynesian. Monetarism focuses only on a stable and low increase of the supply of money while Keynesians focuses on monetary and fiscal policy. Keynesians would probably increase the money supply much further and more erratically and, also, actively increase the public sector, especially during recessions. The monetarists are much more market oriented while the Keynesians are, philosophically, anti market. Compared to Keynesians, Monetarists are pro market. The economy would, probably, also be a lot more stable if guided by monetarism than by Keynesianism. Even if many people proclaim that monetarism is dead, I do not think that this is really true. I think that their ideas influence central bankers a lot. Because of Milton Friedman and Monetarism, we today have relatively low inflation rates and economic stability throughout the entire world and also, relatively, freer markets.
Björn Lundahl
Göteborg, Sweden
Published: January 29, 2007 6:34 AM