I saw tom woods talk on the depression of 1920. In it he said that there was no monetary policy by the fed that affected the result of the 1920-21 recession.
However, apparently the federal reserve cut rates from 7% to 4.5%, which preceded an end to the recession.
This was supposed to be a prime example of how austrian economics can bring the country out of recession. Is there something I'm not seeing?
The Fed jacked the discount rate up in the first place to deal with the postwar inflation. Thus if any pushback in the discount rate from that moment on would be considered "stimulus," then how could the discount rate ever be brought back down to normal levels?
What matters are the monetary aggregates, and it looks to me as if the Fed didn't reverse its policy vis-a-vis the monetary base until 1922.
Was that not the same rate cut that Austrians understand to have fed the roaring 20's?
ThreeTrees: Was that not the same rate cut that Austrians understand to have fed the roaring 20's?
It's been a while since I've read America's Great Depression, but the bulk of the inflation, as I understand, began in 1924. It's true that both Robert Murphy and Tom Woods suggest that the Fed raised interest rates during the 1921 depression. I think that at least the latter wrote his piece for Mises Daily based on "new" Austrian material, that didn't focus on that portion of history and therefore didn't commit to exhaustive research prior to writing. The history is at least a little different than what was written in that article. I've been meaning to do some research on my own, but I've been focusing on other things lately (like, getting through this semester of class).
The problem is that if the rate cut preceded the end to the recession, monetarists can claim this is yet another example of government intervention working.
Daniel Roe:However, apparently the federal reserve cut rates from 7% to 4.5%, which preceded an end to the recession.
This is just wrong. The FED couldn't even control interest rates, short-term or whatever, until 1922.
At the end of the war the Federal Reserve bank of New York began raising interest rates sharply. In December 1919 the rate was raised to 4.75% from 4%. A month later it was raised to 6% and in June 1920 it was raised to 7% (the highest interest rates of any period except the 1970s and early 1980s). The high rates sharply reduced the amount of bank lending in the country, both to other banks and to consumers and businesses.[2][8]Rates were sharply reduced in the latter half of 1921. The New York Federal Reserve reduced rates in successive half-point moves over the July- November period from the 7% high to 4.5% on November 3 1921. The depression ended.
None of this is true. Don't believe everything you read on Wikipedia. The U.S went back to the gold standard after WW1, causing a major contraction in the money supply, purging the economy of the inflation used to finance the war (and the resulting malinvestments).
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Daniel Roe: The problem is that if the rate cut preceded the end to the recession, monetarists can claim this is yet another example of government intervention working.
Then the monetarists would have to explain the boom that followed and ultimately led to the bust of 1929 and the Great Depression.
A cut in the rate of interest by itself means very little. You would have to look at the money supply as well as the timing. But in any event, it is expected that the money supply would have started to increase as a result of Fed policy at some point during the 1920-21 bust simply because we know that the recovery was followed by another bubble.
Esuric:This is just wrong. The FED couldn't even control interest rates, short-term or whatever, until 1922.
I believe you, do you have a source I can read?
Daniel Roe:I believe you, do you have a source I can read?
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3826
Esuric: Daniel Roe:I believe you, do you have a source I can read? http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3826
Ensuric, It talks about not conducting any open market transactions until 1922, but where does it say that it couldn't cut the Fed's discount rate? Although I wold concur that the Fed's ability to inject liquidity without open market operations is severely limited.
DD5:Ensuric, It talks about not conducting any open market transactions until 1922, but where does it say that it couldn't cut the Fed's discount rate? Although I wold concur that the Fed's ability to inject liquidity without open market operations is severely limited.
Oh yeah, I forgot about the discount rate. The FED could control the discount rate, but they couldn't control the FED funds rate (and the yield curve). The Wikipedia article keeps saying cut, or increased "the rate" without further elaborating on what they mean. "The rate" today is usually associated with the FED funds rate. Also, the Wikipedia article cites no source for: "The New York Federal Reserve reduced rates in successive half-point moves over the July- November period from the 7% high to 4.5% on November 3 1921."
>"The New York Federal Reserve reduced rates in successive half-point moves over the July- November period from the 7% high to 4.5% on November 3 1921."
I'm looking for a source on that now to see if it's inaccurate. I've found nothing to contradict it. Robert Murphy's article totally ignores it by jumping from July (where the wiki article admits to 7% rates), and then stops mentioning any rates after that.
From an outsider's perspective, it certainly looks like Tom Woods and Bob Murphy are ignoring this. That doesn't bode well for those of us who speak directly to the monetarists.
The source is probably Benjamin Anderson's Economics and the Public Welfare, since he states the same thing. He describes how during 1921 bank interest rates remained very high, allowing the market to liquidate, while the government cut back spending. He then cites an easy money policy by the Federal Reserve starting in 1922 (I think mostly during the summer of 1922) as another reason as to why the depression ended so soon. But, he still considers the majority of the reason to lie on the shoulders of a reduction in wages and quick liquidation in 1921.
Daniel Roe: From an outsider's perspective, it certainly looks like Tom Woods and Bob Murphy are ignoring this. That doesn't bode well for those of us who speak directly to the monetarists.
Although, like I said before, I don't think Murphy or Woods did a good job in their history of this depression, they are generally correct, and even if easy credit allowed for a quick recovery, that is in line with Austrian theory. Where the Austrians differ is whether or not this boom is sustainable, and the Great Depression showed that it was not.
For anyone wondering, the wikipedia article is correct: The Discount rate was dropped by .5 increments from june to november 1921
The whole point of the Woods and Murphy speeches/papers on the 1921 recession is that we don't need stimulus to get us out.
They used the 1919-21 recession as an example of that, and I think it's disingenuous when, indeed, the government did stimulate the economy in this case.
I feel kind of cheated right now, actually.
EDIT: I meant DISCOUNT RATE, not FUNDS rate.
That's too bad, because they'd have to show by way of theory and not reciting numbers a) why it would have terminated the recession b) why this did not generate further problems down the road (which if it did bodes ill for their own gobbledygook) and c) explain why this was sufficient to "end" the recession and 'stimulate' the economy, not just toss about figures. They better get to it.
They used the 1919-21 recession as an example of that, and I think it's disingenuous when, indeed, the government did stimulate the economy in this case. I feel kind of cheated right now, actually.
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