In an earlier thread where I had been asking about the Great Depression and the conditions prior to it, NewLiberty had kindly given a link that looked to be a pretty strong case for a Laissez Faire handling of such significant downturns in the economy:
Presented by Thomas E. Woods, Jr., at "The Great Depression: What We Can Learn From It Today," the Mises Circle in Colorado
http://www.youtube.com/watch?v=czcUmnsprQI
When I posted that on another board, however, I received the following response:
JeffDB, it's a misconception that the economy "self-corrected" in 1921. I guess that this view is put about by those that wish to contrast 1921 with the Keynesian policies implemented under FDR in the 30s.The reality is that the Fed had a lot to do with instigating both the downturn and recovery. Due to post war inflation, the Fed began interest rate rises in Dec 1919. The recession began in Jan 1920. Rates were increased all the way from 4 to 7%. This was an unprecedented increase and no doubt contributed significantly to the deflation that was experienced. Rates came all the way down again in the second half of 1921, which is when the recession ended. There was a matching contraction in the money supply and expansion at the end of the recession. In fact the 1921 recession is an example of what I was describing. Inflation led to rate rises which led to recession. Where it is different is in recession not leading to higher deficits. In that sense it is unique. It is doubtful if that feat could be repeated because of the post war adjustments that were taking place at the time.
Does he have a point?
Leviathan:For example, income redistribution serves various efficiency purposes in the capitalist economy, with progressive taxation taking advantage of the fact that diminishing marginal utility means that money is of less value to the wealthy few than to the masses of the working class, and sustaining their physical efficiency with welfare programs.
I'm suprised to see this oft repeated misconception of diminishing marginal utility go unchallenged here.
While it's true that any given person will value each additional dollar in his bank account less than the previous, it is not necessarilly true that one person with $1000 will value an additional dollar less than someone with $500. Each person has their own unique set of preferences and value scales and we cannot make interpersonal utility comparisons on order to make such a judgement reliably.
Besides which, what has that to do with efficiency? If efficiency is about maximising aggregate utility for all then you might be on to something. But then Austrians don't try to justify capitalism on utilitarian grounds. If capitalism is about being meritocratic, then income should go to those who have earned it, not those who value it most. As I understand it, the Austrian conception of efficiency is about how well supply and demand dovetale together. And surely the best way to achieve this kind of efficiency is to allow markets as fully as possible to determine incomes? Redistributing incomes (weakening market determination) will only serve to reduce such economic efficiency.
I am no expert by any means but I don't see how that argument undermines the Austrian argument.
The point is that the malinvestments (brought about by the post war inflation) led to the evaporation of investment funding which caused the recession and interest rates to rise. The fact that interest rates rose one month before the recession officially started is neither here nor there.
Furthermore, interest rates that were allowed to rise (unlike today) and a complete absense of a fiscal stimulous funded by deficits (again unlike today) led to a relatively quick recovery (after an albeit sharp recession). Once malinvestments had been liquidated and the supply of investment funding had been suitably restored, economic recovery ensued and interest rates fell.
In neither case should we see interest rate changes as causing the recession and recovery. They are both symptoms of the same phenomena and their correlation doesn't disprove that.
Thanks for the reply, Fried Egg.
Fried Egg: I am no expert by any means but I don't see how that argument undermines the Austrian argument. The point is that the malinvestments (brought about by the post war inflation) led to the evaporation of investment funding which caused the recession and interest rates to rise. The fact that interest rates rose one month before the recession officially started is neither here nor there.
That may well be true, but the other poster, chap08, was contending that the Fed had deliberately raised rates:
"The reality is that the Fed had a lot to do with instigating both the downturn and recovery. Due to post war inflation, the Fed began interest rate rises in Dec 1919. The recession began in Jan 1920. Rates were increased all the way from 4 to 7%. This was an unprecedented increase and no doubt contributed significantly to the deflation that was experienced."
He isn't as forthright in claiming that the Fed had deliberately dropped rates after the recession began, but he implied it when he started out his post with:
"The reality is that the Fed had a lot to do with instigating both the downturn and recovery." ...
and ended with:
"Rates came all the way down again in the second half of 1921, which is when the recession ended. There was a matching contraction in the money supply and expansion at the end of the recession."
Fried Egg: Furthermore, interest rates that were allowed to rise (unlike today) and a complete absense of a fiscal stimulous funded by deficits (again unlike today) led to a relatively quick recovery (after an albeit sharp recession). Once malinvestments had been liquidated and the supply of investment funding had been suitably restored, economic recovery ensued and interest rates fell. In neither case should we see interest rate changes as causing the recession and recovery. They are both symptoms of the same phenomena and their correlation doesn't disprove that.
That really seems to be the crux of the matter. I wonder if there is any original source material to try and document whether the Fed had deliberately tinkered with the interest rates there or if it was a natural function of the free market economy in that phase of its business cycle.
I would suggest reading Benjamin Anderson's Economics and the Public Welfare.
This is also covered in particular detail in Murray N. Rothbard's "America's Great Depression", which happens to be a great book by the way. I felt like shooting Woods an e-mail questioning him on this, but I figured he has much more to do then compose a rejoinder for me.
Jonathan M. F. Catalán: I would suggest reading Benjamin Anderson's Economics and the Public Welfare.
It looks like a very good book and right on point, but I don't see it online or at my local library. I'll probably have to put it off for awhile.
I started reading Rothbard's "America's Great Depression" which you had recommended in an earlier link. Hopefully he will go into it a bit in that book.
Thanks for this recommendation as well, though. Hopefully I'll be able to find the time and pick up a copy soon.
LvMIenthusiast: This is also covered in particular detail in Murray N. Rothbard's "America's Great Depression", which happens to be a great book by the way.
This is also covered in particular detail in Murray N. Rothbard's "America's Great Depression", which happens to be a great book by the way.
I just started it a couple of nights ago, but am still not even all the way through the 5 introductions. ;)
I've skimmed through some other parts though. It looks good so far.
LvMIenthusiast:I felt like shooting Woods an e-mail questioning him on this, but I figured he has much more to do then compose a rejoinder for me.
Thanks for the thought anyway, but as you say, he probably wouldn't have the time to handhold folks on message boards.
I did find this graph, though on The St. Louis Fed website. http://alfred.stlouisfed.org/graph/?graph_id=20953&category_id=0
If I'm reading it correctly the monetary base was going up into 1921 which would seem to go against the notion that the Fed was deliberately "raising interest rates".
Sounds like he's over-simplifying, even if technically correct on facts presented. Anyway, LF primarily refers to how the government didn't embark on a mad "New Deal" spending spree, the Raw Deal being what most people credit for the supposed recovery... which didn't really occur until 1946 or so since the economy was most definitely crummy in terms of prosperity during the war.
Also, I can't remember the details of why, but I do vaguely recall reading something by Rothbard (Case against the Fed?) making a claim that the Fed can pump money into the economy with ease, but has a much harder time doing the reverse. If I'm recalling that correctly, claiming that the Fed "cured" (in such a short time) the very problem it created is somewhat sketchy.
It seems an interesting (i.e. "different", not strong) type of counter point, but I've serious doubts that it's a good one. Think about it some more first or better yet keep a discussion going with this guy to get more information on his viewpoint to evaluate. If you're still not sure, maybe someone should shoot Woods an email regarding this. If it's succinct and well written, I think you will get a response, but honestly I think we can figure it out here if we think about it some.
Not enough time today to comment further, I'm no more an expert than anyone else here anyway.
JeffB:JeffDB, it's a misconception that the economy "self-corrected" in 1921. I guess that this view is put about by those that wish to contrast 1921 with the Keynesian policies implemented under FDR in the 30s.The reality is that the Fed had a lot to do with instigating both the downturn and recovery. Due to post war inflation, the Fed began interest rate rises in Dec 1919. The recession began in Jan 1920. Rates were increased all the way from 4 to 7%. This was an unprecedented increase and no doubt contributed significantly to the deflation that was experienced. Rates came all the way down again in the second half of 1921, which is when the recession ended. There was a matching contraction in the money supply and expansion at the end of the recession. In fact the 1921 recession is an example of what I was describing. Inflation led to rate rises which led to recession. Where it is different is in recession not leading to higher deficits. In that sense it is unique. It is doubtful if that feat could be repeated because of the post war adjustments that were taking place at the time.
This kid doesn't know what he's talking about. America went back on the gold standard in 1919-1920 leading to a massive monetary contraction down to the metallic base. This was, in essence, a massive liquidation of malinvestments and lead to a speedy and robust recovery. The significance of this is that even in the face of enormous deflation, the economy is able to rebound without government intervention and/or expansionary monetary policy (in fact, expansionary monetary policy didn't exist until 1922). This is empirical evidence against new deal type policies and government intervention.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Ansury: It seems an interesting (i.e. "different", not strong) type of counter point, but I've serious doubts that it's a good one. Think about it some more first or better yet keep a discussion going with this guy to get more information on his viewpoint to evaluate. If you're still not sure, maybe someone should shoot Woods an email regarding this. If it's succinct and well written, I think you will get a response, but honestly I think we can figure it out here if we think about it some. Not enough time today to comment further, I'm no more an expert than anyone else here anyway.
Yeah, I'd like to dialogue with him a bit more. I've disagreed with him at times in other threads, but he seems like he knows what he's talking about, or at least has the attitude of someone who does. It would be interesting to have him come on here and discuss things in a little more depth with others, though I tend to doubt he'd want to try his hand at that. He'd probably figure he wouldn't "convert" anyone and would be among people with views hostile to his own.
I posted the link to the chart of the base money supply(?) at the time but he hasn't responded yet. Unfortunately the format there is not conducive to ongoing dialogue. It's almost like an online newspaper format. Someone posts a story and people respond. By the next day most people have moved on to the new stories of the day, yesterday's stories aren't on the main pages and only a few, if any, return to check responses.
But, if he had a valid point or even a common misconception it would be good for me to know about it in more detail so I would know what I was talking about the next time that topic came up.
Thanks for the response, by the way.
Esuric: This kid doesn't know what he's talking about. America went back on the gold standard in 1919-1920 leading to a massive monetary contraction down to the metallic base. This was, in essence, a massive liquidation of malinvestments and lead to a speedy and robust recovery. The significance of this is that even in the face of enormous deflation, the economy is able to rebound without government intervention and/or expansionary monetary policy (in fact, expansionary monetary policy didn't exist until 1922). This is empirical evidence against new deal type policies and government intervention.
Well that's the way I saw things after I saw Mr. Woods' talk on YouTube, and was taken a little by surprise at the rejoinder by this poster. But it does seem to me as if the money supply had taken a dip in early 1919 and then ramped back up later in the year through early 1922 perhaps, at least if I'm reading that chart from the Fed correctly.
JeffB
That may well be true, but the other poster, chap08, was contending that the Fed had deliberately raised rates...
Yes, the Fed deliberately raised it's discount rate but that this was in response to the economic circumstances, the same economic circumstances that led to the recession.
JeffB: Well that's the way I saw things after I saw Mr. Woods' talk on YouTube, and was taken a little by surprise at the rejoinder by this poster. But it does seem to me as if the money supply had taken a dip in early 1919 and then ramped back up later in the year through early 1922 perhaps, at least if I'm reading that chart from the Fed correctly.
For comparison, and I'm honestly not sure if this will be helpful or even an accurate guess, but what did the Fed do before/during/after the 1929 depression? I'm not familiar enough to remember what they did (I know I've read it somewhere!) I'd guess they did basically the same thing the 2nd time... but-- no worky! One difference between the two = Raw Deal.
Of course no matter what the Fed did after they screwed up the economy, that difference still remains, and it's a big one.
Well, Wikipedia says: "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."
http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321
But to know how large the effect of these interest rate reductions was, one needs to know the money supply of that time.
I'm just reading Robert Murphy's "Politically Incorrect Guide to the Great Depression" which states that:
The expansion of the money supply during World War I had led tounconscionable consumer price inflation, which was running at morethan 20 percent by late 1919. Consequently, the (New York) Fed hiked itsdiscount rate from 4.75 percent up to 6 percent in one fell swoop in Jan-uary 1920. The Fed then hiked again to a record-high 7 percent in June1920. Despite the fairly severe depression-recall that unemployment averaged 11.7 percent in 1921-the Fed held steady to its record-high ratefor almost a full year, not cutting until May 1921, after the depression wasbasically over.
And also my above quote form Wikipedia says, that just in July of 1921, the FED began lowering interest rates. But at that time, the economy has already recovered - the Depression lasted from January 1920 to July 1921!
I hope this helps.