Washington Post Crashed-and-Burned Watch (Foreign Policy Edition)
Fear of Reese Witherspoon Look-Alikes on the Pill

A Note on Friedrich Hayek and Lionel Robbins in the Great Depression...

Larry White continues his war with Milton Friedman over Friedman's condemnation 25 years ago of "the London School (really Austrian) view that I referred to... when I spoke of 'the atrophied and rigid caricature [of the quantity theory] that is so frequently described by the proponents of the new income-expenditure approach and with some justice, to judge by much of the literature on policy that was spawned by the quantity theorists'. This time I appear to be Friedman's proxy:

Lawrence White: DeLong acts as though he is unaware (though elsewhere he has indicating having read my paper) Hayek's and Robbins' monetary policy norm was not that the central bank should let a deflationary monetary contraction procede. Rather, the central bank should stabilize nominal income MV, meaning expand M to offset a drop in V, and expand the monetary base to offset a drop in the money multiplier...

Since Friedman can no longer speak, let me say that I still agree with him. I think that White's painting of Hayek and Robbins as people who wanted to stabilize MV is completely wrong--it is Ben Bernanke and the inflation targeters who want to stabilize MV, not Hayek and Robbins. If you had asked Hayek back at the time, he would have said that increasing the monetary base from 1929-1933 in order to offset the decline in monetary velocity was the very last thing that he wanted to see done. Stabilizing MV at its 1929 level was not on his or Robbins's agenda by any means.

In fact, he did say so.

Let me pull out his 1932 denunciation of monetary policies that stabilize the price level:

Hayek (1932), "The Fate of the Gold Standard": ...the extraordinary influence exercised by two particular representatives of... the concept of a systematic stabilization of the price level... Irving Fisher and Gustav Cassel... succeeded in making the concept of price stabilization as the objective of monetary policy into a virtually unassailable dogma... the influence of which upon actual developments it is impossible to overestimate....


It was not a big step from the desire to be released from the unpleasant necessity of adapting the general standard of living to the lower level of national income by reductions in wages and prices, to a theoretical justification of a monetary policy which rendered inoperative the tendencies of the gold standard in that direction.... The most important error is the distinction drawn between temporary movements of gold... [which] should not be allowed to bring about any changes in the domestic volumes of credit, and 'genuine' movements.... What is left unexplained in this is why movements of gold should under any circumstances represent movements of capital that are not genuine.... [T]he great monetary theorists of the classical period from Ricardo onwards always insisted that a non-metallic circulation of money ought always to be so controlled that the total volume of all money in circulation changes in just the same way as would happen if gold alone were in circulation....

[T]he artificial prevention of the fall in prices... up to 1929... is not meant to depict the fall in prices which has occurred since then as innocuous.... Instead of prices being allowed to fall slowly [from 1918 to 1929]... such volumes of additional credit were pumped into circulation.... Whether such inflation merely serves to keep prices stable, or whether it leads to an increase in prices, makes little difference...

UPDATE: amv comments:

DeLong is again making uniformed claims. In support of Horwitz, I quote Hayek from The Constitution of Liberty (1960/2008):

This means that when at any time people change their minds how much cash they want to hold in proportion to the payments they make (or, as the economists calls it, they decide to be more or less liquid), the quantity of money should be changed correspondingly. However we define 'cash,' people's propensity to hold part of their resources in this form is subject to considerable fluctuation both over the short and over long periods, and various spontaneous developments (such as, for instance, the credit card and the traverlers' check) are likely to affect it profoundly. No automatic regulation of the supply of money is likely to bring about the desirable adjustments before such changes in the demand for money or in the supply of substitute for it have had a strong and harmful effect on prices and employment. (p. 284)

The automatic regulation is, for instance, Friedman's k-rule.

amv is both right and wrong. He is right in that while writing The Constitution of Liberty Friedrich Hayek wrote like an orthodox Chicago monetarist--a Friedmanite. He is wrong in claiming that this is an accurate summary of Hayek's position either while he was a leader of the LSE-based Austrian School contra Keynes during the Great Depression or indeed of Hayek's long term thinking. The phase during which Hayek was (or perhaps thought it impolitic not to pretend to be) a Friedmanite came after his monetary-overinvestment phase and before his private-money phase.

More representative of his enduring thought, I would argue, is the Hayek of a later period Hayek who would flat-out deny even the possibility of the government's altering M in order to offset changes in V:

[W]e never know what the quantity of money in this sense is. I think the rule ought to be that whoever issues the money must adapt the quantity so that the price level will remain stable. But to believe that there is a measurable magnitude which you can keep constant, with beneficial effects, I regard as completely wrong. I don’t like criticizing Milton Friedman not only because he is an old friend but because, outside of monetary theory, we are in complete agreement. Our general views on what is desired and what is not are almost identical until we get on to money. But if I told him what I said before, that I very much doubt whether monetary policy has ever done anything good, he would disagree. He personally is convinced that a good monetary policy is a foundation for everything...

Horwitz, by contrast, in comments is simply incoherent: if you stabilize Q by stabilizing MV then you automatically must be stabilizing P, for PQ = MV. As long as you are trying to stabilize Q, saying "Hayek's correct arguments against stabilizing P... [are not] denying his belief that stabilizing MV is the correct policy norm..." makes no sense at all.