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Review of Peter Bernholz's book, second
edition in the The Quarterly Journal of Austrian Economics, Vol 19, # 2,
pgs., 187 -191
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Reviewer comments:
Newman writes that in this second edition, the author devoted most attention
and change to Chapters 2 and 9, therefor he focuses his review on these. His
overall assessment is that the book is valuable and he recommends it to
readers. See Bernolz's book
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Newman writes that the financial crisis of
2007-08 created much debate by economists over the huge expansion of their
balance sheet by the FED would create inflation and depreciation of currency
(actually the relative value of the dollar not only it the form of currency).
The FED response to the crisis was to expand its own reserves and to increase
the reserves that member banks held with the FED. The crisis generated an
immediate liquidity crisis in bank reserves, so the principle emergency FED
effort was to increase those reserves. This, in turn, was expected to stimulate
the economy. But, apparently surprisingly, the inflation measure of the CPI
increased only moderately. The GDP expansion during the entire Obama
administration was meager.
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Newman asks: "Have we entered into a
special period where monetary economics is no longer valid, and inflation is no
longer a monetary phenomena?" (Of course I wonder if waves of inflation
and deflation are caused by monetary phenomena or do they cause monetary
phenomena? - See Fischer's The Great
Wave)
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Newman continues by noting that answering the
question is one of Bernholz's purposes for his investigation and book. Bernholz
wrote the second edition to bring his research up to date, to include the
'great recession of 2007-08. His main additions in Chapter 2 about that
financial crisis. "Why central bank's monetary expansions have not led to
present day inflation, and whether or not they will lead to it in the future.
Bernholz also added a "new Chapter 9 about how historically, stable
monetary regimes (that is, monetary regimes that were constrained and did not
lead to significant inflation) were eroded."
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Newman then discussed Bernholz's answer in
Chapter 2. Why no significant inflation? He cites the increase of the monetary
base, MO, (currency in circulation plus member bank reserves) increase of
363.87 percent between Dec. 2007 and April 2014 with little increase in
consumer prices. Newman writes that Bernholz provided some illustrative
examples of great increases in MO in different countries with small increases
in M2.
He writes that Bernholz "concludes that it provides a permanent potential
for inflation in the years to come, once banks start to engage in credit
expansion". And also, that Bernholz 'argues that the rise in consumer
prices was mitigated because velocity during this period fell ) i.e. money
demand rose) and most of the new money was not spent on consumer goods, but on
goods not included in a cost of living index, such as houses and stocks."
(My own opinion has been that US consumer prices did not increase because
consumers are buying on credit from foreign producers - exporting inflation for
instance to China.)
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Newman remarks that it would have been
helpful had Bernholz provided numerical data.
He then provides some data himself. "It would have been nice to know that
from the beginning of Dec. 2007 to the beginning of Dec. 2013 .... despite the
enormous MO growth of 334.99 Percent (27.76 per annum) M2 growth in the U.S.
increased only 47.42 percent (6.68 percent per annum) and the CPI increased
even less that that at 10.99 percent (1.75 percent per annum)". And
likewise for velocity and the money multiplier and housing and stock prices.
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Newman then turns to the real situation that
Selgin shows in his book - FLOORED!- Newman writes, "Bernholz should have
also mentioned, at least for the United States, the use of the contemporary new
policy tool by the Federal Reserve to pay interest on member bank deposits.
With this new proviso, banks no longer have as much of an incentive to engage
in credit expansion in order to earn interest and to cover the cost of
inflation eroding away idle balances."
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Newman turns to the new Chapter 9. The topic
is two questions: "Why did some stable monetary regimes arise when there
was no large inflation beforehand to incentivize their adoption, and under what
circumstances did stable monetary regimes become abolished?" He gives us
Bernholz's answers: "Bernholz answers the first question with the theory
(note theory) that countries enacted stable monetary regimes so they would have
an international currency that could be used in foreign trade." He uses
ancient Athens and Corinth as examples.
(I disagree - see Sitta von Reden - Money in
Classical Antiquity in addition to other reverences listed. Some
historians believe that coins - currencies - were introduced to pay mercentary
soldiers who needed a way to transport easily funds to pay their way.)
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Newman writes that Bernholz "answers the
second question by arguing that countries are able to dismantle their stable
monetary regimes and engage in inflationary policies when ever there is
an'emergency'." In other words people do what they believe they must do.
But I do not believe the authorities in question believed they were
'dismantling their stable monetary regime'.Newman continues by refering to
Robert Higg's Crisis and Leviathan.
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Please note also that in all this discussion
of monetary policy - and money - they are focused on credit -NOT currency.
Something that 'gold bugs' like Nathan Lewis and others consistently ignore.
Currency comprises a very minor component of the real money supply. And while
'gold bugs' are championing fixing the 'value' of the currency to gold, more
and more we read that the government should abolish currency itself, and use
only credit - that is digital entries in bank accounts.
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