In discussing the problems caused by the Fed's manipulation of the money supply and the resultant boom and bust periods I run across a number of people who claim that though things are not perfect now, they are far better than they were before the Fed came into existence.
I'm not very familiar with the economic history of the era, though I've heard that it really wasn't a true "free market" era then either. Any insights as to what went on and why, particularly with a view to discussing why the Fed is not a necessary entity going forward would be appreciated.
Here's an exchange from a couple of other folks, for instance, on another discussion forum. Statements from "John Galt" (JG) will be in quote marks. Responses from an economist using the handle, "Vox Rationalis" will be labelled (VR)
Think Twice Before You Join the Deflationist School of Thought
JG: "How about the bigger booms and bigger busts that the Fed was responsible for pushing?" VR: Completely untrue. Please see 1807-1810, 1815-1821, 1837-1843, 1873-1879, 1882-1885, and 1893-1897. JG: "Do you really think Ben Bernanke can set the price of money better than 300 million people with distinct values?" VR: I think the Fed has proven over the last 60 years that it is far better at regulating the money supply than the private sector was before the Fed existed.
Jeff: If you can tell me were his comments occur, I will personally disabuse VR of his misconceptions.
Milton Friedman provided a good book on the matter.
I think it was called "A monetary history of the United STates"
Corporatism is using state means to enhance market share and profitability of a few favored firms, at the expense of the citizen.
VR is way off about the length and severity of many of these panics/depressions/recessions. I think the biggest myth is that the panic of 1873 was a "Long Depression". Rothbard, in "A History of Money and Banking in the United States" (http://mises.org/books/historyofmoney.pdf)points out that from 1869 to 1879, real GNP increased at 6.8% per year while GNP per capita increased at 4.5% per year. The money supply grew at 2.7% per year and prices fell by 3.8% per year. From memory, I think Rothbard also argues that the panic of 1873 was not what we would think about as a recession, but more of a mass bankruptcy of unsound and overinflated banks. Anyway, the data I'm citing is on page 154 of his book. I think the data speaks for itself as to whether the panic of 1873 was really as bad as people like VR make it out to be.
I don't remember what Rothbard has to say about some of the other panics, but I don't believe any of them were truly as long as VR says they are. From what I recall, the panic of 1819 started in 1819, not 1815. Also the downturn he says lasts from 1837-1843, I believe were 2 separate panics between which business activity returned to normal, but I could be wrong about that. In any case, both these episodes (1819 and 1837) came after periods of highly corrupt central banks, so I don't think this hurts the case for freedom at all.
Selgin: "Jeff: If you can tell me were his comments occur, I will personally disabuse VR of his misconceptions."
Thanks. I imagine you could do a lot better job than could I.
Here's the Comment Section
Here's the article the commenters were responding to: Think Twice Before You Join the Deflationist School of Thought
"I have another question, myself. My economics teacher stated in class (she's pretty much Neo-Keynesian) that recessions have gotten much shorter and shallower than they used to. Is there any truth to that? And if so, why?"
Quite false, the Great Depression lasted 16 years, nothing in the XIX century compares to that. The whole 80's were one big recession in Brazil.
Show her this : http://en.wikipedia.org/wiki/Depression_of_1920-21
Then ask her to explain it. It should be fun.
David Sherin wrote: VR is way off about the length and severity of many of these panics/depressions/recessions. I think the biggest myth is that the panic of 1873 was a "Long Depression". Rothbard, in "A History of Money and Banking in the United States" (http://mises.org/books/historyofmoney.pdf)points out that from 1869 to 1879, real GNP increased at 6.8% per year while GNP per capita increased at 4.5% per year. The money supply grew at 2.7% per year and prices fell by 3.8% per year.
Thanks. That is very interesting. I was expecting something along those lines. I recently started reading Rothbard's book, "America's Great Depression" which starts off on page 1 with "Business Cycle Theory".
THE EXPLANATION: BOOM AND DEPRESSIONIn the purely free and unhampered market, there will be nocluster of errors, since trained entrepreneurs will not all makeerrors at the same time.4 The “boom-bust” cycle is generated bymonetary intervention in the market, specifically bank creditexpansion to business. ... p. 54/409 pdf document, page 9 of the book.
That's why Vox Rationalis' contention that the business cycles prior to the institution of the Federal Reserve not only existed, but were worse and more frequent to boot. As others have noted, however, there were central banks in the U.S. prior to the Federal Reserve. I'm also guessing that fractional reserve banking was in play and that therefore banks effected expansion and contraction of the money supply whether there was a central bank or not.
I'll certainly have to try and finish Rothbard's Great Depression and then start on his "A History of Money and Banking in the United States".
I'm sure getting a lot of reading material to try and digest. ;) . But I guess anything worthwhile can take some effort.
Everyone admits that the interwar period (1914-45) was the least stable since the Civil War in U.S. history. But it is also no longer evident that the post-WWII era has been more stable than the classical gold standard period (roughly 1879-1914). You should encourage your teacher to have a look at Christina Romer's important (1986 and 1989) papers pertaining to this topic, as well as those of Joseph H. Davis and (most recently) Albrecht Ritschl, Samad Sarferaz, and Martin Uebele. According to them, the U.S. economy has been _at least_ as unstable since WWII as it was in the decades prior to the fed's establishment--and that's not even taking the recent crisis into account. Needless to say, a comparison of pre-WWI experience with that of the _entire_ post-Fed period offers no basis whatsoever for singing the Fed's praises.
Vitor replied: "I have another question, myself. My economics teacher stated in class (she's pretty much Neo-Keynesian) that recessions have gotten much shorter and shallower than they used to. Is there any truth to that? And if so, why?" Quite false, the Great Depression lasted 16 years, nothing in the XIX century compares to that.
Vitor replied:
Quite false, the Great Depression lasted 16 years, nothing in the XIX century compares to that.
Actually that came up in the discussion and Vox Rationalis felt he had an answer:
VR: Since 1950 (60 years), we've had 10 recessions (including the latest) with a combined duration of 121 months (assuming, beyond all available evidence, that the latest recession continues today). Between the end of the Long Depression in 1879 and 1908 (29 years), we had 8 recessions totaling 150 months. Latter period - 16.8% of months in recession, earlier period - 43.1%. <<< INSERT CONTRARY DATA HERE >>> <<< THAT IS, IF YOU CAN FIND ANY >>> John Galt: "I'll take the post-war Fed...against the pre-Fed business cycles any time." VR: And what do you know, since 1950 the business cycle has averaged 6 years, whereas in the 30 years ending with the recession associated with the 1907 panic (which led to the Fed's creation) the business cycle averaged less than 4 years. Thanks - you caused me to produce yet more evidence that the Fed has helped to steady the economy. John Galt: "The Great Depression dwarfs the Pre-Fed recessions." VR: True! You got one! Of course, I freely admitted that the Fed made big mistakes back then. Are you now saying that we haven't learned anything since then? I think recent events belie that claim.
VR: Since 1950 (60 years), we've had 10 recessions (including the latest) with a combined duration of 121 months (assuming, beyond all available evidence, that the latest recession continues today). Between the end of the Long Depression in 1879 and 1908 (29 years), we had 8 recessions totaling 150 months. Latter period - 16.8% of months in recession, earlier period - 43.1%. <<< INSERT CONTRARY DATA HERE >>> <<< THAT IS, IF YOU CAN FIND ANY >>> John Galt: "I'll take the post-war Fed...against the pre-Fed business cycles any time."
VR: And what do you know, since 1950 the business cycle has averaged 6 years, whereas in the 30 years ending with the recession associated with the 1907 panic (which led to the Fed's creation) the business cycle averaged less than 4 years. Thanks - you caused me to produce yet more evidence that the Fed has helped to steady the economy. John Galt: "The Great Depression dwarfs the Pre-Fed recessions."
VR: True! You got one! Of course, I freely admitted that the Fed made big mistakes back then. Are you now saying that we haven't learned anything since then? I think recent events belie that claim.
As posted on "Seeking Alpha": The most authoritative recent research contradicts VR's claims concerning the relative stability of the pre-WWI and post-WWII U.S. economies. I especially encourage him or her to have a look at Christina Romer's important (1986 and 1989) papers pertaining to this matter, as well as those of Joseph H. Davis and (most recently) Albrecht Ritschl, Samad Sarferaz, and Martin Uebele. According to these papers, the U.S. economy has been _at least_ as unstable since WWII as it was in the decades prior to the Fed's establishment--and that's not even taking the recent crisis into account. Needless to say, a comparison of pre-WWI experience with that of the _entire_ post-Fed period offers no basis whatsoever for singing the Fed's praises. It is particularly wrong, by the way, to speak of a recession of 1873-9 or of 1893-7. These ridiculously long contractions are figments of the data, which conflate nominal and real developments. Sure, if you reckon every deflation as contractionary, the 19th century might well be viewed as one long downturn. But more careful reviews of real data--certainly more careful than the NBER's mostly hocus-pocus pre-1929 chronology--shows that the downturns of 1873 and 1893, though serious enough, were not of much more than average duration. Indeed,as Atkeson and Kehoe show in their 2004 AER article, apart from the noteworthy exception of the 1930s, there simply isn't any clear link between deflation and recession.
Thanks for taking the time to post that over there, Selgin. Much appreciated.
I was a little surprised, however, at the little bits of info I have been able to glean from those authors so far. The Wikipedia article on Christina Romar, for instance, states:
After her nomination and before the Obama administration took office, Romer was tasked with co-authoring the administration's plan to recover from the 2008 recession. With economist Jared Bernstein, Romer co-authored Obama's plan for economic recovery.[3]
Her work suggests that some of the credit for the relatively stable economic growth in the 1950s should lie with good policy made by the Federal Reserve,[7] and that the members of the FOMC could at times have made better decisions by relying more closely on forecasts made by the Fed professional staff.[8]
I personally think that when one is thinking about the Fed, one must ask "who benefits most by its existence?" The answer, imo, is its owners, the member banks, and the government.
Sure, Romer has joined the Obama team; and yes, she has never suggested that the Fed never does anything right!. But I did not at all mistate the conclusions she reaches in the articles I referred to. Indeed, Romer's credentials should compel anyone to take those conclusions especially seriously.
bloomj31 wrote: I personally think that when one is thinking about the Fed, one must ask "who benefits most by its existence?" The answer, imo, is its owners, the member banks, and the government.
bloomj31 wrote:
That's true. It seems, however, that most mainstream economists think the Fed is a benevolent arm of the government that is quite necessary and does a lot of good, even if it makes an occasional mistake. I get the impression, though, that per Austrian theory they are pretty much at the root of much mischief in the economy and do a lot more damage than good. The ABC makes a lot of sense to me and the Fed directs the now nearly perpetual goosing of the economy to keep it from going into recession or at least moderating recessions when they absolutely cannot be avoided.
That appears to have played a significant part in setting us on our current catastrophic path.
The Fed is just a tool. And it's really not an arm of the government per se, imo. It's more like a private institution that's been delegated powers by the Congress. It's a fusion of public and private.
As to whether it's been beneficial or not, that depends on who you ask. Beneficial to whom?
Sarel Oberholster, wrote an article entitled, The Independence of the Fed? , in which he maintains that the Federal Reserve is owned by the member banks in a very limited sense and is in fact a "Variable Interest Entity" owned by the Federal Government:
"The Board of Governors of the Federal Reserve System is a federal government agency. The power to appoint its members, chairman, and vice chairman is vested in the president of the United States, with the Senate having a veto power over any appointment. The first requirement for a "variable interest," "the power to direct the activities" is fulfilled: the federal government at the presidential level holds "the power to direct activities. ...The outright, indisputable conclusion is that the Fed, when tested against GAAP as the Fed itself uses it in the Fed's assessments of those it regulates, is a Special Purpose Entity of the federal government (or, according to the latest definition, is a Variable Interest Entity of the federal government). The rules of consolidation therefore apply, and the Fed must be seen as controlled by federal government, making it indivisibly part of the federal government. The pretence of independence is no more that that, a pretence. ..."
"The Board of Governors of the Federal Reserve System is a federal government agency. The power to appoint its members, chairman, and vice chairman is vested in the president of the United States, with the Senate having a veto power over any appointment.
The first requirement for a "variable interest," "the power to direct the activities" is fulfilled: the federal government at the presidential level holds "the power to direct activities.
...The outright, indisputable conclusion is that the Fed, when tested against GAAP as the Fed itself uses it in the Fed's assessments of those it regulates, is a Special Purpose Entity of the federal government (or, according to the latest definition, is a Variable Interest Entity of the federal government). The rules of consolidation therefore apply, and the Fed must be seen as controlled by federal government, making it indivisibly part of the federal government. The pretence of independence is no more that that, a pretence. ..."