Can We Control the Boom?

Richard Ebeling emails:

Dear Bob,

In 1937, Fritz Machlup participated in a conference at the University of Minnesota on the theme of "Can We Control the Boom?" (along with Bertil Ohlin and Arthur Marget.)

To my knowledge, Machlup's written talk has never been reprinted since the proceedings were published as a pamphlet in October 1937.

It is Machlup at both his free market and "Austrian" best.

I've scanned the title page and Machlup's remarks. As you know, Machlup was always clear and often witty. I thought you might find it interesting to read.

I'm sending it along with the email as an enclosure.

Best,
Richard 

Richard has made another grand discovery. This is indeed Machlup at "both his free market and 'Austrian' best."

In this speech, Machlup, who served as  President (1966) of the American Economic Association, and President of the International Economic Association (1971 74), discusses the economy while it is in the midst of the Great Depression. From beginning to end, it reads as though he is discussing today's headlines.

He is clearly in his "Austrian" mode, as Ebeling indicates, but unlike Hayek and most Austrians today, Machlup discusses the business cycle in terms of money flows, rather than from the viewpoint of interest rates as signals. Neither is incorrect. They are both looking at the same picture, just from a slightly different perspective. Personally, I prefer the money flows perspective and was pleased to see Machlup using it.

Machlup first discusses the fact that during the boom period leading up to the Great Depression, much like the period leading up to the current  financial crisis, it was mostly just the prices of real estate and the stock market that were soaring. However, he correctly states that this doesn't mean there weren't other maladjustments in the economy.

He then takes on the task of explaining why trying to support the economic structure from collapse is an error, even as far as unemployment is concerned.

He then explains why falling wages might even lead to increasing real wages and argues that the government attempts to support wages through an increase in money supply will ultimately lead to a greater crash.

Using the example of locomotives, he explains why even a slowdown in money printing will lead to an unwinding of the economy (This is important to understand in light of the money printing in China, which has slowed, but not stopped).

Machlup finishes by discussing the then problem of excess reserves in the system and the fact the Federal Reserve will have to stand ready to drain reserves should banks start to employ these excess reserves. He then explains the problem for the Federal Reserve is that instead of draining of reserves, the Federal Reserve is:

showing readiness to purchase government bonds in order to support the market for these bonds, the market for new bonds which the government issues in order to finance its budget deficit. As long as the government has a budget deficit and as long as the Federal Reserve banks have to support the price of bonds by purchases, no control can be effective. Thus, even if we know how we might do something toward controlling the boom, we are not able to apply our knowledge at the time being.

Sound familiar?

Machlup's speech is must reading for anyone who wants to understand many of the nuances of the business cycle that were part of the Great Depression and are part of the current crisis. I have placed Machlup's full speech in the EPJ Vault, here.