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.
While currently reading Rothbard's A History of Money and Banking In the United States, I came across something that I think is on topic with the current discussion.
Let us now turn specifically to the aid that Benjamin Strong delivered to Great Britain to permit its return to gold at $4.86 in 1925. A key as we have seen, to permitting Britain to inflate rather then declare was to induce the United States to inflate dollars so as to keep it from losing gold to the U.S. Before the return to gold, the United States was supposed to inflate so as to persuade the exchange markets that $4.86 would be viable and thereby lift the pound from its postwar depreciated state to the $4.86 figure. Benjamin Strong and the Fed began their postwar inflationary policy from November 1921 until June 1922, when the Fed tripled its holdings of U.S. government securities and happily discovered the expansion of reserves and inflation of the money supply. Fed authorities hailed the inflation as helping to get the nation out of the 1920-21 recession, and Montagu Norman lauded the easy credit in the U.S. and urged upon Strong a further inflationary fall in interest rates. p. 375
Benjamin Strong and the Fed began their postwar inflationary policy from November 1921 until June 1922, when the Fed tripled its holdings of U.S. government securities and happily discovered the expansion of reserves and inflation of the money supply. Fed authorities hailed the inflation as helping to get the nation out of the 1920-21 recession, and Montagu Norman lauded the easy credit in the U.S. and urged upon Strong a further inflationary fall in interest rates.
p. 375
Fried Egg: 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
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.
Unfortunately, that takes away, at least somewhat, from the strength of the Austrian argument that it was a necessary adjustment to malinvestments/overconsumption from the prior period. Monetarists and Keynesians would discount the Austrian interpretation by pointing to the factor they consider to be most important... The Fed made a mistake in raising interest rates too quickly &/or too high according to their theories and the results might be considered to be consistent with them.
But for the purposes of my discussion with the gentleman on the other board, the more critical question was really how and why it all ended. Even if the Fed did cause the 1920 depression would be somewhat irrelevant in and of itself with respect to that question.
Well, it actually lies perfectly in line with Austrian theory. Austrian theory states (according to Jesús Huerta de Soto) that the malinvestments will show themselves when the growth of the money supply either stops completely, or stops growing at an accelerating pace (exponential function). So, if the Federal Reserve raises its discount rate and the money supply stops growing as quickly as it was before, then the malinvestments will show.
But, that's the problem with proving theories with empirical evidence; you can't.
Ansury: 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.
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.
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.
Here's a link to a graph for the 1919 period to 1945: http://alfred.stlouisfed.org/graph/?graph_id=21098&category_id=0
Here's one to the 1928 to 1945 period: http://alfred.stlouisfed.org/graph/?graph_id=21099&category_id=0
I'm not quite positive, whether that is the monetary base for the country as a whole or for the St. Louis region. I got it from the St. Louis Federal Reserve page, but they have much data for the nation as a whole.
Actually, I got if from their ArchivaL Fred pages, as their regular data pages don't go back that far.
The only link I could find that went back to 1918 was labeled St. Louis Source Base, but I saw no description of what data was included. Perhaps its the national records as kept at the St. Louis Fed, or maybe just the data for the St. Louis Fed region, I'm not sure. But I imagine the graphs for both would be pretty similar anyway.
The graphs can be custom designed to include various time frames or even custom time frames, which is what I saved in the 1st two links in this post.
Don't know if that helps, but it is all I could find.
Tobbog: I'm just reading Robert Murphy's "Politically Incorrect Guide to the Great Depression" which states that:
I'm just reading Robert Murphy's "Politically Incorrect Guide to the Great Depression" which states that:
Thanks for the info, Tobbog. It is certainly interesting, and the info and interpretations seem to be in conflict with one another as you note.
From the 1st post quoting the Wikipedia article:
"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."
from your 2nd post quoting Robert Murphy's "Politically Incorrect Guide to the Great Depression"
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 was basically over.
It would be nice to have quick and easy access to some of the source documents, or at least reliable data that would be accepted as accurate by both sides of the argument. It would be nice, for instance, to be able to see a graph of the money supply overlaid by graphs of the unemployment rate, Fed discount rate, GDP, government spending & the federal deficit.
Jonathan M. F. Catalán: Well, it actually lies perfectly in line with Austrian theory. Austrian theory states (according to Jesús Huerta de Soto) that the malinvestments will show themselves when the growth of the money supply either stops completely, or stops growing at an accelerating pace (exponential function). So, if the Federal Reserve raises its discount rate and the money supply stops growing as quickly as it was before, then the malinvestments will show. But, that's the problem with proving theories with empirical evidence; you can't.
That certainly sounds reasonable to me. The problem, however, is that it is consistent with BOTH of the theories, or more likely with all 3 dominant theories. The monetarists and Keynesians would all claim it was consistent with their theories and in no way contradicted what they would have expected then, nor what they think should be done in our current situation.
BUT, the cause of the 1920 depression wasn't the focus of my discussion with the fellow on the other board, but rather why and how it ended, and the ramifications for the best way to handle our current "Great Recession".
Thomas Woods, Jr.'s thesis, as I understood it, and which I took as my own, was that the contrast between how the Federal Government reacted to the 1920 and the 1929 depressions demonstrated that the 1st was far preferable to the 2nd as to the results received. In the 1920 depression, the Federal Government did little or nothing in reaction to the massive drop in the stock market, GDP and economic activity, and although there was a lot of unemployment and bankruptcies and undoubtedly pain involved, the malinvestments cleared relatively rapidly and the economy recovered just as rapidly.
In the 1929 depression, on the other hand, the Federal Government went hog-wild with fiscal stimulus and I believe monetary stimulus, and the malinvestments didn't clear and the depression dragged on until the preparation for WWII and our participation in it basically pulled us out of it, as the Allies ordered many manufactured goods from us, particularly after the war after many of their factories had been obliterated.
Although it may not be a mathematically demonstrable cause and effect relationship, there would appear to be a pretty strong circumstantial case to be made that government intervention was strongly counterproductive in bringing about an economic recovery from a depression and that would strengthen the Austrian case that we would be better off in our present circumstances if the government would "butt out", or at least drastically reduce their intervention in trying to stop the deleveraging and clearing of the malinvestment and adjustment to the over consumption engendered by their prior artificially low interest rates and easy money.
I will research the topic. It seems as if another possibility is that the recession ended, or was assuaged, largely due to a reinflation of the bubble by the Federal Reserve. An inflation which would take place until October 1929.
jmorris84: While currently reading Rothbard's A History of Money and Banking In the United States, I came across something that I think is on topic with the current discussion. Let us now turn specifically to the aid that Benjamin Strong delivered to Great Britain to permit its return to gold at $4.86 in 1925. A key as we have seen, to permitting Britain to inflate rather then declare was to induce the United States to inflate dollars so as to keep it from losing gold to the U.S. Before the return to gold, the United States was supposed to inflate so as to persuade the exchange markets that $4.86 would be viable and thereby lift the pound from its postwar depreciated state to the $4.86 figure. Benjamin Strong and the Fed began their postwar inflationary policy from November 1921 until June 1922, when the Fed tripled its holdings of U.S. government securities and happily discovered the expansion of reserves and inflation of the money supply. Fed authorities hailed the inflation as helping to get the nation out of the 1920-21 recession, and Montagu Norman lauded the easy credit in the U.S. and urged upon Strong a further inflationary fall in interest rates. p. 375
Thanks for the info. I never realized that gold once traded for $4.86/oz. I guess that means gold wasn't a pure or something back then. It couldn't have been due to any devaluation of the dollar as I've heard that it is a truism that "the dollar is as good as gold". ;)
The above quote does, however, seem to be consistent with what I imagine to be the monetarists' and Keynesians' arguments against the Austrians'. They figure that the rising money supply "saved the economy" from depression in 1920, or at least helped it recover post-haste. Of course, it is also consistent with the Austrians' contention that such easy money just fueled even more malinvestment and over consumption with "the Great Depression" inevitably "Roaring 20s".
Maybe the crash after this depression will win over the monetarists in Keynesians, but somehow I doubt it.
JeffB: Thanks for the info. I never realized that gold once traded for $4.86/oz. I guess that means gold wasn't a pure or something back then. It couldn't have been due to any devaluation of the dollar as I've heard that it is a truism that "the dollar is as good as gold". ;) The above quote does, however, seem to be consistent with what I imagine to be the monetarists' and Keynesians' arguments against the Austrians'. They figure that the rising money supply "saved the economy" from depression in 1920, or at least helped it recover post-haste. Of course, it is also consistent with the Austrians' contention that such easy money just fueled even more malinvestment and over consumption with "the Great Depression" inevitably "Roaring 20s". Maybe the crash after this depression will win over the monetarists in Keynesians, but somehow I doubt it.
That would be $4.86 pounds, not USD. Also, I believe it was $4.86 for every 1/20th of an ounce. I'm not sure what you mean by saying "gold wasn't a pure."
Like someone else here already mentioned, it's quite possible that the depression in 1921 was over before the Fed hiked its interest rate. It's still also possible that the hike in the rate could have helped, since my understanding is that the lower interest rates are what helped create the boom and the hike in interest rates would have exposed the malinvestments.
jmorris84: That would be $4.86 pounds, not USD. Also, I believe it was $4.86 for every 1/20th of an ounce.
That would be $4.86 pounds, not USD. Also, I believe it was $4.86 for every 1/20th of an ounce.
Thanks for the correction. That is a pretty big difference, particularly if that was for 1/20 of an ounce. If my math is correct, that would have been $97.2 (pounds) per ounce. Apparently the dollar was quite a bit above the value of the pound at that point in time. What did "the pound" stand for? It seems like someone said it used to be transferable to a pound of gold or a pound of silver if I remember correctly.
jmorris84: I'm not sure what you mean by saying "gold wasn't a pure."
I'm not sure what you mean by saying "gold wasn't a pure."
Sorry, I was trying to be facetious there. -- ie. If one could buy gold for $4.86/oz and now it's north of $1,100 per ounce, (and the dollar had retained its value) then the gold must have been worth less then, perhaps because it wasn't as good in quality as the $1,100+ plus stuff.
jmorris84: Like someone else here already mentioned, it's quite possible that the depression in 1921 was over before the Fed hiked its interest rate. It's still also possible that the hike in the rate could have helped, since my understanding is that the lower interest rates are what helped create the boom and the hike in interest rates would have exposed the malinvestments.
"Helping" in the sense of exposing malinvestments would make sense to me and you, but from the standpoint of the Keynesians it would be an utter catastrophe. Unemployment and bankruptcies would spike and deflation would kick in as well. That would obviously require whatever federal fiscal and monetary stimulus packages are required to keep that deleveraging from happening.
Of course, as I understand it, that is the whole crux of the issue in the disagreement between the Austrian economists and the rest of the world. The Austrians embrace the deleveraging and clearing of malinvestments as necessary, despite the inherent pain involved, to bring the economy back into balance. The monetarists and Keynesians want to do whatever it takes to avoid that painful process.
Jonathan M. F. Catalán: I will research the topic. It seems as if another possibility is that the recession ended, or was assuaged, largely due to a reinflation of the bubble by the Federal Reserve. An inflation which would take place until October 1929.
Keep us posted as to what that research turns up. It seems to be an important area of research, from what I can tell.
JeffB, I do want to emphasize that I could be wrong about it being $4.86 for every 1/20th of an ounce and not 1 oz. I will look into it more later but if in the mean time you find out whether this is true or not, please post your findings!
Thanks!
There weren't any "Keynesian policies implemented under FDR in the 30s," if that's been believed by anyone. Honestly, it's grown aggravating to hear the New Deal constantly referenced as "Keynesian" or even more deplorably, as "socialist." As Renshaw illustrates in Was there a Keynesian Economy in the USA between 1933 and 1945?, the New Deal cannot accurately be described as "Keynesian."
As Eccles pointed out, counter-cyclical spending was really a conservative option which implied 'sustaining government contributions to general purchasing power while the obstacles to private spending are cleared away'. The basic structure and values of capitalism, the ownership and control of the system, would not be disturbed in the long run if such policies were adopted. Yet despite such spending to make good the failure of private investment and so reduce unemployment in 1933-35, and again in 1938-39, almost one in six Americans were still out of work in 1939. In that sense, as Herbert Stein has argued, "It is possible to describe the evolution of fiscal policy in America up to 1940 without reference to Keynes."
Stein's summary was remarkably accurate. As he noted, “It is possible to describe the evolution of fiscal policy in America up to 1940 without reference to [Keynes]...by the outbreak of the war a large part of the fiscal revolution had already occurred. It was accepted policy that we would run deficits in depressions, that we would not raise taxes in depressions in an attempt to balance the budget.”
The workmen desire to get as much, the master to give as little as possible...It is not difficult to foresee which of the two parties must force the other into a compliance with their terms. -Adam Smith
Leviathan, my understanding of socialism, in a nutshell, is when the state essentially attempts to spread the wealth within the private sector. Is this wrong?
Leviathan: There weren't any "Keynesian policies implemented under FDR in the 30s," if that's been believed by anyone.
There weren't any "Keynesian policies implemented under FDR in the 30s," if that's been believed by anyone.
Thanks for the reply.
In what way would Keynesian policies have differed from those instituted by FDR?
Are you a Keynesian?