Austrians realize that empirical reality is unique, particularly raw statistical data. Let that data be massaged, averaged, seasonals taken out, etc. and then the data necessarily falsify reality. — Murray Rothbard, Making Economic Sense, p. 246)
For many years I—and other Austrians—have had to endure charges by monetarists that Murray Rothbard fudged the data to increase monetary growth rates during the 1920s in order to portray it as an inflationary decade. As I argued (here and here) in an exchange with eminent monetary historian Richard Timberlake (here, here, and here) these allegations are baseless. So, now it is with delicious irony that I draw your attention to an explosive article by three econometricians thoroughly debunking the empirical claim made by Milton Friedman and Anna Schwartz (FS) that the velocity of money in the U.S. has exhibited long-run stability for more than a century leading up to 1975.
Neil Ericsson, David Hendry, and Stedman Hood argue that dubious “data adjustment” in FS’s empirical models “dramatically reduced apparent movement of the velocity of circulation of money and . . . adversely affected the constancy and fit of his estimated money demand models.” In other words, FS’s empirical case that the demand for money (the inverse of velocity) is constant, which FS painstakingly elaborated in three statistical tomes published from 1963 to 1982 and which is the linchpin of monetarism, has been exposed as statistical legerdemain.
Current Prices on popular forms of Gold Bullion
FS adjusted the raw data to account for: 1. the sudden onset of rapid developments of financial instruments and institutions in the U.S. economy compared to the U.K. economy; and 2. short-run fluctuations in velocity associated…