We Need Private Money
by Jeffrey M. Herbener
Subcommittee on Domestic Monetary Policy and Technology, Committee
on Financial Services, U.S. House of Representatives, May 8, 2012
ranking member Clay, and distinguished members of the committee,
it is an honor to appear before you.
Left to the
market, the production of all goods, including money, passes the
profit and loss test of socially beneficial production. Like all
private enterprises, a gold mining company produces if the revenue
from the sale of its output exceeds the cost of buying its inputs.
Its production is socially beneficial because the value of inputs
in producing the output to satisfy its customers exceeds the value
of those inputs in producing other goods to satisfy other customers.
In the market,
money production is regulated by profit and loss. Changes in demands
bring forth more production. If the demand for money increases,
making the value of gold coins rise, then minting companies would
increase production to capture the profit. As the supply of gold
coins increased, their value would decline. As the demands for resources
increased, their prices would rise. The profit would dissipate and
resource allocation into and production of money would be optimal
for society at large.
of fiat paper money and fiduciary media cannot be regulated by profit
and loss. It is always profitable for a central bank to produce
more fiat paper money since larger denomination bills have the same
production costs as smaller denomination bills. It is always profitable
for a commercial bank to issue more fiduciary media through credit
creation since the interest it earns on the loan made always exceeds
the nominal costs of issuing fiduciary media.
production of fiat money and fiduciary media cannot be justified
by passing the market test of optimal production, it is claimed
that an elastic currency will render an outcome superior to that
of a monetary system of commodity money and 100 percent reserve
money substitutes. Let me address three such claims for an elastic
it can keep the price level stable. There is no social benefit from
a stable price level, however. Entrepreneurs earn profits and avoid
losses by anticipating changes in prices of all goods, including
money. An elastic currency makes the entrepreneurial task more difficult
by adding another dimension of uncertainty to the purchasing power
is claimed that an elastic currency can prevent price deflation.
There is no social benefit from preventing price deflation, however.
Faced with lower prices for their outputs, entrepreneurs reduce
their demands for inputs and their prices also fall. This leaves
profit, production, and real incomes intact.
the evidence across 17 countries over 100 years, Andrew Atkinson
and Patrick Kehoe, in a 2004 American Economic Review article,
demonstrated that there is no correlation between price deflation
and economic downturns.
The third claim
for an elastic currency is that it can accelerate economic growth.
There is no social benefit from attempting to accelerate economic
growth beyond the rate people prefer, however. Instead of building
up the capital structure of the economy more fully, monetary inflation
through credit expansion generates the boom-bust cycle. In their
research on the performance of the Fed published in Cato Working
Papers in 2010, George Selgin, William Lastrapes, and Lawrence
White concluded that under the Fed the economy has suffered more
instability than in the decades before the Fed’s establishment and
that even its post-World War II performance has not clearly surpassed
that of its predecessor, the National Banking System.
and historical evidence demonstrate that an elastic currency system
confers no benefit on society at large. Instead, it causes financial
instability and business cycles. The Fed should be abolished and
a market monetary system of commodity money and money certificates
should be established. A direct route to achieve this end is to
convert Federal Reserve Notes into redemption claims for gold with
a 100 percent reserve of gold and to redeem the portion of reserve
deposits banks hold at the Fed into cash so that banks hold 100
percent cash reserve against their checkable deposits. At that point,
the production of money and money substitutes should be done by
private enterprises under the general laws of commerce.
of Money on the Market
In a seminal
article published in 1920, Ludwig von Mises demonstrated that there
is only one test of whether or not production of something conveys
a benefit on society at large.  It must be shown that resources have greater value when used
to produce a good to satisfy the preferences of some people than
when they are used to produce a different good to satisfy the preferences
of other people. Production left to the market satisfies the profit
and loss test of socially beneficial production. For Tim Cook to
obtain computer chips, glass screens, labor and other resources
to produce iPads, he must bid them away from other entrepreneurs
who would have used them to produce other goods. By incurring the
costs of production, Apple Inc. compensates the owners of resources
for the value of the other goods they could have produced to satisfy
a different group of consumers. Apple then uses the resources to
produce iPads, which consumers of its products value more highly
as demonstrated by their generating enough revenue for Apple Inc.
to more than cover its costs.
and loss test applies to all production in the market, including
mining gold and minting coins. A gold mining company will produce
when the revenues from the sale of its output exceed the costs of
buying its inputs. The company moves labor, mining equipment, land,
and other resources away from uses consumers find less valuable
into gold mining, which consumers find more valuable. A minting
company will produce when the revenues from the sale of its service
in certifying gold exceed the costs of buying its inputs. The company
moves labor, minting equipment, land, and other resources away from
uses consumers find less valuable into minting coins, which consumers
find more valuable.
Like the production
of all other goods, production of money left to the market is regulated
by profit and loss. Additional money is produced when demand for
money increases or demand for other goods produced by the same resources
decreases. If the demand for money increased, the value of gold
coins would rise. Minting companies would increase production to
capture the profit. As they increased the supply of certification
service, its price would decline and as they increased their demands
for resources to certify gold, resources prices would rise and the
profit would dissipate. If demand for other goods declined, input
prices would fall. Minting companies would increase production to
capture the profit and, by doing so, eliminate profit from further
production. In this way production of money in the market is socially
and loss test also applies to the production of money certificates
in the market.  Money certificates are titles of ownership to money issued
by banks that serve as money substitutes. People may find convenience
and safety in using checking account balances instead of commodity
money when making trades. Banks will produce and maintain checking
accounts for customers if they are willing to pay fees to banks
that generate revenues sufficient to cover the costs of managing
the accounts. If the demand for checking accounts increased, then
banks would expand them to capture the profit. As they increased
their supply of checking account services, the fees would decline.
And as they increased their demand for the resources to manage checking
accounts, their prices would rise. As a consequence, profit would
dissipate and additional production would cease at the socially
and loss test also applies to financial intermediation. Banks perform
a middleman function in credit markets by borrowing from savers
and lending to investors. They provide the services of pooling the
savings, checking the credit worthiness of investors, and bearing
the risk of loan defaults. If customers of banks find these services
valuable, they will be willing to accept lower interest rates for
lending to banks than investors will be willing to pay banks to
borrow. Banks will provide financial intermediation services, if
the revenues earned from the interest rate differential are large
enough to cover the costs of producing the services. If demand for
these services increases, banks will increase production of them.
Their increased demand to borrow from savers and supply to investors
will reduce the interest rate differential. Their increased demand
for the resources will raise their prices. Profit will dissipate
and additional production will cease at the socially optimal point.
all production, including that of money and banking, to the test
of profit and loss, the market renders an integrated system of production
that economizes the use of all resources for society at large.
Inflation and Credit Expansion
currency breaks the integration of production on the market by being
an element foreign to the test of profit and loss. An elastic currency
has two characteristics: a central bank empowered to issue fiat
paper money and commercial banks empowered to issue fiduciary media.
 The production of fiat paper money cannot be regulated
by profit and loss. It is always profitable to produce more. In
2011, the average cost of the 5.8 billion Federal Reserve Notes
produced was $0.091. 
So a profit of around $4.90 is made by printing and spending
a $5 bill. If the Fed continued order the printing of FRNs as long
as it was profitable, then eventually prices of inputs would rise
so that it cost more than $5 to print a $5 bill. Then the Fed could
order the printing of $50 bills instead and so on indefinitely as
we have witnessed in hyperinflations like Zimbabwe’s. To avoid destruction
in hyperinflation, production of fiat paper money must be regulated
by policy, by a rule that is arbitrary with respect to economizing
production for society at large.
of fiduciary media cannot be regulated by profit and loss.
 Fiduciary media are redemption claims for money which are
fractionally backed by a reserve of money. Banks issue fiduciary
media by creating loans. For example, a customer applies at his
local bank for an auto loan of $25,000. If the bank agrees to extend
the loan, it just writes a $25,000 balance into the customer’s checking
account. The loan generates interest revenue for the bank while
the cost of issuing fiduciary media is nominal. It is always profitable
for the bank to create another loan by issuing fiduciary media.
If a bank issues more fiduciary media by creating credit as long
as it is profitable, it will become illiquid and insolvent and end
in collapse. To avoid such destruction, a bank must regulate its
issue of fiduciary media via credit creation by policy, by a rule
that is arbitrary with respect to economizing production for society
an elastic currency realize that its production cannot even be subjected
to, let alone pass, the profit and loss test. As F.A. Hayek wrote,
“There is no justification in history for the existing position
of a government monopoly of issuing money. It has never been proposed
on the ground that government will give us better money than anybody
else could.”  Advocates of an elastic currency
merely assert that it can achieve a desirable outcome that a system
of commodity money and money certificates cannot. There are three
such claims for an elastic currency. First that it can keep the
price level stable. Second, that it can prevent price deflation.
And third, that it can accelerate economic growth.
There is no
social benefit from keeping the price level stable. The alleged
benefit is that price stability prevents wealth transfers between
creditors and debtors and between workers and capitalists. But such
transfers assume that entrepreneurs fail to anticipate changes in
money’s purchasing power. Entrepreneurs can earn profits and avoid
losses by anticipating these changes just as well as changes in
prices of other goods. If they anticipate rising prices for goods
overall, then they will increase their demands for resources today
bidding up wages today. Likewise, lenders will insist on higher
interest rates today. An elastic currency adds another dimension
of uncertainty to changes in money’s purchasing power. It makes
the task of entrepreneurs more, not less, difficult. In extreme
cases, an elastic currency can result in wildly unstable prices
that paralyze entrepreneurial decision making and destroy production
on the market. Being regulated by profit, production of commodity
money responds only to changes in people’s demands. If money demand
rises, the resulting increase in money’s purchasing power would
bring forth more production of money and moderate falling prices.
The modest price deflation over time in a market economy is integral
part of its economizing production.
practice the advocates of price stability aim at price inflation
of around two percent per year. But, if entrepreneurs can adjust
their expectation to cope with a two percent per year price inflation
in an elastic currency system, then certainly they can properly
anticipate and deal with a two percent per year price deflation
under a commodity money system.
of the periods of most rapid economic growth in U.S. history were
from 1820-1850 and 1865-1900. In each of these periods, the purchasing
power of the dollar roughly doubled. 
There is no
social benefit from preventing price deflation. There are two claims
to the contrary. The first alleged benefit is that if prices begin
to fall, then people form expectations that they will fall further
and they put off spending today which pushes prices down even further
which re-enforces deflationary expectations. The collapse of spending
discourages production and employment. But, the downward spiral
of prices is merely the logical implication of assumptions about
expectations within formal economic models. If you assume that the
agents operating in an economic model suffer from expectations that
are self-reinforcing, then the model will produce a downward spiral.
But, people in the real world can only obtain the services of goods
by buying them. They choose at some point, to buy a good even if
they expect its price to fall further. This happens every day in
markets for consumer electronics as people buy tablet computers,
cell phones, and so on knowing that prices will be lower and quality
higher in the future.
is demand for goods and hence prices, whether people expect prices
to increase, decrease, or stay the same, speculation earns profit
and avoids loss by accurately anticipating the level of future prices.
If people anticipate a significantly lower price for a good in the
future and withhold their demands for it today, the price quickly
falls to the level they anticipated and then they buy the good.
Speculation moves prices before they would move without speculation,
but not further than they would move without it. This happens every
day in financial markets as speculators move prices up and down
without generating upward or downward spirals.
alleged benefit is that price deflation pushes down output prices
but input prices are sticky; therefore, profits evaporate and entrepreneurs
cut production and fire workers. But entrepreneurs choose the degree
of price stickiness that their customers and employees prefer. In
many cases consumers prefer prices of goods to remain more stable
from day to day or hour to hour or minute to minute instead of fluctuating
with every increase and decrease in demands. In other cases, buyers
prefer complete flexibility in prices. Entrepreneurs can earn profits
and avoid losses by catering to these preferences. In many cases,
workers prefer to have their wages set over a period agreed upon
with the entrepreneurs instead of having them move daily or hourly
with the movements in demand for the goods they help produce. In
cases where workers desire more flexibility in their compensation,
an entrepreneur will make stock in the enterprise part of their
compensation. When circumstances change, it is in everyone’s interest
to modify the normal arrangements. Entrepreneurs offer deep discounts
of their goods when demand permanently falls. They renegotiate contracts
with workers and other input suppliers when losses accumulate. In
this way, the degree of price stickiness in markets can be changed
to avoid adverse effects.
earn profits and avoid losses by anticipating these changes. If
they anticipate falling prices of their outputs, they will reduce
their demands for inputs today pushing their prices down. When output
and input prices fall together, profit and production are maintained.
The symmetric process occurs during price inflation. If entrepreneurs
anticipate higher output prices, they will increase their demands
for inputs today pushing their prices up. As a result, output and
input prices move up together and profit and production are maintained.
Even if the
prices of inputs entrepreneurs buy remain sticky downward, the effect
on their profit and production is cushioned by the decline in the
value of the assets they own. The market value of their assets adjusts
downward with the decline in the prices of their outputs as investors
reduce their demands to hold claims to these assets in financial
markets. A decline in the value of their assets restores the profitability
of production. Entrepreneurs with superior foresight in anticipating
declines in the prices of their output will invest sufficient equity
in their enterprises to cushion the blow and provide time for adjustments
in the prices of their inputs.
Andrew Atkinson, and Minneapolis Federal Reserve Bank economist,
Patrick Kehoe, in a 2004 American Economic Review article,
have shown that there is no correlation between deflation and depression.  Looking at the evidence across 17 countries
over more than 100 years, they concluded, “A broad historical look
finds more periods of deflation with reasonable growth than with
depression, and many more periods of depression with inflation than
with deflation. Overall, the data show virtually no link between
deflation and depression.”  Even for the Great Depression,
they find that while all 16 countries for which there were data
experienced deflation only 8 of them had a depression. And the relationship
between deflation and depression was not statistically significant.
For all other periods, beginning in 1820 for some countries, 65
of 73 deflation episodes had no depression and 21 of 29 depressions
had no deflation. They wrote, “In a broader historical context,
beyond the Great Depression, the notion that deflation and depression
are linked virtually disappears.”  When all periods are put together, they found that “a 1-percentage-point
drop in inflation is associated with a drop in the average real
growth rate of just 0.08 of a percentage point, say, from 3.08 to
3.00.”  Finally,
when they break the data into Pre-WW II and Post-WW II, they find
a stronger correlation between deflation and depression for the
early period, but a correlation between inflation and depression
in the later period.
There is no
social benefit from attempting to accelerate economic growth. The
alleged benefit is that monetary inflation through credit expansion
builds-up the capital structure of the economy more fully than otherwise.
Monetary inflation and credit expansion generate the boom-bust cycle,
however, not economic growth.
 The capital structure of the economy is the stages of
production from extraction of raw materials to the production of
intermediate capital goods to the production of consumer goods.
Iron is mined out of the ground, then steel is made, then fenders
for an automobile, then the automobile is assembled. In a market
economy, not only is each production process justified by passing
the profit and loss test, but the entire capital structure satisfies
people’s inter-temporal, or time, preferences. The degree to which
they desire to postpone their current consumption by saving and
investing to build up capital capacity across the capital structure
in order to enjoy more and better consumer goods in the future is
satisfied in the market. If people intensely desire present consumption
over future consumption, then the premium they place on the present,
that is, the interest rate, will be high and the amount of their
saving and investing will be small and their consumption will be
large. Only a small number of investment projects will be profitable;
therefore, the capital structure will not be built up extensively.
If people lower their time preferences, then the interest rate will
fall and they will save and invest more and consume less in the
present. With more resources at their command, entrepreneurs will
build up the capital structure more extensively. The greater productivity
of the expanded capital structure results in the production of more
and better consumer goods. This is the process of economic growth.
And, as with other aspects of production in a market economy, people
get the amount of economic growth that they prefer.
suppresses interest rates below the levels determined by people’s
time preferences and increases funds for investment beyond the amount
determined by people’s preferences for saving. When the borrowers
spend the additional money, they bid up the prices of the goods
they are buying. Prices of houses and cars, for example, are pushed
up by the addition demand of consumers made possible by credit creation.
Prices of producer goods are also bid up by the additional demand
of entrepreneurs made possible by credit creation. Prices for auto
factories, lumber mills, are pushed up and the capital goods across
the capital structure used to produce goods in the expanding areas,
iron mines, timber lands, and so on. Monetary inflation through
credit expansion makes it possible for borrowers to demand more
assets without lenders reducing demands for other goods. Therefore,
rising asset prices increase the profitability of their production
while the profitability of other goods need not decline. Not enough
resources are released from the production of other goods to complete
all of the projects made profitable by the credit expansion. With
a market monetary system, the proper amount of resources are made
available because an increase in the supply of credit can only be
brought about by people saving more and consuming less. The additional
investment projects made profitable by the increase in saving are
balanced by the projects no longer profitable because of the reduced
consumption. But with an elastic currency system, the build-up of
capital capacity and other investment projects financed with created
credit do not wind up satisfying people’s time preferences. The
build-up of the capital structure during the boom is unsustainable.
It ends in the liquidation of the build-up in the bust.
the boom to an end is the re-establishment of people’s time preferences
and preferences for saving. People do this through the disbursement
of their incomes. The credit created during the boom is spent by
the borrowers to buy goods, houses, factories, etc. The entrepreneurs
who produce these goods then receive the new money as revenues for
selling the goods. They pay producers to buy the resources used
to produce the goods. The new money is then income for the producers.
People disburse their income to satisfy their preferences, including
their time preferences. They prefer to save only a fraction of their
incomes. Although the entire amount of the new money issued starts
out increasing the supply of credit, only a fraction of it winds
up as supply of credit. Monetary inflation and credit expansion
runs counter to people’s time preferences and market economies operate
to satisfy people’s preferences.
working against the sustainability of the boom is that the further
credit expansion extends the risker the projects and the less credit
worthy the borrowers become. As financial intermediaries, banks
economize credit, lending to the highest return, most secure projects
and the highest interest rate, most credit-worthy borrowers. Additional
credit must be extended to lower return, less secure projects and
lower interest rate, less credit-worthy borrowers. If monetary inflation
and credit expansion go on far enough, investors refuse to accept
the additional risk and sell out of the lines of production expanded
during the boom. Since the prices of assets in the more sound projects
have been bid up along with the prices of projects in the less sound
projects, investors in the more sound projects will also lose wealth
if they continue to hold their investments.
restore interest rates and asset prices to the levels that reflect
their preferences, the particular lines of production in which mal-investments
have been made in building-up the capital structure during the boom
are revealed. The bust consists of reconfiguring the malformed capital
structure to best satisfy people’s preferences. Mal-invested assets
must be sold to entrepreneurs in lines of production that will prove
to be profitable. Labor must be re-allocated away from boom lines
into production supported by people’s preferences. As with all production
decisions, these can be made in the most economizing fashion by
entrepreneurs earning profits from their superior foresight in satisfying
preferences and suffering losses for their inferior foresight.
currency is the cause of financial crises and economic downturns.
Supplant it with a market system of commodity money and money certificates
and there would be no crises and downturns. The residual business
fluctuations would not justify government intervention to solve
the social problems associated with crises and downturns.
As the monetary
system has become more elastic in American history, booms and busts
have worsened. George Selgin, William Lastrapes, and Lawrence White
conclude, in their 2010 Cato Working Paper, that recent research
demonstrates that the Fed has not lived up to its original promise.
and White summarize their findings on the performance of the Fed
in these words: “Drawing on a wide range of recent empirical research,
we find the following: (1) The Fed‘s full history (1914 to present)
has been characterized by more rather than fewer symptoms of monetary
and macroeconomic instability than the decades leading to the Fed‘s
establishment. (2) While the Fed‘s performance has undoubtedly improved
since World War II, even its postwar performance has not clearly
surpassed that of its undoubtedly flawed predecessor, the National
Banking system, before World War I. (3) Some proposed alternative
arrangements might plausibly do better than the Fed as presently
constituted. We conclude that the need for a systematic exploration
of alternatives to the established monetary system is as pressing
today as it was a century ago.”
I concur with their conclusion.
Economic theory and historical evidence demonstrate that a central
bank confers no benefit on society at large. The Fed should be abolished
and a market monetary system of commodity money and money certificates
should be established.
goal of monetary reform is to make money production subject to the
profit and loss test of socially beneficial production. Money production
must become an integral part of the market economy. There may be
several viable paths of transition to a system of market production
of money, but any such path must take account of Carl Menger’s famous
demonstration that an item can only arise as money consistently
with what people are actually using as the most widely traded good.
 After the transition, a monetary system integrated into
the market economy could begin. 
Reserve Notes are money in the American economy. Thus, the most
direct way to establish a market monetary system is to reestablish
FRN as redemption claims for commodity money. The most widely-recognized
commodity money today is gold coins. The primary step in monetary
reform, then, is to turn FRNs into 100-percent-reserve redemption
claims for gold coins.
other step along this path to a market monetary system is to establish
a 100 percent reserve of money against bank issued fiduciary media.
The Fed’s tripling of its balance sheet in response to the crisis
of 2008 makes this part of the transition easier. Banks now hold
reserves against their checkable deposits in excess of 100 percent.
In early April, banks held $1,587 billion in total reserves against
$1,204 billion in total checkable deposits. Fifty billion dollars
of their total reserves consisted of vault cash and $1,537 billion
reserve balances in accounts with the Fed. Therefore, banks would
need to build their cash reserves up to 100 percent of their checkable
deposits of $1,204 by redeeming $1,154 billion of their reserve
balances at the Fed for cash. The Fed could acquire the cash needed
by selling some of the more than $2 trillion in assets it built
up on its balance sheet during the crisis or by printing more FRNs
or some combination of the two. Whatever the total value of FRNs
was at the point where checkable deposits are 100 percent backed
by a reserve of cash, the redemption value of all FRNs could be
set by calculating the ratio of FRN to the gold holdings of the
Fed. If no change in the stock of FRNs outstanding was necessary
to accomplish the transition, then the calculation would be as follows.
The Fed is showing on its balance sheet of April 18, $11.041 billion
in gold holding. Valued at $42.22 per ounce, this is 261.5 million
ounces of gold. On the same balance sheet, the Fed shows $1,100,160
million in currency in circulation. Thus, the redemption ratio would
be $4,207 per ounce of gold. The actual calculation, however, could
only be done after an audit of the Fed and the process of establishing
a 100 percent cash reserve, described above, were completed. 
this transition was accomplished, the government should permit private
production of money and money certificates according to the general
laws of commerce. Mining and minting companies would produce commodity
money that people made profitable by their demands. To earn profit,
entrepreneurs would produce coins from the metals, in the weights,
and with the designs people preferred. They would keep their costs
down and invest and innovate when people’s demands made it profitable.
Scholars have chronicled many historical episodes of private production
of coins. Recently, George Selgin, in his book Good
Money, has recounted the production of private coinage
in England in the late 18th and early 19th
centuries. As he shows, private coinage thrived until the British
government outlawed it in 1821.
too, should be put under the general laws of commerce including
those relating to warehousing money by holding a 100 percent reserve
of money against their money substitutes. Banks would earn profit
by producing the amounts and types of money substitutes that satisfied
people’s demands. To earn profit, they would keep their costs down
and invest and innovate when people’s demands made it profitable.
The operation of 100 percent reserve banking is described in Jesús
Huerta de Soto’s book, Money, Banking,
and Economic Cycles. As he documents, money warehouse banks
thrived in Amsterdam for over a hundred years in the 17th
and 18th centuries. 
No one can describe today the configuration of commodity money and
money certificates that entrepreneurs would bring about if permitted
to operate private enterprises in their production any more than
one could have predicted in 1900 the development of the 21st
century automobile industry or predicted in 1950 the 21st
century consumer electronics industry. What we do know is that their
production would be regulated by profit and loss and therefore,
would result in the satisfaction of people’s preferences. The monetary
inflation and credit expansion of our elastic currency system would
be eliminated and with it the booms and busts that have plagued
 This is an implication of Mises’s famous argument
that central planners cannot economize the use of resources in
society. See Ludwig von Mises, Economic
Calculation in the Socialist Commonwealth (Auburn, Ala.:
Mises Institute, 1990 ) and Mises, Human
Action, scholar’s edition (Auburn, Ala.: Mises Institute,
1998 ), pp. 685-711.
 Mises wrote that making money production conform
to profitability and not politics, “is not a defect of the gold
standard; it is its main excellence,” Human Action, p.
 On bank production of money certificates and credit
intermediation, see Jesús Huerta de Soto, Money,
Bank Credit, and Economic Cycles, trans. Melinda Stroup
(Auburn, Ala.: Mises Institute, 2006 ), pp. 1-36.
 On fiduciary issue and credit creation, see Murray
Mystery of Banking (Auburn, Ala.: Mises Institute, 2008
 The annualize rate of increase in the purchasing
power of the dollar from 1815-1850 was 2.24 percent and from 1865-1900
was 1.75 percent.
 Andrew Atkinson and Patrick Kehoe, “Deflation
and Depression: Is There an Empirical Link,” American Economic
Review Papers and Proceedings 94 (May 2004): 99-103. They
define deflation “as a negative average inflation rate” and depression
“as a negative average real output growth rate.” Ibid., p. 99.
 On the boom-bust cycle, see Mises, Human
Action, pp. 535-583; de Soto, Money, Bank Credit, and Economic
Cycles, pp. 265-395; F.A. Hayek, Prices
and Production and Other Works (Auburn, Ala.: Mises Institute,
2008 ); and Murray Rothbard, America’s
Great Depression (Auburn, Ala.: Mises Institute, 2000
 George Selgin, William Lastrapes, Lawrence White,
“Has the Fed Been a Failure?,” Cato Working Paper Dec.
2010, p. 1.
 Carl Menger, “On the Origin of Money,” Economic
Journal 2 (1892): 239–55; Peter G. Klein and George A. Selgin,
“Menger’s Theory of Money: Some Experimental Evidence,” in John
Smithin, ed., What
Is Money? (London: Routledge, 2000), pp. 217–34.
 On such monetary reform, see Rothbard, Mystery
of Banking, pp. 247-268; Salerno, Money,
Sound and Unsound, pp. 333-363; and de Soto, Money,
Bank Credit, and Economic Cycles, pp. 736-745.
 Data from Federal Reserve Statistic Releases:
H.3 Aggregate Reserves of Depository Institutions; H.6 Money Stock
Measures; and H.4.1 Factors Affecting Reserve Balances. April
 De Soto, Money, Bank Credit, and Economic
Cycles, pp. 37-114.
Herbener teaches at Grove City College and is a senior fellow of
the Mises Institute.