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[log in to unmask] (JAMES C. W. AHIAKPOR)
Date:
Fri Mar 31 17:18:25 2006
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Alas, Mary has managed to open the the flood-gate to this discussion  
by dismissing the relevance of defining money.  And so Steven Horwitz  
writes, quoting: 
 
> Mary Schweitzer: 
>  
> >You need to add two elements to the story to be able to explain 
> >the role of the Fed in contributing to the length and duration 
> >of the fall of the economy from 1929-1933. 
> >     First, focusing on the money stock (however defined) is not 
> >as useful as focusing on the fall in prices.  Prices fell by 
> >one-third in four years.  THAT'S A LOT. 
>  
> But isn't the whole point that the fall in prices was caused (at least 
> to a large extent) by the fall in the money stock, precisely what the 
> Fed was intended to prevent? 
>  
 
Now, if one appreciates first that the price level is determined by  
the supply and demand for money (currency) and that the Fed did  
expand currency by 25% between 1930 and 1933, then it is easy to  
argue that the significant fall in prices during the Great Depression  
should be explained by a much greater demand for money (cash) than  
the increase could accommodate.   
 
Furthermore, it is also easy to interpret the run on banks (increase  
in currency/deposit ratios) as reflecting the significant increase in  
the demand for money (cash) at the time.  This is why it is not so  
trivial to focus on the definition money in order properly to assign  
blame or responsibility for what happened.  
 
Were the unit-branch laws detrimental to the ability of the U.S.  
economy to deal with the monetary chaos.  Absolutely.  But it helps  
clarity of argument to define money for which the Fed is primarily  
responsible very clearly.  And that is cash. 
 
The supply and demand for credit determine the rate of interest.   
Mixing up credit with cash in the modern definition of "money" has  
promoted more confusion than clarity of argument. 
 
James Ahiakpor 
CSU, Hayward 
 
 
 
 
 
 
 
 

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