But is this an accurate account of Hayek’s and Robbins’ actual monetary and fiscal policy advice during the early years of the Great Depression? Is it an accurate account of the policies of the Hoover administration, of the Federal Reserve System, and of what influenced them? A critical examination finds DeLong’s history unpersuasive on four key points.
- The Hayek-Robbins (“Austrian”) theory of the business cycle did not in fact prescribe a monetary policy of “liquidationism” in the sense of doing nothing to prevent a sharp deflation. Hayek and Robbins did question the wisdom of reinflating the price level after it had fallen from what they regarded as an unsustainable level (given a fixed gold parity) to a sustainable level. They did denounce, as counterproductive, attempts to bring prosperity through cheap credit. But such warnings against what they regarded as monetary over-expansion did not imply indifference to severe income contraction driven by a shrinking money stock and falling velocity. Hayek’s theory viewed the recession as an unavoidable period of allocative corrections, following an unsustainable boom period driven by credit expansion and characterized by distorted relative prices. General price and income deflation driven by monetary contraction was neither necessary nor desirable for those corrections. Hayek’s monetary policy norm in fact prescribed stabilization of nominal income rather than passivity in the face of its contraction. The germ of truth in Friedman’s and DeLong’s indictments, however, is that Hayek and Robbins themselves failed to push this prescription in the early 1930s when it mattered most.
- With respect to fiscal policy, the Austrian business cycle theory was silent. Hayek and Robbins did oppose make-work public programs, but they opposed them because they believed that the programs would misdirect scarce resources, not because the programs were financed by public-sector borrowing.
- There is no evidence that either Hoover or Mellon, or any “liquidationist” in the Federal Reserve System, drew policy inspiration from Hayek or Robbins. Given that Hayek’s theory was unknown to English-language economists before he gave the lectures published as Prices and Production in 1931, it would be surprising to find that Hayek had influenced the U.S. policy debate in 1930. Robbins’ writings on the Depression came even later. Rather than following Hayek or Robbins, the Fed’s decision makers were following a variant of the real bills doctrine, as Richard H. Timberlake, Jr. (1993, pp. 259-83; 2007, pp. 339-43), David C. Wheelock (1991, p. 111), Allan H. Meltzer (2003, pp. 76, 138-139, 263-66, 322), and David Laidler (2003a, pp. 1259-63) have emphasized.
- The Austrian and real-bills views should not be conflated. If they were, as Laidler (2003a, p. 1263, n. 11) puts it, “Apparently parallel strands in the literature,” then such an appearance was misleading. In key respects the two views were diametrically opposed. It may be true, as Laidler (2003b, p. 26) argues, that by offering their own non-expansionist policy advice in the early 1930s “the Austrians . . . lent considerable academic respectability to similar views, based on the so-called needs of trade or real bills doctrine, which at that time had wide currency in banking circles in general, and at the Federal Reserve Board in particular.” Nonetheless, the Austrian and real-bills views were analytically quite distinct, and the Austrians were not the source of the Fed’s thinking.
- Herbert Hoover explicitly rejected “liquidationist” doctrine in both word and deed. Hoover’s claim that Mellon advocated liquidationism in cabinet meetings lacks corroboration from Mellon’s public statements.
—Lawrence H. White, “Did Hayek and Robbins Deepen the Great Depression?” Journal of Money, Credit and Banking 40, no. 4 (June 2008): 753-754.
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