Chapter 29 of 29 · Money, Sound and Unsound by Joseph T. Salerno
INDEX A
appraisement, Mises on, 183
Argentina
confiscatory deflation, 294–299
Austrian School. See also Hayek; Menger; Mises; Rothbard
deflation with application to the U.S., 267–314
depressions: comments on Tullock’s viewpoint, 315–321
inflation, 549
long-run general equilibrium, 210
Menger’s contribution to, 44
monetary theory, 53–56, 153–165, 592
money and gold in 1920s and 1930s, 421–439
October stock market crash, 449–467
purchasing-power-parity (PPP) theory, 163
Tullock on Austrian business-cycle theory, 317–320
Turgot’s ideas, 42
value of money, 271
B
as a monetary phenomenon, 87, 168, 170
Currency School, 422
gold standard: price changes and balance-of-payments adjustment, 171, 405–409
bank credit deflation, 276–294
deflationary monetary policy, 278–294
bank deposits, currency principle, 501
bank runs
bank credit deflation, 276–278
history of before World War II, 276
banking school, xii
barter economies, interest and future price movements, 83
Bernanke, Ben S.
about, 567
bi-metallic standard, xiii-xiv
Blinder, Alan, on Greenspan, 536
Böhm-Bawerk, Eugen von, monetary theory, 45–47
British Currency School (BCS), 500
bullionists, on sound money, xii
business cycle
Austrian theory about, 54, 455, 466
discount rate and gold reserves, 508
Greenspan, 536
transmitting between countries, 417
C
calculation. See also monetary calculation
socialist calculation debate: ex-Communist Europe, 467–469
Cannan, Edwin, resource reallocation in war economy, 241
capital
consumption of during wartime, 258
and monetary calculation: Menger, 45
Rothbard’s Equation, 141
capital goods, wartime, 250, 255
capital markets
transmitting business cycle from country to country, 417
cash-balance approach, market demand for money, 50
cash-building deflation, 274–276
Cassel, Gustav
compared to Mises, 105
PPP theory: comparison to Mises, 160–163
central banks. See also Conversion Agency; currency boards; Federal Reserve; national reserve system; reserves
lender-of-last-resort role, 515
certificates of deposit (CDs), as money, 125
checking account balances, as money, 118
Chicago School, and Austrian School, 591–594
China, deflation experience: years 1998–2001, 273
command-and-control economy, during wartime, 245
commodity markets
Rothbard’s Equation, 137
sensitivity to monetary conditions, 299–301
commodity money
Argentina demonetization, 297
common measure of all values function of money, 38–41
communism, ex-Communist Europe, 467–496
confiscatory deflation, 294–299
consumer goods, prices: years 1982–1987, 452–454
contractionary monetary policy, bank credit deflation, 278–294
Conversion Agency, 488, 491, 492
coordination. See also price coordination
costs
interest rate as cost of holding money, 83
opportunity costs: holding cash balances, 81
credit money, defined, 69
credit transactions, Rothbard’s Equation, 143
cross price elasticities of demand for and between commodities and money, 138
crowding out effect, wartime, 252
as a national reserve system, 517–519
anti-deflation policy, 510–516
national reserve system, 502–507
theory of currency crises, 499–502
currency principle, central banks, 507–520
Currency School, inflation, business cycle and gold standard, xii–xiii, 424
D
data
Greenspan’s use and analysis of, 537, 540
Rothbard, 599
deflation, 267–314. See also inflation 1987, 459–463
anti-deflation policy, 510–516, 564–566
bank credit deflation, 276–294
cash-building deflation, 274–276
China: years 1998–2001, 273
classical gold standard, 388
confiscatory deflation, 294–299
defined, 270
gold standard: inflation and deflation in an open economy, 410–414
Greenspan and the Federal Reserve, 558–566
Keynesian redefinition, 270
macroeconomic stability and sound money, 477
phobia about, 559
price deflation in electronics and other high-growth industries, 272
under common international money, 156
U.S. early 1930s, 433
U.S mid 1930s: Timberlake, 434
deflationary monetary policy, bank credit deflation, 278–294
demand deposits, as money, 118, 127, 446
demand for money
exchange demand for money, 272
demonetization, Argentina, 297
deposit insurance, role in creating money, 118
depressions
Great Depression, 571–580, 596
devaluation, Swiss franc in 1936, 516
discount rate, business cycle and gold reserves, 508
disequilibrium. See equilibrium
distribution effects, real balance effects: Mises, 79
dollar-exchange standard, 487
E
economic fascism, war and inflation, 259–263
Edwards, James Rolph
inflationary process, 202
review of Mises monetary theory, 63, 65–77, 84, 87–94, 104
Eichengreen, Barry, gold standard, 575
elasticities, price elasticities of demand for and between commodities and money, 138
employment. See also Phillips curve
effects of inflation: Mises, 209
entrepreneurial forecasting
ability of entrepreneurs to forecast changes emanating from money side of economy, 193
social appraisement process: Hutt, 184, 189
Equation of Exchange, 478, 480
equations. See also Rothbard’s Equation
equilibrium
individual actors versus interindividual equilibrium in balance-of-payments analysis, 174
long-run general equilibrium: Austrian School on, 210
momentary states of rest, 141
monetary equilibrium, 159, 169, 170
price coordination, 182
price equilibrium, 186
purchasing power of money, 158
Rothbard’s Equation, 134
sustainability of disequilibrium in Hong Kong, 523
Turgot on, 41
exchange demand for money, 272
exchange rates
in 100% gold standard, 350
fixed exchange rates, 161, 490
gold standard: fluctuating exchange rates and autonomy of national monetary policy, 414–418
instability of in 1930s: Mises on, 72
Keynes on price level and exchange rates, 403
monetary adjustment process, 87–111
as a monetary phenomenon, 87
exchange tokens
money as: based on John Law, 4, 17–22
Turgot on money as, 34
exchanges rates, purchasing power of money (PPM), 159
expectations
themology, 219
F
fascism. See economic fascism
federal deposit insurance, role in creating money, 118
Federal Open Market Committee (FOMC), Greenspan, 542
Federal Reserve
deflation and Greenspan, 558–566
gold reserves, 573
Greenspan, 541
Laffer’s gold price rule, 380
price-level rule and deflation, 305
private gold standard: Timberlake, 392
relationship with U.S. Treasury, 287
reserve requirements: raising 1936 and 1937, 436
role in averting deflation, 302
Timberlake’s private gold standard, 396
Ferguson, J. David, Great Depression, 576–580
fiat money, measurement of, 116
final state of rest (FSR), compared to WSR, 100, 103
Fisherian Equation of Exchange, 88
fixed exchange rates, problems with, 161
FOMC (Federal Open Market Committee), Greenspan, 542
foreign exchange markets sound money, 486
years 1982–1987, 458
foreign exchange reserves, money supply, 520
fractional-reserve banking
John Law, 9
Turgot, 37
free banking
about, 479
Austrian School, 55
Timberlake’s private gold standard, 394
Friedman, Milton
100 percent gold standard, 334
Anna Schwartz, on the Great Depression, xxv
monetarism, xviii
money supply, 426
pseudo gold standard, 366
resource cost of money, 28
FSR (final state of rest), compared to WSR, 100, 103
full employment, Keynesians and monetarists, 23
G
Gavin, William T., role of money, 592
German hyperinflation
Mises on, 110
Germany, Nazi economic system, 260
gold
Bernanke on, 561
and currency competition: years 1865–1879, 581–590
Currency School, 422
Great Depression: monetarists and Keynesians, 571–580
money and gold in 1920s and 1930s: Austrian School, 421–439
sensitivity to monetary conditions, 299–301
gold reserves
centralization of, 278
discount rate and business cycle, 508
abolition of, xiv
balance of payments, 171
classical gold standard, 384–391, 502
exchange rates and monetary policy, 414–418
Friedman on, 28
genuine 100% gold standard, 330–351, 355–365, 492
gold-certificate reserve, 377–379
gold-exchange standard, 573
gold price rule, 365–368, 379–384
inflation and deflation in an open economy, 410–414
Mises on, 474
monetarists on, 16
NCS theory, 509
parallel private gold standard, 391–399
price changes and balance-of-payments adjustment, 405–409
supply-siders on, 16
government borrowing, wartime, 253
Great Britain, Federal Reserve assistance during the 1920s and early 1930s, 431
Great Depression, 571–580, 596
Austrian perspective, xvi
Greenspan, Edward
New Economy, xix
performance of, 535–553, 555–569
H
Hall, Thomas E., Great Depression, 576–580
Hayek, F.A
balance of payments, 408
Federal Reserve and deflation, 303
inflation and deflation, 283
macroeconomic instability, 333
national reserve system, 505–507
Hayekians, human learning and interindividual knowledge-diffusion process, 223
Hazlitt, Henry, private parallel gold standard, 396
Heilperin, Michael A., foreign monetary policies, 415–417
Higgs, Robert, government economic intervention in wartime, 245
hoarding
entrepreneurial appraisements, 192
gold standard, 338
Keynesians on, 1
Law on, 5
price deflation, 274
Hong Kong, currency board system, 519–527
hot money, anti-deflation policy, 510–516
Humphrey, Thomas J., relative and real output effects of inflation, 206
Hutt, William H.
social appraisement process, 187
on valuing and pricing, 213
hyperinflation
Austrian School, 53
German hyperinflation and expectations, 225–231
Hazlitt’s parallel private gold standard, 398
I
income effects, meaningfulness of, 138
inflation, 199–265. See also deflation; Phillips curve
Austrian business-cycle theory, 455
caused by price-level rule, 305
classical gold standard, 388
German hyperinflation, 225–231
gold price rule, 382
gold standard: inflation and deflation in an open economy, 410–414
Keynesian redefinition, 270
long-run nonneutrality of money, 202–204
as means of obtaining money income, 332, 376
paper fiat money, 117
prior to Black Monday crisis, 452–454
process: Mises versus quantity theory, 204–214
rational expectations hypothesis, 218
role of labor unions in, 211–213
savings deposits role in: Mises, 72
Timberlake: a reply to, 441–448
under common international money, 156
instantaneous consumption cost, 81
institutions. See also central banks; Conversion Agency; currency boards; Federal Reserve; national reserve system
interest, natural rate of: Turgot, 41
interest forgone cost, about, 81
interest rate
as cost of holding money, 83
Law on, 6
interspatial equalization
purchasing power of money (PPM), 156
value of money and determination of exchange rates, 87–111
intertemporal coordination, Garrison, 181
J
Jastram, Roy W., on gold standard, 326
job market, impact of a rise in liquidity preferences, 193–196
K
Keynes, John Maynard
cause of depressions, xvii–xviii
motives for holding money, 17
on price level and exchange rates, 403
stabilization of money-wages, 22
Keynesians
government deposits as money, 128
and monetarists: Great Depression, 571–580
money as a policy tool, 13, 17
Phillips curve, 22
redefinition of inflation and deflation, 270
L
L (liquidity), components of, 126
labor unions, in inflationary process, 211–213
Lachmann, L.M, expectations compared to thymological method, 219–223
Laffer, Arthur, gold price rule, 379–384
land, Law on land at the basis for currency, 8, 10
land rents, Turgot on, 39
large-denomination time deposits, as money, 126
fractional-reserve banking, 9
money as an exchange token, 17–22
money supply as a political monopoly, 30
price level stabilization, 22–27
resource costs of commodity money, 27–30
Lehrman, Lewis, classical gold standard, 384–391
lender-of-last-resort role, central banks, 515
Lerner, Abba P., money as policy instrument, 18
life insurance reserves, 427
liquidity (L), components of, 126
liquidity preferences, impact of a rise in, 194
location. See spatial element
Luskin, Donald L.
pricing process and ensuring that optimal quantities of goods are produced, 303
role of Federal Reserve in averting deflation, 302
M
M1
Argentina: years 1991–1994, 295
following Black Monday crisis, 463
pre-Friedman quantity theorists, 591
M2
empirical measurement of, 140
post-World War I experience, 281
M3, components of, 126
Machlup, Fritz, gold standard, 510
macroeconomic stability. See also business cycle; deflation; depressions; equilibrium; inflation; monetary policy
Atkeson-Kehoe study, 599
coordination as an organizing principle, 181–197
gold standard, 414
macroeconomic instability: Hayek, 333
relative prices and stabilizing macroeconomic aggregates: Mises, 482
sound money, 477
Makin, John H., Federal Reserve and deflation, 306
Marget, Arthur W., on analysis of momentary positions of rest, 97–101
markets. See capital markets; foreign exchange markets; money markets
Menger, Carl
as foundation for Mises’ work, 65
Mints, A., price stabilization, 26
Mises, Ludwig von
appraisement, 183
classical gold standard, 387, 474, 484–494
foreign exchange markets, 458
free market commodity money, 329
inflation and deflation, 285–287
inflation and expectations, 201–236
lost gold reserves by central banks, 508
monetary approach to balance of payments, 167–179
monetary theory, 47–49, 61–114
money and calculation, 470
national reserve system, 505, 514–516
PPP theory: comparison to Cassel, 160–163
relative prices and stabilizing macroeconomic aggregates, 482
sound money, 484
The Theory of Money and Credit, xv–xvi
MMDAs (money market deposit accounts), as money, 123
momentary equilibrium. See plain state of rest
momentary states of rest, equilibrium, 141
monetarists. See also Friedman
central bank monopolies, 30
on gold standard, 16
and Keynesians: Great Depression, 571–580
money as a policy tool, 14, 20
quantity rule, 15
velocity of money, 20
monetary adjustment process, monetary theory, 87–111
monetary calculation
Menger, 45
Mises, 48
social production process: Böhm-Bawerk, 45
monetary deflation, 1987, 459–463
monetary equilibrium
equilibrium, marginal utility theory of money, 169
how quickly established, 159
monetary policy
contractionary or deflationary, 278–294
gold standard: fluctuating exchange rates and autonomy of national monetary policy, 414–418
Heilperin on foreign monetary policies, 415–417
money as a policy tool: based on John Law, 13–17
need for with sound money, 488
private gold standard: Timberlake, 392
Turgot, 35
Austrian School, 53–56, 153–165
balance of payments: Mises on Yeager, 167–179
monetary adjustment process, 87–111
Phillips curve, 51
regression theorem and demand for money, 73–87
money. See also gold standard; sound money
as a catallactic institution, 49
as a measure of value, 24
as a policy tool, 4, 13–17, 368–372
as a social institution, 368–372
common measure of all values function, 38–41
compared to other economic goods, 336
credit money, 69
defined, 425
as distinguished from non-monetary commodities: Mises, 91
as an exchange token, 4, 17–22, 34
functions of: based on Turgot, 32–35
as medium of exchange, 24, 592
Mises on types of, 66
nonneutrality of, 36
quality of and price controls, 370
savings deposits as, 71
money market deposit accounts (MMDAs), as money, 123
money market funds, 100 percent gold standard, 363
money market mutual fund (MMMF) share accounts, as money, 123–125
money markets, Rothbard’s Equation, 137
quantity theory of money, 146–149
Say’s Law and Rothbard’s Equation, 144–146
money supply. See also True Money Supply
as a political monopoly, 30
1930s, 437
empirical measurement of, 140, 425
measuring in relation to foreign exchange reserves, 520
monetary theory: Edwards review of Mises, 65–73
ownership, 3
Rothbard, 425
U.S. 1990–2004, 310
monopoly
money supply as a political monopoly, 30, 371
use of, 333
N
national reserve system. See also central banks; Conversion Agency; currency boards; Federal Reserve; reserves
classical gold standard, 388
hot money, 513
institutional framework of financial markets, 504
Nazi Germany, economic system, 260
Negotiable Order of Withdrawal (NOW), as money, 118
Neo-Currency School (NCS)
gold standard, 509
theory of currency crises, 499–502
neo-Keynesians. See Keynesians
neutral money, versus sound money and stable money, 475–484
nonneutrality of money
Mises demonstration of, 78
Turgot on, 36
NOW (Negotiable Order of Withdrawal), as money, 118
O
October stock market crash, Austrian School viewpoint, xxv–xxvi, 449–467
open economies, gold standard: inflation and deflation, 410–414
open-market operations, private gold standard: Timberlake, 393
opportunity costs, holding cash balances: Mises, 81
overnight Eurodollars, as money, 123
overnight repurchase agreements (RPs), as money, 122
ownership, money supply, 3
P
paper fiat money, measurement of, 116
Patinkin’s individual-experiment, 84–86
Phillips curve
Mises’ explanation, 209
monetary theory, 51
stability of, 22
plain saving cost, 81
plain state of rest (PSR), defined: Mises, 94
policy. See also monetary policy
anti-deflation policy, 510–516
money as policy tool, 13–17, 368–372
PPM. See purchasing power of money
PPP. See purchasing-power-parity
price controls
quality of money, 370
wartime, 259
price coordination
about, 182
Böhm-Bawerk’s initial formulation of, 47
price equilibrium, Wicksteed, 185–186
price rule, supply-siders, 21, 27, 478
price-specie-flow adjustment mechanism, balance of payments, 406
prices. See also deflation; inflation; money prices
benefits of falling prices, 338
consumer goods: 1982–1987, 452–454
elasticity of demand for and between commodities and money, 138
and foreign exchange markets, 458
gold price rule, 365–368, 379–384
Keynes on price level and exchange rates, 403
Law on, 6
MMMFs effects on, 125
of money itself, 476
and nonneutrality of money, 37
price-level rule, 305
pricing process and ensuring that the optimal quantities of goods are produced, 303
relative price effects of inflation, 206
Say’s Law, 144
secular decline of, 29
sensitivity of gold and commodity prices to monetary conditions, 299–301
social appraisement process: Hutt, 188
speculative appraisement of, 185
stability under gold standard, 339
stabilization: based on Law, 8, 22–27
Turgot on, 36
wartime, 250
private fractional-reserve. See free banking
progression theorem, Rothbard, 49
PSR (plain state of rest), defined: Mises, 94
purchasing power of money (PPM)
equilibrium, 158
exchanges rates, 159
interspatial equalization, 156
Rothbard’s Equation, 136
spatial dimension, 161
purchasing-power-parity (PPP) theory
Austrian School, 163
Q
quantity rule
and government monopoly over money, 334
monetarists, 15
quantity theory of money
Viner on, 14
R
rational expectations hypothesis, inflation adjustment process, 218
real balance effects, distribution effects: Mises, 79
redistribution of income and wealth from inflation, Mises, 205
reform, monetary reform: Law, 10–12
regression theorem, demand for money, 73–87
reserves. See also central banks; Federal Reserve; national reserve system
gold-certificate reserve, 377–379
life insurance reserves, 427
nationalization of, 503
resource costs, commodity money, 27–30
Reynolds, Alan, on gold price rule, 365
Rist, Charles, on Law, 2
gold standard, 511
inflation and deflation in open economies, 410
Rothbard, Murray N.
bank credit contraction, 287
data, 599
industrial commodity prices and general deflation, 301
inflation, defined, 422, 441–445
sound money doctrine, xxi
Rothbard’s Equation, money prices, 132–143
RPs (overnight repurchase agreements), as money, 122
S
savings bonds, as money, 126
savings deposits
as money, 120
as money substitutes, 71
national reserve system, 513–515
Say’s Law, Rothbard’s Equation, 144–146
Schumpeter, J.A., resource reallocation in war economy, 240
Schwartz, Anna, money supply, 426
Second Bank of the United States, bank credit deflation, 277
seignorage effect, 290
share accounts, 425
silver, Law on the suitability of gold and silver as currency, 7
Simons, Henry C.
price stability, 25
quantity theory of money, 14
small-denomination time deposits, as money, 125
social appraisement process
about, 184
coordination, 191
entrepreneurial forecasting, 189
Hutt on, 187
social institutions, money as, 368–372
socialist calculation debate, ex-Communist Europe, 467–469
sound money
and monetary calculation, 469–475
versus stable money and neutral money, 475–484
spatial element
Mises on, 177
PPP theory, 161
quantity of goods, 157
stable money, versus sound money and neutral money, 475–484
stagflation, 325
sterilizing gold, 1930s, 434–437
stock market
October stock market crash, 449–467
World War I stock market crisis, 253
substitution effects, meaningfulness of, 138
supply-siders
on gold standard, 16
role of money, 26
Swiss franc, devaluation in 1936, 516
T
thymology
German hyperinflation, 225, 230
Timberlake, Richard H.
inflation and money: a reply to, 441–448
private gold standard, 391–396
travelers’ checks, as money, 119
Treasury liabilities, as money, 126
True Money Supply (TMS), 115–130
L, 126
M3, 126
Tullock, Gordon, depressions, 315–321
common measure of all values function of money, 38–41
fractional-reserve banking, 37
long-run equilibrium, 41
monetary policy, 35
nonneutrality of money, 36
U
unions. See labor unions
United States. See also Federal Reserve
bank credit deflation, 277
centralization of gold reserves, 278
U.S. government, World War II, 261
U.S. Savings Bonds, as money, 126
U.S. Treasury, relationship with Federal Reserve, 287
U.S. Treasury liabilities, as money, 126
U.S.S.R, War Communism: years 1918–1921, 246
V
values
common measure of all values function of money, 38–41
Law on the value of money and goods, 7
of money: Austrian School, 271
money and determination of exchange rates, 87–111
money as a measure of, 24
velocity of money, 19
vertical market supply curve, Rothbard’s Equation, 142
Viner, Jacob, quantity theory of money, 14
vouchers. See exchange tokens
W
wage rates, in deflation, 274
Walker, Francis A., on inflation, 423
War Communism in U.S.S.R: years 1918–1921, 246
Weintraub, Robert E., gold-certificate reserve, 377–379
welfare effects, from additions to money stock: Mises, 80
Wicksteed, Phillip H., price equilibrium process, 185–186
Wicksteedian state of rest (WSR), about, 96, 100–103
Woodward, Bob, on Greenspan, 537, 539, 540, 543
end of the classical gold standard, 571, 573
stock market crisis, 253
World War II
Nazi Germany, 260
U.S. government, 261
Y
Yeager, Leland
balance of payments: Mises comments on, 167–179
classical gold standard, 390
test for assets that function as a medium of exchange, 445, 447
Money, Sound and Unsound
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