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No Room For Austrians At Bretton Woods?

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The Telegraph reports

The reason why many reach for the rose-tinted spectacles when recalling Bretton Woods is because it marked a rare moment of international co-operation. It also played a role in ushering in three decades of heady economic growth in the US and a resurgent Germany. Though Keynes was unhappy with parts of the agreement, he was determined not to waste a crisis that makes the past three years appear a blissful stroll in comparison. It was in a similar spirit that more than 200 economists and policy-makers past and present gathered in the same hotel last weekend. In a more cerebral version of television’s The Krypton Factor, delegates were invited to think about why more economists didn’t spot trouble brewing and how economics should change as a result.

Does anyone know if any of the Austrian School economists, whose theory of the business cycle predicted the credit-induced boom that led to the bust, were invited? Or was this another missed opportunity by 200 of the worlds “leading” economists to talk about how good they have been at stopping a secondary recession, patting each other on the back and not recognising that that same credit is still waiting to unwind, and that with the new credit added there will be an even bigger correction brewing.

Jeremy Vine Show

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Following the Robert Peston BBC 2 documentary “Britain’s Banks: To Big to Save?” I was invited to appear on the Jeremy Vine Show yesterday (my segment starts 1 hour and 8 minutes in). I was introduced as the fishmonger who wanted banks just to keep my cash in a safe. This was unfortunate, as I seek to have banks give their clients the option of safe keeping their money or lending it for a duration the depositor is happy with (3 months, 6 months, 9 months, 12, 18, 36, 60 months, etc), with an increasing rate of interest to reflect the sacrifice the depositor is making to suspend consumption now and defer it to a future date. Robert Peston came on to explain the basic working of the banking system, i.e. we deposit, they lend out. This means the money is on the whole not in the bank, but lent to mortgage holders and entrepreneurs. If a number of people want it back all at once, then the bank will fail as it has lent the money out. David Buik of BGC Partners came into explain the essential nature of this banking service. He explained the chief reason why this system fell apart at the time of Northern Rock: it was that the interbank lending market dried up and banks could not borrow short term money off each other to pay redemption requests from their customers. If we have more of a capital buffer to absorb losses and more reserves, this type of event, more than likely, will not happen again. This was his essential message. I asked if he thought it was wrong that a bank can take your money and place it on deposit and tell you that you have instant access to it, in the sure knowledge that they have lent it long, sometimes for many years. He replied of course he did not agree to that. Interestingly, the comments flooding into J Vine were more often of the variety, “if you kept all money in the safe / vault, there would be no lending”, the implication being that the world as we know it would come to an end. There is an art to communicating that I must be lacking. It seems so simple to me, that instead of fumbling around in Switzerland dreaming up more and more regulation, more and more controls, and likewise doing that in each and every central bank and government around the globe, just do what was proposed in parliament recently. Allow people to choose whether their money is safely kept in the bank’s vault (for a modest fee) or lent out, for a specified duration. Then banks will have to lend money to people and enterprises and match their borrowing to their lending. Pension fund and Life companies that currently take in very long term savings (i.e. up to the duration of your life) are ideally placed to lend long to people who need long term debt. God forbid, we might even get back mutually-owned building societies where you historically saved long and they lent long. What could be simpler? Why have we made something as basic as banking, which should be a solid and boring thing, so complicated and so hard for people to understand? P.S. The producer of the program gave me a hat tip to watch Inside Job, a documentary film that he had screened for his staff. Clearly, I am glad to say, the Beeb are taking their research into this matter very seriously. I can’t comment on the film, not having seen it, but from the reviews it does seem to be a must-watch for all people interested in what has happened and continues to happen to our money when it gets into these banks.

Is Inflationism Part of our Mindset? The Paper Pound & The Bullion Report

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Most people have one principle “asset”: the house they live in. Long gone are the days when your physical house was simply your home and nothing to do with your financial assets. Indeed, as the last boom was manufactured by the low interest rate policies of most of the central banks in the Western World, cheap credit pushed up asset prices, notably houses, which you could then cash in, spending this newly minted credit, drawn down as money to buy the goods and services you desired. House prices, perversely, are one of the few key costs of living to be celebrated when they rise. If a man from Mars came down to earth, he should surely conclude that this trend was mad and that people supporting a cost of living increase, on such a stupendous scale, were surely punch drunk on inflationist ideology. Now governments around the world are fully committed to a policy of inflationism. This is when a policy of more cheap money, via exceptionally low interest rates and blatantly “printing” electronic money, is used to create a “recovery.” Please note: like some doctor of old prescribing a leech to suck out your blood if you had a disease and then doing so again when you started to faint as a result of blood loss, we have the cure of easy money being advocated as the cure for a past easy money policy blunder on a spectacular scale. This policy of inflationism ensures that the creditors of the world will eventually get their debts paid back in nominal terms, but with money of lower purchasing power. This fleecing of the thrifty, sensible and prudent is thoroughly dishonest. I would prefer to meet a highway robber who at leasts offers me a choice – “Your money or your life?” – rather than the theft of my purchasing power that is taking place now.

Is honest money a lost cause?

I recently read the Bullion Report of 1810, which has a fantastic introduction from the great economist and holder of the Economics Chair at the London School of Economics from 1895 to 1924, Edwin Cannan, prior to Lionel Robbins. He wrote his introduction to this most famous of House of Commons reports in 1919, after the end of the First World War. Then, our money was debased and the policy solutions were inflationism: dishonestly paying off debt by trying to pass it to the next few generations, covering the misdeeds of the current generation. This was a time in history very similar to the end of the Napoleonic Wars when our money, hitherto being indestructible gold, was replaced by inconvertible paper money and then switched back into convertibility at a lower rate after the conclusion of the peace. I will leave you with some quotes from Cannan in his Introduction,

But no government involved in a great war is willing to give up so potent an engine for surreptitiously fleecing it’s subjects as an inconvertible currency , whether in it’s own hands or in that of a bank it influences.

Joined with the determination of the public to accept notes, the Act placed in the hands of the Bank the power of creating money without limit for the benefit of it’s shareholders , or Proprietors , as they were called……the Directors had long managed the Bank with one eye indeed on the interest of the proprietors but with the other on that of the “monied interest” generally.

But the bank had found itself comfortable under the Suspension, and felt no enthusiasm for a return to a system which did not guarantee it against being asked to pay it’s debts at a possibly inconvenient moment.

Much as this was written 90 years ago, referring to events of 200 years ago, we should not become despondent that the cause of honest money is doomed: we certainly have sound economic reasoning on our side. We must find better and more persuasive ways to stick up for hard work, thirty management of your affairs and in general for liberty. This is a core part of the Cobden Centre’s mission and indeed why we set it up.

Some Virginia Legislators Worry about Hyperinflation!

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A good article from Robert Jackson Smith:

Some legislators in the Commonwealth of Virginia are worried about hyperinflation!  See House Joint Resolution No. 557.  Should the Commonwealth adopt a currency to serve as an alternative to the currency distributed by the Federal Reserve System?  Could an alternative currency avoid or mitigate many of the economic, social, and political shocks to be expected to arise from hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System?  These are the questions some Virginia legislators are asking.  They’re even proposing to appoint a joint subcommittee to study whether the Commonwealth should adopt a currency to serve as an alternative to the currency distributed by the Federal Reserve! In my opinion yes, an alternative currency would help to avoid and/or mitigate many of the economic, social, and political shocks arising from a breakdown of the Federal Reserve System.  The thing is, however, that an alternative currency already exists.  It’s called gold/silver, and it’s available in several forms.  Gold and silver have been used as money for thousands of years.  They have proven themselves to be reliable as media of exchange, stores of value, and units of measure for as long as man has recorded history.

Read the whole article.

Gross Domestic Expenditures

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If you want to read a very genuine and new contribution to the body of knowledge set out in academic terms, I recommend this paper by Mark Skousen:

Here’s the introduction:

In national income and product accounts, Gross Domestic Product (GDP) is widely recognized as the most common denominator of economic performance. However, because it measures final output only, GDP overemphasizes the role of consumer spending as a driver of economic growth rather than saving, business investment, and technological advances. In an effort to create a more balanced picture of the production/consumption process, I create Gross Domestic Expenditures (GDE), a new national aggregate statistic that measures sales at all stages of production. Drawing from the annual input-output data compiled by the Bureau of Economic Analysis, gross business receipts from the IRS, and other sources, GDE estimates gross spending patterns in intermediate production (goods-in-process) and final output. GDE should be the starting point for measuring aggregate spending in the economy, as it measures both the “make” economy (intermediate production), and the “use” economy (final use or GDP). It complements GDP and can easily be incorporated in standard national income accounting and macroeconomic analysis. In the United States, GDE appears to be more than twice the size of GDP, and has historically been three times more volatile than GDP, and serves as a better indicator of business cycle activity. I conclude that consumer spending represents approximately 30 percent of total economic activity (GDE), not 70 percent as often reported. This conclusion is more consistent with the leading economic indicators published by the Conference Board.

Sean Corrigan has published something similar on our site, and he comes to the same conclusions: the unmeasured part of the economy, the producing part, is 3 to 1 to the final goods part. This erroneous GDP measure leads economists to be able to claim that consumer spending is some 70% of all economic activity as it is mainly the final goods, i.e. the consumption goods, that are measured in standard GDP statistics . In simple terms, when I used to sell fish in this country I bought fresh landed fish at auction. I would then take it back to my factory and cut to the bespoke requirements of our chef customers. Only the value-adding part of this process would be included, so as to avoid double counting of the final goods sold that make up the GDP stats. The restaurateur would only have the value adding he does measured. In short, if you eat some fish and chips in a restaurant, GDP measures the initial price of the raw material plus the value added in each sector of the economy it passes through until you eat it. As far as the GDP numbers are concerned, you have eaten the raw material and the difference between the raw material and the battered fish and chips. My prior company, Seafood Holdings, was the largest fresh fish seller to the food service sector and as far as the GDP measure was concerned, we did not exist! Skousen’s GDE measure shows how the larger producer sector in the economy is much more sensitive to things like interest rate movements that, according to the Austrian Theory of the Business Cycle, will cause greater investment in the productive sector as it seeks to make more things. Empirical support is offered by this paper for the ATBC, if it were required! Prof Skousen provides a very simple pedagogical approach to measure the entire production process to create a full picture of what goes on in the economy where all sectors activities are measured. This shows us how important prior production is before you even get to the consumption sector. This shows us that the consumption sector is not 70% of the economy but closer to 30%. This shows us that the desire to stimulate consumption over and above anything else is misguided. This means that our political masters and their court economists are looking at the economy with a partial eye patch on one eye and a cataract on the other. Surprised? I thought not. Legislators who read this site, please take note! You need to produce something to be able to consume something. You can’t consume something unless you have done, or someone else has done, some prior production of a good or service of some use to your fellow man. To be able to produce more things, we need to save, not spend on consumption. It was an axiom of Keynes, that final demand determined the level of prosperity in the economy. It is the exact opposite: production precedes consumption. Also, that whole productive sector of the economy dwarfs the size of the consumption sector 3:1. Policy makers should be putting all their efforts to removing barriers for wealth creation in that sector and encouraging savings. The German people seem to get this. The mercantilist policy of Keynes and his follows needs periodic refutation.  Like a Zombie waking up from the dead, it perpetually haunts our policy makers. Prof Skousen provides a rigorous statistical paper and methodology to help slay the Keynesian beast once more.

Reactions to Robert Peston's Documentary

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I’ve been really encouraged by the response to Robert Peston’s documentary, Britain’s Banks: Too Big to Save?. Lots of people are waking up to the problems at the core of our banking system, and like-minded campaigners are using the documentary to help spread the word. For the Adam Smith Institute, Sam Bowman wrote

There’s a big debate on the right at the moment about the banks: naturally, most of us are sympathetic with private businesses, but people like Toby are making the argument that British banks are so closely interwound with the state that they can be better understood as semi-state bodies than private firms. If banks cannot make significant losses without being bailed out by the taxpayer, is it appropriate to think of them as creatures of capitalism or of the state? I honestly don’t know, but it’s a debate we need to have if we’re to make the necessary structural changes to the regulatory system to avoid another Great Recession like the one we are (hopefully) crawling out of now.

Meanwhile, Josh Ryan-Collins at the New Economics Foundation expounded the benefits of a 100% reserve system:

An economy running on this kind of foundation should be less prone to pro-cyclical tendencies (boom and bust) and less inflationary (house price inflation in particular) than an economy based on fractional-reserve banking. And the enormous, tax-payer underwritten banks that currently monopolise credit creation would be bought back down to size, enabling greater competition and diversity in our banking sector.

Monetary reform is an idea that should appeal to people from all across the political spectrum. It is an idea whose time has come.

More Trouble Coming

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On Financial Sense Newshour this week Bill Laggner and Kevin Duffy, Co-Founders of Bearing Asset Management, join Jim Puplava for discussions about more trouble coming to the markets and economy.

http://www.netcastdaily.com/broadcast/fsn2010-1120-1.mp3

What can Business Learn from Academia: Fish, Hayek, Keynes and Oakeshott

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Having recently sold my food business, life is moving at a much slower pace, which gives time for thought and reflection before I undertake my next venture or ventures. One thought was: what did I learn from academia that I applied to my business dealings? I concluded that my behaviour was moved by my instinct and alertness to opportunity, and my ability to provide strategic leadership to people and give them vision. With my actions over the years I was always Hayekian in outlook. I could not say for sure if my reading of Hayek made me behave and structure my business as I did, or if I just did it because common sense always told me that local management, with profit and loss responsibility handed down to the smallest units possible, and as little reliance on the central head office function as possible, was the only way forward. In fact, to the day I sold, I never did have a head office. This perplexed bankers, accounts etc, but no one else. I also used to say to my people, “if the man from Mars (read: management consultant, banker, accountant, anyone who’s good at spreadsheets and sits at a desk) came down and looked at our business, he would say we are mad”. We would sometimes send three vehicles to deliver fish down the same road to different people at different times of the day — we should surely consolidate these deliveries, and send one vehicle only. Also, we would buy some of the same species of fish from all the ports of the land, indeed from all over the world, and but not consolidate our buying power. “You are mad”, the Martian would say, “you are running an inefficient business”. To this I’d respond that the proof is in the bottom line of the P&L. We made more money than any of our competitors, by far. So do not worry, I told my people, with reason and conviction I knew our approach was right. The Keynesian approach would be the opposite of the Hayekian, and would be just what my hypothetical man from Mars would advocate. The aggregation for efficiencies by central agents would have destroyed my business, as I saw happen with my major competitors once the spreadsheet whallas got involved. Dispersed knowledge, collected locally and applied intelligently, told us that our customers were prepared to pay more for very convenient just-in-time deliveries. Some of our customers opened up their business for a lunch service that required delivery early in the morning; others were evening service only. Some were open 24 hours; others were night only. So we catered to all, as opposed to saying “we are only in this area from time X to time Y, on such and such a day”. This meant vans going out 1/4 full and “inefficient”, but up to three times a day with a higher margin payload delivering up more profit. Dispersed knowledge, collected locally and dealt with intelligently, told us that buying wild-hunted local fish from various ports and harbours, and selling it locally having bought at different cost prices (rather than using our buying power to leverage the best deal with the cheapest central seller) actually meant we could sell fish to the local restaurant and hotel marketplace for more margin and hence more profit was delivered to the P&L. The aggregating and centralising “Keynesian” approach would have been the end for us. One influence that I must also add to this little reflective piece is Michael Oakeshott. His On Human Conduct has probably had more influence on me than Human Action by Mises. This being an economics-orientated web site, I think this is the first time I’ve mentioned the great political philosopher. Tradition, intimation, and latent knowledge and talent are often hard to observe. Cooking a recipe is following a simple set of instructions, just like cutting fish. Some of us can perform only moderately well (even with lots of training), and others, like Gordon Ramsey, outstandingly. This talent is latent and cannot be written down and copied. It can’t be rationalised. It is the aim of most of the world’s all-encompassing philosophies to be rationalistic in outlook. Applied to business, there were many skills I could not objectify that key members of my staff displayed. If they produced a profit, I left alone. This is not to say you should not always attempt to fully understand what is going on, and why people do things in certain ways; you always should. My Oakeshottian contribution was to exhaust this process of understanding, only gently change if it was deemed wrong by me, and love and cherish it if it was a little bit off piste and entrepreneurial. This is why my bottom line was always bigger than my competitors. Oakeshott famously criticised his LSE contemporary Hayek by saying that his political philosophy, as expounded in The Road to Serfdom, of less planning was just as much a rationalist ideology as the central planners he cautioned against, even if it may be a better approach. Irrationality, “quirkiness”, hidden skill, and entrepreneurial talent are all things that do not fit in the box. These I always sought to preserve and encourage in the business. So my rational leadership and vision was always tempered by respect for this insight of Oakeshott. This is also why I am a liberal philosophically, tempered with good doses of conservative wisdom and leanings.

Those Dishonest Goldsmiths

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My second beach reading has been the above named article. Like the last one I reviewed, this is written by one of the giants of the Austrian School, Prof George Selgin. You can download this paper in draft here. For anyone interested in the origins of modern banking, this paper should definitely be consulted. Prof Selgin challenges the conventional wisdom that the acts of some goldsmiths as they took in gold for safe keeping and issued out more claims, or promises, to redeem gold than there was gold in their vaults, was fraudulent. In a good bit of historical detective work, the Professor has dug up new references that would seem to show some of the following points, which may surprise some readers:

  1. Goldsmiths paid interest, so this implied that people knew that they were not engaging in an act of safekeeping, but were indeed entering into lending (client / depositor) and borrowing (the goldsmith / banker).
  2. The use of the word deposit was used to describe a deposit for safekeeping and a deposit for lending.
  3. There was case law well before Carr v Carr in 1811 that clearly established that if you deposited in a sealed bag, your money would be yours and stored for safekeeping only. If it was deposited loose, it would indeed be a act of lending, by the depositor, to the goldsmith.
  4. When I last read the case notes of Carr v Carr I do seem to remember that the bag was indeed sealed and earmarked, but the judge found that it was still a bank debt obligation as opposed to a safekeeping arrangement. Not being able to check sources from the beach, I would not say for certain that his was the case, however, I believe it was contra Selgin.
  5. The goldsmiths rejected the establishment of a state sponsored Bank of England. There was a smear campaign against goldsmiths to discredit them.
  6. The real angst against the Goldsmiths was that (i) they exported heavier and finer coin for export where it would fetch a better price and leaving the less valuable coin for the local population and (ii) they were usurious in the way they charged interest.
  7. After King Charles I’s theft of money deposited form safe keeping in the Mint, merchants placed money in the hands of corrupt servants who them embezzled funds with the knowing and or unknowing collaboration of some goldsmiths.

Other economists such as Jesus Heurta De Soto in his book, Money, Bank Credit and Economic Cycles, may well dispute this history as he has documented many counterexamples to support the usual notion that goldsmiths over-issued promissory notes to specie deposited. Anyway, does it matter to us today what happened in our history concerning this disputed issue? I say yes it does. Selgin’s work clearly shows us that there was confusion between the use of the term deposit. Some used it clearly to mean safekeeping and some lending. To me this begs the question, should banking be about a fiduciary arrangement of trust between parties, an enduring obligation of safekeeping and careful investment, or should it be about a straight forward commercial investment with risk to get reward? This today is still not clear for most depositors. Take the example of the Cobden Centre’s commission of a survey of 2,000 people. Here the majority think they own the money deposited and want to have safe and easy access. Most are confused that to have interest this means they have to lend it to bankers to invest, implying risk and reward. Confusion still reigns supreme in matters of banking. For my part, as Carswell and Baker have said in Parliament, we can help clear up this multi century confusion by defining a deposit for custody and deposit for lending. One is a enduring relationship of trust, the other a commercial relationship of profit and loss. I hold also, that with regards to bankers offering fractional reserve accounts, this is possible if the following is adhered to:

  1. Both parties know this is happening (i.e. the contract explicitly explains this),
  2. The bank receives the deposited money and makes you a timed depositor from an accounting perspective, for an agreed time period, thus making sure there is no maturity mismatch and no grant of legal privilege required to keep the bank solvent (i.e. it is forced to account like any other commercial entity).
  3. The depositor is offered “instant access” by exception only via the bank making available for redemption only the cash it has on hand and in its own equity funds. If a panic / run occurs, it can enforce a no redemption policy until the time deposit expires.

This way, you can begin to see a way of squaring the circle: having banks with full reserves, that a run could not be made against, that could not over issue bank credit, but only lend real timed savings, but would also allow a solvent “fractional reserve” type of account. Fiduciary and trust would be the bywords for the safekeeping and investment for the lending and paying of interest. Selgin’s work is a very interesting revisionist historical account of the foundation of modern banking and should be read by all interested in the subject area. The questions that arise from it are touched upon here by me. I urge you all to read if you have time as it may stimulate more and other thought processes.

Did Hayek and Robbins Deepen the Great Depression?

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I always love sitting on the beach in the Caribbean post Christmas, catching up with my neglected reading and getting lots of strange stares from fellow holiday makers looking at my book titles. “Oh, how interesting”, they politely comment, when what I know they want to say is “you weirdo!” Anyway, some of you readers may well appreciate … Caribbean Reading 1: Did Hayek and Robbins Deepen the Great Depression? This is written by Professor Lawrence (Larry) White, one of the leading Austrian School economists of his generation. His speciality is monetary theory and economic history. Little has been said of White on this site as I and a number of my fellow writers have many problems with his views on free banking, but as we have no corporate line at the Cobden Centre, we do have writers who have great sympathy with his views who are free to “big him up,” not to mention enthusiastic commentators who blog on our site with vigour! The article does what it says on the tin. It shows that Hayek and Robbins at the LSE in the 30′s did not have any policy application to the workings of the liquidationists in the Hoover administration. Indeed it becomes clear that the American administrations of the 30′s came under the direct influence of the Real Bills Doctrine before the Keynesian tidal wave swept all other forms of economics to the backwaters of remote and inhospitable places. The article is a great service to economic history. It the allows us to ask the question of ourselves as Austrian School sympathisers: in this Great Depression 2, what should we be advocating? White shows us that Hayek and Robbins in the 20′s would have supported a real deflation due to the great productivity increases in the key world economies at the time. Instead, more fiduciary media was created that caused the roaring 20′s boom that led to the bust of the late 20′s and 30′s. He goes on to show how Hayek, faced with the significant money deflation, advocated in his writings a policy of holding the money supply at it’s old level: the pre-bust level . The inflating of prices caused malinvestments and the deflating of it would cause unnecessary bankruptcies. In and ideal world, if wages and other key factors of production were flexible, a mild deflation would take place, prices would readjust, and we would soon get back to a productive economy. If they were not, we would spiral into a “secondary deflation.” This was akin to mass money hoarding and a Central bank could step in and provide cash for investment projects so that large parts of the productive structure would not be blown away. This would offset the irrational panic. Both Robbins and Hayek thought a mild deflation with a fully functioning free market would clear out the past excesses in a targeted way. They both thought that post Depression 1, the deflation was too severe and advocated a money creating process by the Central Bank to prop up industry. This has given a branch of modern day Austrian School, the Monetary Equilibrium School led by Selgin and White himself, the intellectual antecedents to develop out this theory further . Are we at the stage today when we need a Central Bank accommodative policy to avoid a secondary deflation ? As we have had real money supply contraction (when you look at cash notes, coins, and demand deposits and not timed deposits see Baxendale and Evans on money supply definitions here) would it be time to do this now? With what great wisdom does the Monetary Equilibrium School / Demand School come to be able to gauge when a good deflation turns into a bad ? Are we in a bad deflation yet? I can’t personally see how creating more money units to offset a demand to hold cash will achieve anything other than sowing of the seeds for the next credit induced boom. However, lets give money creation in these circumstances the benefit of the doubt and say “yes, it will make people feel more comfortable to know their bank will be more accommodating to their needs in personal and business life.” They then start to respond again and the old patterns of spending reboot themselves and the new additional money stays in circulation and bingo, we have a mini credit boom on our hands again with the massive distortion of the structure of production this implies. I would counsel anyone interested in this interpretation of Hayek’s work to look more closely at this line of thinking, as it is not far from being as dangerous as Bernanke’s own thoughts. I would encourage people to think about what gets in the way of prices resetting themselves, allowing employers to set flexible wage and working time policies in these circumstances, for example, may well be a far better policy for Austrians to pursue. Labour is invariably the most expensive part of the cost base of most firms and this does seem to sure-fire way of avoiding a secondary wipe out deflation. I would also look at advocating a money base fix so there could never be a deflation. Huerta De Soto advocates this in Chapter 9 of Money, Bank Credit and Economic Cycles, which you can download here. I have also advocated a similar approach, in layman’s terms, here. We can never know what Hayek and Robbins would be advocating today. Thanks to White’s essay, we do know what they did and did not advocate, and who was and was not listening to them in the first Great Depression. We do also know there are wide views across the modern Austrian School . I favour a “play it safe” approach, and do not think you can predict what the right or wrong level of demand for money is to offset with newly minted “counterfeit” money. There are ways to avoid deflation; a money base fix is described above . A freer market would of course prevent much of this happening anyway!