THE BLOG

Book Review: Tim Congdon's 'Money in a Free Society'

28/10/2014 16:08 GMT | Updated 28/12/2014 10:59 GMT

Long a monetarist advocate, Tim Congdon's distinguished career involved roles in the City of London and as a key advisor to the Thatcher government. To this day, Money in a Free Society remains one of the only critiques of the financial crisis from a monetarist standpoint.

In his 2011 book 'Money in a Free Society', Congdon argues policymakers have abandoned the legacy of Keynes and Friedman and calls for a focus on the money supply. Moreover, the free-market advocate firmly rejects the notion that the Great Recession arose from a lack of economic intervention, instead placing the blame with a misinterpretation of Keynes and Friedman's policies and a failed monetary policy. To compound his point, Congdon compares the policies of the Obama administration and the Federal Reserve to Keynes and Friedman's original theories. Congdon also disputes the notion of a 'Keynesian revolution' in the UK. Referring to the notion such a revolution as a "factoid", Congdon majestically dissects the supposed 'revolution' by citing the fiscal policy utilised in the recession of the mid-1970s and 2008 onwards.

Congdon skillfully dismantles the 'New Keynesian' model, which focuses on manipulation of the short-term interest rate, and berates the model for its dependency on interest rates as a policy instrument. The author cites the Taylor Rule and its impotence during the financial crisis (when it recommended negative nominal interest rates) to highlight the model's failure. Congdon associates the failings on the 'New Keynesian' model with interest rates becoming "...the only policy instrument, the factotum of macroeconomics".

A large section is dedicated to the 'liquidity trap' theory, specifically aimed at contemporary advocate and Nobel economics laureate Paul Krugman. The liquidity trap was originally conceptualised in Keynes' 'The General Theory of Employment, Interest and Money' (1936). Congdon argues that coetaneous Keynesian advocates (including Paul Krugman) have misinterpreted Keynes' theory regarding liquidity. Several interpretations of the theory are discussed, ranging from the yield on bonds to the short-term money market rate. The author concludes that Keynes liquidity trap refers to long-term bond yield. Due to this, Congdon disputes the contemporary Keynesian consensus that monetary policy has been rendered impotent, thus governments must respond to a budget deficit with a loose fiscal policy and a larger budget deficit. Conversely, Congdon postulates that the US would only be in a liquidity trap if bond yields remained stubbornly high despite increases in the money supply.

Congdon dedicates a section to the role of government, saying that "As its critics understood, monetarism was not--and is not--politically neutral. It was and is an ally of a certain disposition towards political problems. This disposition was basically liberal, in the best nineteenth-century sense of valuing the freedom of the individual." It may be a fair critique of monetarism, but I would dispute that one can easily apply political dispositions to the Keynesian model. Whilst traditionally renowned as a left-wing model due to its association with higher government spending and budget deficits, the Keynesian model is not exclusively left wing and can possess more right-wing traits. Government spending is one facet of fiscal policy that can be utilised to stimulate an economy, but so can tax cuts, traditionally a more right-wing policy.

Whilst Congdon presents a compelling case for a more monetarist economic policy throughout the essays, his last two essays are the most captivating. Congdon rejects the lazy factoid that the bankers single-handedly caused the financial crisis and instead analyses the role of monetary policy, a point of substance. It is postulated that the crisis led to unorthodox and often-untested policies arose post-2008 (such as QE and bailing out the banks) which were a reflection of the 'credit' view of key actors such as Ben Bernanke (the 'credit' view is first analysed at the start of the book).

As the author admits, a handful of essays are cumbersome (notably essay 4, which is not too accessible for the intermediate economist), but it is imperative readers focus on essays 17 and 18. In a world dominated by banker bashing, whilst politicians, regulators and bureaucrats emerge relatively unscathed from the crisis, it is refreshing for an economist to explore the real causes, rather than relying on popular but lazy factoids. Essay 18 is entitled 'The Role of Creditism in the Great Recession', which provides an astute account of loose credit's role in the crisis. Congdon alludes to Creditism at the start of the novel; a term coined by Mark Gertler of NYU and Ben Bernanke, the 14th Chairman of the Federal Reserve. Congdon also fiercely criticises the policy of bank-recapitalisation, associating it with the acceleration of recessionary forces and the deterioration of demand, output and employment. Fiscal reflation does not escape the wrath of Congdon, which is referred to as an "ancient tribal custom". IMF data is alluded to which indicates that changes in the budget balance did not have a "statistically significant impact" on the output gap.

Money in a Free Society provides a compelling case for Friedmanite monetarism from one of the few remaining bastions of this school of thought. Perhaps an apt criticism of the book is the verbose nature of the Keynesian history, but personally the history provided the context for contemporary decisions.