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I first heard David Henderson speak at Cato University in 2003 at the Rancho Bernardo Inn. What he said about capitalism being compassionate stuck with me. And it still does. Henderson put it so well, and I’ve quoted him on it over the years.

Henderson understandably wasn’t pleased with my critique of his tribute to Robert Lucas, and he wrote as much. More than fair enough. If I could take back what I wrote, it’s safe to say the substance of what I wrote wouldn’t much change, but the tone would. Up front, I’d like to apologize to Henderson for how I approached his tribute to Lucas. The sarcasm was obnoxious. Thanks also go to Henderson for engaging me in a civil debate.

At the same time, it’s hard to find in his rebuttal any substantial evidence that my critique was incorrect. Henderson writes that I’m wrong in my contention that “money has no purpose absent production.” His assertion is that we use money to “exchange,” which is what I wrote. Henderson seems to be saying that money can be used by people who haven’t produced, which is true, but it’s making a distinction without a difference. No doubt lots of kids at University spend with abandon despite not producing anything, but the simple truth is that the money in their pockets is a consequence of someone else’s production. Same with my kids. I’m rather socialist with them. What I have is for them to spend. Still, their “money” is born of my production. Money is a consequence of production, period.

In his tribute to Lucas, Henderson wrote with evident reverence about Lucas’s observation that “if the Federal Reserve increased the growth rate of the money supply to get a temporary reduction in unemployment, the policy would work only if the actual growth rate was bigger than what people expected.” I was puzzled as to why he would be impressed, only to write that “Implicit here is that market intervention by non-market actors is a positive so long as the intervention is properly executed.”

In his rebuttal, Henderson responded with “Tamny fails to make one of the most basic distinctions we have in economics: the distinction between the positive (what is) and the normative (what should be.)” Which was really not even a response in consideration of my critique of intervention. Whether Henderson thinks the latter is good or bad he doesn’t explicitly say, but judging by his initial tribute, it’s apparent he thinks intervention has positive qualities? If not, why mention Lucas’s embrace of what he deemed proper market intervention (an oxymoron as I see it) to begin with? In which case it’s puzzling why Henderson would think intervention from non-market actors a good thing.

Of course, and as I wrote, it’s unnecessary as is. Money and credit flow relentlessly to intriguing concepts, so why would free market economists find positives in central bankers or economists substituting their actions for those of the marketplace? Henderson doesn’t address this. Instead, he writes that he has “no idea” why I don’t think money creation instigates actual economic activity. Which was and is odd. It implies that a professed free thinker like Henderson believes producers require economists in the employ of central banks to “supply” exchange mediums. They don’t. Good, trusted money is once again an effect of production. Wherever there are worthy goods and services primed for exchange, money will be there. As Mises himself wrote, “No individual and no nation need fear at any time to have less money than it needs.” Precisely. Which was and is my point. The dollar doesn’t liquefy the vast majority of exchange in Caracas because wise economists planned it that way, but because those with goods and services will not accept bolivars in exchange for them. Markets are wise.

Which hopefully helps answer Henderson’s commentary about Iran and its rial. Here Henderson wonders if I agree that “the number of rials printed by Iran’s central bank had any effect on the value of the rial. Didn’t that money “instigate” substantial inflation?” Actually, there’s an historical argument to be made that “inflation” (meaning devaluation) happens first, with excess money or “printing” the result. It’s something I argue in my latest book The Money Confusion, and that George Gilder embraces in his brand new book Life After Capitalism. Alas, that’s another debate. For now, the ubiquity of dollars in Iran is yet more evidence that money finds production once again without regard to the desires of central bankers; Iran just further evidence of the myriad holes in the Friedmanite view that the Fed's "tight money" brought on relatively slow economic growth in the 1930s. Henderson is clear that he disagrees. 

On the matter of the Great Depression, Henderson writes that “It should be accepted wisdom” among Keynesians (as it already is among Monetarists) that “a large decrease in the money supply” factored substantially in shaping the 1930s. If we ignore that Henderson is mistaking causation (a large decline in production born of tax hikes, enormous increases in government spending, record taxes on 20,000+ imported goods, 70% dollar devaluation, etc. etc.) as to what brought on fewer dollars in circulation, it’s much more difficult to ignore his implied belief that producers then and now require the Fed to play croupier as it were before producing. He wonders why I put “free market” in quotes in describing him, but then it is he who at least hints that production requires all manner of wise machinations from monetary authorities associated with the state.

From there, Henderson writes that “Tamny doesn’t tell us why or how he’s come up” with his view that the Fed had nothing to do with the downturn in the 1930s. That didn't read right. Indeed, a read of my critique makes plain how I back my assertions about money flowing without regard to the Fed: the dollar’s global usage as an exchange and investment medium is all one need to see the folly of a deeply held Monetarist view that a “tight” Fed was a major cause of the 1930s. The simple truth is that money flows to its highest use globally, and always has. To then presume that the Fed acted as barrier to “money” in the 1930s vandalizes reason.

Henderson is so very right about my handling of Lucas and taxes. Taxes matter. Government spending matters. Reduce the penalties placed on work because we both agree that free people prosper. I was overly sarcastic, and the fault lies with me.

In closing, I’m a fan of Henderson and have quoted him for years. My sarcasm embarrasses me, and I take it back without taking back the critiques. Thanks again to Henderson for a civil debate, discussion, or however he’d like to describe it.

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His latest book is The Money Confusion: How Illiteracy About Currencies and Inflation Sets the Stage For the Crypto Revolution.

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