Just What Is John Taylor Thinking?

I See I Have Annoyed the Very Sharp David Glasner: Milton Friedman and the History of Economic Thought Edition

Over at Equitable Growth: Apropos of my The Monetarist Mistake over at Project Syndicate, the very sharp David Glasner is annoyed, and attempts to administer a smackdown. I think he misses:

David Glasner: Milton Friedman, Monetarism, and the Great and Little Depressions | Uneasy Money: "I find this criticism of Friedman and his followers just a bit annoying... READ MOAR

...Why? Well, there are a number of reasons, but I will focus on one: it perpetuates the myth that a purely monetary explanation of the Great Depression originated with Friedman.

And David then goes on to write a great deal of accurate, true, and insightful things about the history of economic thought, about the Great Depression, plus some insightful but I am not sure accurate and complete thoughts about the past decade:

It wasn’t Friedman who first propounded a purely monetary theory of the Great Depression. Nor did the few precursors, like Clark Warburton, that Friedman ever acknowledged. Ralph Hawtrey and Gustav Cassel did--10 years before the start of the Great Depression in 1919.... The Genoa Monetary Conference of 1922, inspired by the work of Hawtrey and Cassel.... The Genoa system worked moderately well until 1928 when the Bank of France, totally defying the Genoa Agreement, launched its insane policy of converting its monetary reserves into physical gold.... In late 1928 and 1929, the Fed, responding to domestic fears about a possible stock-market bubble, kept raising interest rates to levels not seen since the deflationary disaster of 1920-21. And sure enough, a 6.5% discount rate (just shy of the calamitous 7% rate set in 1920) reversed the flow of gold out of the US, and soon the US was accumulating gold almost as rapidly as the insane Bank of France was. This was exactly the scenario against which Hawtrey and Cassel had been warning since 1919.... For reasons I don’t really understand, Keynes was intent on explaining the downturn in terms of his own evolving theoretical vision of how the economy works, even though just about everything that was happening had already been foreseen by Hawtrey and Cassel.

More than a quarter of a century after the fact... along came Friedman, woefully ignorant of pre-Keynesian monetary theory, but determined to show that the Keynesian explanation for the Great Depression was wrong and unnecessary. So Friedman came up with his own explanation of the Great Depression that did not even begin until December 1930.... Rather than see the Great Depression as a global phenomenon caused by a massive increase in the world’s monetary demand for gold, Friedman portrayed it as a largely domestic phenomenon, though somehow linked to contemporaneous downturns elsewhere, for which the primary explanation was the Fed’s passivity in the face of contagious bank failures. Friedman... ignorantly disregarded the monetary theory of the Great Depression that had already been worked out by Hawtrey and Cassel and substituted in its place a simplistic, dumbed-down version of the quantity theory. So Friedman reinvented the wheel, but did a really miserable job of it....

The problem with Friedman is not, as Delong suggests, that he distracted us from the superior insights of Keynes and Minsky into the causes of the Great Depression. The problem is that Friedman botched the monetary theory, even though the monetary theory had already been worked out for him if only he had bothered to read it.... We do know that the key factor explaining recovery from the Great Depression was leaving the gold standard. And the most important example of the importance of leaving the gold standard is the remarkable explosion of output in the US beginning in April 1933.... Between April and July 1933, industrial production in the US increased by 70%, stock prices nearly doubled, employment rose by 25%, while wholesale prices rose by 14%. All that is directly attributable to FDR’s decision to take the US off gold, and devalue the dollar (see here). Unfortunately, in July 1933, FDR snatched defeat from the jaws of victory (or depression from the jaws of recovery) by starting the National Recovery Administration, whose stated goal was (OMG!) to raise prices by cartelizing industries and restricting output, while imposing a 30% increase in nominal wages. That was enough to bring the recovery to a virtual standstill....

You can’t prove that monetary policy is useless just by reminding us that Friedman liked to assume (as if it were a fact) that the demand for money is highly insensitive to changes in the rate of interest. The difference between the rapid recovery from the Great Depression when countries left the gold standard and the weak recovery from the Little Depression is that leaving the gold standard had an immediate effect on price-level expectations, while monetary expansion during the Little Depression was undertaken with explicit assurances by the monetary authorities that the 2% inflation target--in the upper direction, at any rate--was, and would forever more remain, sacred and inviolable.

Whew. A long quote. But I don't have time today to cut it down to its essentials--and David is well worth reading.

But in response I say:

  1. David is, I think, correct in saying that Milton Friedman had the wrong monetary explanation of the Great Depression, and Hawtrey had the right one. But it doesn't matter. Milton Friedman's was the only explanation North Atlantic macroeconomics heard from 1970 to 2008. And it was the version North Atlantic macroeconomics believed, and so neglected Keynes and Minsky--and Hawtrey. Thus here, I say, is thus annoyed at me not for getting anything wrong but, rather, for reminding him of an unpleasant reality.

  2. David is, I think, also annoyed at me for failing to recognize that the Lesser Depression would have come to a quick end had the Federal Reserve and the ECB committed themselves at the end of 2008 to a permanent 5%/year inflation target, and for instead dinking around with Keynesian fiscal policy and Minskyite credit policy ideas. But the failure of Abenomics to make more of a difference keeps me from being as certain as David is. I certainly believe that Neville Chamberlain's policy of returning the British price level to its pre-1930 level and Franklin Roosevelt's abandonment of the gold standard were monetary régime changes that worked wonders. But I do not think that justifies ignoring Keynesian and Minskyite ideas of alternative ways of restoring macroeconomic balance--especially given the illegality of a 5%/year inflation target in both the United States and in the European Union.