TO KEYNES OR NOT TO KEYNES? THAT IS THE QUESTION
21 February 2010 by Cullen Roche
1 Comment
Disclosures - Unless otherwise noted, authors have no positions in any securities mentioned and readers should never consider this to be investment advice. Always consult your financial advisor before acting on any ideas.
Comments Guideline - Readers who denigrate authors or other readers will be banned without warning. This site does not tolerate any sort of reader abuse. The goal of this site is to create an environment that is conducive to learning and better understanding of the monetary system and the investment world. We expect readers to behave maturely and responsibly. We welcome and encourage intense and intelligent discourse, but the site adheres to a strict 1 strike policy. While it is your right to speak freely, it is not your right to behave childishly. Above all else, please enjoy the site. It is intended to be used as an educational tool and we hope the intelligent and mature debate will further that purpose. We hope readers will make an effort to respect that goal. Comments with excessive linking or foul language will be moderated before posting.
Comments
I think Professor Leijonhufvud is a bit unjust to Hayek. By the end of his life Hayek had left both Austria and Chicago behind. He had come to a point of view that neither Friedman nor Mises would have accepted: that both money and banking should be completely open to competition. Hayek never articulated what he expected such anarchy to produce, but his historical essays provide several hints. He thought money would evolve into something close to the American Constitutional standard – currency convertible on demand to specie. Nothing else would meet the consumer demand for what President Cleveland called “the best and safest money”. I think Hayek thought banking, on the other hand, would be likely to evolve, as it has, into a dizzying variety of credit arrangements and instruments. Those arrangements and instruments would be, as they are now, subject to the risks of panic and miscalculation; but they would not be supported by the ability to have the government – i.e. the private wealth of citizens – to make good any losses. Borrowers and lenders would have to look solely to their counter-parties. Hayek knew that such a divorce between money and credit would prevent even the worst “market failures” (sic) from jeopardizing the safety or value of people’s money savings. That money would remain available as collateral for new forms of credit that would fund investments and speculations. Liquidations would be painful but they would be temporary. Hayek knew that in financial system where the government, whether national or international, held a monopoly over money, “reform” would always find a way to make money simply another form of credit. That meant that, in a crisis, prices in the capital markets would be set by expectations about regulation and political change and the availability of government money, not by any private speculations. There would be no free money available as collateral. Professor Leijonhufvud is certainly right about the present dilemma; but, like it or not, as President Nixon said just before the United States entered into the decade of wealth destruction that most closely parallels our current one, we are all Keynesians now.