Money: Sound and Unsound

The 26 essays collected in this book were published over the last three decades in a variety of academic journals, scholarly books, policy-report series, and periodicals aimed at the nonspecialist. Several were originally published in electronic periodicals. They share a common theme despite the fact that they were written at different times and for disparate audiences. This theme may be broadly summed up in the term “sound money” as defined by Ludwig von Mises. According to Mises,

The sound money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.… Sound money meant a metallic standard.… The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of governments and political parties.1

The idea of sound money was present from the very beginning of modern monetary theory in the works of the 16th-century Spanish Scholastics who argued against debasement of the coinage by the king on ethical and economic grounds.2

The concept of sound money, or “sound currency” as it was then called, was central to the writings of David Ricardo and his fellow “bullionists” in the early 19th century who argued that the price inflation observed in Great Britain during and after the Napoleonic Wars was caused by the suspension of the convertibility of bank notes into gold and silver mandated by the British government.3 The ideal of the bullionists was “a self-regulating currency,”4 whose quantity, value, and distribution among nations were governed exclusively by market forces of supply and demand.

The sound-money doctrine reached the peak of its influence in the mid-19th century after another great debate in Great Britain between the “currency school” and the “banking” school. Supporters of the “currency principle” favored a monetary system in which the money supply of a nation varied rigidly with the quantity of metallic money (gold or silver) in the possession of its residents and on deposit at its banks. Their banking-school opponents upheld the “banking principle,” according to which the national money supply would be adjusted by the banking system to accommodate the ever-fluctuating “needs of trade.” The currency school prevailed in the short run with the passage of Peel’s Act of 1844.

But although the currency principle was basically sound, its policy application was considerably weakened by two serious errors committed by its proponents. First, they failed to include demand deposits in the money supply, along with metallic coins and bank notes. Thus while they insisted that every new issue of bank notes was to be backed 100 percent by gold, they did not apply the same principle to the creation of new checking deposits. The result was that the money supply was still free to vary beyond the limits imposed by international gold flows, thus subjecting the economy to continued recurrences of the inflation-depression cycle.

This error in the currency-school program was compounded by a second one that further undermined its ultimate goal of sound money and rendered the economy even more susceptible to cyclical fluctuations. The currency school proposed that the Bank of England, a governmentally privileged bank with a quasi monopoly of the note issue, oversee the application and enforcement of the currency principle.

Of course a monopoly bank with such close ties to government would have both the incentive and influence to engineer departures from the principle during a financial panic in order to prevent a widespread bank run that would threaten its own gold reserves. To avoid a general loss of confidence in the banking system, it needed to expand its own supply of notes in order to lend to shaky private banks that did not have sufficient reserves to meet their own depositors’ demands for redemption.

This is exactly what occurred, as Peel’s Act was routinely suspended during panics, effectively guaranteeing an inflationary bailout of the banks in future crises and intensifying their inflationary propensity. Peel’s Act thus did not moderate or abolish the business cycle and, indeed, came to be viewed as an impediment to the Bank of England operating as a lender of last resort during crises. As a result, the currency principle was thoroughly discredited and the ideal of sound money was badly tarnished.

“The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of governments and political parties.”Ludwig von Mises, The Theory of Money and Credit

The early opponents of the sound-money principle, such as the antibullionists and the banking school, were nearly all naïve and unsophisticated inflationists who either confused money with wealth or believed that real economic activity was being stifled by a chronic scarcity of money. But in the late 19th century a new and much more sophisticated opposition to sound money began to develop during the debate over the bimetallic standard, a monetary system in which both gold and silver served as money with their exchange rate fixed by legal mandate. The bimetallic standard had functioned as the legal (if not always the de facto) standard for most major countries except Great Britain from the beginning of the 19th century until the 1870s, when silver was officially demonetized by the United States, France, Italy, Switzerland, Belgium, the Scandinavian countries, and the newly created German Empire.

The proponents of the bimetallic standard argued for remonetization of silver on the grounds that this measure would increase the money supply and thus arrest the decline in prices under the monometallic gold standard that had begun in the late 1870s. The quantity theory of money was the foundation of the arguments put forward by the bimetallists.

The theoretical counter-arguments of the advocates of the monometallic gold standard were completely inadequate to meet the challenge posed by the quantity theorists. They were based on the view that the costs of production of mining gold directly determined the price level, a distortion of classical monetary theory developed by Ricardo and the currency school.5 Paradoxically, although the gold standard remained intact, at least for the short run, the seeds for its eventual abolition had been sown, because the classical sound-money doctrine had been discredited among economists.

As David Laidler, a modern proponent of the quantity theory, commented,

The refinement of the quantity theory after 1870 did not strengthen the intellectual foundations of the Gold Standard. On the contrary, it was an important element in bringing about its eventual destruction… The notion of a managed money, available to be deployed in the cause of macroeconomic stability and capable of producing a better economic environment than one tied to gold, was not an intellectual response to the monetary instability of the post-war period. The idea appeared in a variety of guises in the pre-war literature as a corollary of the quantity theory there expounded.6

Thus, by the end of the 19th century, the view that money should ideally be “stable” in value had fully displaced the classical ideal of “sound” money, meaning a commodity chosen by the market whose value was strictly governed by market forces and immune to manipulation by governments. This new view culminated in the work of Irving Fisher, who in 1911 formalized the quantity theory in mathematical terms and proposed it as a formula for use by politicians and bureaucrats charged with the task of managing money in the interests of stability of the price level.7 Indeed, it was Fisher and not Keynes who was the true founder of modern macroeconomics, with its aggregative reasoning and its central notion of politically managed fiat money.8 As the modern monetary theorist and historian of thought, Jürg Niehans wrote,

Fisher’s reformulation of the quantity theory of money … has successfully survived seventy-five years of monetary debate without a need for major revision; its analytical content is accepted today by economists of all persuasions, and in the present world of fiat money it is actually more relevant than it was in Fisher’s gold standard world.9

Such was the state of monetary economics when Mises published his seminal work on The Theory of Money and Credit, in 1912.10 In writing this book, Mises achieved two aims. The first was to reconstruct monetary theory by integrating it with the subjective-value theory of price which had been developed by the early Austrian economists, most notably Carl Menger and Eugen Böhm-Bawerk. By doing this, Mises was able to resolve the so-called “Austrian Circle,” according to which the value of money could not be explained in terms of marginal utility because any such explanation involved circular reasoning. It was this misconception that opened the door to Fisher’s analysis of money in terms of aggregative variables such as the national money supply, velocity of circulation of money, the average price level, and so on, eventually leading to the unquestioned predominance of the macroeconomic quantity theory of money.

Mises’s second accomplishment was to revive the currency school’s sound-money doctrine and correct its shortcomings by severing its ties with the classical cost-of-production theory of value and grounding it in modern monetary theory. Friedrich A. Hayek, Mises’s protégé, further developed the theoretical foundations of the sound-money doctrine in works published in the 1920s and early 1930s.11

Unfortunately, Mises’s and Hayek’s ideas on sound money were ignored, and the stable-money doctrine continued in ascendancy after World War One. The Federal Reserve and other central banks instituted a regime of managed money and central-bank “cooperation” during the 1920s that stifled the natural operation of the gold standard. In the United States, in particular, the Fed engineered a rapid and prolonged expansion of the money supply through the fractional-reserve banking system, driving interest rates below the “natural” or equilibrium rate and precipitating bubbles in stock and real-estate markets.

However, the inflationary-monetary policy was not recognized by most of the American economics profession, who were quantity theorists and stabilizers like Fisher. They focused almost solely on movements in wholesale or consumer prices, which remained basically unchanged during the 1920s. Under a sound-money regime, these prices would have dropped dramatically to reflect the increased abundance of goods that resulted from the extremely rapid growth in productivity and real output that occurred during the decade.12

The ultimate effect of the central banks’ manipulation of the money supply and interest rates was the onset of the Great Depression. Mises and Hayek had been led by their analyses to anticipate such an occurrence.13 Writing in 1932, the eminent Harvard economist and international monetary expert John H. Williams summarized the Austrians’ position and noted their forecast of the depression:

It can be argued but that for credit expansion prices would have fallen, and that they should have done so. It was on such grounds that the Austrian economists predicted the depression.14

In contrast to the Austrians, the stabilizers, especially Fisher, were surprised and totally befuddled by the event. But Hayek knew exactly where to place the blame, writing in 1932:

We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.15

The stable-money doctrine was soon discredited, only to be replaced by the vastly more inflationary spending doctrine propounded by John Maynard Keynes, himself a former advocate of stable money. In its essentials, Keynes’s doctrine harked back to John Law and the so-called “monetary cranks” of the 19th century.

Keynes maintained that depression was simply the result of a deficiency of total spending or “aggregate demand,” which was a chronic condition of the market economy. The only remedy for this problem, he argued, was government budget deficits that directly injected money spending into the economy combined with an expansionary monetary policy to lower interest rates and stimulate private investment spending. The Keynesian spending doctrine achieved unchallenged dominance in academic economics in the United States and Great Britain shortly after World War Two, and by the 1960s it was settled doctrine among economic policymakers, who eagerly implemented cheap-money and deficit-spending policies.

These policies eventually resulted in the accelerating inflation of the 1960s, followed by the chronic stagflation of the 1970s. Like the earlier stable-money policies, aggregate-demand policies led to consequences that were completely unexpected by their advocates and could not be explained within the Keynesian framework.

By the late 1970s, Keynesianism as a policy program had lost its credibility and it was supplanted by monetarism, a movement led by Milton Friedman, which had been growing in influence in academic economics since the early 1960s. But monetarism was nothing more than Fisher’s stable-money principle supported by a seemingly more-sophisticated version of the quantity theory of money restated in Keynesian terminology. Instead of aiming directly at a stable price level, Friedman and the monetarists advocated that the central bank aim at stabilizing the growth of the money supply at a rate consistent with a zero or low long-run rate of inflation. Events soon falsified monetarist predictions of price and output movements during the mid-1980s, and orthodox monetarism rapidly declined in influence in academia and, especially, in the policy arena.

By the early 1990s, a new theoretical consensus in macroeconomics had emerged, known as New Keynesian economics, which synthesized elements of Keynesianism, monetarism, and New Classical economics, an offshoot of monetarism. The policy goal of this consensus remained stable money, or at least a low and stable rate of inflation. Although the Greenspan Fed did not articulate this goal explicitly, the central bank operated in a way consistent with it throughout the 1990s, and consumer price inflation remained moderate and remarkably stable as growth of real output accelerated.

Beginning in 1995, a financial boom developed centered on technology stocks. Financial writers, media commentators, economists on Wall Street and in academia, and even Alan Greenspan himself began to refer to the “New Economy” to designate the combination of low inflation, rapid productivity and output growth, and a booming stock market that marked the latter half of the 1990s. Blinded by the fallacious stable-money doctrine which focused narrowly on consumer price indexes, they all ignored the huge increase in the money supply that had fueled the boom.

But once again the goal of stable money proved to be chimerical: the dotcom bubble burst and the economy plunged into a short-lived recession in 2001. The Fed quickly pumped the economy out of the slump with a new burst of monetary expansion driving the federal-funds rate down to 1 percent from 6.5 percent by mid-2003 and maintaining it at that level for a year. The recovery of financial markets and the speed up in economic growth by 2003 along with a continuing moderation of consumer-price inflation allayed most doubts about the inflationary thrust of Fed policy and restored confidence in the stable-money program.

Still, there were a handful of critics who warned that a massive housing bubble was forming as early as 2003, but they were ignored or ridiculed as “doomsayers” or “gold bugs.” Most were either Austrian economists or bankers and financial commentators who had discovered and were influenced by the sound-money tradition of Mises, Hayek and Rothbard.17

Despite their recent experience with the meltdown of the 1990s New Economy, the stable-money enthusiasts inside and outside the economics profession were incorrigible and proclaimed that the economy had passed into a new era of long-run stability in the economy beginning in the mid-1980s. This new era they dubbed “The Great Moderation.” The term was even used as the title of a speech delivered in 2004 by then-Federal Reserve Board Governor and leading macroeconomist Ben Bernanke.18 Another leading light of macroeconomics, Robert Lucas, declared in 2003, “[the] central problem of depression-prevention has been solved, for all practical purposes.”19

The whole notion of the Great Moderation trumpeted by establishment macroeconomists was uncannily reminiscent of the “New Era” of permanent prosperity proclaimed by Fisher and other stable-money economists in the 1920s. The dawning of both eras was attributed to the adoption of new and improved money management techniques by the Fed. As was the case in the 1920s and the 1990s, however, the relative stability of the price level misled the stabilizers into ignoring or denying the growth of dangerous asset bubbles. Thus the Great Moderation ended in the spectacular deflation of the stock market and real-estate bubbles followed by the financial crisis and stunning collapse of several iconic financial institutions. In the United States, the crisis culminated in the longest recession since World War Two.

After the latest debacle caused by the stable-money program, almost all mainstream macroeconomists were compelled to abandon the mathematical models and policy prescriptions of New Keynesianism in their search for an explanation and a remedy. They beat a headlong retreat straight back to old-fashioned Keynesianism with its emphasis on investor irrationality, wayward financial markets and the pervasive tendency of the public to “hoard.” The recovery polices that they now recommended were designed to pump up spending through deficit financing and a zero interest rate.

Several eminent macroeconomists even advocated the deliberate creation of inflationary expectations among the public as a legitimate tool of monetary policy.20 They argue that spending would be stimulated if people were convinced that the value of their money “would melt away over time.”21 Others have put forward bizarre schemes, such as a tax on holding money, for forcing the nominal interest rate below zero and thereby stimulating investment spending.22 The Keynesian spending doctrine is back with a vengeance!

“Recurring crises throughout the world economy have provoked a general revival of interest in the gold standard.”

Fortunately, there is a sound-money alternative whose influence has grown prodigiously in the past decade. It is based on the works of Mises, Hayek, and especially Murray Rothbard. By the end of World War Two, the Austrian school had been forgotten and the sound-money doctrine was in danger of falling into oblivion until it was revived in the early 1960s by Rothbard, Mises’s leading American follower. Rothbard made notable advances in the doctrine and sustained and promoted it in his copious writings.

By the mid-1970s, Rothbard’s efforts started to bear fruit as a growing number of young Austrian economists in academia began to publish articles and books on money and business cycles from an Austrian perspective. Despite Rothbard’s untimely death in 1995, the new millennium dawned with the Austrian sound-money paradigm thriving — but still ignored by the mainstream.

The bursting of the housing bubble and the meltdown of financial markets changed all this. A small number of economists and participants in financial markets forecast these events using the Austrian theory of the business cycle, which gives the only coherent explanation of booms, bubbles, and depressions. Word spread quickly through the banking and financial sector and among the general public via the Internet. Soon several high-profile financial pundits and other members of the official media were publically recognizing and embracing the Austrian analysis. Even a few mainstream financial economists were stimulated to give it a sympathetic hearing.23

Prominent (and not-so-prominent) mainstream economists were nonplussed, if not alarmed, by this spreading challenge to their authority; and they attempted to respond to it by engaging Austrian business-cycle theory on blogs and in popular periodicals.24 But these attempts were little more than hysterical diatribes based on a very inadequate knowledge of the literature and a profound misconception of the nature and claims of the theory.25 In the meantime, the doctrine of sound money, with Austrian monetary and business-cycle theory at its core, has continued to flourish and grow and has emerged as the main challenger to the collapsing Keynesian spending paradigm. This book is intended as a contribution both to the theory of sound money and to the eventual restoration of a free and unhampered market in money.

The book comprises essays that were written for different purposes and with different audiences in mind and that therefore cannot be separated into neat categories. Nevertheless, for expository purposes a division of the book into five parts suggests itself. Part 1 consists of six essays pertaining to the “Foundations of Monetary Theory.” These are the most technical essays in the book and focus on the Austrian theory of money, which underlies the doctrine of sound money. These essays set the Austrian theory in historical perspective, elaborate and extend several of its characteristic doctrines, and contrast it with modern mainstream monetary theory on a number of central issues.

One essay in this part builds on the work of Murray Rothbard, identifying the empirical components of the money supply that correspond to the Austrian theoretical definition of money as the general medium of exchange. This essay was published four years before Robert Poole’s memo formulating MZM (for “money of zero maturity”), which has since become a well-known monetary aggregate calculated and reported by the Federal Reserve Bank of St Louis.26 MZM is very similar in conception and content to the “true money supply” (TMS) aggregate that I proposed in my essay.27

The five chapters in part 2 deal with “Inflation, Deflation and Depression,” mainly within the context of an unsound fiat-money regime controlled by a central bank. The first essay in this part elaborates William Hutt’s seminal concept of “price coordination,” distinguishes it from F.A. Hayek’s concept of “plan coordination,” and demonstrates its central importance to Austrian macroeconomics. A second essay develops a distinctively Austrian approach to expectations based on Mises’s process analysis of inflation.

Part 3 consists of essays on the gold standard. Here the term “gold” should be construed as representing any commodity chosen by the free market as the general medium of exchange.

The essays in this part taken together have three purposes. The first is to explore the nature and operation of the Misesian neocurrency school ideal of a pure commodity money governed exclusively by market forces and unhampered by government intervention, including and especially the existence of a central bank. The second aim is to assess and respond to claims by mainstream monetary theorists and macroeconomists alleging various defects of the gold standard relative to an ideal monetary system based on fiat money issued by a central bank. Such an “ideal” is based on a fanciful notion of money as a government policy tool deliberately designed to stabilize the economy rather than on what it actually is: a general medium of exchange chosen by the market participants themselves as the most efficient means of carrying on their daily transactions.

During the past three decades, recurring crises throughout the world economy have provoked a general revival of interest in the gold standard as a possible alternative to our current monetary arrangements. A number of economists and media commentators have proposed restoring one or another historical variant of the gold standard or even implementing a modernized version. The third aim is thus to critically evaluate these proposals and to show that most of them contemplate watered-down or “false” versions of the gold standard that would result in unsound and disorderly monetary systems.

Since these essays on the gold standard were published my view has changed on one issue of some importance. I am much more sympathetic now than I was when I wrote my essay on “The Gold Standard: An Analysis of Some Recent Proposals” (chapter 14) to the parallel private-gold standard proposed independently by Professor Richard Timberlake and Henry Hazlitt. Their respective proposals now strike me as the most feasible route forward to sound money, because I have become much more skeptical about whether the US, or any other, government can competently and honestly manage a transition to a genuine gold standard.

It is also appropriate to point out here that, in addition to minor revisions to improve style and clarity, there were deletions and some rewriting to eliminate repetition in a few of the essays in the book. But in some cases the elimination of the overlap between essays was not possible without disrupting the flow of the exposition. This is the case in chapters 13 and 14 where a section of the later chapter substantially repeats, although in a little more detail, my critique of the supply-siders’ gold price-rule proposal of the earlier chapter.

Part 4 on “Applications” contains essays that apply the Austrian theories of money and the business cycle to analysis of historical episodes and events and to an evaluation of alternative monetary policies for emerging-market and small-open economies. Two of the essays elaborate and defend the Austrian position that the 1920s was an inflationary decade and that the Fed did aggressively attempt to reflate the money supply for most of the 1930s.

The Austrian position was expounded in great detail by Murray Rothbard and sharply contradicts the monetarist explanation of the Great Depression formulated by Milton Friedman and Anna Schwartz, which is now widely accepted by macroeconomists.28 Rothbard argued that the boom–bust cycle that culminated in the Great Depression was initiated by the inflationary policy pursued by the Fed during the 1920s.29 He attributed the length and severity of the Depression to the unprecedented interventions by the Hoover and Roosevelt administrations designed to maintain nominal prices and especially wages above market-clearing levels.

According to the Friedman-Schwartz story, the 1920s was a halcyon decade of economic stability that was interrupted by a routine, “garden variety” recession that was rapidly transformed into a catastrophic depression by the Fed’s error of permitting and even inducing a contraction of the US money supply. Recently, the monetarist explanation of the depth of the Great Depression was challenged on essentially Rothbardian grounds by UCLA macroeconomist Lee Ohanian in a leading mainstream economics journal.30

Another essay in part four analyzes the causes of the October stock-market crash of 1987. Appended to this essay is an excerpt from a later article published in September of 1988. By that time the consensus among both academic and Wall Street economists was that the crisis had passed and a recession had been averted because the Greenspan Fed had taken decisive action in flooding the financial markets with liquidity. I dissented and, based on Austrian business-cycle theory, forecast a recession “in late 1989 or early 1990, which should strike the US economy with a particularly heavy impact on the thrift and banking industries.” The recession struck in 1990 when the S&L crisis was already well under way.

Of the remaining two essays in this part, the first outlines a sound-money policy for a typical transition economy in Eastern Europe and the second critically evaluates the institution of the currency board as an alternative to a central bank in light of the two Hong Kong currency crises of the late 1990s.

Part 5 contains reviews, comments and less technical essays on contemporary economic events and controversies.

I wish to thank Douglas French and Jeffrey Tucker, president and editorial vice president of the Ludwig von Mises Institute, respectively, for originally suggesting the idea for this book and for their moral support and encouragement — and forbearance — during its preparation. I am especially thankful to the donors of the Mises Institute whose generous support has made the publication of this volume a reality. My greatest intellectual debt is to my dear friend and mentor Murray Rothbard. Throughout his brilliant career he was an articulate, courageous, and intransigent proponent of sound money. Of course, Mises and Hayek also profoundly influenced my thinking, and I learned much from the works of William H. Hutt, Henry Hazlitt, Hans Sennholz, Jacques Rueff, Michael Heilperin, Wilhelm Röpke, and Benjamin Anderson. All were fearless and outspoken advocates of sound money during the high tide of Keynesianism.

I am indebted to my many colleagues who have read and commented on various drafts of these essays and whose articles and books in the sound-money paradigm have taught and inspired me over the years. Although far too numerous for me to properly acknowledge here, they include Walter Block, William Butos, John Cochran, Roger Garrison, Jeffrey Herbener, Hans-Hermann Hoppe, Jesus Huerta de Soto, Jörg Guido Hülsmann, Antony Mueller, Gary North, George Reisman, Pascal Salin, the late Larry Sechrest, the late Sudha Shenoy, Frank Shostak, Mark Thornton, Lawrence H. White, and, of course, the polymathic David Gordon. I am especially grateful to Llewellyn H. Rockwell, Jr. founder and chairman of the Mises Institute, who has steadfastly supported and encouraged all of my writing projects and has provided an institutional home for the modern sound-money movement.

Several of the essays collected in this book were presented as papers at New York University Colloquium on Market Institutions and Economic Processes (formerly, the Austrian Economics Colloquium), and I thank its members for their cogent suggestions and criticisms. Last but not least, I owe a great debt of gratitude to Helen and Michael Salerno, who suffered through my long absences, periods of distraction, and occasional irritability while these essays were being written. This is a debt that cannot easily be repaid.

 

LOCATION?

[16] N. Gregory Mankiw, and David Romer, eds., New <em>Keynesian Economics.</em> 2 vols. (Cambridge, MA: MIT Press, 1991). For a short description, see N. Gregory Mankiw, <a href=http://www.econlib.org/library/Enc/NewKeynesianEconomics.html>”New Keynesian Economics,”</a> in David R. Henderson, ed., The <em>Concise Encyclopedia of Economics</em>, 2nd ed.

• 1Ludwig von Mises, The Theory of Money and Credit, 2nd ed. (Irvington-on-Hudson), New York: Foundation for Economic Education, 1971), pp. 414–16.
• 2Jesus Huerta de Soto, “New Light on the Prehistory of the Theory of Banking and the School of Salamanca,” Review of Austrian Economics, Vol. 9, No. 2 (1996), pp. 59–81; idem, “Juan De Mariana: The Influence if the Spanish Scholastics,” in Randall G. Holcombe, ed., 15 Great Austrian Economists (Auburn, Ala.: Ludwig von Mises Institute, 1999), pp. 1–12; and Jörg Guido Hülsmann, The Ethics of Money Production (Auburn, Ala.: Ludwig von Mises Institute, 2008); and Alejandro Chafuen., Faith and Liberty: The Economic Thought of the Late Scholastics, 2nd ed. (New York: Lexington Books, 2003).
• 3On the bullionist controversy, see Murray N. Rothbard, Classical Economics: An Austrian Perspective on the History of Economic Thought Volume II, pp. 157–224 and the literature cited therein.
• 4David Ricardo 1838, p. 22.
• 5On the error of the late 19th-century monometallists of interpreting classical monetary theory as involving strictly a cost-of-production theory of the value of money, see Will E. Mason, Classical Versus Neoclassical Monetary Theories: The Roots, Ruts, and Resilience of Monetarism—and Keynesianism, ed. William E. Butos (Boston: Kluwer Academic Publishers, 1996).
• 6David Laidler, The Golden Age of the Quantity Theory (Princeton: Princeton University Press, 1991), p. 2.
• 7Irving Fisher, The Purchasing Power of Money, Its Determination and Relation to Credit, Interest, and Cycles, 2nd ed. (New York: Macmillan, 1922); also idem, The Money Illusion (New York: Adelphi Company, 1928).
• 8Cf. Mark Thornton, “Mises vs. Fisher on Money, Method, and Prediction: The Case of the Great Depression,” Quarterly Journal of Economics, 11 (2008): 230–41.
• 9Jürg Niehans, A History of Economic Theory: Classic Contributions 1720–1980 (Baltimore Md.: The Johns Hopkins University Press, 1994), p. 278.
• 10Ludwig von Mises, The Theory of Money and Credit, trans. H.E. Batson 3rd ed. (Auburn Ala.: Ludwig von Mises Institute, 2009).
• 11The most important of these works are collected in F. A. Hayek, Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, ed. Joseph T. Salerno (Auburn, Ala.: Ludwig von Mises Institute, 2008).
• 12On the inflation of the 1920s and the remarkably profound and widespread influence of the stabilizationist idea on Anglo-American economists, bankers, monetary policymakers, and politicians during this period, see Murray N. Rothbard, America’s Great Depression, 5th ed. (Auburn, Ala.: Ludwig von Mises Institute, 2000), pp. 85–135, 165–81.
• 13See Mark Thornton, “Mises vs. Fisher on Money, Method, and Prediction”; and idem, “Uncomfortable Parallels,” www.LewRockwell.com (April 18, 2004). Also see, Mark Skousen, The Making of Modern Economics: The Lives and Ideas of the Great Thinkers (Armonk, N.Y.: M. E. Sharpe, 2001), pp. 291–93.
• 14John H. Williams, “Monetary Stabilization and the Gold Standard,” in Quincy Wright, ed., Gold and Monetary Stabilization (Chicago: University Press, 1932), p. 149.
• 15Hayek, Prices and Production and Other Works, p. 7.
• 17On Austrians who forecast a housing bubble in 2003–2004, see Mark Thornton, “The Economics of Housing Bubbles,” in Randall G. Holcombe and Benjamin Powell, eds., Housing America: Building Out of a Crisis (New Brunswick, N.J.: Transaction Publishers, 2009), pp. 237–62.
• 18Ben S. Bernanke, “The Great Moderation” speech delivered at the meetings of the Eastern Economic Association, Washington, DC (February 20, 2004).
• 19Robert E. Lucas, “Macroeconomic Priorities,” Presidential Address to the American Economic Association (January 10, 2003), p.1.
• 20See for example Paul Krugman, The Return of Depression Economics and the Crisis of 2008 (New York: W. W. Norton & Company., Inc., 2009); N. Gregory Mankiw, The Next Round of Ammunition, Greg Mankiw’s Blog: Random Observations for Students of Economics (December 16, 2008); Kenneth Rogoff quoted in Rich Miller, U.S. Needs More Inflation to Speed Recovery, Say Mankiw, RogoffBloomberg.Com (May 19, 2009).
• 21Krugman, The Return of Depression Economics, p. 75.
• 22See N. Greg Mankiw, Reloading the Weapons of Monetary PolicyGreg Mankiw’s Blog: Random Observations for Students of Economics (March 19, 2009). For a deeper theoretical analysis of this scheme, see Marvin Good-friend, Overcoming the Zero Bound on Interest Rate Policy, Federal Reserve Bank of Richmond Working Paper Series (August 2000).
• 23For instance, Jerry H. Tempelman, “Austrian Business Cycle Theory and the Global Financial Crisis: Confessions of a Mainstream Economist,” Quarterly Journal of Economics, Vol. 13, No. 1 (2010), pp. 3–15.
• 24See, for example, J. Brad DeLong, “The Financial Crisis of 2007–2009—Understanding Its Causes, Consequences—and Possible Cures” presented at MTI-CSC Economics Speaker Series Lecture, Singapore, September 5, 2009; idem, What Is Austrian Economics?Grasping Reality with Both Hands (April 6, 2010); John Quiggin, “Austrian Business Cycle Theory,” Commentary on Australian and World Events from a Social Democratic Perspective (May 3, 2009). Another uncomprehending critique of Austrian business-cycle theory written by a leading Keynesian macroeconomist during the dotcom bubble is Paul Krugman, “The Hangover Theory: Are Recessions the Inevitable Payback for Good Times?“ Slate (December 4, 1998).
• 25For a thorough demolition of these mainstream critiques see Roger Garrison, “Mainstream Macro in a Nutshell,“ Freeman: Ideas on Liberty, 59 (May 2009); idem, “A Rejoinder to Brad DeLong,“ Mises Daily (May, 11, 2009); idem, “Contra Krugman,“ Mises Daily (December 2, 1998).
• 26Poole, William (1991). Statement before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, November 6, 1991, Government Printing Office, Serial No. 102–82; John B. Carlson & Benjamin D. Keen, “MZM: a monetary aggregate for the 1990s?” Economic Review, Federal Reserve Bank of Cleveland, (2nd Quarter, 1996), pp. 15–23
• 27The term “true” here is used in the sense of true to the theoretical definition of money as the medium of exchange. For more recent articles on TMS, see Frank Shostak, “The Mystery of the Money Supply Definition,” Quarterly Journal of Austrian Economics, Vol. 3, No. 4 (2000), pp. 69–76;Download PDF and Michael Pollaro, “Money-Supply Metrics, the Austrian Take,” Mises Daily (May 3, 2010).
• 28Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J.: Princeton University Press, 1971).
• 29Rothbard, America’s Great Depression.
• 30Lee E. Ohanian, “What—or Who—Started the Great Depression?” Journal of Economic Theory, vol. 144(6), (November 2009): 2310–2335.