My quarrel with James was initially centred on whether the Fed failed in its duty to be lender of last resort in 1929-33, thereby bearing large responsibility for the Great Depression. (I'm pleased that Tom Humphrey also focuses on the relevance of wage-price flexibility in times of crisis, and Thornton's insights on this.)

James says the Fed substantially increased the money supply, so don’t blame the Fed. In this context, he is unimpressed by the fact that means of payment in the sense of currency plus the use of bank transfers fell by one third. He is entitled to his definitions but not to unchallenged conclusions from his premise that so long as the supply of currency is increasing the Fed can be absolved of blame.

He does not satisfactorily address my conclusion that insofar as the Fed did not expand MO sufficiently to prevent the total money supply from falling by a third, this alone proves that the Fed failed in its duty as a stabilizing LLR in the Great Depression.

Instead, he writes:
      > People had deposits in their bank accounts. They demanded redemption of some of these deposits into cash. But they didn't increase their demand for money (cash) to hold? And why would people suddenly find that paying with checks was so undesirable that they'd switch their preferred means of payment to cash?

But I never said they didn’t increase their demand for cash. On the contrary, I highlighted this fact, while coupling it with the obvious point that in the aggregate they correspondingly and consequentially suffered a calamitous decline in the total of their money holdings (defined to reflect reality). The Fed, in failing as LLR, allowed reserves to fall, incomes to fall and loss of bank depositors’ confidence.

James clings as fiercely to his admiration for Mill’s definitions as I do to Currie’s definitions, his critique of the ambiguities in some prominent economists’ definitions, hence confused policy guidance.

“Credit” can be interpreted to mean many things. It can, for example, mean the supply of loans, the supply of savings, the supply of some bank deposits, or the supply of all bank deposits, etc. These aggregates can move in opposite directions and give very different signals. Worst of all, for 1929-33 - as an indicator of the health of the economy and the correctness of Fed policy - is a narrow focus on the money base alone. [I acknowledge that elsewhere James does not ignore “velocity” - and nor did Currie.]

Finally, in answer to James’s picking me up on my statement that Currie was not a besotted Keynesian, I was simply alluding to Keynes’s greater admiration for the Keynes of the Tract (1924) than the GT (1936) about which he had various strong criticisms as well as praise.

In the Tract, Keynes wrote: “In truth, the [classical] gold standard is a barbarous relic”, and went on to make the case for enlightened discretion in the management of the nation’s money supply. (I'm not sure if James hankers for a return to the classical GS with gold - or 100% gold backing - as the currency.) In the special conditions of the Great Depression, this included the use of fiscal policy to break a "credit deadlock" (Hawtrey's term) to help restore the money supply and the circulation rather than the hoarding of currency and reserves.

Mine would be a plea for eclecticism in our evaluation of our HET heroes. In 1975, in a retrospective note, Currie wrote:
   “Personally, I would not call myself a monetarist nor a Keynesian, nor a believer in intervention nor the market, nor a structuralist nor a neo-classicist but a little of all of these, and am prepared to use policies involving elements of all these approaches when the attainment of certain goals  appears to make their use appropriate.”

Roger Sandilands [author of "The Life and Political Economy of Lauchlin Currie: New Dealer, Presidential Adviser, and Development Economist", Duke UP, 1990]

________________________________
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Sent: Tuesday, March 01, 2016 10:44 PM
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Subject: Re: [SHOE] Is there a history of cost-push or wage-price spiral analysis?

Roger Sandilands again has chosen to reiterate ("double down" on) his admiration for Lauchlin Currie's monetary views that I have criticized rather than addressing directly the points I made.  I see little reason in my responding to him in any detail.  Everyone is free to express admiration for whomever they like, I suppose.  I'll simply highlight some of the points at which Roger has chosen to talk past me.

He says:


the Fed did accommodate the demand for cash but only by placing the banks in debt to the Fed at a penalty rate that caused them to contract their earning assets (loans).


 I earlier explained that there is nothing strange or undesirable about commercial banks getting into debt.  They are intermediaries between savers (sources of funds) and borrowers (uses of their funds).  The Discount Rate is typically a penalty rate: higher than the rate at which banks borrow among themselves.  When the banks couldn't redeem their liabilities, they had to borrow from the Fed: at the discount rate.  What is this quibbling about banks finding their indebtedness to the Fed repugnant?

Roger goes on with:



By switching from bank deposits to cash as their preferred means of payment, the public did not increase their total demand for money to hold.

People had deposits in their bank accounts. They demanded redemption of some of these deposits into cash. But they didn't increase their demand for money (cash) to hold? And why would people suddenly find that paying with checks was so undesirable that they'd switch their preferred means of payment to cash? According to Roger, Currie found "credit" to have

so many contradictory meanings that he recommended it be dropped from the monetary vocabulary. And he was also well versed in Smith, Mill, Ricardo, Jevons, Marshall and Allyn Young.* He made wide reference to them in his 1931 PhD dissertation on bank assets as well as in his 1934 (1st ed.) book on the supply and control of money.

Now, anyone who understands credit in the context of monetary analysis should recognize it as a means of payment without the use of income. Currie's failure to appreciate that, which led to his recommending that the concept be dropped from the monetary vocabulary, does not suggest to me that he made much meaning of his citations from Smith, Ricardo, Mill, etc., on the subject. Note also Currie's failure to learn from the quote from Mill that Roger cites in the next paragraph: "‘credit… is purchasing power’ and ‘credit, in short, has exactly the same purchasing power with money’." Mill here distinguishes credit from money. But what does Currie do? Equate credit with money in his definition of M1! Credit should mean only demand deposits, Currie insists. Having decided to ignore my distinction between savings (acquired financial assets) from money (the unit of account issued by a central bank in modern times), Roger declares:

if checkable deposits are “savings”, so too is the holding of cash, for both are interchangeable as means of payment or purchasing power.

Cash holding is called "hoarding"; it detains income from being spent on goods and services. Savings transfer the incomes of savers to borrowers who spend them. The classics distinguished the means of payment from money, the unit of account. Money is both a unit of account and a means of payment. Other means of payment are not money -- in the classical sense. I earlier cited Irving Fisher 1912 distinction between money and means of payment, but which Roger has chosen to ignore. I can't help him any more than that. Roger also declares:

In the process [of their lending] banks usurp seigniorage from the government.

The interest banks earn from lending their depositors' savings is not the same thing as the seigniorage governments earn from printing money or converting metal into a currency unit. Banks are not creators of money, properly so called. Put differently, banks lend their customers' savings, not money. In his ultimate refusal to recognize the classical distinction between money and credit, Roger declares:

The fact is that the Fed did not expand MO sufficiently to prevent the total money supply from falling by a third.

The so-called "total money supply" includes the public's deposits with banks and other depository institutions.  The central bank controls the monetary base as well as the required reserve-deposit ratio.  But the banks control their own economic or excess reserve-deposit ratio, just as the public controls its currency-deposit ratio.  That is also why in a fractional-reserve banking system, a central bank never has enough currency to redeem the public's demand for cash in a panic.  I quoted extensively from David Ricardo's Principles regarding this issue.  I also cited Henry Thornton and Walter Bagehot on the point; Bagehot (1873) actually cites Ricardo's argument.  So what can I now tell Roger?

Finally, Roger quotes Allyn Young's refusal to learn in a letter to Edwin Cannan: "I would hold that banks _do_ create deposits!"  This after my reference to Adam Smith's chapter on money, explaining that banks lend their depositors' savings.  And I'm supposed to be impressed with Roger's admiration of Allyn Young's persistence in error?  I choose the classicals' explanation of the deposit expansion process over Young's error.

In footnote 2 of my HOPE 2010 critique of David Laidler and Roger Sandilands's portrayal of Currie as a brilliant monetary theorist, I quote Currie's own (AER 1972) claim that his theoretical approach "had been influenced by Keynes since [his] London School of Economics days in 1922-25, and at Harvard throughout the Depression [he] had bootlegged [Keynes's] heretical views on fiscal policy ... [and] considered [himself] a Keynesian from way back."   How is it that Roger still wants to distance Currie from Keynes's influence?

James Ahiakpor

On 3/1/2016 8:41 AM, Roger Sandilands wrote:

James writes, in response to Currie’s (and my) insistence that the Fed’s policy in 1929-32 was one of almost complete passivity and acquiescence: “Yeah, yeah, I heard this declaration several times before.  It misrepresents what happened."

He then goes on to say that “the price level fell because of the increased demand for money (cash) in excess of its supply.” James defines money narrowly as cash and on this basis suggests that Currie, besotted by Keynes [which is far from true], failed to understand the classical quantity theory whereby a rise in the demand for money in excess of supply causes deflation.

Actually what James won’t acknowledge is that the Fed did accommodate the demand for cash but only by placing the banks in debt to the Fed at a penalty rate that caused them to contract their earning assets (loans). The result was that the public’s total purchasing power (means of payment) contracted by a multiple of the banks’ loss of reserves. Instead of striving to get the banks out of debt, through OMO or by financing government deficits, thus restoring their willingness to lend, the Fed sat back while bank assets and the public’s spending power contracted drastically. By switching from bank deposits to cash as their preferred means of payment, the public did not increase their total demand for money to hold. Instead they suddenly found a quarter of them were out of work with no income and no money to spend, let alone money to hold. C/Y rose because Y fell, and with it the velocity of circulation of the depleted money supply.

The Fed felt constrained by the 40% gold reserve ratio, but that was a ratio the Fed could and should have lobbied the government to lift. The constraint on issuing base money in exchange for open market bond purchases was a legal one that Currie urged be lifted, because (contra James) he understood monetary theory very well indeed. (He was highly critical of the real-bills, or commercial loan theory of central banking that guided Fed policy: see his JPE April 1934 paper that Harry Johnson selected in 1962 as one of the 24 best JPE papers published in its first 75 years.)

Actually Currie was also very critical of Keynes for inadequate or confused attention to the definition of money and the highly ambiguous term "credit" - a word with so many contradictory meanings that he recommended it be dropped from the monetary vocabulary. And he was also well versed in Smith, Mill, Ricardo, Jevons, Marshall and Allyn Young.* He made wide reference to them in his 1931 PhD dissertation on bank assets as well as in his 1934 (1st ed.) book on the supply and control of money.

Inter alia, here is what he wrote in 1934 (p.46) about Mill, focusing especially on Mill’s concept of “credit” that had become “the standard doctrine”. Currie continued: “The general drift of his reasoning, and such statements (Mill, Bk 4, ch.XII, para 4) as ‘credit… is purchasing power’ and ‘credit, in short, has exactly the same purchasing power with money’ unquestionably tended to identify the term “credit” with the concept of means of payment, even though exception may be taken to some of the instruments which he regarded as purchasing power.’”

Here Currie referenced Jevons who wrote: “It is extraordinary that few writers on currency have remarked the deep difference between commercial documents [such as savings deposits] which bear interest and those [demand deposits] which do not. On this point turns the possibility of their forming representative money.”

James, however, equates demand deposits with “savings”. (In a previous post he wrote: “M1 and M2 include the public's ‘savings’, be they the regular savings deposits or checkable deposits.”)  But if checkable deposits are “savings”, so too is the holding of cash, for both are interchangeable as means of payment or purchasing power. So this is to miss Jevons’s important point. Currency and highly active demand deposits (DDs) almost never earn any real interest. Real interest is only paid on relatively inactive savings or time deposits (TDs). These latter are used to transfer purchasing power from lenders to borrowers through the intermediation of banks and NBFIs. When banks hold only fractional reserves against DDs, their lending operations create multiple new means of payment. Money (purchasing power) is then not transferred, it is created.

In the process banks usurp seigniorage from the government. This is one reason why Currie advocated 100% reserves against DDs (and none against TDs). But the more important reason was that by divorcing the creation of money from the lending of money, monetary control could be enhanced, not least because changes in the public’s preferred C/DD ratio would not affect the total.

I trust this also deals with James point that


What Currie (and Sandilands) fail to recognize is that bank deposits originate from the public's desire to place their non-consumed incomes with such institutions.  Thus, no central bank can control their volume.


This is an astonishing claim. Central banks do have the power, if they choose to use it, to engage in open-market operations and/or to control the required reserves of banks. I agree they do not really have the power to refuse to accommodate an increase in the public’s C/D ratio. But nor should they, unless they are willing to countenance a catastrophic run on the banks – as tragically happened in 1929-32 when the Fed had the power but failed to use it. By ensuring that the circular flow of national  income is maintained at as near as possible to non-inflationary full employment, control over the controllable part of the nations’ money supply – the DD portion – can also ensure, indirectly, that the currency portion is also under control at its desired C/Y ratio at full employment.

The fact is that the Fed did not expand MO sufficiently to prevent the total money supply from falling by a third. This alone is proof positive, contrary to James's contention, that the Fed failed in its duty as a stabilizing LLR in the Great Depression.

- Roger Sandilands
     * PS: I may also note that Currie was a student both of Edwin Cannan (at the LSE, 1922-25) - who espoused the very  narrow definition of money that James prefers - and of Allyn Young (at Harvard, 1925-27).  Currie evidently preferred Young. This is what Young wrote to Cannan, June 22, 1926, while the LSE was trying to attract him to the Chair of Political Economy on Cannan’s retirement:
      “… I can quite understand that you would have liked to have been followed by one of your own pupils, if that had been possible. Yet, although not a pupil of yours, I can at least put forth a claim of some measure of discipleship. Except for a few points in monetary theory (for example, I would hold that banks _do_ create deposits!) I think there would be very little difference between us.”




--
James C.W. Ahiakpor, Ph.D.
Professor
California State University, East Bay
Hayward, CA 94542

(510) 885-3137
(510) 885-7175 (Fax: Not Private)