From Keynes’ “Open Letter to President Roosevelt,” published December 16, 1933:

“Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.”

This near the very bottom of the Great Depression. Perhaps Keynes was wrong then. But is there not a strong case to be made, nevertheless, that the recent rounds of QE were, what with all that heaping-up of excess reserves, just so much unhelpful belt-loosening?

What say ye, my Market Monetarist friends?

I was recently asked to submit a “solution proposal” concerning a panel, on “The New Global Financial Architecture,” in which I’m to take part at this September’s Global Economic Symposium in Kuala Lumpur. The proposal is supposed to summarize my own scheme for reforming the global financial system, showing, in 700‑1000 words, that my plan is “feasible,” “innovative,” and (naturally) of “positive social impact.”

A you might well expect, the request posed something of a challenge to this unreconstructed Hayekian. Here, for whatever it may be worth, is what he came up with.

Truth be told, I’m not quite sure that my proposal is consistent with the organizers’ assumption, as given in their “challenge” to the panel, that “Different regulators — including the monetary authorities — must cooperate in order to achieve better but not necessarily more regulation.” I hope, in any event, that it will help fuel a spirited discussion.

Well, that’s that. I’ve made up my mind to leave Athens. It wasn’t that hard, actually: thanks to John Allison and a number of generous contributors, Cato is establishing a new center for monetary studies (the formal name has yet to be determined), and I’m going to direct it. The idea is one that John and I have been talking about since before he came to Cato, so it amounts to having had the opportunity to write my own job description. You can’t ask better than that! I’ll also be affiliated with GMU and Mercatus, so as to be able to occasionally teach and otherwise get involved with graduate students working on monetary topics, which is something I haven’t been able to do at all lately here at UGA. Larry White, on the other hand, has more students up there than he can shake a stick at, and so could use some help!

Yet the occasion isn’t without a fair measure of melancholia. Twenty-five years is a long time to get settled into a place–longer by far than I’ve ever spent elsewhere. When I contemplate the tangle of roots I’ve put down during that time, it brings to mind the long battle I waged with the paper mulberries in my back yard at 460 Meigs, whose roots (OK, rhizomes) seemed as sturdy, and also as long, as power lines.

I eventually won that battle, more-or-less, and fought and won countless others besides, making my old house and garden conform to my personal (OK, eccentric) idea of what a home should be. Now there’s scarcely an inch of the place that I haven’t altered according to my whims. And, my friends here will assure you, that’s not hyperbole.

Of course those friends also make departing bittersweet, as does the fact that my brother, Peter, now lives less than two hours from Athens, in Milledgeville. (The back route there is, incidentally, just the thing for a 450cc motorcycle, adding to the regret.)* Luckily for me its easy to travel between DC and Atlanta (itself not all that far from Athens), and DC has plenty of attractions, so I can plan on returning often, and also on having my former companions remain just as close, if not quite so constant. It also helps to have many friends, and a half-sister, awaiting me in DC. That gives me plenty to look forward to, even if it can’t quite make up for the sadness of having to say adieu to my buddies here.

And I’ll miss my UGA colleagues, starting with our little group that’s been meeting for lunch every Monday for some years now. Not the same group, mind you: others have left before me, and new ones have taken their place. But it seems there’s always been enough to take up a table for four, if not five or six, at the good old Globe–one of several pubs here where the staff and I have long been on a first name basis. I will miss them, too.

One thing I’ve known all along is that, when you move from one town to another very different one, you mustn’t try to recreate the sort of life you’ve been experiencing–or rather, your favorite bits. The challenge is to figure out the best brand new life to make out of the new materials. Its like a sculptor working first with one, and then with another very different hunk of marble. If of the first he makes a fine bust of Voltaire, it doesn’t follow that the second isn’t better suited for Pericles. Being happy in Athens has meant taking long bike rides (and, lately, longer motorcycle rides) on quiet back roads, playing interior-decorator with a Victorian house, and taking Penelope for long walks at Lake Herrick. In DC, I’m thinking, it might mean joining the Alliance Française, or visiting museums, or attending some black-tie event. (Perhaps I had better buy a little cocktail dress for Penelope!)

All of this, by the way, may help explain why I’ve done relatively little blogging here lately. It’s not just that I’ve been busy first negotiating the new job, and then actually preparing to move–though both things are true. There’s something else that’s kept me from blogging, or for that matter from doing much ordinary work of any sort. It is that I’ve been “busy” living my usual life–hanging out with friends; spending time at home with Penelope; riding my bike; riding and toying with my Honda; hanging around my favorite bars. Although I’ve tried, I just can’t seem to concentrate on business of any kind. Now and then I feel a twinge of guilt about it. But then, in the back of my mind, I have this voice telling me I’ll end up feeling even guiltier if I quit goofing off. Yeah, I know: its dangerous to heed voices in one’s head. But I’m doing it anyway. Call me crazy. Call me sentimental, even. I’ll get over it.

__________________________

*What one does with a 450cc motorcycle in the heart of DC is a good question–one of many on my long and ever-lengthening list of “things I’ll have to figure out all over again.”

A couple weeks ago I experienced an embarrassing bout of “premature e‑publication,” having unknowingly made public a mere fragment of a post-in-progress, consisting of a quotation that I thought I had merely saved for future editing. That involuntary emission elicited some puzzled inquiries and speculation concerning just who the quote was from, and what its point was, for which, my humble apologies.

Here is the passage again:

Unlike the income tax, prominent lawmakers from both parties recognized the need to overhaul the laissez-faire, crazy-quilt way that money was created and interest rates determined. Private “national” banks were still in charge of issuing currency and loaning it out, in blithe disregard of the panics that resulted every few years–the latest in 1907–from such unpredictability. Everyone familiar with the problem favored some kind of regulated coordination among banks.

The words are, in fact, not Paul Krugman’s (as one reader speculated). Nor are they from any economist. They are from Michael Kazin’s book, A Godly Hero: The Life of William Jennings Bryan, which I’d decided to read in order to gain a better understanding of the man who played an important (if overlooked) part in shaping the modern U.S. currency system.

To be honest, even a few initial dips into Kazin’s book where enough to persuade me that his was not a work that I was likely to gallop my way through with bells on. For one thing, in discussing the Scopes trial Kazin dismisses Mencken as an anti-semite, which is, to employ a Menckenesque term (and no matter what Charles Fecher says), a calumny, and a threadbare one at that. For another, he considers the fact that Bryan anticipated much of FDR’s New Deal a reason for us to revise our opinion of the man upward.

So Kazin is no economist–or at least isn’t enough of one to seriously reckon with the predictable consequences, for an economy faced with mass unemployment, of policies aimed at boosting prices by curtailing output. But he is a professional historian, with a teaching post a Georgetown U., who as such might be expected to do a little homework before committing to print a statement as misleading as the one I’ve quoted above–not to mention one brandishing such a doozy of a misplaced modifier.

Kazin, it seems, believes that panics were somehow caused by private bankers issuing currency, as if the problem had been a surfeit of that nasty private paper. In contrast every economist or economic historian worth his weight in leftover Chautauqua tickets, whether he be current or of the late 19th century, knows or knew that the problem back then was one of currency shortages, where the shortages, far from having been the bankers’ fault, were a result of government regulations dating from the Civil War. Those regulations tied the stock of national bank notes to that of outstanding U.S. government bonds, the supply of which steadily declined as the century wore on, while making it it unprofitable for state banks to issue any notes at all. In Canada currency also consisted of the notes of private banks. But because the Canadian government imposed no comparable limits on its banks’ ability to issue notes, Canada was spared both currency shortages and associated panics.

U.S. reformers naturally tried at first to get rid of the regulations that were the true cause (or at least one of them) of U.S. financial crises. So it’s something of a kicker to realize that no man did more to oppose such reforms, “in blithe disregard of the panics that resulted every few years,” than Mr. Kazin’s godly hero.

If William Jennings Bryan is remembered at all these days, other than as the real-life model for “Matthew Harrison Brady”–the buffoonish Bible-quoting opponent of Darwinism portrayed by Fredric March in the movie version of “Inherit the Wind”– it is as the three-time populist presidential candidate whose campaign for a revival of bimetallism, at the long-defunct ratio of 16:1, split the Democratic party in two, and whose “Cross of Gold” speech at the 1896 Democratic Convention gave goose-bumps both to his audience and to Wall Street’s plutocrats, albeit for very different reasons.

Bryan’s plea for renewed coining of silver ultimately served only to assure William McKinley’s victory, and to thereby pave the way for silver’s official demonetization with the passage, in 1900, of the Gold Standard Act. But though the fact is often overlooked, Bryan’s influence upon the development of the United State’s currency system went far beyond his failed effort to revive bimetallism. For Bryan also played a crucial part in the paper currency reform movement that was to lead, thanks in no small way to his influence, to the passage of the Federal Reserve Act.

To appreciate Bryan’s role, one must recall the circumstances that lead, during the last decades of the 19th century, to widespread pleas for the reform of the existing U.S. currency arrangement. During the Civil War the Union, seeking to replenish its depleted coffers, passed the National Banking Acts. Those acts provided for the establishment of federally (as opposed to state) chartered banks, subject to the requirement that any notes issued by the new banks be fully, or (at $110 nominal backing for every $100 of notes outstanding) more than fully, secured by U.S. government bonds. 

When the number of applications for national bank charters (and associated bond sales) proved disappointing, chiefly because state banks were not tempted to convert to them, the authorities responded by subjecting outstanding state bank notes to a 10% tax. The prohibitive tax forced most state banks to either secure federal charters or go out of business altogether, with only a relatively small number managing to survive despite no longer being able to issue their own currency. Thus by the war’s end, or not long thereafter (for the implementation of the 10% tax was eventually delayed until August 1866), national banks had become the country’s only suppliers of banknotes, which, together with U.S. Treasury notes (“greenbacks”) also authorized during the war, made up the total stock of United States paper currency.

Because the stock of greenbacks was itself legislatively fixed, with the intention of eventually withdrawing them altogether, national banknotes were the only component of the paper currency stock that might conceivably expand, once a ceiling on their quantity was lifted in 1875, to accommodate either temporary or permanent growth in the demand for currency. However, that capacity was undermined by the bond-security provision, which linked the total potential stock of national banknotes to the extent of the federal governments’ indebtedness, and, particularly, to the outstanding quantity of those particular government bonds that had been deemed eligible for securing such notes. Because the Treasury enjoyed surpluses for most of the years between 1879 (when gold payments were resumed) and 1893, and took advantage of them to reduce the federal debt, national banks, rather than finding it profitable to supply more currency as the nation grew, supplied less. Total national banknote circulation, which stood at over $300 million around 1880, had fallen to less than half that amount a decade later. 

What’s more, because acquiring and holding the necessary securities, with their increasingly high market prices and correspondingly low yields, was so costly, national banks were not at all inclined to acquire them just for the sake of providing for temporary spikes in the demand for currency, such as occurred every “crop moving” season. Consequently every autumn witnessed some tightening in the money market, as farmers came to withdraw currency from rural banks, and those banks were compelled, by the high cost of bond collateral, to draw instead on their cash reserves. Because national banking laws allowed country banks to reckon as part of their legal reserves deposits lodged with “reserve city” correspondents, while those bankers were in turn allowed to treat their own correspondent balances in New York (the “central reserve city”) as cash, Wall Street tended to bear the brunt of this tightening, which on several occasions, and most notoriously in 1893 and 1907, manifested itself in full-fledged financial panics.

The troubles stemming from our “inelastic” currency arrangements had a straightforward solution. That solution was not, as so many monetary economists today assume (knowing as they do the solution that was actually settled upon, but lacking understanding of the roots of the problem), a central bank. It was simply to free national banks, and perhaps state banks as well, from the Civil-War era shackles that, owing to long-obsolete fiscal considerations, were preventing them from supplying notes on the same terms as those governing their ability to create demand deposits. Once allowed to back their notes with their general assets, national banks could swap notes for deposits, either permanently or temporarily, without limit, thereby conserving both their own cash reserves and those of their city correspondents. State banks, once freed from the obnoxious 10% tax, might do likewise. Reform, in other words, was a simple matter of leaving bankers equally free to supply customers with either paper or ledger-entry promises, according to the customers’ needs.

That that is precisely what the banks would have done, had they been permitted, and that it could have worked, were far from being untested conjectures. For proof one had only to look north. For Canada’s currency exhibited precisely the sort of elasticity that it’s U.S. counterpart lacked, growing steadily while the stock of national bank notes shrank, and rising and falling with the coming and going of the harvest season. How come? Central banking had nothing to do with it. Instead, Canada’s paper currency stock, like the U.S. stock, consisted mainly of commercial banknotes. The key difference was that Canadian banks, unlike the national banks, could issue notes based on assets of their own choosing.

Canada’s system differed as well in other crucial respects, though ones that did not bear so directly upon it’s currency’s elasticity. Chief among these was the fact that Canadian banks were able to establish nationwide branch networks, and the fact that entry into the industry was very strictly limited. Canadian banks therefore tended to be much larger, much more diversified, and much less prone to fail than their U.S. counterparts. An important, though often overlooked, connection exists between banks’ freedom to issue notes and their ability to establish branch networks, in that the cost of keeping additional cash reserves is among the more important costs connected to the establishment of branches. To the extent that banks are free to issue their own notes, the need for cash reserves, whether at branches or at the home office, is greatly reduced. Consequently, the fact that Canada’s banks enjoyed a relatively high degree of freedom of note issue meant that they were also better able to exploit gains from branching. Well developed branch networks, in turn, indirectly contributed to the elasticity of Canada’s currency stock, by allowing for local clearings that substantially reduced the cost of mopping-up surplus notes.

That numerous attempts should have been made to reshape the U.S. system along Canadian lines, especially by allowing national (and perhaps also state) banks to issue “asset currency,” but also by allowing for unlimited branching, shouldn’t be surprising. What is (or ought to be) surprising is the fact that none of these eminently sensible plans succeeded. Instead, every one–including the Baltimore, Indianapolis Monetary Commission, Gage, Carlisle, and Fowler plans–was either voted down by Congress, or scuttled in committee.

I had long supposed that opposition to unit banking, from “Main Street” unit banks naturally, but also from “Wall Street” banks that profited from the correspondent business that unit banking brought, was responsible for the failure of these attempts. But that explanation isn’t entirely satisfactory, because at least some asset currency plans didn’t call for branch banking. Something else was to blame for the utter failure of the asset currency movement. And that something else turns out to have been…William Jennings Bryan. For if Bryan was a tireless champion of silver, he was no less unremitting in his violent opposition to any sort of bank-issued currency, and to asset currency especially.

As a Democratic congressman (1891–95), Bryan fought not only against opposition measures calling either for asset currency or for a repeal of the 10% tax on state bank notes, but also against those sponsored by the Cleveland administration itself. So far as he was concerned, state banking was just another name for “wildcat” banking; and the Constitution’s clause declaring that “No state shall…emit bills of credit” meant that allowing banks of any sort to issue notes was tantamount to surrendering a sovereign power of Congress to private corporations.(1) When, in the wake of Panic of 1893, Cleveland again called for a repeal of 10% tax, Bryan

delivered an impassioned speech in which he blamed the “crime of demonetization” [of silver] for the deflation of agricultural prices following 1873 and asserted that the federal government alone should issue paper money. He would make all government money legal tender and prohibit, as the New Deal did, the writing of contracts calling for payment in any particular kind of money. Furthermore, he would retire national bank notes in favor of government money.(2)

Though beaten in the 1896 presidential election, and again in his 1900 bid, Bryan retained control of the progressive minority within the Democratic party, which he employed skillfully and effectively in “waging incessant war against asset currency”(3), especially by putting paid to attempts to include any sort of currency reform allowing for such currency in the Democratic platform. “If you said anything against Bryan,” a representative of long standing recalled many years later, “you got knocked over, that is all.”(3)

The Panic of 1907, far from causing Bryan to modify his blanket opposition to any relaxation of existing currency laws, only made his opposition to asset currency more resolute than ever, by convincing him that bankers would stoop to anything to retain control over the nation’s money. Replying, in the midst of the panic, to “editorials in the city dailies, demanding an asset currency,” Bryan claimed that “The big financiers have either brought on the present stringency to compel the government to authorize an asset currency or they have promptly taken advantage of the panic to urge the scheme which they have had in mind for years.”(4) Democrats, Bryan continued, “are duty bound to…oppose asset currency in whatever form it may appear” as “a part of the plutocracy’s plan to increase its hold upon the government”:

The democrats should be on their guard and resist this concerted demand for an asset currency. It would simply increase Wall Street’s control over the nation’s finances, and that control is tyrannical enough now. Such elasticity as is necessary should be controlled by the government and not by the banks.(5)

As if not content to assail a good idea using bad arguments, Bryan went on to endorse a genuinely rotten alternative: nationwide deposit insurance:

What we need just now is not an emergency currency but greater security for depositors. …All bank depositors should be made to feel secure, and they could be made to feel secure by a guarantee fund raised by a small tax on deposits. What depositors feel sure of their money they will not care to withdraw it.(6)

During the 1908 presidential campaign, his third and last bid for the presidency, Bryan, in deference to the party’s divided opinion on the subject, downplayed the currency question, but lost to Taft anyway. Four years later, however, he was instrumental in securing Wilson’s nomination, which he favored in part because Wilson seemed to echo his own beliefs in declaring, in a 1911 speech, that “The greatest monopoly is the money monopoly.” When further examined by Bryan, Wilson passed with flying colors by again stating that he would oppose any currency plan “which concentrates control in the hands of the banks”(7). Wilson was thus able to secure the democratic nomination, for which he thanked Bryan by making him his Secretary of State.

By the time of Wilson’s election, former advocates of asset currency had for some years given up any hope of achieving their preferred reforms, and had instead turned their attention to the alternative of establishing a “central reserve” bank, charged with supplying currency to supplement, and perhaps replace, the limited quantities forthcoming from the national banks. But here again they encountered opposition from progressives, including Bryan, who was no less opposed to reforms that smacked of European-style (or, for that matter, Bank of the United States-style) central banking than he had been to asset currency itself. The Aldrich plan, ostensibly the fruit of the National Monetary Commission’s extensive deliberations, but really a scheme secretly cobbled together by Aldrich and his banker friends at Jekyll Island, was (according to Paolo Coletta) “particularly anathema to Bryan…because it called for a single, privately controlled central bank located in New York.”(8) Bryan also believed–correctly–that “big financiers” were behind Aldrich’s “scheme.”(9)

Though he also wished to steer clear of a European-type central bank Wilson thought the Aldrich plan “about sixty or seventy per cent correct,” and so had Carter Glass come up with an alternative that differed chiefly in proposing numerous regional reserve banks governed by a Federal Reserve Board. But because the proposed Board was mainly to consist of bankers, and so left them in charge of the nation’s currency, Glass’s plan also dissatisfied Bryan, who “was exceedingly disturbed at those provisions of the [bill] contemplating currency in the form of bank notes rather than greenbacks” (10), and who, as the most prominent member of Wilson’s cabinet, was capable of killing Glass’s bill, just as he’d killed previous asset currency measures. When Robert Owen, an old associate who was now chairman of Senate Banking and Currency Committee, drafted an alternative calling instead for new Treasury issues to replace existing national banknotes, Bryan naturally preferred it, placing the Glass plan, which was already encountering stiff opposition from bankers, in still greater jeopardy.

Yet Wilson managed, by means of some very clever politicking, to rescue Glass’s Federal Reserve plan. To scare the bankers into supporting it he had William McAdoo, his Treasury Secretary, offer (to Glass’s considerable dismay) a “compromise” that would have replaced banknotes, not with redeemable Treasury notes (as contemplated by Owen’s plan), but with legal-tender notes resembling the Civil War-era greenbacks.(11) To win Bryan over, he had Glass revise his bill by making Federal Reserve Notes obligations “of the United States” as well as of the Federal Reserve banks themselves, and by excluding banker representation from the Federal Reserve Board.(12) When Glass’s bill, having made it through the House Banking Committee, was attacked by Bryanite Democrats at the party caucus, Glass stunned and silenced them by brandishing Bryan’s letter calling for his supporters “to stand by the president and assist him in securing the passage of this bill at the earliest possible moment” (13). Thanks to Bryan’s support, the Federal Reserve Act became law just two days shy of Christmas, 1913.

And so it happened that, through his unrelenting efforts over the course of more than two decades, William Jennings Bryan, the most stalwart enemy of both private currency and currency monopoly since Andrew Jackson, helped to create a currency monopoly far more powerful than any that Jackson could ever have envisaged, and far more capable of gratifying Wall Street, at the expense of the rest of the nation, than Wall Street alone, left perfectly free from government controls, could ever have devised.
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(1) Paolo E. Coletta, “William Jennings Bryan and Currency and Banking Reform,” Nebraska History 45 (1964), p. 33.

(2) Ibid., p. 35.

(3) Gerald D. Dunne, A Christmas Present for the President, Federal Reserve Bank of St. Louis, p. 9.

(4) William Jennings Bryan, “The Asset Currency Scheme,” The Commoner 7 (43) (November 8, 1907).

(5) Ibid.

(6) Ibid. Besides overlooking the moral hazard problem, Bryan’s argument neglects the fact, crucial to a proper appreciation of the advantage of asset currency, that bank customers often wish to convert deposits into currency for reasons, like paying itinerant workers, having nothing to do with doubts concerning the safety of bank deposits.

(7) Colette, p. 41

(8) Ibid., p. 42.

(9) James Neal Primm, A Foregone Conclusion: The Founding of the Federal Reserve Bank of St. Louis, St. Louis: Federal Reserve Bank of St. Louis, 2001.

(10) Dunne, p. 11.

(11) Ibid., p. 13.

(12) Glass went along with this plan only owing to his understanding, the correctness of which Wilson readily affirmed, that the supposed obligation “would be a mere pretense,” the government’s obligation being “so remote that that it could never be discerned” (Colette, pp. 48–9).

(13) Dunne, p. 19.

Over at Zero Hedge, “Tyler Durden” reposts a piece by Sean Corrigan, the link to which appears to be non-working, in which Corrigan imagines that he is having a “Gotcha!” moment, at the expense of yours truly, because he has discovered some reputable authorities who claim that (commercial) banks are in fact capable capable of making loans above and beyond any sum of deposits they acquire. Here are the first few paragraphs:

Of late there has been much breathless wonder expressed at the Bank of England’s supposedly ground-breaking release. ‘Money in the Modern Economy’, in which it argues – shock! horror! — that banks do not lend out previously received deposits, but that they create the latter ex nihilo by first making loans. Alas, as Gunnar Myrdal waspishly observed of Keynes himself, this has been a reaction plagued with the ‘unnecessary originality’ of those who don’t know their literature.

As an example, some few months ago, I had an exchange with the disputatious George Selgin (he of the perfervid fractional free banking bent) in which I cited – after a good twenty minutes’ research – the following authorities to that very same effect:-

Roepke from a footnote (p113) to his 1936 work, ‘Crises & Cycles’:

The process [of credit creation] is now clearly explained in any text-book on economics, banking or money (especially recommendable is Hartley Withers’ Meaning of Money). A fuller treatment may be found in the following books: R. G. Hawtrey, op. cit.; J. M. Keynes, A Treatise on Money, pp. 23–49 : C. A. Philips, Bank Credit, New York, 1920; W. F. Crick, “The Genesis of Bank Deposits,” Economica, June 1927, and F. A. von Hayek, Monetary Theory and the Trade Cycle, London,1933.

Without an understanding of this process and of its limitations, no real insight into the working of our banking system and, consequently, of our entire economic system seems possible, to say nothing of the mechanism of business cycles. There may still be many people who can no more believe the story of the genesis of bank money than they can believe the genesis of the Bible, but on the whole it now seems to be generally accepted. A last but hopeless attempt at disproving it has recently been made by M. Bouniatian, Credit et conjoncture, Paris, 1933. [Emphasis mine and apparently NOT the last!]

Or as Hayek indeed noted in ‘Prices and Production’ above his own lengthy footnote (pp 81–2):

The main reason for the existing confusion with regard to the creation of deposits is to be found in the lack of any distinction between the possibilities open to a single bank and those open to the banking system as a whole.

Actually, Sean, I can assure you that I’ve read them all, and carefully; what’s more, I’ve probably taught several thousand students about the process of multiple deposit expansion, being careful in doing so to make precisely the distinction Hayek insists upon between what individual banks on one hand and the system as a whole on the other are capable of making doing with any fresh deposits.* In fact, no individual bank involved can lend more than a part–usually the greater part–(the “excess reserves”) of whatever fresh funds it is able to secure. It is precisely your misunderstanding of Hayek’s point that was, I am inclined to think, the nub of our original disagreement!

*Here FYI is a screenshot of the relevant page of the class notes I give to my students:

It seems that, even when I’m not trying to do so, I manage to raise the hackles of some of the 100-percent crowd. Most recently I did so by trying to explain, a couple posts ago, my preference for remaining independent of the Austrian School, or any other economic school of thought. The particular passages at which my critics took aim were this one:

And what sort of economics [do I want to do]? I can’t tell you–I’ve never thought much about it. But perhaps that’s just it: I don’t “think” about writing any “sort” of economics. I don’t want to have to think about whether what I’m up to qualifies as “praxeology” or not, or whether Mises would mind my using terms like “money” and “inflation” the way most contemporary economists use them, instead of the way Mises himself used them a century ago. Nor am I any more inclined to trouble myself over whether my work fits neatly into any other economic school’s pigeonhole.

and this:

But if there’s one thing I truly believe concerning the “methodology” of economics, it’s that thinking about it is as helpful to actually doing economics as contemplating one’s steps is to dancing the rumba. In short, having to look over my shoulder while I think or write, at any methodological strictures at all, cramps my style.

According to Joe Salerno, the implication of the first of these passages is “that those of us who pursue a research program within the praxeological paradigm continually sweat and fret about using terms or formulating concepts in exactly the same way as Mises did ‘a century ago.’ ” Joe then goes on to point out, with what (I can’t help observing) seems like a fair amount of fretting and sweating, that plenty of Austrian economists, including Mises himself, have in fact not hesitated to depart from Mises’ 1912 definitions. To this I can only say, Bully for them! But why is Joe pointing this out to me? He should be telling the legions of self-styled Austrian economists, most of whom presumably formed their opinions by reading various Mises Institute publications, who burst a blood vessel every time someone uses the term “inflation” to mean a general rise in prices, or the term “money” to refer to a fractionally-backed bank deposit or note.

As for me, I wasn’t pretending to characterize the preoccupations of each and every Austrian economist, by means of “equivocations, omissions, and errors” (as Joe reckons) or otherwise. Nor did my remarks have much to do with my desire (however fervent it may be) “to prevent ‘the 100 percent crowd’ from ‘hijacking the ‘Austrian’ brand name’.” I was just tossing out an example of the sort of ruminating I’d just assume not bother with when setting out to do some economics. (Next time I should be more careful and add a disclaimer like the ones you find in novels, you know, “This illustration is a work of fiction. Any resemblance between my economist worrying about Mises’ old definitions and any particular member of the current Austrian school is entirely coincidental.”)

As I might have predicted, some of my critics (who never seem to come up short when it comes to putting an uncharitable spin on things) went still further, by understanding me to say that I don’t find thinking of any sort especially helpful to doing economics! Bob Murphy, for instance, has fun with what he took to be my suggestion that the best way to dance the rumba is to never have learned it in the first place. In a comment to Gene Callahan’s favorable notice of my post, Bob went so far as to characterize me as someone who “rips on the philosophy of science, saying he don’t need no stinkin’ thinkin’ about *what* he’s doing.”

Ah well, that’s the risk one takes in employing a metaphor. The gain, of course, is that the metaphor helps readers who aren’t merely interested in playing “gotchya!” Such readers won’t bother to put the poor little thing on a rack to see what it will confess to when stretched to the breaking point. Gene Callahan himself, for instance, was quick to come to my defense, both in his own post and in the comments to mine, where he (quite properly) ridiculed the suggestion that, in saying (as he nicely put it) that I didn’t want to look over my shoulder “at some ‘methodological’ scold,” I meant to declare, among other things, that I “didn’t care about logic or consistency.”

Of course I do care about logic and consistency; indeed, I insist upon them both for myself and for others who wish to engage me in a discussion. And of course (news flash!) I believe that good economics takes some thinking! Besides requiring one to think about whether one is being logical and consistent, it takes thinking about whether one’s reasoning is consistent with available evidence, and thinking about whether one is expressing his ideas clearly, and (ahem) thinking about whether one is characterizing rivals’ views accurately. Indeed, the only sort of thinking that I insist is unhelpful to doing good economics is thinking about, so as to better obey, the methodological credos of some particular school of thought.

What’s more, I have what I consider to be the best possible reason for having this opinion–an opinion that, remember, is intended only to justify my personal decision not to belong to any school, and not to browbeat others into joining me in my heterodoxy. The reason is simply this: that I have found that, when I set out to address some economic issue, I do not find it at all helpful to concern myself with “methodology” except of the “very small‑m” sort that supplies such rules as ought to command the assent of economists of all schools. In particular, though I sympathize with the arguments that underlay what Joe calls “the praxeological paradigm,” and what’s more believe that I understand them, I don’t give that paradigm any thought in pursuing my research; if someone claims that despite this I’ve been doing praxeology all along, I can only say, like Molière’s* Monsieur Jourdain when informed that he’s been speaking prose, that I have been quite unaware of it.

Addendum: Joe Salerno’s rejoinder. I never accused Joe personally, by the way, of insisting on Mises’ 1912 definitions of “money” and “inflation.” Much less did I ever mean to hold him responsible for the many “Austrians” (for they present themselves as such) who insist on those old definitions. That such Austrians exist, and in large numbers, cannot reasonably be denied by anyone familiar with the economics blogosphere. As for where their understanding comes from, I should be glad to hear Joe or anyone else offer an alternative to my own conjecture.
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*I had previously (and foolishly) written “Proust’s.” I thank Andras Toth for correcting me.