Monetary Theory and the Trade Cycle
Hayek writes: To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection -- a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end. FULL ARTICLE
Comments (5)
Mike Sproul
Something else Hayek said in the same book:
"This recourse to a rationing of credit caused renewed stringency in the money market in the spring of 1796 and evoked loud protests from the City (London). It is not easy to reconcile these complaints about the continued scarcity of money during this period with the no less insistent complaints about high prices, and with the continued unfavorable course of the exchanges." (Hayek, 1933, p. 40)
From a real bills perspective, it is easy to reconcile the two sets of complaints. High prices would have been the result of the pound having inadequate backing, while monetary stringency would have been the result of the Bank’s refusal to issue money to those offering adequate security in exchange. On real bills principles there is no reason to think that these two things could not happen together. Only on quantity theory principles would mere scarcity of money be expected to relieve inflation. In fact, complaints of scarcity of money are often dismissed out of hand by quantity theorists, since their models imply that scarcity of money would increase the value of money, thus relieving the scarcity.
Published: September 27, 2008 9:17 AM
Kevin Cummiskey
You must think I am either (a). a speedreader or (b) have no life.
Published: September 27, 2008 11:54 AM
newson
to mike sproul:
in "the mystery of banking", rothbard points out that in 1797, when convertibility to specie was suspended for 24 years, there were 280 country banks in england and wales. in 1813, they numbered over 900. bank profits climbed in the same period.
how is it possible to have a credit shortage amongst a flourishing of bank lending?
i don't think it's necessary to look for answers in the real bills doctrine, it's more likely hayek was plain wrong about credit rationing.
Published: September 27, 2008 10:11 PM
Mike Sproul
Newson:
Now I'll have to look up the book, but as I remember, Hayek was referring to credit rationing that was happening in 1796-97, and not to the period up to 1813. In any case, the quantity theory does indeed have trouble explaining how inflation can happen during credit rationing, while the real bills doctrine has no such problem.
Published: September 27, 2008 11:23 PM
rtr
Stupid. And the Stupid Cycle.
Published: September 28, 2008 5:32 AM