If I had a twitter account, I might have just tweeted this, but since I don’t, I will write a quick post instead. In the Economix blog at the New York Times website, Bruce Bartlett writes a post today with the somewhat misleading title “What Rule Should the Fed Follow?” about how Austrian Business Cycle Theory has come to dominate the thinking of right-wing economics, displacing the Monetarism of Milton Friedman. As some commenters point out, that is a bit of an exaggeration on Bartlett’s part. At the upper levels of right-wing economic policy-making, there are still very few, if any, Austrians to be found. However, mainstream types like John Taylor and Alan Meltzer have managed to make the necessary adjustments to the zeitgeist.
All in all, a worthwhile and enlightening discussion, but I couldn’t help wondering . . . whatever happened to Hawtrey and Cassel?
Uneasy Money 
Hawtrey was not flamboyant and Cassel was from the “fringes of civilization”. Cannot help imagining how things would have progressed very differently if there were blogs at the time!
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I didn’t mean to imply that the Austrians had won the intellectual argument among conservative economists, only that they have in effect adopted the Austrian view as an OPERATIONAL matter. Just ask yourself when was the last time a conservative economist called for monetary stimulus? They want no stimulus whatsoever, monetary, fiscal or otherwise–exactly as the Austrian School preaches.
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I wish there were more Republicans like Bruce Bartlett.
— Registered Independent
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From the article:
“Representative Paul is here reciting the Austrian theory of the Great Depression. It says that even though there was no inflation during the 1920s, somehow or other inflation nevertheless caused the Great Depression. The result was stable prices, but the mal-investment caused by the Fed’s loose monetary policy became evident by 1929.”
Here is the fed’s “loose” monetary policy from 1920-1930 via inflation adjusted AAA interest rates:
http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=CPIAUCNS_AAA&transformation=pc1_lin&scale=Left&range=Custom&cosd=1920-01-01&coed=1930-01-01&line_color=%230000ff&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2012-05-15_2012-05-15&revision_date=2012-05-15_2012-05-15&mma=0&nd=_&ost=&oet=&fml=b-a&fq=Monthly&fam=avg&fgst=lin
After a bout with severe deflation in 1921, real (inflation adjusted) interest rates hung around 5% throughout the 1920’s. So for most of the 1920’s monetary policy could be considered tight. This is not much different than the Volcker / Greenspan eras:
http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=CPIAUCSL_AAA&transformation=pc1_lin&scale=Left&range=Custom&cosd=1980-01-01&coed=2012-04-01&line_color=%230000ff&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2012-05-15_2012-05-15&revision_date=2012-05-15_2012-05-15&mma=0&nd=_&ost=&oet=&fml=b-a&fq=Monthly&fam=avg&fgst=lin
“But the Austrian school believes there was actually some sort of double-secret inflation because the money supply increased. They believe the same thing is happening right now.”
That is because the Austrian school does not understand why interest rates are important and they certainly don’t understand supply side tax policy.
“Just ask yourself when was the last time a conservative economist called for monetary stimulus?”
Stimulus by its very nature is temporary, discretionary, and ultimately short sighted economic policy. While politicians love stimulus, it is ultimately bad economic policy. Milton Friedman knew it from the demand side and formulated his permanent income hypothesis. People make better economic decisions based upon rules. Hence the Taylor rule for interest rate policy (and Taylor is vehemently opposed to stimulus while not being from the Austrian school). Too bad the supply siders didn’t come up with rules concerning tax policy.
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Frank Restly,
If broad money is growing slowly and prices are rising, then monetary policy is loose.
If prices are low/falling and broad money is growing strongly, then monetary policy is loose.
If nominal interest rates are low, then monetary policy is loose.
If nominal interest rates are high but real interest rates are low, then monetary policy is loose.
If real interest rates are high but broad money is growing strongly, then monetary policy is loose.
If all the above aren’t happening but the monetary base is expanding strongly, then monetary policy is loose.
If even that isn’t happening but the gold price is rising at all, then monetary policy is loose.
In short: monetary policy is always loose when business cycles happen. Austrian Economics 101.
(I agree about stimulus. If we think in terms of policy regimes rather than policy actions, then we see that “stimulus” destabilises policy regimes and it is therefore to be avoided.)
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If I had a twitter account…
Get on Twitter, David!
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Marcus, Whose line is the “fringes of civilization?” Well, Marcus, although our friend Scott has made a huge reputation as a blogger, we are four years into the Little Depression, and not that much has changed. Or is the glass really half full?
Bruce, I understand. I was exaggerating a bit for the sake of a good title. But it is remarkable, and a bit scary, that Ron Paul seems to be viewed as far less of a nut now than when he ran for President four years ago.
Steve, They say that you should be careful what you wish for. In this case, I think you are safe.
Frank, By almost any measure, interest rates in the 1920s were on the high side.
W. Peden, Well said.
stickman, Thanks for the encouragement, but I think I am at the limit of technological capacity.
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David I made the phrase up as a way of explaining why Cassel was not paid attention (nothing against Sweden. My son was born there). Blogs at the time would have put Cassel and Hawtrey inside the debate. Until a little over 3 years ago when he started blogging “nobody” had heard of Scott Sumner (or Bentley U for that matter). Nowadays Scott is in the newspaper here in Brazil and on the same day, in the same newspaper, there was a full page interview with a colleague of his from another department at Bentley.
And Cassel and Hawtrey were much better known to start wit than SS, so they would certainly have gotten more mileage faster, maybe in time to avoid the worst.
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“Frank, By almost any measure, interest rates in the 1920s were on the high side.”
I disagree.
Here is the complete data series – nominal interest rates and real interest rates from 1920 to 2010:
http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=AAA_CPIAUCNS,AAA&transformation=lin_pc1,lin&scale=Left,Left&range=Custom,Custom&cosd=1920-01-01,1920-01-01&coed=2010-01-01,2010-01-01&line_color=%230000ff,%23ff0000&link_values=,&mark_type=NONE,NONE&mw=4,4&line_style=Solid,Solid&lw=1,1&vintage_date=2012-05-21_2012-05-21,2012-05-21&revision_date=2012-05-21_2012-05-21,2012-05-21&mma=0,0&nd=_,&ost=,&oet=,&fml=a-b,a&fq=Monthly,Monthly&fam=avg,avg&fgst=lin,lin
On a nominal basis, AAA interest rates have averaged between 5% and 6% over the last 90 years. And so nominal interest rates through the 1920’s were slightly below the long term average. Real interest rates through the 1920’s were above average – roughly 6% through the 1920’s while the long term average is closer to 3%.
And so interest rates through the 1920’s were above average on a real basis and below average on a nominal basis.
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