Steve Horwitz



Greg Ransom has found a new book with an interview done with Hayek in 1979. In it, Hayek says the following:

“I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression.”

Those Austrians who think deflation is always and everywhere a good phenomenon strongly overlap with those Austrians who wonder whether Hayek is really an Austrian (or a even a classical liberal) anyway, so I'm doubtful this will convince them of the claim that a concern with monetary deflation has been, and should be, a core part of Austrian monetary and macro theory. However, it does, in fact, bolster the case for a monetary equilibrium reading of Hayek.

It is also useful to counter the claim that Hayek was a "liquidationist" in the sense often deployed by people like Brad DeLong, as well as the more general claim that Hayek thought we should do nothing during the depression. By implication, if you think deflation is bad, you believe that the Fed (given its existence) should have behaved differently between 1930 and 33. It could have done something to prevent the events that "prolonged the depression."

This also is some support for what I would call the Austrian-Monetarist-Interventionism explanation of why the Great Depression got started, got so deep so quickly, and lasted so long. Each "school" (think Rothbard, F&S, and Higgs if you want authors) lines up with each element of the explanation in the order given. Even Hayek agrees that traditional Austrian cycle theory alone can't explain the whole thing, even buttressed by Higgs or Cole & Ohanian. If you want to explain why the Great Depression was both "great" and a "depression" not a recession, you need the Friedman and Schwartz story, and you'll have Hayek on your side.



Whether the same situation as we faced in 1930 was in place last fall remains a debatable question. However, if velocity was falling in the way some folks believed, doing nothing would have invited a potential repeat of the early 30s, and now we can say with even more certainty that Hayek, at least, would have recommended that the Fed act to avoid it. (Of course, nothing in this paragraph is an endorsement of the extreme to which the Fed went, nor the other really stupid things it did last fall and since.)

