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The Curious Case of Lloyd Mints, Milton Friedman and the Emergence of Monetarism*

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The Curious Case of Lloyd Mints, Milton Friedman and the Emergence of Monetarism* The Dog that Didn’t Bark: The Curious Case of Lloyd Mints, Milton Friedman and the Emergence of Monetarism* Harris Dellas, University of Bern and CEPR George S. Tavlas, Bank of Greece, and the Hoover Institution, Stanford University Economics Working Paper 19116 HOOVER INSTITUTION 434 GALVEZ MALL STANFORD UNIVERSITY STANFORD, CA 94305-6010 October 2019 Evidence about Lloyd Mints’s role in the development of monetary economics at the University of Chicago has proven elusive, with the result that Mints has long been considered a peripheral figure at Chicago. We provide evidence showing that the standard assessment of Mints’s standing in Chicago monetary economics -- and in American monetary economics more broadly -- is deficient. In light of (i) the originality and the breadth of his monetary contributions, (ii) the cross-fertilization of his thinking with that of Milton Friedman, and (iii) the way Mints’s original contributions helped shape part of Friedman’s framework and were pushed forward by Friedman, we argue that, far from being a peripheral figure in the development of Chicago monetary economics, Mints played a more substantial role than has been previously thought in the emerging Chicago monetary economics of the late-1940s and early-1950s. Keywords: Lloyd Mints, Milton Friedman, monetarism, Chicago monetary tradition. JEL Codes: B22, E52 The Hoover Institution Economics Working Paper Series allows authors to distribute research for discussion and comment among other researchers. Working papers reflect the views of the authors and not the views of the Hoover Institution. * Correspondence may be addressed to Harris Dellas, Department of Economics, University of Bern, Schanzeneckstr 1, 3012 Bern, Switzerland; telephone number: +41316313989, email: [email protected], www.harrisdellas.net; and George Tavlas, Bank of Greece, 21 E Venizelos Ave, Athens, 10250, Greece; telephone number: +302103202370; email: [email protected]. We are grateful to the Editor, Kevin Hoover, two referees, and Thomas Humphrey, Ed Nelson, Richard Timberlake, and Michael Ulan for helpful comments. We thank Elisavet Bosdelekidou and Maria Monopoli for excellent research assistance. Research for this paper was conducted while George Tavlas was a Visiting Scholar at the Becker Friedman Institute at the University of Chicago, and the Center for the History of Political Economy at Duke University; and Harris Dellas was a Visiting Scholar at the Bank of Greece. Gregory (Scotland Yard detective): Is there any other point to which you would wish to draw my attention? Sherlock Holmes: To the curious incident of the dog in the night-time. Gregory: The dog did nothing in the night-time. Sherlock Holmes: That was the curious incident. Arthur Conan Doyle, The Adventure of Silver Blaze 1. Introduction Evidence about Lloyd Mints’s role in the development of monetary economics at the University of Chicago has been elusive, with the result that Mints has long been considered a peripheral figure at Chicago.1 Thus, although the literature on the development of Chicago monetary economics during the 1930s and 1940s has systematically assessed the relevance to later monetary thinking of the monetary writings of such Chicagoans as Henry Simons, Jacob Viner, Frank Knight, and Paul Douglas, including their possible influences on Milton Friedman’s quantity-theory framework, Mints’s contributions have, by-and-large, been neglected.2 In this paper, we provide evidence showing that the conventional assessment of Mints’s standing in Chicago monetary economics -- and in American monetary economics more broadly -- is mistaken. We argue that, far from being a peripheral figure in the development of Chicago monetary economics, Mints, especially through the cross-fertilization of his thinking with that of Friedman in the late-1940s and early- 1950s, played a more substantial role than has been previously thought in the emerging Chicago monetary economics of that period. We show that Mints made important, original contributions that were later adopted and pushed forward by Friedman. In particular, Mints argued that: (i) exchange- rate volatility is not a function of the specific exchange-rate regime in place, but of the volatility of the underlying macroeconomic fundamentals; (ii) the frictional rate of unemployment represents the lower sustained bound of unemployment that 1 We use the word “peripheral” in the sense that Mints’s contribution to the development of monetary economics at the University of Chicago has not been viewed as being so important as the contributions of some of his Chicago colleagues in the 1930s and the 1940s. 2 In addition to the Chicagoans mentioned above, Tavlas (1997) provided a brief discussion of Aaron Director’s monetary views. Friedman (1956, p. 3) asserted that, in the 1930s and 1940s, his Chicago mentors “Henry Simons and Lloyd Mints directly, and Frank Knight and Jacob Viner at one remove” developed a subtle and relevant version of quantity theory that influenced his monetary economics. Despite Friedman’s acknowledgment of Mints’s influence, there is no biographical information on Mints on any economics (including history of economics) websites. A book on the Chicago School, edited by Emmett (2010), contains biographical articles on nineteen early Chicagoans, including Director, Douglas, Knight, Simons, and Viner, but not on Mints. More to the point, and as a referee observed, there has never been a study devoted to Mints’s monetary economics. Consequently, Mints has been treated as of peripheral importance in the doctrinal literature. 1 monetary policy can support; a central bank that systematically attempts to go below this rate is destined to bring about high and uncertain inflation, and a higher rate of unemployment; and, (iii) based on his interaction with Friedman, discretionary monetary policies are the main culprit for macroeconomic instability due both to the uncertainty they create and the lags that characterize their effects. In addition, Mints built on the work of other economists in the areas of (i) the Federal Reserve’s role in the Great Depression, (ii) the role of wealth effects in the transmission of monetary policy, (iii) the use of a portfolio-balance model of the demand for money, and (iv) the advantages of a monetary-policy rule. Mints taught at Chicago from 1919 until his retirement in 1953, the longest consecutive stretch of any of the earlier Chicagoans. Moreover, Mints specialized in monetary economics and taught the graduate course in money and banking at Chicago. Additionally, Mints’s tenure at Chicago overlapped with both the early-1930s, the formative years of the Chicago monetary tradition, and with the years 1946 to 1953, which marked the formative period of Friedman’s monetary thinking.3 Moreover, Mints published two major books -- A History of Banking Theory, in 1945, and Monetary Policy for a Competitive Society, in 1950. The former book became a standard reference in the literature on monetary doctrine and helped establish Mints’s scholarly reputation within the profession while the latter book, reflecting that reputation, was reviewed, generally positively, by such notable economists as Harry Johnson (1951), Dennis Robertson (1951), and James Tobin (1951). As indicated, however, discussions of Mints’s monetary views, and their possible influence on Friedman’s thinking, have been sparse. By-and-large, studies of Mints’s monetary views (see Tavlas, 1977; McIvor, 1983; Steindl, 1995; Rockoff, 2010) have focused on his criticisms of the Federal Reserve’s policies during the Great Depression and the similarity of those criticisms with those of Friedman and Schwartz (1963)4. None of these studies provided a systematic analysis of Mint’s original contributions, contained in his publications between 1945 and 1951; or, 3 Nelson (2009; 2017, Chapter 4) identifies Friedman’s move away from Keynesianism and greater support for monetary policy with Friedman’s work from 1944 onward. Friedman’s main research on money began after he moved to the University of Chicago in 1946. 4 Rockoff (2010, p. 97) noted that “it is possible that Mints’s views on the role of the Federal Reserve in the Great Depression formed part of the background that shaped the narrative in Monetary History but his views … are not cited explicitly.” In his book, Essays On and In the Chicago Tradition, Patinkin (1981) provided scattered observations on Mints’s monetary views, but not a cohesive discussion of those views. 2 of the interplay between Mints’s contributions and the maturation of Friedman’s monetary thinking during the late-1940s and early-1950s. Why has Mints’s work been neglected in studies on the Chicago monetary tradition? Two possible reasons are the following: First, previous studies on that tradition focused mainly on the pre-General Theory (Keynes, 1936) period, 1927- 35, a period during which Mints published only a single article, “The Elasticity of Bank Notes,” in 1930 that bore essentially no relationship to the characteristics that would mark the Chicago monetary tradition. Second, and related to the first point, apart from occasional book reviews, primarily in the Journal of Political Economy (JPE), Mints did not publish anything between 1931 and 1945, the year his book, A History of Banking Theory, appeared. Following the publication of that book, however, Mints published several articles and his 1950 book; these works exhibited both a continuity with key aspects of the early-1930s Chicago monetary tradition as well as breaks with that tradition, with the breaks displaying clear similarities to Friedman’s emerging monetarist thinking. A third possible reason for the neglect of Mints’s work is discussed in the concluding section of this paper. 2. Biographical Sketch5 Lloyd Winn Mints (1888-1989) was born near Bushnell, South Dakota. He received his Bachelor’s Degree in 1914 and his Master’s Degree in 1915 -- both from the University of Colorado. After completing his Master’s Degree, he worked for the federal government -- first in Washington D.C., and then in Chicago.
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