David 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.
November 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.
