In 2017, the economics profession bid farewell to Allan H. Meltzer, one of the most influential monetary economists of the last century.
On January 4th, the Institute for Humane Studies and the Mercatus Center are co-sponsoring an event honoring “Meltzer’s Contributions to Monetary Economics and Public Policy.” The event features a veritable “Who’s Who” of monetary economists. The lineup is a testimony to Meltzer’s enormous impact and enduring legacy.
So why is Meltzer’s name so vaunted in monetary economics? Meltzer is perhaps best known today for his exhaustive two volume History of the Federal Reserve (released in 2003 and 2010, respectively). Often overlooked, however, is his role dating back more than a half-century as one of the pioneers of monetary disequilibrium theory during the early stages of the monetarist counter-revolution.
Melzer’s status as a leading monetarist is indisputable. But his insights went beyond many of his monetarist peers. At the 12-minute mark of his Macro Musings interview with David Beckworth in November 2016, Meltzer discussed how misguided monetary policy can affect asset prices and distort real economic activity. In particular, Meltzer harkened back to his early work on how an excess supply of money “distorts relative price signals.” By printing too much money, central banks inflate asset prices. This, in turn, fuels speculative bubbles. Meltzer insisted that this simple story explains much of what went awry during the housing bubble. Unfortunately, he lamented, Friedman and others largely glossed over these relative price affects in their analysis.
Meltzer’s story provides an excellent summary of what happened during the Great Recession. Monetarists are correct to blame the Fed for the excess demand for money that provoked the Financial Crisis of 2009. But, as he rightly notes, they should also blame the Fed for the excess supply of money that helped inflate the housing bubble. Meltzer might eschews labels, but his emphasis on the role central banks play in fueling the boom bears a striking resemblance to the Austrian account.
Consistently applying monetary disequilibrium theory requires that we point out both the excess supply of money that incites the boom and the excess demand for money that occurs during the bust. Meltzer recognized both sides of the problem. In doing so, he reaffirms that the most powerful explanation for major economic downturns like the Great Recession and the Great Depression combines key elements from these two applications of monetary disequilibrium theory: it uses Austrian business cycle theory to explain the boom and monetarism to explain the bust. He provides an excellent road forward for macroeconomics (one that other writers on this blog have eloquently explained).
I’d strongly encourage readers of this blog who are interested in the monetary disequilibrium tradition to read Meltzer’s work. I’d also encourage them to keep up with the proceedings of the January 4th event honoring him. Few economists have done more than Meltzer to advance the cause of sound, rules-based monetary policy over the past century.