I started thinking about Ludwig von Mises's claim:
Attempts to carry out economic reforms from the monetary side can never amount to anything but an artificial stimulation of economic activity by an expansion of the circulation, and this, as must constantly be emphasized, must necessarily lead to crisis and depression. Recurring economic crises are nothing but the consequence of attempts, despite all the teachings of experience and all the warnings of the economists, to stimulate economic activity by means of additional credit...
Note what von Mises is not saying. He is not saying that myopic governments may overuse the inflation tax. He is not saying that using monetary policy to push unemployment below the natural rate will generate accelerating inflation. He is not saying that easy money and easy credit sometimes lead to financial crises that cause depressions.
He is saying something different and stronger. He is arguing against ever attempting to cure any depression by expanding the money supply: "never amount", "must necessarily", "nothing but the consequence", "all the teachings", and "all the warnings" are very strong phrases indeed in one of the statements that led Milton Friedman to say:
there are Austrian insights that are of great value… but not in the field of monetary theory.
Paul Krugman comments on my willingness to think about von Mises. In summary, he says: better me than him:
Mental Monetary Disorders: Brad DeLong has been blogging about von Mises and his belief — shared by a number of people to this day — that any economic expansion driven by monetary expansion must somehow be unsound and destructive.
I'm glad he’s doing this. There’s a tendency on the part of economists, both liberals and Tory Keynesians like Greg Mankiw and John Taylor (because that’s what they are, except when they’re playing for Team Republican), to understate the depth of incomprehension on much of the right.
The best cure I know for the notion that a money-led expansion can’t be real is still the story of the baby-sitting coop… when the coop was depressed, it was depressed because of inadequate demand, and this inadequacy could be cured by issuing more scrip — money that was created by fiat. If you try to ask where the value of that money came from in terms of its production, you’ve already fallen into an intellectual morass. The point was that the miniature economy of the coop was suffering from inadequate liquidity, and creating more money eased that problem.
I know that a lot of people refuse to accept the possibility of such things, and nothing will convince them that a monetary expansion can ever do real good. But they’re mistaking their own confusion for profound insight.
From my perspective, the interesting thing is that von Mises and his remarkably and strikingly unmannerly present-day acolytes appear to believe all of the following:
Increases in the real money stock produced by decreases in the wage and price level are efficacious at pulling the economy out of a depression.
If labor unions push-up wages and prices so that they are "too high"--not, mind you, that real wages are too high (with nominal wages being high relative to consumer prices), but simply that the nominal wage is too high given the money stock--then a union-busting program that does not change relative prices but simply raises the real money stock is efficacious at curing a depression.
Moreover, an increase in the real money stock that comes about from people spending time energy and resources digging gold from the ground and refining it is equally efficacious in curing a depression.
However, a credit expansion caused by government money printing (or by leverage expansion by private fractional-reserve banks) is always, invariably, and inescapably poison.
Now any real economist looking at (1) through (4) has a very hard time even beginning to think how this striking bifurcation between "healthy" and "poisonous" expansions in the real money stock could have a basis in a coherent monetary theory.
I would like to hear an alternative theory as to where this mammoth #economictheoryfail comes from--other than the theory that it comes from enslavement to a naïve cost-of-production theory of value, according to which gold-backed money's value is in some sense "real" because of the resource cost of mining, while fiat money's value is in some sense "fake" and thus bound to cause trouble.
Anybody? Anybody? Bueller?