The Global Financial Crisis
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The Global Financial Crisis

What Have We Learnt?

Edited by Steven Kates

The Global Financial Crisis is a unique investigation into the causes of the most savage economic downturn experienced since the Great Depression. Employing wide and divergent perspectives – which are themselves critically examined – this study analyses the measures that have been taken to restore our economies to acceptable rates of unemployment and growth.
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Chapter 4: The Great Recession and its Aftermath from a Monetary Equilibrium Theory Perspective

Steven G. Horwitz and William J. Luther


* Steven G. Horwitz and William J. Luther Modern macroeconomists in the Austrian tradition can be divided into two groups: Rothbardians and monetary equilibrium (ME) theorists. The name for the latter is somewhat misleading, however, as both groups argue that monetary equilibrium is ultimately achieved where the quantity of money supplied equals the quantity of money demanded. The difference between these two approaches concerns what should adjust so that equilibrium is obtained. Rothbardians argue that ‘any supply of money is optimal’, provided only that it is above some trivial minimum necessary to conduct transactions (Rothbard, 1988: 180).1 Because Rothbard’s proposal for 100 per cent gold reserves ties the money supply rigidly to the supply of gold, Rothbardians effectively hold the money supply constant in the short run and thereby rely on price adjustments to bring about monetary equilibrium in the face of changes in the demand for money. In contrast, monetary equilibrium theorists argue that an ideal monetary system would expand or contract the supply of money to prevent changes in the demand to hold money from affecting its current value. Whereas price changes are typically desirable to clear markets for goods and services, ME theorists note that money is unique in that it has no price of its own. Because money is one half of every exchange, changing ‘the price of money’ to clear the money market requires changing all prices. The economy-wide price changes needed if the price level is to bear the burden of adjustment disrupt the...

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