Abstract
In this chapter Young’s monetary views are discussed. He stated that modern business was in the hands of men who had come to think in terms of money and the price-making process was largely in their hands. A change in the money supply causes distortion in relative prices which, in turn, caused business cycles. Young took the best points from Fisher, Laughlin and Hawtrey while rejecting their weak points in his monetary views. While agreeing with Laughlin on the gold standard, he rejected his laissez-faire and passive accommodation policies. While agreeing with Fisher’s activist monetary policy, he rejected his rules-based approach. He disagreed with Hawtrey on the discount rate as an instrument of control particularly in the American context.
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Notes
- 1.
Their distaste for money perhaps arose as a reaction to mercantilist obsession with hoards of gold and silver to the neglect of the real economy. In the classical conception wealth meant real output rather than gold and silver.
- 2.
In his day, credit was commonly defined as checkable demand deposits.
- 3.
“Even if not the fundamental cause, the expansion of bank credit is a necessary condition of the overexpansion of business” (Ely et al. 1923, p. 337).
- 4.
Mehrling (1996, pp. 620–1) observes that for Young business cycles were not monetary in origin but definitely monetary in character.
- 5.
Young to Blivin dated 9 January 1923.
- 6.
Schumpeter (1954, p. 876, f.n. 23) stated that “in his [Young’s] concise and unassuming analysis of national bank statistics, there is enshrined the better part of a whole theory of money and credit”.
- 7.
“An ideal monetary system would be that which would give stability in prices. The gold standard, by this test, is far from ideal. Its strongest claim is not that it gives stability in prices, but that it is, one might say, automatic in its operations. If we must have general fluctuations in prices, alternating movements up and down, it is better that these should be governed by the changes in the output of a relatively stable commodity, like gold, than that they should be the outcome of political manipulation or of arbitrary adjustment of any sort whatever. It may be said of the gold standard, not that it is perfect, but that it is measurably ‘fool-proof’” (Young 1929a; Mehrling and Sandilands 1999, p. 292).
- 8.
“There is plenty of gold. Production and trade can grow without there being a general fall of prices, if only the central banks of the world will permit it… To attempt, under present conditions, to build a large idle hoard of gold, whether in London or elsewhere, is generally only an expression of financial nationalism, and financial nationalism is an expensive luxury… A gradual downward trend of prices is probable, not because the supply of gold is or will soon become inadequate, but merely because the central banks of different countries will probably try to maintain their separate hoards of gold” (Young 1929b; Mehrling and Sandilands 1999, p. 373).
- 9.
Young defines this as a standard where local currency is not necessarily redeemable in gold in the home country, but redeemable in bills of exchange or drafts payable in gold in a foreign country (Ely et al. 1916, p. 270).
- 10.
Young was the chief US economist at the Versailles Peace Conference in Paris in 1919 but resigned (as did Keynes) because the peace terms were unduly harsh to Germany.
- 11.
“[The] view of things, that men invented money in order to rid themselves of the difficulties and inconveniences of barter, belongs, along with much of conjectural history, on the scrapheap of discredited ideas. Men did not invent money by reasoning about the inconveniences of barter any more than they invented government by reasoning about the inconveniences of some mythical primitive state of anarchy. The use of money, like other human institutions, grew or evolved. Its origins are obscure. It is, nevertheless, fairly certain that at no period in history has man ever conducted any considerable volume of trade by means of barter. There was very small gap, perhaps no gap at all, between the beginnings of trade and the origin of money” (Young 1929c; Mehrling and Sandilands 1999, p. 265).
- 12.
- 13.
However, other things may not remain constant—given unutilized resources the volume of transactions may increase; a sudden increase in the money supply may reduce transactions velocity V; and an increase in M may increase M’, the demand deposits.
- 14.
Blitch (1995, p. 134) appears to think that the chapter on business cycles in the 1923 edition of the Outlines was written by T.S. Adams, but Laidler (1993) and Mehrling (1997) who reconstructed Young’s monetary theory think that it was written by Young himself. If one compares this chapter with Young’s treatment of business cycles in Nicholas Kaldor’s Notes on Allyn Young’s LSE Lectures 1927–29 (Young 1990), the treatment of the subject appears strikingly similar suggesting that it is probably Young rather than Adams who wrote the chapter.
- 15.
But Young (1928; Mehrling and Sandilands 1999, p. 356), did state: “I have little doubt but that relations such as we are now considering lie at the very heart of the problem of instability of the modern mechanism of bank credit and of those business activities which depend upon credit.” Further: “Under the national banking system, the money forced out of circulation, in periods of low prices and stagnant trade, flowed to New York… The New York banks made advances to investors and to speculative buyers of bonds… But a considerable part of the funds thus secured in New York could not be held there long. Payments had to be made to the ultimate borrowers in other parts of the country. Deposits were transferred to outside banks. The revival of industrial activity, with which these outside payments probably had something to do, led to increased lending by outside banks. An increase of prices and of the volume of retail trade draws money from New York through the outside banks, into circulation… I see no basis for the belief that these cyclical swings, once under way, were never halted until the resources of the banks had been exhausted… But only in cycles of exceptional magnitude do such limits become effective” (ibid., pp. 356–8). Moreover: “The investment operations of the outside banks were…a factor making for stability of the deposits and their earnings. But in this, as in other respects, the comparative stability of outside banks was purchased by throwing upon the New York banks most of the stresses created by the cyclical flow of money into and out of the banks” (ibid., p. 360).
- 16.
Young had expressed an early enthusiasm for banks’ loan-deposit ratios as key indicators of credit cycles. With the establishment of the Federal Reserve System, the alternation of funds between country banks and New York and back so prominent earlier was now less visible. In a letter to Thomas Adams (18 April 1922), Young admitted: “The relation of bank loans to bank deposits is a hobby of mine, and I may exaggerate its importance.”
- 17.
Young emphasized individual or personal credit as opposed to collateral and hence for him credit was more than coining of saleable goods.
- 18.
Young did not favour bimetallism on a further ground that it is difficult to keep the market ratio of gold and silver at the same point as the mint ratio, driving one of them out of circulation. Thus, Gresham’s Law would become operative.
- 19.
For Young’s (1923b) review of Fisher’s Making of Index Numbers, see Chapter 9.
- 20.
In a letter to Thomas S. Adams dated 18 April 1922, on the subject of business cycles, Young stated: “I must say frankly that I do not believe that I can get at the matter by tinkering with the monetary standard. This is for two reasons. In the first place, any arbitrary adjustment of the monetary standard would react differently upon different sorts of prices… In the second place, it is easily possible that the mint officials and the Federal Reserve Board might be pulling in the opposite direction… Changes in the production of gold have little or nothing to do with business cycles.”
- 21.
“The general exchange values of commodities that are bought and sold in modern markets are, in fact, merely relations that we derive or infer from their money prices… [M]easuring values and serving as a medium of exchange are only one function, not two” (Young 1929c; Mehrling and Sandilands 1999, p. 268). According to Young, these word-wasting controversies can be avoided by recognizing money as a means of payment. This would cover all its uses: medium of exchange, measure of value, a standard of deferred payments and settlement of debts (ibid., p. 268).
- 22.
As Young (1920, p. 525) noted: “A rise in prices results from the use of purchasing power, not from its accumulation.”
- 23.
- 24.
- 25.
By ‘money of account’ Hawtrey (1919, p. 2) meant a unit for the measurement of debts which could be served by credit even in the absence of physical money. “In fact a unit for the measurement of debts is indispensable. Where a commodity is used as money, it naturally supplies the unit for the measurement of debts. Where there is no money, the unit must be something wholly conventional and arbitrary. This is what is technically called a ‘money of account’.” That there could be credit without currency was a proposition Young could not agree with.
- 26.
In a letter to T.S. Adams, dated 18 April 1922 referred to earlier, Young stated: “So far as the mechanism is concerned, I am not at all sure about the adequacy of the Federal Reserve discount rate to control matters in a period of rapid business expansion. The analogy with the bank of England is imperfect… By reason of our comparative isolation, it is idle to suggest that we shall hold large quantities of foreign paper, even if our discount rates should become the lowest in the world. It was of course low discount rates which attracted foreign paper to London.”
- 27.
Young was sceptical in the ability of interest rates to influence investment. As opposed to the importance attached by Keynes, Cassel and Hawtrey to the rate of interest, Young (1990, p. 82) stated: “[A]ctual industrialists (and bankers) deny that variations in the rate of interest influence the extent of their operations, providing their competitors pay the same. It is the ‘market’ on which they count.”
- 28.
See also Patrick Deutscher (1990, pp. 195–99) for a discussion of similarities and differences in Young and Hawtrey’s views on monetary theory. Deutscher stated that while Young was influenced by Hawtrey, he was himself an independent and influential figure making original contributions in various fields of economics. Thus, Young was not Hawtrey’s disciple, and probably, Hawtrey never had any.
- 29.
In a letter to Charles Blitch, dated 15 October 1973, Overton H. Taylor, one of Young’s students at Harvard who took his course in Money and Banking during 1924–1925, wrote: “Our textbook in that course was R. G. Hawtrey’s Currency and Credit. Young made us understand Hawtrey’s version of the Cambridge (Marshallian) ‘cash balances’ idea (Hawtrey’s ‘unspent margin’) and its uses. He was critical, however, of Hawtrey’s stress on the effects of high and low short-term interest rates on ‘traders’ and thus on the level of economic activity.” See Blitch (1995, pp. 61–2).
- 30.
“Some have suggested that, since credit expansion is a necessary factor the overexpansion of business, the Federal Reserve Board attempt to control credit expansion through its power to modify the rate of discount. It is very difficult to say whether the Federal Reserve Board could accomplish this result. Furthermore, would the Federal Reserve Board wish to use such power even if it possessed that control? In the first place, it is practically impossible to say to what extent the Federal Reserve Board could, by increasing the discount rate, control the expansion of credit at the beginning of the period of credit expansion. Such a policy would undoubtedly be more effective later in the cycle when member banks became dependent on the federal reserve banks for additional funds. The tendency would then be for businessmen to limit such expansion as was highly speculative. However, it should be remembered that that interest is only one of the expenses of production. Secondly, if the Federal Reserve Board could check expansion by raising the discount rate, could it not create prosperity by lowering the rate of discount? After the World War the Federal Reserve Board raised the discount rate. Since then there has been much talk to the effect that the prices of farm products were deflated too rapidly by this means. The possibility of using this power, if the Federal Reserve Board possessed it, for political ends is clear. There might be political pressure from various organized groups for higher prices for their own commodities” (Young 1925c, pp. 140–1).
- 31.
“Business cycle is largely the result of inaccurate estimates” (ibid., p. 140).
- 32.
In a letter to Senator William S. Keyton of Ohio dated 25 November 1921, commending him on his bill to tackle future depressions, Young stated: “It is sound economics and it seems to me that it would be sound public policy to attempt to counteract the disastrous periods of business depression, so far as possible, by increasing public expenditures on permanent improvements at such times.”
- 33.
“It is certainly unwise that public expenditures should be at their maximum when private expenditures are also at their maximum… The proposals made in the carefully drafted bill do not look forward, as I understand them, to the imposition of heavier taxes or securing of larger public revenues in other ways in depression. The proposals merely are that such public funds as can be conveniently and properly expended at one period rather than another, should so far as possible, be expanded at times when such expenditures will be attended by maximum public benefits” (ibid.).
- 34.
Hawtrey (1932, pp. 208–9) commended Benjamin Strong, Governor of the New York Federal Reserve Bank, to whom Young was a consultant, for following “a policy of stabilisation, which prevented any serious fluctuation of the price level from 1922 to 1929”. With Strong’s death in 1928, this experiment came to an end. This was in contrast to Bank of England’s practice of using the discount rate to protect its gold reserves rather than to stabilise the cycle (see Ely et al. 1923, p. 338).
- 35.
It is worth noting that Fisher damaged his professional reputation by forecasting that stock market prices would keep rising before the Great Crash occurred.
- 36.
- 37.
Laidler and Sandilands (2002, p. 522) write: “And in the background here perhaps there stands the shade of Young, who had advocated activist monetary and fiscal stabilization policies during the 1920s.”
- 38.
Also see Robert Skidelsky (1992), Keynes biographer, who wrote: “In the 1920s Keynes’s good conversations in economics were with Robertson, Hawtrey, Henderson, Gerald Shove, less frequently with Pigou: all Cambridge men, within the Marshallian tradition… In the 1930s his good conversations were with disciples like Richard Kahn, Joan and Austin Robinson, though he continued to have bad ones with his older colleagues” (p. 424). Further: “By May 1935, Maynard’s book was in ‘retouching’ state… Gallery proofs went out to Harrod, Hawtrey, Kahn and Joan Robinson in mid-June. The exchanges with Robertson were not renewed with mutual consent… Neither Henderson nor Pigou received proofs. Thus, of his own generation, Keynes thought only Hawtrey was sufficiently sympathetic to help him in his last stage” (ibid., p. 532).
- 39.
In his review of A.C. Pigou’s Wealth and Welfare he took the view that external economies were not very plentiful. In his article on increasing returns and economic progress he based his growth theory on external economies. To take another example, in index number theory he was initially fascinated by the ideal index number but later changed his views to say that any properly weighted index was just as good.
- 40.
There is some evidence that Young was aware of pump priming as a tool in depression. One of his students at Harvard Overton H. Taylor, who took Young’s course on money and banking, in a letter to Charles Blitch dated October 15, 1973, stated that one of the books for that course was that of W.T. Foster and W. Catchings (1923), “attributing depressions to insufficient purchasing power in the hands of the people, and advocating ‘pump priming’ through governmental public works expenditures as the remedy”. See Sandilands (1999, p. 474). See also Currie (1990, p. 13) who wrote: “It is interesting to speculate on the position he would have taken in the Great Depression. I am sure that he would immediately have seen the fallacy of composition in the argument of the budget balancers… Of all the people at Harvard, I think that he would have been the most open minded to the Keynesian point of view.”
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Chandra, R. (2020). Allyn Young on Money, Banking and Business Cycles. In: Allyn Abbott Young. Great Thinkers in Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-31981-6_7
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