Re: Money Bawl, by Ramesh Ponnuru
Kevin D. Williamson needs to hold a few more classes in Austrian School Economics at National Review. For example, Ramesh Ponnuru gives a fine synopsis of the essentials of Austrian business cycle theory as caused by bank credit expansion, yet he still has confidence that some bank credit expansion is warranted under certain circumstances. He makes the same great mistake as that of Irving Fisher, noted early 20th century American economist, who advocated price level stability rather than money supply stability. Fisher considered the 1920s credit induced expansion as benign, since productivity increases offset money supply expansion (due primarily to bank fractional reserve lending), creating a fairly stable price level. The crash of 1929 came as such a surprise that he lost his considerable personal fortune in the mistaken belief that more money pumping by the Fed would cure all ills. Mr. Ponnuru also considers an increase in the demand for money to be a threat to recovery and prosperity. It is no such thing. An increase in the demand for holding money merely reduces the price level, which cures the very demand for which people hold money; i.e., an expectation of lower prices and a greater money-holding to price-level ratio which occurs in times of uncertainty. Why attempt to thwart the people's desire to become more liquid? Holding more money does not reduce investment, as long as people's time preference remains unchanged. What does reduce investment is consumer spending, for that which is spent cannot be saved and invested. Thusly, the government's stimulus programs spur the very thing that prevents capital accumulation--savings.