Money, Banking, and the Business Cycle: Volume I: Integrating Theory and Practice

297 Pages·2014·1.835 MB·English

by  Brian P. Simpson

Money, Banking, and the Business Cycle
Also by Brian P. Simpson
Money, Banking, and the Business Cycle, Volume 2: Remedies and Alternative Theories
Markets Don’t Fail!
Money, Banking, and the

Business Cycle
Integrating Theory
and Practice
Volume One
Brian P. Simpson
money, banking, and the business cycle
Copyright © Brian P. Simpson, 2014.
All rights reserved.
First published in 2014 by
PALGRAVE MACMILLAN®
in the United States— a division of St. Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Where this book is distributed in the UK, Europe and the rest of the world,
this is by Palgrave Macmillan, a division of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills,
Basingstoke, Hampshire RG21 6XS.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries.
ISBN: 978–1–137–33531–9
Library of Congress Cataloging-in-Publication Data
Simpson, Brian P., 1966–
Money, banking, and the business cycle : integrating theory and
practice / Brian P. Simpson.
volumes ; cm
Includes bibliographical references and index.
ISBN 978–1–137–33531–9 (hardback)
1. Business cycles. 2. Monetary policy. 3. Banks and banking. I. Title.
HB3714.S56 2014
338.542—dc23 2013044047
A catalogue record of the book is available from the British Library.
Design by Newgen Knowledge Works (P) Ltd., Chennai, India.
First edition: April 2014
10 9 8 7 6 5 4 3 2 1
To Annaliese Cassarino, my wife, and Charles and
JoAnn Simpson, my parents
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Contents

List of Exhibits ix
Preface xiii
Acknowledgments xv
Introduction 1
Part I Theory
1 Money, Banking, and Inflation 9
2 How Does the Government Cause Inflation? 29
3 What Causes the Business Cycle? 57
4 In Defense of Austrian Business Cycle Theory 87
Part II Practice
5 The Recession of the Early 1980s 113
6 The Business Cycle in Late Twentieth-/Early
Twenty-First-Century America 143
7 John Law’s Financial Scam and the South Sea Bubble 171
8 The Great Depression 187
9 The Business Cycle in America from 1900 to 1965 221
Epilogue 245
Notes 247
Selected Bibliography 267
Index 273
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Exhibits

1.1 Example of a blank balance sheet 19
1.2 Bank balance sheet 20
1.3 Bank A’s initial balance sheet 21
1.4 Bank A’s balance sheet after making a $900 loan 21
2.1 T he effect in the loan market of an open-market
purchase of government debt by the Fed 30
2.2 T he long-term effect in the loan market of a greater inflation
rate (of the money supply) on interest rates 34
3.1 One-time increase in money and spending of 2 percent 66
3.2 C ontinuous annual increase in money and spending of 2 percent 67
3.3 Accelerating increase in money and spending 68
3.4 A ccelerating increase in money and spending with
change in velocity 70
3.5 Hypothetical example of the business cycle 83
5.1 Real GDP, 1975–85 115
5.2 Real GNR, 1975–85 119
5.3 Business failure rate, 1975–87 121
5.4 Unemployment rate, 1975–85 121
5.5 Industrial production (consumers’ goods, intermediate
goods, and materials), 1975–85 122
5.6 Industrial production (total, durable manufactured goods, and
nondurable manufactured goods), 1975–85 123
5.7 Rate of profit and interest rate (return on equity and
commercial paper rate), 1975–87 126
5.8 Average annual rate of change of the money supply and prices
during specified five-year periods, 1960–85 128
5.9 Velocity of money using the money supply described in
exhibit 5.8 and GNR, 1960–86 130
5.10 Rate of change of the money supply, 1974–85 131
6.1 Real GDP, 1965–2012 144
6.2 Real GNR, 1965–2010 145
6.3 Business failure rate, 1965–98 146
6.4 Unemployment rate, 1965–2012 147
6.5 I ndustrial production (consumers’ goods, intermediate
goods, and materials), 1965–2012 148