Recently, UC-Berkeley economist J. Bradford Delong posted a blog post in which he rails against Ludwig von Mises. Apparently, he was introduced to the work of Mises by Joe the Plumber who recommended Mises’s The Theory of Money and Credit as “important reading for these troubled times”. Truth be told, The Theory of Money and Credit is important reading for anyone who wants to understand monetary theory, regardless the state of the economy. Apparently, however, Prof. DeLong was less than impressed with the book. In fact, he declares that it is “completely bats--- insane”. He suggests that we start reading at page 416, and provides quotes that apparently he believes are the “highlights”. Upon reading DeLong’s very lengthy block quotation, a few things stood out to me. First, there were ellipses everywhere, indicating that DeLong was ignoring sections of text. Whenever I see ellipses, I try to check the source. After all, it is not difficult to take “Fiat money is a standard that should not be adopted by any country, regardless its economic system” and make it “Fiat money … should … be adopted by any … economic system”, or “[M]oney … should not be adopted…”. So, to be sure that Mises was not being totally misquoted, I pulled out my 1980 edition copy of The Theory of Money and Credit. I turned to page 416, and couldn’t find the quotation anywhere. Then, I realized that the .pdf that DeLong linked to was of the 1953 edition. The relevant starting page in the later edition is 456. The second thing I noticed about the block quote was that the effect of the ellipses, in themselves, was to make Mises sound like a madman. It’s as if Mises is writing disconnected phrases and trailing off into mumbling between each discernible phrase. For convenience, DeLong’s quotations of Mises are indented, while my completions/corrections/comments are not indented. So, let’s begin! “[T]he gold standard appears as an indispensible element of the body of constitutional guarantees that make the system of representative government function....” What Mises actually said in the beginning of the paragraph: “The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of the policies of governments and political parties. Furthermore, it prevents rulers from eluding the financial and budgetary prerogatives of the representative assemblies. Parliamentary control of finances works only if the government is not in a position to provide for unauthorized expenditures by increasing the circulating amount of fiat money.”
What Mises (clearly) has in mind: a system in which, constitutionally, budgetary decisions rest with a representative legislature but an unelected executive “ruler” may potentially have the power to issue fiat currency. Naturally, this is not the system of the United States, but only a particularly patriotic economist would claim that it must be about the United States. A brief glance at the Wikipedia entry about the government of the Austro-Hungarian Empire reveals more of what Mises probably had in mind. In the government of the Empire, the Austrian and Hungarian parliaments jointly determined the expenditures of the common government, which was headed by the (unelected) monarch. If, in fact, the monarch had the authority to print money, then any restrictions that the parliaments placed on his expenditures would be absolutely meaningless. In turn, any restrictions on the monarch coming from the representative assemblies would vanish. So, in this type of system, the gold standard appears as an indispensible element of the body of constitutional guarantees that make the system of representative government function. Which is exactly the conclusion that J. Bradford DeLong quotes.
“What the foes of the gold standard are asking for is... to intensify very considerably the already-prevailing upward trend of prices and wages....” The quote follows this passage: “We may neglect dealing with the economic effects of a general tendency of money prices and money wages to drop. For there is no doubt that what we have experienced over the last hundred years was just the opposite, namely, a secular tendency toward a drop in the monetary unit’s purchasing power, which was only temporarily interrupted by the aftermath of the breakdown of a boom intentionally created by credit expansion [Note: This is a reference to the early stages of the Great Depression.] Gold became cheaper in terms of commodities, not dearer.”
What Mises is saying: some advocate a fiat system because it can avoid the evils of (price) deflation. Mises’s point is that the evils of price deflation were not a reason to dispose of the gold standard in 1952. Why not? Because prices were not falling. They were rising, and had been generally rising for some time. So, why should we abandon a gold standard in favor of a fiat money? Because such a move would allow prices to rise even faster. Now, it may seem ridiculous today to say that economists were proposing that prices should increase. However, this was exactly what was being advocated during the early stages of the New Deal. Robert Higgs reports: “If the major strategies of the early New Deal had a common denominator or rationale other than simply reinstituting controls like those employed during the war, it was to raise prices.” (Crisis and Leviathan 173-174) So, while it may be true that modern economists do not advocate inflation, it most certainly was not true in the 1930s. And, in fact, it isn’t even true today. In 2003, “The [Federal Open Market] Committee judged that, on balance, the risk of inflation becoming undesirably low would remain the predominant concern for the foreseeable future.” The risk spoken of here doesn’t seem to be prices falling. It seems to be that prices are not rising fast enough. Which is exactly what Mises is accusing opponents of the gold standard of claiming.
“Such a policy of radical inflationism is, of course, extremely popular....” The following sentence: “But its popularity is to a great extent due to a misapprehension of its effects. What people are really asking for is a rise in the prices of those commodities and services they are selling while the prices of those commodities and services they are buying remain unchanged.”
Now, here I can agree with those who might claim that this statement is a bit outdated. At the time it was written, many people were business owners of some sort (Proprietors’ income, a decent measure of small business income, was 13.4% of national income, and was more than corporate income). Today, few people are business owners (proprietors’ income only accounts for 8.6% of national income, and is about 30% less than corporate income), and when we think of “prices”, we think of prices we pay. So, today, deflation is likely to be popular… except that mainstream economists have done a marvelous job convincing people that price deflation would lead to a Second Great Depression.
“How pale is the art of sorcerers, witches, and conjurors when compared with that of the government's treasury department! The government, professors tell us, 'can raise all the money it needs by printing it'[1]. Taxes for revenue, announced a chairman of the Federal Reserve Bank of New York, are 'obsolete'[2]. How wonderful!” Here, DeLong missed his opportunity. If he wanted to make Mises sound really crazy, he’d have quoted the next sentence “And how malicious and misanthropic are those stubborn supporters of outdated economic orthodoxy who ask governments to balance their budgets by covering all expenditures out of tax revenue!” Naturally, Mises is being sarcastic here. In fact, he is very blatantly making fun of what he terms “the naïve mind”. Looking at the sentences before what was quoted makes that perfectly clear. Mises says, “For the naïve mind there is something miraculous in the issuance of fiat money. A magic word spoken by the government creates out of nothing a thing which can be exchanged against any merchandise a man would like to get.” What Mises has in mind: someone who believes that printing fiat money is very much like a child’s parents going to the ATM. “But, Mommy, why do you say you don’t have the money? Can’t you just go to the machine and get more?” It is also in this quote that J. Bradford DeLong declares that Mises is misusing two quotes: one from Abba Lerner (denoted by footnote [1]), and one from Beardsley Ruml (footnote [2]). DeLong’s complaints are essentially that Abba Lerner says that we can raise all the funds the government needs by printing it “if the raising of the money is the only consideration” and that Ruml goes on to state that the government should use taxation to stabilize the purchasing power of the currency. If Mises were being serious here, DeLong’s complaints would be valid. But, Mises is obviously not being serious. He is expressing the train of thought of the naïve mind, and the naïve mind would take these quotations out of context.
“Eventually... the cleverly-concocted plans of inflation collapse. Whatever compliant government economists may have said, inflationism is not a monetary policy that can be considered as an alternative to a sound-money policy....” Here, DeLong intentionally omits an entire (page-long!) paragraph of The Theory of Money and Credit. Why? Because that page-long paragraph shows Mises’s true brilliance. A full 20 years before Robert Lucas wrote his article describing the importance of ignorance in monetary policy being effective at changing output, Mises says the same thing. He declares “These enthusiasts [for inflation] do not see that the working of inflation is conditioned by the ignorance of the public and that inflation ceases to work as soon as the many become aware of its effects upon the monetary unit’s purchasing power.” Once the public catches on, continuous price inflation becomes ineffective at stimulating output, and even has the danger of starting a hyperinflation if people flee to real values. Mises’s point here is that using inflation to tamper with the economy is self-defeating, as, eventually, people catch on. Once they do, all that inflation did was erode the purchasing power of money, and create serious economic distortions along the way.
“[T]he gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion--policemen, customs guards, penal courts, prisons, in some countries even executioners--had to put into action in order to destroy the gold standard. Solemn pledges were broken, retroactive laws were promulgated, provisions of constitutions and bills of rights were openly defied. And hosts of servile writers praised what the governments had done....” Here, DeLong just needs to read some good economic history. Perusing the relevant section of Higgs’s Crisis and Leviathan documents exactly what Mises describes.
“The most remarkable thing about this allegedly new monetary policy, however, is its complete failure.... [I]t substituted fiat money in the domestic markets.... It contributed considerably to the disintegration of the international division of labor.... but the position of gold as the world's [monetary] standard is impregnable....” Here, I must agree… Mises was a bit of an optimist. The Bretton-Woods system did break down. So, eventually, the new monetary policy did succeed at eliminating gold from the monetary stage (though it took about 20 years after Mises wrote these words for that to happen).
“The expansionist doctrine does not realize that interest... is an originary category of human valuation, actual in any kind of human action and independent of any social institutions. The expansionists do not grasp the fact that there never were and there never can be human beings who attach to an apple available in a year or in a hundred years the same value they attach to an apple available now....” In mid-quote DeLong only omits the definition of interest, which is not a great loss. But the preceding paragraph is absolutely essential to understanding this passage. In particular, when I see “expansionist”, I think of “imperialist”. But, that’s not what Mises is saying. He’s saying “credit expansionist”. That is, someone who believes that expanding credit is a good thing. Also absolutely essential is the section following what J. Bradford DeLong quotes. In it Mises declares “In their [the credit expansionists’] opinion interest is an impediment to the expansion of production and consequently to human welfare that unjustified institutions have created in order to favor the selfish concerns of the money lenders.” Which is almost a direct quote from Keynes.
“These absurd doctrines greatly impressed ignorant politicians and demagogues....” This is an exceptionally disjointed selection for a quote. I’m just going to chalk this one up to carelessness and move on. All I’ll say: in context, Mises is actually talking about how the doctrines of credit expansion combined with nationalism to convince politicians that international cooperation was unnecessary for prosperity. All that was required was abandoning the gold standard so that credit could expand unabated.
“The inevitable eventual failure of any attempt at credit expansion... impossible to substitute fiat money and a bank's circulation credit for non-existing capital goods.” Here is one where J. Bradford has intentionally pieced things together in a way that violates good English grammar to make Mises look like a madman. I can cut this sentence in a way that preserve grammar. Watch: “The inevitable eventual failure of any attempt at credit expansion... is the outcome of the fact that it is impossible to substitute fiat money and a bank's circulation credit for non-existing capital goods.” Sloppy, J. Bradford, very sloppy.
“Credit expansion initially can produce a boom... bound to end in a slump, in a depression... the recurrence of periods of economic crises... [caused by] the reiterated attempts of governments and banks supervised by them to expand credit....” Here, J. Bradford shows that he is either intentionally trying to make Mises look like a madman (he is trying to do that) or that he himself just doesn’t understand proper English. Simply including “is” at the beginning of “[caused by]” would fix the grammar. What is probably most fair to Mises here would be to take this quote and the preceding one, and let Mises fill in the blanks.
“The inevitable eventual failure of any attempt at credit expansion is not caused by the international intertwinement of the lending business. It is the outcome of the fact that it is impossible to substitute fiat money and the bank’s circulation credit for non-existing capital goods. Credit expansion initially can produce a boom. But such a boom is bound to end in a slump, in a depression. What bring about the recurrence of periods of economic crises are precisely the reiterated attempts of governments and banks supervised by them to expand credit in order to make business good by cheap interest rates.”
In short, Mises was giving a very brief overview of the Austrian business cycle theory. Now, if DeLong wants to refute that theory, then that’s fine. Instead, he just butchers the quotation to make it look disjointed.
“This spurious grocer philosophy was once and for all exploded by Adam Smith and Jean-Baptist Say. In our day it has been revived by Lord Keynes....” What grocer philosophy was it? Mises tells us in the passage that DeLong omits: “Business is bad, says the grocer, because my customers or prospective customers do not have enough money to expand their purchases. So far he is right. But when he adds that what is needed to render his business more prosperous is to increase the quantity of money in circulation, he is mistaken.” The doctrine that was exploded by Smith and Say? Mercantilism. The wealth of the country is not based on how much money is circulating, but on the production of real goods and services.
“ Keynes was at a loss to advance a tenable argument against Say's law. Nor have his disciples or the hosts of economists, pseudo and otherwise, in the offices of the various governments, the United Nations, and divers other national or international bureaux done any better....” J. Bradford, care to provide an example of an actual argument against Say’s law? Keynes’s argument was a straw man at best, as he stated Say’s law incorrectly. Now, there may be something to be said for price stickiness allowing for a “general glut” of goods. But, price stickiness should be just as relevant on the upside as on the downside, so that “general shortages” should happen, too.
“Wage rates are a market phenomenon....” Is DeLong suggesting that wage rates are not a market phenomenon?
“If the government or labour unions fix wage rates at a higher point than the potential rate of the unhampered labour market and if they enforce their minimum-price decree by compulsion and coercion, a part of those who want to find jobs remain unemployed. Such institutional unemployment is the inevitable result of the methods applied by present-day self-styled progressive governments. It is the real outcome of measures falsely labeled as pro-labour....” Once again, is DeLong denying that effective price floors cause surpluses? If so, I really need to hear what he thinks the effects of price floors actually are.
“ [T]he reputation and prestige of the men now ruling the countries... and of their professional and journalistic allies are so inseparably tied up with the 'progressive' doctrine that they must cling to it. If they do not want to forsake their political ambitions, they must stubbornly deny that their own policy tends to make mass unemployment a permanent phenomenon....” Is this not true, even today? If a major candidate proposed eliminating the minimum wage, and limiting the power of the unions so that they have less control over wage rates, can we expect that they will not face such severe political opposition that they will not be elected. Yet, as soon as we buy standard economic theory about price floors and apply that theory to minimum and union wages, the result is obvious: such wages cause unemployment, if they do anything at all. Yet, any politician must deny such things if he wants to get elected.
“[...]” These tricky ellipses are a way of saying “let’s skip 15 pages”.
“Sound money still means today what it meant in the nineteenth century: the gold standard.... “ These ellipses, like most of J. Bradford’s, are used to eliminate the explanation for why. During them, Mises explains that the gold standard prevents governments from inflating, and that government’s should have to run balanced budgets. But these concerns pale in importance when compared to:
“The main thing is that the government should no longer be in a position to increase the quantity of money in circulation and the amount of [private bank-provided] cheque-book money not fully--i.e. 100 per cent--covered by deposits paid in by the public. No backdoor must be left open where inflation can slip in.... It merely helps the rulers whose policies brought about the catastrophe to exculpate themselves.” Ellipses = “No emergency can justify a return to inflation. Inflation can provide neither the weapons a nation needs to defend its independence nor the capital goods required for any project. It does not cure unsatisfactory conditions.” Which is exactly the point that Mises has been trying to make the whole time.
“[M]ost supporters of sound money do not want to go beyond the elimination of inflation for fiscal purposes.... [T]hey do not want to prevent... [private-sector] credit expansion for the sake of lending to business.... Their idea of sound money is... with all the errors of the British Banking School.... They still cling to the schemes whose application brought about the collapse of the European banking systems... discredited the market economy by generating the almost regular recurrence of periods of economic depression.” Mises’s point: if we want a monetary system that doesn’t create boom-bust cycles, we have to eliminate all forms of credit expansion not backed by actual savings. So, those who advocate removing the power of governments to use newly created money for expenditures are right, except that they see no problem in using the same process for funding business expenditures. This system can create an illusion of a free market, as the government is relatively small. But, as long as banks are expanding credit, we’ll still get business cycles. Then people like Karl Marx can claim that boom-bust is part of the nature of capitalism. But, this is not true. A banking system based on 100% reserves would not experience regular boom-bust.
“There is no need to add anything to the treatment of these problems as provided in Part Three of this volume and also in my book Human Action.... [T]he characteristic duplicity of the [central] bank policy.... [Private-sector] credit expansion... obscure[s] the fact that there prevails a nature-given scarcity of the material things on which the satisfaction of human wants depends...” What a horrendous hack-job! First, the first part of the quotation has no content at all except for providing the reader with somewhere they can look if they’re interested in Austrian business cycle theory, which was very nice of DeLong. Then ellipses capture an entire half-page of text which are needed to understand that mysterious phrase “the characteristic duplicity of the [central] bank policy”. What is that? It is that “The central bank or banks must not lend to the government but should be free, within certain limits, to expand credit to business.” Another ellipses conceals a full page of text, and then J. Bradford finally comes to the last butchered quote from the “madman Mises”. The full quote reads: “Inflation and credit expansion are the means to obfuscate the fact that there prevails a nature-given scarcity of the material things on which the satisfaction of human wants depends.” That is, credit expansion creates the illusion that we have more “stuff” than we do. It makes it look like we can spend a lot and save a lot simply by creating additional money to be used in these purposes. In reality, however, the quantity of money we can use for these purposes does not matter. What matters is the quantity of resources that are used for these purposes. Increasing the money supply through monetary inflation and credit expansion does not increase the supply of real resources. We still only have so much real stuff to consume or save. As long as we believe that people do eventually learn, they will eventually learn that things are not as rosy as was believed. The prosperity was an illusion, and the actions taken based on that illusion were destructive.
I would like to provide a more substantive refutation of DeLong’s argument. However, he doesn’t make that possible, as he provides too little actual substance to refute.
Many thanks to Bob Murphy for pointing me toward this gross misrepresentation of Mises’s work, to Brian Doherty for making me think about what a response would be like, and Tom DiLorenzo for suggesting that this type of response could be perfectly appropriate.
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