The usually sensible Larry White recently blogged a silly and petty comment on Hans Hoppe's Mises Daily Article "The Yield from Money Held' Reconsidered."
White quoted the following two (consecutive) paragraphs from Hoppe's article:
The second example [of supposed anti-Hutt thinking] is from closer at home, i.e., from the proponents of "free banking" such as Lawrence White, George Selgin, and Roger Garrison. According to them, an (unanticipated) increase in the demand for money "pushes the economy below its potential," (Garrison) and requires a compensating money-spending injection from the banking system.
Here it is again: an "excess demand for money" (Selgin & White) has no positive yield or is even detrimental; hence, help is needed. For the free bankers help is not supposed to come from the government and its central bank, but from a system of freely competing fractional-reserve banks. However, the idea involved is the same: the holding of (some, "excess") money is unproductive and requires a remedy.
White then comments:
The second sentence of Hoppe's first paragraph quoted above is correct. The second paragraph contradicts the first, and makes no sense.
He then pedantically instructs Hoppe as he would an undergraduate who hasn't gotten the lesson:
Let's be clear about terms. An "excess demand" generally means an excess of quantity demanded over quantity supplied, i.e. a shortage at the current price. An "excess demand for money" -- certainly not a phrase original with Selgin and me -- accordingly means a deficiency of money held. It exists when the current quantity of money units falls short of the quantity demanded at the current purchasing power per unit. It can indeed be alleviated by an injection of additional units (or, alternatively, by an increase in the purchasing power per unit of money).
What provoked this ponderous lecture? According to White:
In the second paragraph Hoppe takes "excess demand for money" to mean "the holding of (some, 'excess') money", or in other words a surplus of money units held. This is the reverse of its meaning.
Now, this interpretation of Hoppe's two paragraphs is slipshod, if not downright disingenuous. In the first paragraph Hoppe is clearly referring to an excess demand for money in the conventional sense, in which "an increase in the demand for money" (Hoppe's words) at the prevailing price level constricts the flow of spending. White does not dispute this. The first sentence of the second paragraph follows logically from the first paragraph, as Hoppe argues that the resulting condition of an actual "excess demand for money" is considered detrimental by the free bankers and requires alleviating by a monetary injection from competing fractional reserve banks (in Hoppe's words, "help is needed . . . from a system of freely competing fractional-reserve banks).
There is no reference, explicit or implied, to the holding of excess money balances up to this point. So it appears it is the meaning of the last quoted sentence of Hoppe's passage that White takes issue with: "However, the idea involved is the same: the holding of (some, 'excess') money is unproductive and requires a remedy." While this sentence may be a bit obscure taken out of context, its meaning is pellucidly clear in light of the entire passage quoted by White himself. Hoppe uses the term "excess" in scare quotes to refer to the actual condition of excess demand that ensues upon the increased demand for money and which entails a Misesian process of a step-by-step reduction in prices and the (ex post and trivial) money spending stream. It is this Misesian monetary adjustment process, which necessarily unfolds over time, that, according to Hoppe, the free bankers consider "unproductive" and "requir[ing] a remedy." Where is the contradiction White claims to see?
Keynes referred to an interest rate that was in "excess" with respect to the interest rate that would ensure a potential or "full employment" level of output (with a given marginal efficiency of capital (MEC) schedule and marginal propensity to consume). Keynes's full employment level of output can only be maintained by a central banking policy that pegs the interest rate at a level that induces a full employment level of investment (although he had doubts about whether this interest rate would always be positive given the volatility of the MEC schedule).
Similarly the free bankers, Hoppe argues, consider the holding of cash balances by some of the public to be in "excess,"--at least during the time-consuming monetary adjustment process--of the level of money holdings necessary to ensure what we might call the "free banking" level of output. (Indeed if no one actually increased his cash balances by reducing his demands for various products, the condition of excess demand that the free bankers fear so much would never actually be set in train). The free banking level of output, White et al. allege, can only be continuously maintained by the automatic and instantaneous equilibration of the supply of and the (unpredictable) demand for money by a system of competing fractional reserve banks. Hoppe correctly presents this argument, draws the parallel with Keynes's argument and critically comments on it. It is not my intention here to argue the merits of the free banking position or of Hoppe's critique of it.
If White's comment is uncharacteristically unperceptive and uncharitable, Steve Horwitz's blog on The Austrian Economists on Hoppe's article is risible and positively venomous. One cannot suppress an audible groan, as Horwitz, after quoting at length from White's comment, wags his finger at Hoppe as a school boy would in malicious mimicry of a teacher who has just chastised one of his classmates. Horwitz sputters,
I will only add to Larry's point that it is really interesting to see that Hoppe does not understand a concept that is central to monetary theory and even more central to the debate between free bankers and 100 percent gold advocates. The entire monetary equilibrium framework depends on the idea of an excess demand for money meaning that people's actual money balances are less than they desire, which is, of course, merely an extension of the more general concept of an excess demand for anything.
Horwitz closes with a typically vicious and gratuitous swipe at those who take Murray Rothbard's and Ludwig von Mises's work on monetary theory seriously:
My questions now are: do the other Rothbardian critics of free banking really understand the concept? And why should anyone now take seriously any criticisms Hoppe makes of free banking?
Steve, my answers are: 1.The Rothbardian critics you address went to real graduate schools like Columbia, Rutgers, VPI, Berkeley, etc, and do not need a Heyne-level lecture from you on the meaning of excess demand for money or for anything else. 2. Ludwig von Mises made an elementary error in arguing that a competitive price can be distinguished from a monopoly price on the free market, therefore we should not take seriously anything else Mises ever wrote about monopoly. Is this proposition true or false? (I will give you extra credit if you can identify the logical error entailed in the proposition.)
