Guilty as Charged

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Henderson and Jeff Hummel have managed to ruffle quite a few Austrian
feathers with their recent Cato briefing paper, and no wonder: that
paper claims not only that Alan Greenspan’s Fed was innocent of
any role in encouraging the housing boom but that Greenspan had
actually managed to do something Austrian monetary economists have
long claimed to be impossible, namely, solve the monetary-central-planning
problem. Greenspan, by their assessment, managed to mimic the kind
of money-demand accommodating money supply growth that would occur
under free banking, thereby achieving (according to their paper’s
executive summary) "a striking dampening of the business cycle."

To be sure,
Henderson and Hummel do not see Greenspan’s supposed achievement
as justifying central banking. On the contrary, they make clear
their "preference" (the word, again, comes from the executive
summary) for free banking. Nevertheless, their argument supplies
ammunition to apologists for central banking. After all, if the
choice between free banking and central banking is merely a matter
of "preference," rather than a choice between arrangements
with inherently distinct capacities for either limiting or exacerbating
business cycles, then there are strong prima facie grounds
for dismissing radical and (recently) unproven alternatives in favor
of the status quo.

But are Henderson
and Hummel’s claims valid? Contributors to the Mises blog, including
Robert Murphy ("Greenspan
not to blame?
"), have attempted to counter Henderson and
Hummel’s arguments largely by pointing to various alternative measures
of money that appear to suggest faster money growth earlier this
decade than the measures Henderson and Hummel themselves emphasize.
In my opinion, such efforts miss the real problem with Henderson
and Hummel’s analysis, which is precisely that one cannot accurately
gauge the easiness of monetary policy by looking at money-stock
measures alone. Instead, one must look at measures that indicate
the relationship between the stock of money on one hand and the
real demand for it or, if one prefers, its velocity. What matters
isn’t how rapidly the money stock grows, regardless of how one chooses
to measure it, but whether its grows faster than the public’s demand
for real (that is, price-level-adjusted) money holdings. Even a
low, a zero, or a negative absolute growth rate for some money-stock
measure can prove excessive if demand for the monetary assets in
question is declining. Regarded in light of this consideration,
Greenspan’s monetary policy was in fact "easy," as I will
endeavor to show.

the rest of the article

8, 2008

George Selgin,
professor at West Virginia University, has discovered the monetary
equivalent of the lost city of Atlantis. He has written a full-scale
historical narrative
– one that is deeply interesting and
engaging – that has been largely unknown, even to scholars
of the Industrial Revolution.

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