“The moment there is any sign that the total income stream may actually shrink [during a post-bust deflationary crash], I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.”
– F. A. Hayek, in reply to a question from his old friend Gottfried Haberler in a talk given at the American Enterprise Institute in 1975.
“I agree with Milton Friedman that once the Crash [of 1929] had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression.”
– F. A. Hayek, interviewed by Dieg Pizano July, 1979 published in Conversations with Great Economists: Friedrich A. Hayek, John Hicks, Nicholas Kaldor, Leonid V. Kantorovich, Joan Robinson, Paul A.Samuelson, Jan Tinbergen by Diego Pizano.
NYU economist Mario Rizzo comments:
So now we have not only the logic of Hayekian economics (both micro and macro) and the words of the man himself that deflation (of the increase in the relative demand to hold variety) should be avoided. I claim infallibly that this is the Hayekian position. We can argue about whether he was right but we cannot profitably argue about whether this was his position. QED.
Lawrence White provides an extended discussion of the Hayekian position on post-bust deflation (lacking some key passages from Hayek on the topic) in his article, “Did Hayek and Robbins Deepen the Great Depression?”, Journal of Money, Credit and Banking, Volume 40 Issue 4, (2008), pages 751 – 768.
I also recommend this short piece by David Glasner posted originally here on Taking Hayek Seriously.