Austrians blame the Great Depression on the inflation created by the Federal reserve during the 1920s and how that fueled the bussiness cycle. Milton Friedman blames it on the collapse of the money supply during the 1930s. Could both be right? It seems like the decline of the m3 money supply by one third would strangle any economy. As solutions to prevent another depression Hayek and Friedman both advocated for full reserve banking, abolishing the federal reserve and a slowly growing money supply. Hayek wanted to achieve that through a gold standard while Friedman wanted to achieve that by mandating the treasury to grow the money supply about 3% per year. Both methods would not be inflationary according to Hayek's definition of inflation. Our the differences between Friedman and Austrians overstated?Also would Friedman's approach to monetary policy be more stable and cheaper instead of relying on how much gold we dig out of the ground? Could this be a viable solution for today's problems?
Welcome to the Mises Forum!
Be sure to check the newbie thread for forum tips and how-tos.
ABCT doesn't necessarily account for the length and severity of the Great Depression. That was largely fueled by multiple factors of intervention in the economy. For a good Austrian source on this, see America's Great Depression (as well as the links included).
As for "preventing" depressions, the best method is zero intervention. Let the market function. But on that note, could you please provide your source for "Hayek's definition of inflation"?
Either way, the only argument for growing the money supply is the fearmongering argument against "deflation"...but this has been debunked. There is no legitimate reason to purposfully inflate the money supply with the specific goal of "stabilizing prices" or any other sort of centralized planning end.
For resources on deflation:
Why Deflation Isn't Harmful by Jörg Guido Hülsmann
Also, here's an abridged version of Prof. Salerno’s assessment using a specific case, and his full paper is "An Austrian Taxonomy of Deflation" (PDF) and there's also
An Austrian Taxonomy of Deflation—With Applications to the U.S. [PDF]
Also see here for a list of threads on the topic, and then of course there's the Mises Wiki.
If the goal is zero deflation would gold be a impractical standard becuase the supply of gold is increasing every year? Also if the money supply remained constant wouldn't the increased demand for money increase the value of the gold coinage? Would this inflation be a transfer of wealth? Under deflation anybody who holds debt will see part of their wealth transfer to currency holders. Would a slowly growing money supply allieviate this problem?
Also out of practicality would it get the point where the amount of coinage in comparision to the economy is so small that there is not enough for all of the transactions to occur? Thanks for the help
sherpup:If the goal is zero deflation
a) Define "deflation"
b) Where did you get that idea?
c) did you look at any of the resources I provided?
Also if the money supply remained constant wouldn't the increased demand for money increase the value of the gold coinage?
What "increased demand for money"?
Would this inflation be a transfer of wealth?
What inflation?
Under deflation anybody who holds debt will see part of their wealth transfer to currency holders.
If I lend you $100 in a "deflationary enironment", when you pay me back (in the future) would I not be able to buy more things with that same $100? Where does this "wealth transfer" come in?
Would a slowly growing money supply allieviate this problem?
What problem?
Also out of practicality would it get the point where the amount of coinage in comparision to the economy
What does that mean? "Coinage in comparison to the economy"?
there is not enough for all of the transactions to occur?
How do transactions occur in societies where there is no coinage at all??
The definition of inflation and deflation are containted here from an question on mises.org that quotes mises. The demand for money is discussed in this question. Posted below this section is mises defining the demand for money.
While (re-)reading one of the chapters of Mises’s Theory of Money and Credit, I noted my underlining of the very clearly formulated definitions on page 240. Mises defines inflation as:
an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.
Austrians commonly refer to only the first part of this definition – the increase in the quantity of money – without the specifying statement that inflation is only that part which is not offset by an increased demand for money (which, indirectly, seems to suggest a “soft dismissal” of monetarism rather than the hard line that would otherwise follow).
The same seems to be true for Mises’s definition of deflation:
a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange-value of money must occur.
Economists have tried to enumerate the factors which within the whole economic system may increase or decrease the demand for money. Such factors are: the population figure; the extent to which the individual households provide for their own needs by autarkic production and the extent to which they produce for other people's needs, selling their products and buying for their own consumption on the market; the distribution of business activity and the settlement of payments over the various seasons of the year; institutions for the settlement of claims and counterclaims by mutual cancellation, such as clearinghouses. All these factors indeed influence the demand for money and the height of the various individuals' and firms' cash holding. But they influence them only indirectly by the role they play in the considerations of people concerning the determination of the amount of cash balances they deem appropriate. What decides the matter is always the value judgments of the men concerned. The various actors make up their minds about what they believe the adequate height of their cash holding should be. They carry out their resolution by renouncing the purchase of commodities, securities, and interest-bearing claims, and by selling such assets or conversely by increasing their purchases. With money, things are not different from what they are with regard to all other goods and services. The demand for money is determined by the conduct of people intent upon acquiring it for their cash holding
Concerning the wealth transfer that occurs with deflation, if the money becomes more valuable after the loan has been made than the loan that is made in that currency becomes more valuable. THis means the value of the debt that the borrower has to repay increases.
For the part that that you wrote "what inflation?" I meant to write deflation.
"How do transactions occur in societies where there is no coinage at all??"
The other means of exchange would be bartering or favors. Due to the impracticality of bartering and favors money was created as a easier means of exchange. Money made trade easier. refering back to bartering and favors would severely damage the world economy by rendering trade impractical.
sherpup:The definition of inflation and deflation are containted here from an question on mises.org that quotes mises. The demand for money is discussed in this question. Posted below this section is mises defining the demand for money.
Yes, I've read that blog post. You may be interesed in the reply post made by Joe Salerno a few days after...
It may help with some understanding.
"How do transactions occur in societies where there is no coinage at all??" The other means of exchange would be bartering or favors. Due to the impracticality of bartering and favors money was created as a easier means of exchange. Money made trade easier. refering back to bartering and favors would severely damage the world economy by rendering trade impractical.
Sounds like you're contradicting yourself. In your previous post you suggested that it were possible for there to be "not enough coinage" for "all transactions" to occur. Now it sounds like you're saying it would just be a nuisance, making things more difficult.
The first section of the below link may help.
I said it would be a nuisance if there wasn't money to be used and other forms of exchange are inferior.
how can inflation and deflation be meaningless? Isn't the expansion of the money supply (inflation) a key part in ABCT?
...did you read the article? Or are you still just completely focused on your own ideas about the subject, such that you're not really interested in any actual reply to your inquiries?
" Mises rejected the concept of monetary equilibrium or what was then called “neutral money” precisely because money was a dynamic element, an agent of change that had a “driving force” of its own. Money could not and did not affect the height of prices without necessarily and simultaneously altering the supply and demand conditions in every market and, therefore, the entire structure of prices. Since all changes in the supply of money had precisely the same qualitative effects regardless of the relation they bore to changes in the demand for money, the concepts of inflation and deflation were meaningless and must be rejected"
Does the quote refer to the definitions of inflation and deflation as meaningless because it is so hard to calculate? if not I am confused about the article.