Glasner studies in the history of monetary theory controversies and clarifications (2021)

PALGRAVE STUDIES IN THE HISTORY OF ECONOMIC THOUGHT Studies in the History of Monetary Theory Controversies and Clarifications David Glasner Palgrave Studies in the History of Economic Thought Series Editors Avi J Cohen, Department of Economics, York University & University of Toronto, Toronto, ON, Canada G C Harcourt, School of Economics, University of New South Wales, Sydney, NSW, Australia Peter Kriesler, School of Economics, University of New South Wales, Sydney, NSW, Australia Jan Toporowski, Economics Department School of Oriental & African Studies, University of London, London, UK Palgrave Studies in the History of Economic Thought publishes contributions by leading scholars, illuminating key events, theories and individuals that have had a lasting impact on the development of modern-day economics The topics covered include the development of economies, institutions and theories The series aims to highlight the academic importance of the history of economic thought, linking it with wider discussions within economics and society more generally It contains a broad range of titles that illustrate the breath of discussions – from influential economists and schools of thought, through to historical and modern social trends and challenges – within the discipline All books in the series undergo a single-blind peer review at both the proposal and manuscript submission stages For further information on the series and to submit a proposal for consideration, please contact the Wyndham Hacket Pain (Economics Editor) wyndham.hacketpain@palgrave.com More information about this series at http://www.palgrave.com/gp/series/14585 David Glasner Studies in the History of Monetary Theory Controversies and Clarifications David Glasner Washington, DC, USA ISSN 2662-6578 ISSN 2662-6586 (electronic) Palgrave Studies in the History of Economic Thought ISBN 978-3-030-83425-8 ISBN 978-3-030-83426-5 (eBook) https://doi.org/10.1007/978-3-030-83426-5 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations Cover credit: ilbusca This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Preface The studies in this volume, written over the course of four decades, are the result of my continuing interest in monetary theory and its historical development The studies often reflect my own disappointment with that development, especially the long ascendancy of the quantity theory of money and the price-specie-flow mechanism as the lynchpins of monetary theory and policy The prolific writings of Ralph Hawtrey from 1913 through the mid1930s provided a basis on which an improved monetary theory might have been constructed But, working largely in isolation as a civil servant, with little opportunity, despite his early prominence, to educate younger economists who might have carried on his unique approach to monetary theory, his own contributions were gradually eclipsed during the Great Depression, when they were most needed, falling into undeserved semioblivion Hawtrey’s friend, J M Keynes, whose early work was influenced by, and shared much in common with, Hawtrey’s approach, eventually set the profession on a much different path from that followed by Hawtrey A couple of decades after Keynes published his great work, Milton Friedman launched an anti-Keynesian Monetarist counterrevolution In their monumental Monetary History of the United States, Friedman and Anna Schwartz seemed to provide historical and empirical support for his Monetarist doctrines with what seemed a more compelling v vi PREFACE monetary explanation of the Great Depression than either Keynesian or non-Keynesian economists had ever before articulated But there was an earlier monetary theory of the Great Depression that had been forgotten by the time the Monetary History was published: the explanation that Hawtrey and Gustav Cassel had both developed independently in warning—fully a decade before the onset of the Great Depression—of the danger of a catastrophic deflation unless the likely resumption of the prewar gold standard was managed in a way that minimized increases in the international monetary demand for gold The sad story of the collective amnesia suffered by the economics profession concerning the Hawtrey-Cassel explanation of the Great Depression is not widely known Although our understanding of the causes Great Depression was greatly enhanced over the past 30 years by the work of Barry Eichengreen, Peter Temin, and others, the more recent work merely confirms and expands upon the fundamental early insights of Hawtrey and Cassel, and the immense contributions of those two great economists remain unrecognized or underrated That is not the only sad story told in this volume We are still watching the latter story work itself out in real time, without knowing how, or when, it ends Following its 1980s collapse as a guide for policy and a theoretical paradigm, Monetarism was superseded by a new paradigm in which expectations are formed rationally, and all agents make microfounded optimal decisions Yet again, the economics profession has, in my view, taken the wrong path Perhaps I will have occasion in the future to spell out more fully than I have in this volume the reasons for my dissatisfaction with the path taken by modern macroeconomic theory But I have begun telling that story in my three final chapters about Hayek Although his early work led him to offer horrendous policy advice, it also endowed him with profound insight, at least in the abstract, into the conditions for intertemporal equilibrium and macroeconomic stability That profound insight, developed almost simultaneously with Hayek by two young Swedish economists, Gunnar Myrdal and Erik Lindahl, helped lead Hayek’s younger colleague at the London School of Economics, J R Hicks, to develop the idea of temporary equilibrium as an alternative to the pure Walrasian general-equilibrium approach, whose underlying assumption of perfect foresight renders it unsuitable for the analysis of involuntary unemployment and financial crises And it is that analysis, after all, which is what justifies the existence of macroeconomics PREFACE vii But neither Hayek nor Hicks was able to carry the temporary-equilibrium approach forward as an analytical tool for monetary and macroeconomic theorizing, which, instead, wandered into the dead-end known as the neoclassical synthesis Enthralled by rational expectations, macroeconomists sought escape from that dead-end by succumbing to the methodological imperatives of axiomatic mathematical formalism, devoting themselves for 40 years to a family of sterile micro-founded models that, obeying methodological fiat, assume away the vexing problems of uncertainty and imperfect foresight that are, or should be, at the heart of any useful macroeconomic theory Modern macroeconomics has thus been reduced to a methodological approach by which it has been disabled from considering the very problems that macroeconomists and monetary theorists ought to be addressing Attentive readers of the essays in this volume will hardly conclude that I am hostile to the theory and practice of neoclassical economics in which I was trained at UCLA, and whose alien concepts have been instilled deeply in my mind by a half-century of repeated and varied iteration But the version of neoclassical theory on which modern macroeconomics has been built is a vulgar and reductive neoclassicism that is rightly disparaged and mocked by its critics These pessimistic comments notwithstanding, I have not lost hope that the following essays may provide some hints and suggestions about finding alternative paths toward a more useful macroeconomics Washington, DC, USA David Glasner Acknowledgments The studies that follow were written over the course of four decades, and I fear that there are many deserving of thanks whose assistance I no longer recall, and whom I therefore cannot mention, much less adequately thank Thanks to those whom I remember must start with my parents, Rabbi Juda and Deborah Glasner, Holocaust survivors who arrived in the United States with my brother, Moses, in time for me to become a natural-born citizen of the United States of America, thereby anchoring the residence and eventual citizenship of my parents and my brother in the United States My parents raised their two sons lovingly, instilling in us reverence for, and attachment to, the cherished traditional Judaism in which we were raised and the liberal, democratic values of their adopted country They encouraged the pursuit of our scholarly ambitions, even though those ambitions were not quite the ones that they would have chosen for us My scholarly debts, of course, begin with my teachers at UCLA, especially Armen Alchian, Harold Demsetz, Jack Hirshleifer, Benjamin Klein, Axel Leijonhufvud, and Earl Thompson Only Klein, Leijonhufvud, and Thompson taught me about monetary theory and macroeconomics, but, at a deep level, my understanding of what economics is about and how it should be done was enriched immeasurably by what I learned from all of them I also had the benefit of meeting, and briefly studying under, F A Hayek when he visited the UCLA philosophy department in the 1968– 1969 academic year Notwithstanding my criticism of some of his writings ix x ACKNOWLEDGMENTS and policy recommendations, his work, as will be evident to readers of this volume, has been a continuing source of insight and inspiration for me In writing the studies in this volume, I have benefitted from comments, suggestions, and criticisms from among others James Ahiakpor, Armen Alchian, William Baumol, Mark Blaug, Meyer Burstein, Phillip Cagan, Robert Clower, Patrick Deutscher, Robert Dimand, Malcolm Fisher, June Flanders, Charles Goodhart, Harald Hagemann, Geoffrey Harcourt, Benjamin Klein, David Laidler, Axel Leijonhufvud, Richard Lipsey, Perry Mehrling, Donald Moggridge, Jürg Niehans, Denis O’Brien, Anna Schwartz, George Selgin, Rajiv Sethi, Neil Skaggs, Matthew Smith, Scott Sumner, Earl Thompson, Richard Trestrail, and Larry White I deeply regret being unable to mention the names of others who also provided valuable assistance when I was writing these studies I was greatly impressed by the early papers of David Laidler on Thomas Tooke and Adam Smith, and they have served as a model for me to emulate David has never disappointed me when I sought to draw on his wisdom and his insight into economic theory and its history, which he has always imparted to me with thoughtfulness and good humor I am deeply grateful for the benefit of his friendship and counsel A paper on the foundations of national-income theory by another great Canadian economist, Richard Lipsey, also made a deep impression on me when I read it as a graduate student It was also one of the first papers I read that discussed Ralph Hawtrey in detail In recent years, after beginning my blog Uneasy Money, Dick and I began corresponding frequently, and I have benefitted greatly from his insight and advice on diverse topics, especially the Phillips Curve, monetary neutrality, and rational expectations Chapter in this volume was originally a paper presented at a conference in Tokyo in 2011 commemorating the 200th anniversary of David Ricardo’s first published work in economics That conference was conducted along with another conference on Ricardo which was attended by Geoffrey Harcourt who presented a paper to a joint session of the two conferences It was my good fortune to meet Geoff for the first time before his lecture, and we immediately took a liking to each other, finding out to our surprise that, despite the differences in our upbringings and our viewpoints on economics, we shared similar eastern European roots Though we have not seen each other since, we have stayed in frequent touch, and I am honored by, and grateful for his friendship, as well as his INDEX Fisher, F.M., 419 Fisher, I., 14, 185, 187, 212, 215, 264, 268, 284, 294, 334, 350, 355, 405–407, 413, 414, 417, 420, 422, 424, 425, 437, 461, 477 independence of real rate from expected inflation, 414, 423 own-rate analysis, 405–407, 423 fixed exchange rates, 2, 12, 37, 60, 66 fixed investment, sensitivity to interest-rate changes, 271 flexible exchange rates, 66 focus on price level in Treatise, 322 forced saving, 409, 411 foreign-exchange reserves, 169, 172 fractional-reserve banking, instability of, 215 France gold standard restoration, 334, 335 monetary law (1928), 346 free banking, 161, 179 Free-Banking School, 160 free-market economy, self-adjusting properties, 451 Fremling, G., 395 French franc 1928 restoration of convertibility, 369 postwar depreciation, 232 prewar gold parity, 341 stabilization of, 342 undervaluation, 345 French monetary law (1928), 393 Frenkel, J.A., 10, 36, 37, 56, 113, 377 Friedman and Schwartz explanation of Great Depression, 392, 393 Friedman, M., 5, 9, 10, 13, 164, 165, 169–173, 184, 188, 189, 198, 199, 214, 219, 220, 222–228, 495 230, 233, 265, 326, 331–335, 349–351, 356, 357, 360 criticism of Simons, 223 denies that fiduciary money can be supplied competitively, 25 explanation of Great Depression, 213 favored 100-percent-reserve banking, 227 on Chicago oral tradition, 395 on gold standards and pseudo-gold standards, 220 on instability in demand for money, 222 on k-percent rule and discretion, 219 on targets vs instruments, 188 on the Bank of France in Great Depression, 169, 170, 173 on vertical Phillips Curve, 433 overlooked Hawtrey-Cassel explanation of Great Depression, 213 proposed k-percent rule, 219, 221, 233 Fullarton, J., 6, 23, 29, 39, 44–46, 86, 94, 96–104, 107, 110, 156, 158, 160, 161, 164, 165, 169, 174, 179, 181, 204, 374, 375 on real-bills doctrine, 94, 95, 107, 110, 158, 175 full employment, lapses from, G Gandolfi, A.E., 359 general equilibrium (Walrasian), 4, 15 general gluts, 240–242, 245–247 general-glut theory, 241, 242, 244 Genoa Conference, 211, 298, 300, 341, 367 Hawtrey’s influence, 327 Genoa Resolutions, 367, 368, 384 496 INDEX intent of, 300, 327 Gibson, A.W., 283 Gibson paradox, 266, 283 Girton, L., 30, 38, 59, 60, 113, 374 Glass, C., 94 Glass, (Sen.) C., 354, 355 Glass-Steagall Act, 94, 158, 182 gold, 136, 139–141, 143, 149–151 1929-32 inflow to U.S., 13, 170, 327, 360 appreciation of, convertibility into, 71 demand for, 164, 171, 181, 185, 186 effects of discoveries, 51, 52, 76, 78, 79 monetary demand for, 2, 12 World War I demonetization, 2, 378 World War I depreciation, 340 gold accumulation and deflation, 173 gold accumulation, by US, 338 gold appreciation, 331, 357 gold bonds, U.S Treasury, 339 gold-exchange standard, 341, 375, 380, 384 gold flows, 3, 70 effect on currency, 76 sterilization, 340, 442 gold flows into U.S and France effect of currency speculation, 223 effect of U.S bank failures on, 395 gold inflows, into U.S and France, 386, 393, 394 gold redemption fund, U.S Treasury, 340 gold-reserve requirements, effects of, 378, 386 gold reserves, 53, 70, 74 ancillary to gold standard, 198, 207 French, 327 French accumulation, 327 international, 327 U.S., 327 U.S accumulation of, 384 gold reserves and the quantity of money, 168, 169, 187 Goldsborough, Bill, 94 creditor opposition to, 355 implications for dollar-gold parity, 331, 354 opposed by Hoover Administration, 355 Goldsborough, (Rep.) T.A., 354 gold shortage, 342 gold standard, 115, 120–125, 128, 130, 139, 140, 148, 150, 151, 158, 159, 165–169, 171–174, 180, 183, 185–187, 433, 436–438, 440–448, 455 1925 British restoration, 443 abandonment by Britain, 336, 351 abandonment by Sweden, 341, 350, 351, 356 abandonment by U.S., 340, 342 as price rule, 198, 207, 208, 215, 231, 232 British abandonment in 1931, 322 collapse in World War I, 9, 187, 378 Hayek’s support for, 436 internationalization of, 196, 197 monetary adjustment under, 2, postwar consensus about, 373 postwar restoration, 342 prestige of, 378 restoration, 169, 178, 180, 184–186, 190 restoration after World War I, 210, 211, 224, 232, 323 role of U.S., 327 rules of the game, 196, 197, 206, 210, 211, 213, 336 suspension of, 350 INDEX Gold Standard Act (1900), 339 gold-standard fundamentalists, 211 gold-standard mentality, 371 gold stock, short-term fixity of, 140, 346 Goodhart, C., 226 Goodhart’s Law, 226, 230 Gordon, R.A., 361 Grant, D., 297 Great Depression, 2, 3, 5, 11–15, 159, 169, 170, 173, 174, 178, 182, 185–187, 190 Austrian interpretation, 345 eclectic interpretations, 333 Friedman and Schwartz interpretation, 331–335, 349, 357 Hawtrey-Cassel explanation of, 13, 369–371, 373, 387, 389, 392, 396 Hawtrey-Cassel interpretation, 334, 335 international character of, 170 Keynesian explanations of, 391 Keynesian interpretation, 333 Monetarist interpretation, 333, 334 monetary explanations of, 332, 334, 370 onset of, 320 recovery from begins after convertibility suspended, 425, 436 unemployment in, 314, 325, 328 Great Recession, 9, 178 Green, R.H., 86, 95 Grieve, R.H., 405, 406 Grigg, P.J., 301 Gurley, J.G., 24, 26 497 H Haberler, G., 124, 265, 309, 367, 383, 387, 391, 449, 452, 453, 455 on secondary deflation, 449 Hagemann, H., 12, 411 Hamilton, J., 334, 349 Hansen, A.H., 433 Harrison, W., 369 Harrod, R., 313, 314, 411 Hart, A.G., 214 Hawley-Smoot tariff effects of, 348, 381 Hawtrey and Cassel business-cycle theorie, 367 criticized by gold-standard supporters, 371 explanation of Great Depression, 369–371, 373, 387, 389, 392, 396 explanation of Great Depression, eclipsed by Keynesian theory, 370 explanation of Great Depression overlooked by Friedman, 372 explanation of Great Depression overshadowed by Austrian theory, 391 viewed 1929 downturn as atypical, 387, 388 Hawtrey-Cassel explanation, 369–371, 373 Hawtrey-Cassel theory, 334, 335 Hawtrey, R.G., 3, 5, 9–14, 146, 147, 169, 174, 178, 180, 181, 185, 186, 189, 263–271, 273–285, 288, 290–292, 294, 437, 446, 448, 477 algebraic derivation of multiplier, 306 disagrees with Keynes about savings-investment, 306 498 INDEX disagrees with Keynes that liquidity preference explains interest, 309 explanation of financial crises, 465 favored reduced Bank Rate after prewar dollar parity restored, 372 monetary explanation of Great Depression, 327 on deflation risk, 372 on gold shortage, 384 on quantity theory, 306 opposed French and U.S monetary policies, 386 overlooks interest-sensitivity of money demand, 307 questioned by Keynes at Macmillan Committee, 384, 390 responses to General Theory, 299 reviews Keynes’s Treatise, 299 similarity to Keynes early monetary theory, 319 supported British departure from gold standard, 380 testimony to Macmillan Committee, 350 Hayek, F.A., 4, 5, 9, 11, 14, 15, 118, 141, 173, 186, 189, 240, 249, 255, 320, 383, 388, 389, 403, 404, 406–408, 410, 411, 413, 414, 417–419, 423, 424, 459–465, 468, 474, 475, 478–481, 485 accuses British of violating rules of game after 1925, 437 adopts Hume’s view of gold standard, 434, 436 alternative criteria for neutral money, 424 and liquidationism, 435, 450 anticipation of vertical Phillips Curve, 433 apology for early support for deflation, 452, 454 conception of natural rate, 404 condemned Britain’s departure from gold standard, 444 confusion between real and nominal natural rate, 406, 407, 413, 417, 419, 423, 424 consistency with Fisher’s own-rate analysis, 405, 407, 412 constant-total-spending criterion for natural rate, 424 criticism of, 443 criticized 1927 Federal Reserve monetary easing, 432, 434 criticized k-percent rule, 226 distinction between perfect and contingently correct foresight, 459 failure to understand conditions for real equilibrium, 431–433 favored declining nominal income except in US, 433, 435 ignores U.S control over international price level, 441, 443, 444 misunderstanding of gold-standard requirements, 438, 447, 448 on cause of cyclical downturn, 431, 448 on discretion in monetary policy, 229 on judicial exercise of discretion, 228, 229 on liquidation, 435, 450 on primary and secondary deflation, 448 on secondary deflation, 451, 453 opposition to inflation during Great Depression, 429, 432, 434, 436, 446, 448, 449, 452, 454 INDEX political aim in supporting deflation, 453, 454 pro-deflationary stance, 449 questioned whether money exists in Walrasian equilibrium, 464 rejected constant spending as policy norm, 434, 435 response to Morgenstern, 459, 466, 467, 484 response to Sraffa, 405–407, 417, 419, 423 review of Keynes’s Treatise, 410, 414, 421 support for gold standard, 436 unable to formulate a policy norm, 434, 435 unconcerned about deflation in 1932, 436, 443, 446, 448 Hegeland, H., 38 Henderson, H.D., 322 Hickman, W.B., 41 Hicks, J.R., 2, 5, 16, 23, 38, 43, 47, 256, 271, 305, 389, 459, 460, 462–464, 474, 485 temporary-equilibrium analysis, 460, 474 Hirshleifer, J., 3, 204, 469 Hollander, S., 74 Holmes-Moriarty, 468, 484 Holmes-Moriarty game, 468 Hoover Administration, creditor influence on, 348 Hoover, H., 94, 352, 354, 368 Hoover, K.D., 103 Horn, B.L., 403, 404 Horner, F., 140 “hot potato”, 45, 66, 163 housing bubble, 178 Howson, S., 300 Hughes, J.R.T., 356 Humean tradition, 136 499 Hume, D., 2, 5, 6, 8, 37, 52, 56–63, 80, 97, 115, 118, 121, 126, 129, 136, 140, 141, 150, 156–161, 165, 166, 175, 177, 186, 201–204, 206, 217, 373–375, 436, 438, 439, 441, 443 favored fixed quantity of money, 222, 223, 233 hostile to banks, 438 ignored use of bank credit instruments as money, 439 refutation of mercantilist doctrine, 438 theory of banking, 204 Humphrey, T.M., 59, 60, 86, 136, 145, 146, 276, 374 100-percent-reserve banking, support by Friedman, 219–221, 233 Huskisson, W., 140 Hutt, W.H., 240, 253, 254, 256 I illiquidity, 158, 177 incomplete markets, 464, 465 inconvertible currency, overissue of, 65 inconvertible money (currency), 39, 42, 43 inconvertible money, Fullarton’s view of, 102, 104 indirect exchange, 244, 250 inflation rules, 171 inflation, World War I, 340 information, incomplete, ingot plan, 186 inside money, 51, 55, 56, 72, 74, 103, 104, 107, 164 insolvency, 158, 177, 184 interbank market for credit, 177 interest commodity rate of, 14 500 INDEX natural rate, 14, 53, 67, 68, 129, 144–147, 150 nominal rate of, on deposits, 28, 100, 127, 136, 144, 148 on money (deposits), 30–33, 53, 56, 68 own rate of, 14 real rate of, 2–4 interest arbitrage, Keynes and Fisher on, 420 interest on money (deposits), 68 interest rate, 248, 266, 269, 270, 272, 277, 278, 283, 284, 290, 292, 461 general-equilibrium analysis of, 461 nominal, 3, 31, 53, 357, 424 partial-equilibrium analysis of, 461 real, 2–4, 27, 28, 422 international arbitrage, 140 international commodity arbitrage, 121 international gold standard convertibility version, of, 338 gold-reserve version of, 336 international monetary adjustment, 126 international monetary cooperation, 157, 159, 168 international price level stabilization of favored by Hawtrey and Cassel, 382 U.S control of, 382 U.S control over recognized by Robertson, Keynes and Mises, 444 intertemporal equilibrium, 5, 15, 16, 407–410, 413, 419–421, 424, 457, 459–468, 473–475, 479, 483–485 conditions, complete markets vs incomplete markets, 464 definition of, 460, 468 interpretations of, 459 intertemporal-equilibrium model, intertemporal inconsistency, 246 inventories role in business cycle, 278 sensitivity to interest-rate changes, 11 investment, 245, 248, 249 bank financing of, 431–433 investment banking, 182 Irwin, D.A., 212, 213, 357, 370 IS-LM model, 4, 356 J Jalil, A.J., 357, 387, 392 Jevons, W.S., 75, 76, 458 Johnson, H.C., 213, 370 Johnson, H.G., 10, 25, 36, 56, 113, 164, 165, 169, 377, 441 Jonung, L., 350, 386 Joplin, T., 63, 67 K Kahn, R., 321 Kahn, R.F., 306 multiplier analysis of, 306 Kaldor, N., 389 Keynesian economics, Keynesian Revolution, 13, 369, 390–392, 396 Keynesian theory, Keynes, J.M., 4, 5, 9–12, 14, 138, 144, 145, 174, 185, 212, 222, 247, 248, 251, 254, 255, 263, 264, 269, 271, 273–275, 279, 282, 283, 404–407, 410, 411, 419–425, 437, 444, 475 adopts Fisher’s own rate analysis, 406, 407, 414, 421–423 annoyance with Hawtrey, 307 INDEX changed analytical approach of General Theory, 314, 321, 328 Fisherian basis of own-rate analysis, 423 opposed gold-standard restoration, 372 opposition to restoring gold standard, 315, 317, 319 own-rate analysis, 405, 421, 423 questions Hawtrey at Macmillan Committee, 390 rejection of intertemporal equilibrium model in General Theory, 475 responds to Hayek’s review of Treatise, 410, 414, 421 Kindleberger, C.P., 333, 340, 356, 359 Klausinger, H., 430, 448 Klein, B., 3, 5, 8, 137, 165 Knight, F.H., 214 Kochin, L., 315, 323–325 Kochin, L.A., 356 Koppl, R., 468, 480 Kreditanstalt, failure of, 320 Krugman, P., 204 Kurz, H.D., 403 L Lachmann, L., 403, 406, 419–421 on natural-rate and intertemporal equilibrium, 407, 409, 410, 413, 419–421, 424 Laidler, D., 59, 60, 80, 86, 96, 102, 113, 119, 136, 145, 146, 155, 159, 181, 206, 231, 273, 302, 374, 377, 385, 435, 454, 475 on Hayek’s policy stance in Great Depression, 435 Lancaster, K., 458 Lange, O., 41, 240, 249, 250, 254, 256 501 Laughlin, J.L., 59 Lavington, F., 177 Law, J., 85, 126 Lawlor, M.S., 403, 404 law of one price, 114, 120–123, 125, 376 law of reflux, 6–8, 23, 24, 35, 45, 52, 55, 56, 66–68, 70, 71, 86, 87, 94–96, 102, 103, 105–108, 204, 205, 375 role of convertibility, 87 law of the markets, 241 Leijonhufvud, A., 4, 240, 254, 256, 479 corridor concept, 479 lender of last resort, 118, 130, 158, 175–177, 179, 183 and moral hazard, 181, 182 lender of last resort (doctrine), 158, 179 Lenin, V.I., 453 Lerner, A., 389 Lindahl, E., 459, 460, 463 Lipsey, R.G., 41, 309, 458, 482 liquidationism, 435, 449–451 Little Depression, 9, 178 Lloyd George, D., 298 Longfield, M., 64 Lopokova, L., 297 Lord King, 66, 201 Lothian, J.R., 359 Low, J.M., 59 Lucas Critique, 163, 208, 209, 219, 226, 230 Lucas, R.E., 16, 459, 482, 485 M Macmillan Committee, 180 Hawtrey’s testimony, 350, 384 Keynes’s questioning of Hawtrey, 304 502 INDEX Majewski, R., 405 malinvestments, 409 induced by below-natural bank rates, 409 unsustainability of, 409 Malthus, R., 242, 245 managed money, 187 marginal efficiency of capital, 144, 145 marginal efficiency of investment, 145 Marshall, A., 138, 264, 294, 297, 431 Marshallian partial-equilibrium analysis, 451 Mattei, C., 372, 380 Mazumder, S., 212 McCloskey, D.N., 3, 10, 113, 185, 197, 207, 210, 335–337, 375 McCulloch, J.R., 63, 64 McKenzie, 459 Meade, J.E., 189, 321 Means, G., 215 Meltzer, A.H., 361, 392 Menger, C., 458 metallic currency, 155, 156, 161, 184, 186, 190 metallic standard, 58, 60 Milgate, M., 463 Miller, A., 450 Mill, J.S., 5, 6, 36, 38, 71, 72, 79, 94, 103, 114, 117, 156, 174, 239, 243 Mints, L.W., 56, 86, 93, 94, 102–104, 106, 175, 198, 214 Mises, L.v., 174, 186, 271, 276, 411, 429, 436, 438, 443, 444, 448, 454 gradual loss of influence over Hayek, 455 influence on Hayek, 455 Mitchell, W.C., 429 modern macroeconomics, 16 Moggridge, D., 380, 384 Monetarism (Monetarists), 10, 152, 159, 164, 177, 190, 332–334 Monetarist Counterrevolution, 13 Monetarist explanation of Great Depression, 370 See also Friedman and Schwartz explanation of Great Depression monetary adjustment, 114 international, 2, monetary-adjustment, process of, 218 monetary aggregates, 21, 188, 189, 191 monetary approach to the balance of payments, 165, 174, 377, 441, 442, 446 monetary base, 152, 162–164, 188, 191, 225, 227 monetary business-cycle theory, 265, 294 monetary contraction 1929-33, 331, 332 cause or effect, 333 monetary disequilibrium, 138, 146 monetary equilibrium, 141 international, 22 monetary neutrality, 155 monetary policy, discretion vs predictability, 229 monetary-policy rules, 189, 190 monetary rules, monetary sector, 22, 24, 35, 41, 43, 44, 244 money competitive supply of, 3, 5, 137, 138 demand for, distinguishability of issuer, 25 high-powered (monetary base), 151, 152 inside, 35 interest on, 68 INDEX outside, 72, 103, 104, 106, 107, 164 payment of interest on, 25 private production of, money and prices, direction of causation between, 378 money-backing assets, 34, 250, 257 money-backing services, 34 money multiplier, 3, 23, 39, 47, 101, 119, 162, 163, 188 reduced form, 226 Mongiovi, G., 405 Moore, B., 8, 165 Moore, G.E., 264, 297, 321 influence of on Keynes, 321 Moosa, I.A., 123 moral hazard, 181, 182 Moreau, E., 170, 171, 344, 386 franc stabilization, 344 supported French monetary law, 375 Morgenstern, O., 409, 467, 468 critique of equilibrium concept, 459, 466, 467 on perfect-foresight assumption, 459 Mouré, K., 13, 169, 213, 344, 357, 370 multiplier, 254, 266, 269, 275, 279, 280, 321 Myrdal, G., 459 N Napoleonic Wars, 7, 9, 55, 183, 184 Nardi, N., 405 narrow banking, 182, 183 National Industrial Recovery Act (NIRA) enactment stalls U.S recovery in July 1933, 387 ruled unconstitutional in 1935, 387 503 national price-level, stabilization of favored by Keynes and Fisher, 383 natural rate, 270, 280 difference between Wicksell’s and Hayek’s conceptions, 404 natural-rate model, 144 natural rate of interest, 404–406, 409, 411, 415, 417, 420, 421, 423, 424, 431 Hayek’s criticism of Wicksell, 431 unobservability of, 410 Wicksell’s conception of, 431 needs of trade, 23, 86, 96, 108, 131 Nelson, D.B., 342, 357, 386 neoclassical theory, 299 neutrality of money, 41 neutral-money policy, 15, 403, 404, 419, 423, 435, 450 and gold standard, 436, 449 consistency with monetary expansion, 410, 411, 419 implies constant total spending, 431, 434 inconsistency with constant money stock, 442 Newmarch, W., 76, 77, 79 New View, 24, 151, 152, 163 New York Federal Reserve Bank, 332, 368 NGDP targeting, 190 Niehans, J., 6, 41, 43, 85, 110 non-tradable goods, 125, 127, 128, 278 non-tradable-goods sector, 61, 77 Norman, M., 317, 367, 369, 386 1927-28 appeals for US assistance, 384 note issue, fiduciary, 166 notes and deposits, differences between, 96 Nurkse, R 504 INDEX influenced by Hawtrey and Cassel, 391 on increased demand for gold reserves, 338 O O’Brien, D.P., 7, 22, 36, 51, 86, 95, 114, 120–127, 130, 131, 137, 155 on correlation between money and prices, 266, 283, 336 optimality, 458, 464, 475 outflow of gold, implications of, 65 outside money, 103, 104, 106, 107, 164 overissue, 25, 39, 46, 86–88, 91–94, 96–98, 100–107, 119, 126–129, 136, 139, 142, 143, 149, 150, 157, 160, 161, 168, 174, 182, 184, 200, 374, 375 incentive for, 176 overproduction, 241, 242, 246 overstocking, 92 Overstone, Lord, 130, 131, 160 own rates (of interest), 413–417, 419, 422 accounted for by Fisher, 413 causes of multiplicity, 405, 413, 414, 416, 418, 420 multiplicity of consistent with unique real own rate, 405, 414, 417, 419, 422, 423 P Palmer, H., 293 Palmer rule, 64, 197 Pareto, V., 458, 469 Patinkin, D., 5, 24–26, 34, 35, 41, 240, 243 Pearson, F.A., 334, 335, 352, 353, 377, 391, 392 Peden, G.C., 307 Peel, (Sir) R., 28, 94, 203, 204, 221, 439 Pennington, J., 63 perfect foresight, 15, 408, 409, 459 assumption, 459, 463, 465–467 replaced by ADM model, 459, 463 perfect-foresight equilibrium, 463 Perlman, M., 86, 87, 93, 95, 102, 106 Persons, W.M., 429 Pesek, B.P., 25, 26 Petrella, F., 59 Phillips, C.A., 22, 39, 162 Phillips Curve, 233, 433 Pigou, A.C., 211, 282, 294 plans, temporal dimension of, 459 Poincaré, R., 344 1926 franc stabilization, 368, 385 Poor Law Commission, minority report of, 268, 282 Popper, K.R., 454 prewar dollar parity, 316, 317 price expectations, 245, 256, 257, 459, 462, 465, 471–474, 476, 477, 479, 480, 483, 484 equilibrating variables in, 465, 480 inferring non-price information from disappointment of, 477 price flexibility, 254 price level, 51, 53–56, 58–61, 65, 72, 74, 76–78, 80, 141, 145–149, 151 exogeneity of, 137 international, 3, 7, 10, 12, 56, 61, 65, 120, 125, 140, 304, 335, 338, 340, 341, 357, 359, 376, 377, 383, 387 means of stabilizing, 268 national, 3, 56, 59–62, 65, 120–122, 128, 130, 331, 374–377, 382 INDEX price-level rules, 188 price-level stabilization, 186, 319, 332 criticized by Hayek, 433, 434, 437, 444 role in recovery after World War II, 329 supported by Marshall and Wicksell, 431 price rules, 159, 197–199, 206–208, 212, 215, 230–232 in Smithian tradition, 159 price-specie-flow mechanism (PSFM), 2, 3, 6, 8, 22, 24, 52, 56, 59–61, 65, 75–77, 79, 118, 122, 124, 136, 140, 141, 150, 156, 157, 159, 165–169, 171–174, 201–203, 205, 211, 266, 294, 331, 335, 337, 361, 370, 372–374, 376, 377, 392, 393, 439, 441, 446, 448 Hayek’s reliance on, 141 no-arbitrage assumption, 439 Smith’s omission of, 374 profit rate, 269–272, 280, 281, 285, 291 purchasing-power parity (PPP), 37, 114, 122–124, 266, 267, 275, 277, 368, 377, 380 Q quantity of money, endogeneity of, 23, 130, 136 quantity rule(s), 159, 186, 188, 190, 197–199, 207–210, 213–215, 218, 219, 229–231 in Humean tradition, 189 quantity theory, 155–157, 159, 162, 163, 166, 319, 320 quantity theory of money, 21, 35, 40, 51, 113, 115, 119, 121, 135, 141, 202 505 R Radner (EPPPE) equilibrium differences between and ADM equilibrium, 470 non-Pareto-optimality of, 469 Radner, R., 15, 16, 256, 408, 472–474, 480, 484 formalization of Hayek’s insight into intertemporal equilibrium, 459, 460, 463, 464, 468, 473, 479, 485 generalization of ADM analysis, 459 rate of profit, 144 rational-expectations assumption, 480–482, 485 rational-expectations equilibrium, 16 rational-expectations postulate, expected-price equilibration as methodological assumption rather than a demonstrated theorem, 465 real-balance effect, 34, 35, 41, 51 real-bills doctrine, 7, 8, 23, 85–88, 90, 92–96, 102, 104–110, 149, 150, 158, 175–177, 182 anti-Bullionist version, 96 influence of, 86 liquidity rationale, 106 price-level rationale, 106 single-bank interpretation of, 87, 110 real-business-cycle theory, 16 real quantity of money, in Great Depression, 356, 359 real sector, 55, 56, 71, 72 reflation, 389 reflux, channels of, 101 reparations payments effects of, 346 restoration of gold standard, by France, 327 506 INDEX Ricardo, D., 8, 38, 41, 55, 70, 71, 73, 74, 79, 114, 116, 117, 121, 135, 136, 138–144, 148–151, 156, 174, 186, 200, 239, 242, 243, 293, 300, 374, 377 on Say’s Law, 73, 74 supports gold-bullion standard, 136 Rist, C., 211 Robbins, L., 22, 40, 211, 334, 430, 431 Robertson, D.H., 309, 320, 321 Robinson, A., 321 Robinson, J., 321 Roosevelt, F.D., 350, 391 suspends gold convertibility, 387 Roper, D., 30, 38, 59, 60, 113, 374 Röpke, W., 449 on secondary deflation, 449 Rosser, B., 468, 480 Rua, G., 387, 392 Rueff, J., 24, 42, 211, 324 rules price, quantity, “rules of the game”, 168–170, 173, 185, 186, 197, 206, 210, 211, 213, 336, 339, 375, 378, 383, 440, 442, 443 implicit causal assumptions of, 437, 442 rules vs authorities (discretion), 198, 227 Russell, B., 264 S Sachs, J., 359 Salvadori, N., 403 Samuelson, P.A., 33, 34, 60, 61, 121, 123, 124, 136, 377, 439 savings, 245, 248 savings and holding money, 250 savings and investment, 320 equilibration of, 248 Saving, T.R., 25, 26 Say, J.B., 6, 95, 156, 239, 241–243, 246 concessions by, 242 Say’s Equality, 72, 74 Say’s Identity, 6, 52, 56, 72, 74, 121, 244 Say’s Law, 6, 9, 35, 71, 136, 240–242, 244, 245, 247, 249, 250, 253, 254, 256–258 accounting interpretation, 245 as denial of general-glut theory, 244 causal interpretation, 245 classical objections, 242 cumulative process, 257 dynamic analysis, 251 equivalence to law of reflux, 24 future demand for output, 241, 246 Keynesian theory, 248 Lange-Patinkin interpretation of, 42 modern objections, 240, 245, 248 responses to objections, 240 Say’s Principle, 240, 254 Schumpeter, J.A., 1, 22, 39–41, 59, 103, 104, 265, 367, 388, 430 Schwartz, A.J., 5, 21, 170, 265, 326, 331–335, 349–351, 356, 357, 360 Scotch (Scottish) banks, 53, 91 secondary deflation, monetary expansion required to counteract, 449 Selgin, G., 9, 53, 86, 95, 107 Senior, N., 38, 55, 121, 123 sequential equilibrium, 474 Shackle, G.L.S., 42, 264, 389 Shaw, E.S., 24, 26 Shell, K., 465 Shughart, W.F., 332 INDEX Simons, H.C., 9, 183, 184, 187, 188, 198, 199, 214, 216–225, 227–230, 232, 233 endorsed price rule, 199 on quantity vs price rules, 198 support for 100-percent-reserve banking, 198, 219, 227, 232, 233 Sismondi, J.C.L., 242, 245 Skaggs, N.T., 86, 87, 104, 110, 114, 117, 118, 144, 155, 181 Skidelsky, R., 314, 321 small open economy, 167 Smith, A., 5–8, 24, 30, 37–39, 41, 52, 53, 56–60, 62, 63, 65, 70–72, 75, 79, 85–93, 95, 97–100, 102, 103, 106, 109, 115, 121, 122, 126, 127, 129, 135, 136, 149, 150, 156–161, 167, 174–177, 181, 186, 189, 373, 374, 377 banking theory, 88 Smithian monetary tradition, 376 Snyder, C., 385 Sowell, T., 22, 41, 245 Spain, Great-Depression experience, 356 Sraffa, P., 5, 14, 321, 389, 403–407, 411–419, 421–423 criticisms of Hayek, 403, 404, 406, 407, 411, 418, 419, 421–423 critique of Hayek, 407, 410, 414, 417 stationary state, 465 Steedman, I., 463 sterilization, 169–172 sterilization of gold flows, misunderstanding of, 442 sterling, depreciation of, 138, 139, 141, 143, 149, 150 stock dealers financing of, 288 507 margin requirements, 288 stock exchange, 288, 289 stock-market boom 1927-29, 345 Austrian interpretation, 345 stock-market crash, 320 causes of, 346 stock market, rally after 1927 interest-rate cut, 368 stock-market speculation, 369, 381 Strong, B., 170, 171, 332, 345, 350, 368, 384–386 criticism of Cassel’s deflation warnings, 384 Strong, (Rep.) J.G., 355 Sumner, S., 213, 357, 370, 387, 392 supply-side multiplier, 254 T tariff policy, 268 tâtonnement , 252, 256, 257 Temin, P., 13, 333, 356, 357, 359, 370, 371, 388 criticisms of Friedman and Schwartz, 357 temporary equilibrium, 16, 240, 256, 257, 459, 460, 462, 464, 465, 474–479 incorrect expectations and market-clearing, 475 market-clearing with inconsistent individual plans, 464 potential disruption in the private supply of the medium of exchange, 478 potential non-existence, 468 role of banks in, 471 temporary equilibrium model, 16 financial crises caused by disappointed expectations, 477 508 INDEX privately supplied credit instruments serving as media of exchange rationalized, 465 terms of trade, 122–124 Thompson, E.A., 3–6, 8, 10–12, 113, 137, 165, 240, 244, 250, 372 Thornton, W.H., 8, 38, 53, 58, 61, 62, 67, 69, 70, 79, 86, 94, 105, 109, 114, 116–119, 121, 126, 127, 129, 156, 158, 174, 179, 181, 184, 200, 276, 374 criticism of Hume, 118 criticism of Smith, 127 Thornton-Wicksell model, 144–148 Thornton-Wicksell model, defects (problems) of, 148 Tobin, J., 8, 163–165, 189 Tollison, R.D., 332 Tooke, T., 76, 156, 161, 181 on real-bills doctrine, 94, 96 Torrens, R., 63, 119, 160 Tout, H., 433 tradable goods, 125 tradable-goods sector, 7, 277, 278, 348, 390 Treasury view, 266, 279–282, 299, 372 Treatise on Money, 319, 329 Keynes’s decision to revise, 322 Treatise on Money, 319 Tugwell, R., 215 U UCLA economics department, 1, 2, unemployment, cause of in General Theory, 315, 327 cause of in Treatise, 320 effect of wage reductions on, 358 influence of unemployment insurance, 323, 325 involuntary, 250, 326 proposals to mitigate, 268 unemployment in Britain, 314 unemployment insurance effect of deflation on, 321 effect on wages, 323, 326 universal banking, 182 upper-turning point, 448 U.S control of recognized by Robertson et al., 444 U.S control over international price level, 382 U.S Federal Reserve, 300 usury laws, 129 usury limit, 149 V Versailles, Treaty of, 347 Viner, J., 22, 39, 40, 59, 61, 64, 66, 115, 118, 122–124, 136, 143, 155, 156, 159, 374, 395 Volcker, P., 10, 11, 227, 230 von Wieser, F., 429, 454 W wages, sticky (rigid), Wallace, H., 215 Walrasian model, 250, 252 Walras, L., 458 Walras’s Law, 9, 35, 240, 241, 249, 250, 256–258, 470 potentially violated under incorrect price expectations, 471 violation of, 257 Warburton, C., 334 war debts, 335, 346, 347 Warren, G.F., 334, 335, 352, 353, 377, 391, 392 advises Roosevelt on gold price, 391 war reparations, 335 Wheatley, J., 63, 80, 139 INDEX White, L.H., 53, 69, 86, 100, 101, 109, 110, 160, 389, 435, 450, 452 defense of Hayek, 448 on Hayek’s pro-deflationary stance, 449 Wicksell, K., 40, 41, 53, 67, 138, 144, 149, 410, 414, 431, 432 conception of natural rate, 406, 409 Wicksteed, P.H., 458 Wilcox, J.A., 357, 361 Willis, H.P., 94 Wood, J.H., 212 509 Woolf, V., 297 World War I, inflation during, 328 Y Yeager, L., 164 Young, A., 385 Z Zappia, C., 467 Zecher, J.R., 3, 10, 61, 113, 185, 197, 207, 210, 335–337, 375 ... “David Glasner? ??s Essays in the History of Monetary Theory: Controversies and Clarifications examines the long sweep of monetary economics from the 18th to the 21st century in relation to changing monetary. .. Monetary Controversies 51 The Real-Bills Doctrine in the Light of the Law of Reflux 85 Classical Monetary Theory and the Quantity Theory 113 Monetary Disequilibrium and the Demand for Money in Ricardo... of the dispute between the Currency and Banking Schools In Sect 2.5, I compare my version of the classical theory with the modern restatements of the classical theory by Patinkin and others and