catallaxy files

catallaxy in technical exile

Sennholz on Friedman

with 2 comments

Hans Sennholz has an honourable place among the Austrians as the teacher who converted Peter Boettke from tennis and basketball to economics.

He has a challenging piece on Milton Friedman which concludes:

The monetarists actually have no business cycle theory, merely a prescription for government to “hold it steady.” From Irving Fisher to Milton Friedman the antidote for depressions has always been the same: reinflation. The central banker who permits credit contraction is the culprit of it all. If there is a recession, he must issue more money, and if there is inflation, that is, rising price levels, he must slow the increase in the supply of money, but increase it nevertheless.

Professor Friedman himself seems to have been aware of his lack of business cycle theory when he admitted “little confidence in our knowledge of the transmission mechanism.” He had no “engineering blueprint,” but merely an “impressionistic representation” that monetary changes are “the key to major movements in money income.” His “gap hypothesis,” therefore, is designed to fill the gap of theory and allow for the time it takes for all adjustments to be corrected. He seeks to time the recession without explaining it.

The increasing importance of government obligations as bank assets gives great confidence to monetarists; however, it creates anxiety because government obligations merely are receipts for money spent and savings consumed. Every budgetary deficit that creates more government obligations consumes productive capital and thereby hampers economic production. The growing importance of government obligations in bank portfolios actually signals government consumption of economic substance and wealth. To commercial banks, it means the loss of real property securing the loans, and the addition of yet more government promises to tax, print and pay. A banking system built primarily on government IOUs is in a precarious condition.

What Professor Friedman called the “dethroning” of gold was, in truth, the default of central banks to make good on their legal and contractual obligations. Following the example set by the United States on August 15, 1971, central banks all defaulted in their duty to redeem their currencies in gold. The default, unfortunately, did not bring stability and prosperity; it opened the gates for world-wide inflation. It made the U.S. dollar the world currency, elevated the Federal Reserve System to the world central bank, and inundated the world with U.S. dollars. (Cf. My Money and Freedom, Libertarian Press, 1985.)

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Written by Admin

December 7, 2006 at 10:02 am

Posted in Uncategorized

2 Responses

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  1. Jason, your comment on this post seems to have gone AWOL… but maybe only for me 🙂

    skepticlawyer

    December 7, 2006 at 10:28 am

  2. No I was testing the comment box to ensure it hadn’t been italicised because I think Rafe left a stray italic code somewhere, and then I deleted it.

    Jason Soon

    December 7, 2006 at 10:31 am


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