Hi everyone,
I just wrote a post that was longer than I expected, so I'll give the short version first:
I'm confident there's a logical explanation for this, and I'll probably feel like an idiot once someone points it out...but anyway, can anyone explain the cause of the 19th century booms and busts or point me to literature that competently addresses them? Thanks!
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Long Version:
This is my first post, so I'll give a quick rundown on my background first: At the moment, my economic understanding comes from reading a lot of different scattered writings (and actually, I started by reading up on Keynesian economics...) and spending a lot of time thinking and working things out on my own, but I have not yet read a full-length treatise from cover-to-cover (e.g. Human Action). My understanding of Austrian economics and the ABCT is probably pretty rudimentary by the standards of some of the people here, but I "get it" in general. From what I have read, I've been very impressed by the logic of Austrian theory...if nothing else, I haven't found any deep logical flaws in it. ;) Plus, I'm convinced that the methodology is sound, at least for qualitative purposes. I'm an intuitive thinker anyway, so admit I'm biased in favor of a priori logical deduction anyway (as opposed to sensory thinkers, who are biased in favor of empiricism, a posteriori thinking, and logical positivism). More importantly though, I like the Austrian methodology simply because I dislike the mainstream methodology so much: By treating economic theory as an empirical science, it's impossible to come up with the right answers and derive sound conclusions from the available data set. By trying, all you end up with is a whole bunch of contradictory correlations that you mistakenly try to fit into a sensible model of causation...and these relationships only hold "most" of the time (and never as a unified theory), because it's impossible to isolate the variable you're trying to study the affects of (there are just SO many dependent and independent variables involved, you can't perform controlled experiments, and the sample pool of countries with fundamentally different economic policies is extremely small by statistical standards).
Anyway, moving onto my question...on another forum, a poster replied to one of my posts with this:
You are assuming that Austrian economics prevents booms and busts. That there would be no business cycle.Before we had a central bank the economy would lurch from boom to bust every few years. And that was also with money backed by gold.
This isn't the first time he's brought up 19th century booms and busts as an empirical "rebuttal" of the ABCT, and it's kind of a recurring theme. Apparently, it seems to be a sticking point for him...but the problem is, at the moment, I can only speculate about the response the Austrians have for this argument.
I'd be completely shocked if it turned out the Austrian school doesn't have a completely logical response for this argument, though...I'm sure there is one, but I just don't know what it is. After all, Mises did a lot of work expounding upon David Ricardo's business cycle theory before the Federal Reserve was created. For one thing, his Theory of Money and Credit was published in 1912 (even though Human Action didn't come until later). In other words, even before the Federal Reserve came about, the the Austrian business cycle theory cited central banking systems as the primary culprit behind booms and busts, did it not? If so, I sincerely doubt they completely ignored 19th century America (and I further doubt that Austrian economists of the past century - particularly ones FROM America - completely ignored that entire century).
Under a gold standard or free market commodity money and without the intervention of government (especially a central banking system, which can provide easy/free credit and manipulate interest rates), there's no logical reason commercial fractional reserve banks would all act in concert, engaging in risky practices and overleveraging all at once unchecked, subsequently failing all at once. Furthermore, competition and self-interest would actually make this impossible, as Rothbard briefly explains here:
...for the banks, for one thing, would never be able to expand credit in concert were it not for the intervention and encouragement of government. For if banks were truly competitive, any expansion of credit by one bank would quickly pile up the debts of that bank in its competitors, and its competitors would quickly call upon the expanding bank for redemption in cash. In short, a bank's rivals will call upon it for redemption in gold or cash in the same way as do foreigners, except that the process is much faster and would nip any incipient inflation in the bud before it got started. Banks can only expand comfortably in unison when a Central Bank exists, essentially a governmental bank, enjoying a monopoly of government business, and a privileged position imposed by government over the entire banking system. It is only when central banking got established that the banks were able to expand for any length of time and the familiar business cycle got underway in the modern world.
So...if this is all true - and I believe it is - why in the world did we see the boom/bust pattern in 19th century America?
I can speculate, of course:
Back to the point: I'm confident there's a logical explanation for this, and I'll probably feel like an idiot once someone points it out...but anyway, can anyone explain the cause of the 19th century booms and busts or point me to literature that competently addresses them? Thanks!
I'm actually researching the topic for school, so I am gaining more knowledge on this. Still working on some of the information though.
In short, the basic "panics" were 1819, 1837, 1857, 1873, 1893, 1907. (If we are to end at the creation of the Federal Reserve)
1819
The Bank of North America and the First Bank of the United States start off the country by expanding the money supply. They expand credit, allow the government to manage its debt/create money, and help new FRB open up. The Bank of North America failed, and that was replaced by the First Bank of the United States. First Bank failed to get its recharter. Suddenly we were in the War of 1812. Our government had to pay for its war, and New England (pro British), were uninterested in buying up government debt. So the U.S government edged on new banks to be created to pay for it, and things got so out of hand that the gov't allowed them to suspend specie payment in 1814. The Second Bank of the United States was ushered shortly after the war, and then started inflating. It soon realized things got out of hand and then and contracted loans, popping the bubble and creating the Panic of 1819.
1837
Again the Second Bank of the United States inflates, and through Jackson's libertarian befliefs and his personal quarrels with Biddle/banks, Jackson manages to effectively kill the Bank. The "pet" banks and wildcat banks keep inflating, England contracts its own bubble, yanking the carpet under our economy. The panic of 1837 comes. However the banking institution/state governments try to inflate, and a small bubble keeps going in 1838. However, the liquidation continues en masse in 1839 and ends around 1843.
1857
With the new Indepedend Treasury system started by Martin Van Buren and brought back again by Polk, Federal involvement in banks are probably at their lowest. However, the FRB are subject to a large amount of regulations and through the typical ABCT a bubble economy forms. The bubble this time is broked in 1857, and it was not as bad as 1837 since we didn't inflate as much nor did we try to prop it up.
1873
The Civil War forces our government to issue new money (greenbacks) and go into a large amount of debt. They also sign in the National Banking Acts, which are quasi central banks that help our government with its debt. Combined with heavy federal investment (land grants, subsidies, pork barrel, corruption), a large railraod boom forms. The bubble pops, and the Panic of 1873 ensues.
1893/ 1907
Haven't found out a terrible amount of this one yet, although its really similiar in nature to 1873 since it involves the National Banking Acts. So far from what I've looked at, 1893 appears to be the worst out of them all, although I can't say that for certain. 1907 is still similar, with the increasingly regulatory NB institutions inflating and popping the bubble.
In terms of actual recession economics, I am also looking for those two. From what I read on basic websites, most of these panics involved high unemployment rates, low prices, etc etc. I'm still looking for rebuttals on the unemployment problem. If you want to see my earlier thread, http://mises.org/Community/forums/p/6772/101632.aspx#101632
Thanks, BlackNumero! I'll definitely be following your thread...I noticed you started it only a few days ago, so hopefully you'll be able to dig up more information as you work on your project.
It is a bit discouraging though that the Austrians have paid so little attention to the 19th century crises, especially considering they're such a common empirical counterargument to the basic ABCT. It'd be nice to stumble across some lesser-known works defending the Austrian perspective with respect to each of these...I doubt I'll be able to find anything myself, but if I do, I'll let you know. No matter how horribly flawed Keynesian, neo-Keynesian, etc. economics may be in methodology, theory, and policy prescriptions, Austrian economics are still at a significant disadvantage from the standpoint of mainstream acceptance. It's going to take a pretty watertight case (especially from the empirical point of view) to win people over, unfortunately...without one, the sheer inertia of mainstream economics will keep them mainstream despite their obvious shortcomings. It's probably high-time for a leading scholar to address the more "problematic" 19th century crises in a full-length book, I think...but short of that, I'm looking forward to your own analysis!
Rothbard wrote an entire book on the panic of 1819, available for free on this site.
http://mises.org/rothbard/panic1819.pdf
Thanks...unfortunately though, anyone attacking the ABCT is more likely to ignore that one (and probably 1837 too) and bring up the more problematic panics between the Second Bank of the United States and the Federal Reserve (e.g. 1857, 1873, 1893, and 1907). I kinda wish Rothbard wrote a book on those ones instead. :-/
Just because there wasnt a central bank doesn't mean there can't be artificial monetary expansion. Rozeff wrote a good piece on the 1873 railroad boom.
http://www.lewrockwell.com/rozeff/rozeff231.html
Your best bet, imo, is to search mises.org and lewrockwell.com for the specific years, and there will most likely be pieces written on each individually.
I'm sure most people here understand this; Fractional reserve banking, and more specifically a Central Bank, can cause a business cyle or errors on a widescale. It does not entail that any boom and bust that occured, without the Federal Reserve, was caused by forces that must-necessarily also explain a business cyle in a central banking economy.
do we get free cheezeburger in socielism?
fezwhatley: I'm sure most people here understand this; Fractional reserve banking, and more specifically a Central Bank, can cause a business cyle or errors on a widescale. It does not entail that any boom and bust that occured, without the Federal Reserve, was caused by forces that must-necessarily also explain a business cyle in a central banking economy.
Yeah, all of Rothbard's books on banking deal with these crises.
Basically it was government supported cartelisation which allowed the banks to expand then renege on their loands.
The difference between libertarianism and socialism is that libertarians will tolerate the existence of a socialist community, but socialists can't tolerate a libertarian community.
Actually, I tend to agree with both of your viewpoints (Sean_M and fezwhatley), and that's why I'm looking for Austrian explanations first and foremost (or ANY logical explanation in particular, as opposed to the Keynesian "animal spirits" copout explanation). To me, I think the important thing is to be able to demonstrate that none of these crises stand as empirical rebuttals to the Austrian theory or somehow discredit it (or the economic policies the Austrians advise, e.g. sound money).
On the one hand, I'm betting some of the crises CAN be explained from top to bottom by the ABCT, and according to BlackNumero's post (and his other thread) and Sean_M's Rozeff link, 1873 looks like a pretty good candidate. On the other hand, as fezwhatley said, other concrete factors besides government intervention can sometimes or potentially affect businesses on a wide scale (causing a business cycle with clustered failures)...but nevertheless, whenever a panic is caused by factors other than the ABCT (as caused by government intervention), I think it's important to be able to pinpoint these factors, especially considering:
Thedesolateone, do you know if any of Rothbard's books extensively discuss 1857, 1893, or 1907? If nothing else, BlackNumero is looking for as much evidence as he can get (he's doing a project defending Austrian theory with respect to the pre-Fed crises).
Mini-Me:On the other hand, as fezwhatley said, other concrete factors besides government intervention can sometimes affect businesses on a wide scale (causing a business cycle with clustered failures).
I suggest you read Hulsmann's paper on this, it's very good, it's not entirely relevant but it'll be a worthwhile read concerning error cycles in general. The fact of the matter is that as you rightly point out any theory of the trade cycle needs to explain how it came about that a number of entrepreneurs, who were otherwise competant, made such a large number of errors in a small space of time. Also, it should explain why it is that the depression hits the capital goods industries harder than the consumer goods industry, especially those further from consumption. Now, if you can point to some explanation that satisfied both of these conditions I'm willing to hear, but I don't think there is one. It may well be that other events coincide with the business cycle that may have the effect of exacerbating the crisis, or triggering it, but not to cause it.
Mini-Me:A lot (or perhaps I'm exaggerating? can't remember) of the Austrian literature I've come across does seem to imply - intentionally or not - that only government intervention (generally a central banking system) will cause the boom/bust cycle (Re: The quote I pasted in my first post from Murray Rothbard's Economic Depressions: Their Cause and Cure).
I don't know how accurate this is, especially not of Rothbard, who has written extensively concerning panics before the Federal Reserve System. The fact of the matter is that the ABCT requires only that new credit is created (and that economic agents are not aware of this) in the form of loans, since in order to get rid of this credit the banks will have to lower interest rates. This only requires fractional reserve banking, not a central bank. In fact, I'd go so far as to say that you're putting the cart before the horse, fractional reserve banking causes central banks, not the other way around.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
Economists have tried to dispute the claim that 19th century recessions were "short and sharp". See for example, this post:
http://johnquiggin.com/index.php/archives/2009/01/15/short-and-sharp-2/
Thanks for the link! I'll check it out after I get some sleep. I'm not sure if you're saying that you know of no explanation (including the ABCT) that satisfies both conditions, or if you're saying you know of no non-governmental explanation that satisfies both conditions. I'll assume the ABCT holds though: In that case, in terms of non-governmental events that could cause the business cycle, I can really only think of one hypothetical event that would clearly trigger the ABCT and satisfy both conditions of an explanation: If we had commodity money (such as gold), a large stash of that commodity was magically discovered, and it began flooding the market, that would create a whole lot of new monetary base for fractional reserve banks to leverage over a period of time, and it would cause a single round of the ABCT for the same reason that central banking + fractional reserve banking causes it. Other than that, I can think of major non-governmental events (natural disasters, other kind of supply shocks, etc.) that could have a widespread impact on a free market economy, but I guess they wouldn't cause a boom/bust cycle by themselves, strictly speaking.
In response to putting the cart before the horse: I suppose you're correct that the ABCT only really requires fractional reserve banking, but fractional reserve banking by itself will not account for the business cycle (because it can't by itself account for clustered failures of entrepreneurs...or banks themselves). In other words, fractional reserve banking is basically necessary but not sufficient for booms and busts to occur. Even in a completely free market, fractional reserve banking would still exist, but without some overriding factor that allowed competing banks to all pursue credit expansion in concert, it wouldn't cause the business cycle. In addition to fractional reserve banking, some other explosive ingredient is also necessary. That's why I put so much focus on central banking in general: The central bank's ability to create free/easy credit arbitrarily and manipulate interest rates makes it the single biggest reason why competing fractional reserve banks do all pursue credit expansion in concert. Of course, this obviously doesn't apply to the business cycles causing the panics of 1857, 1873, 1893, or 1907, since there wasn't a central bank at the time. In these cases, factors other than a central banking system must have caused the business cycle (combined with fractional reserve banking). On one hand, these factors may be merely other types of government intervention. If Austrians can demonstrate that some form of government intervention was indeed necessary for the concerted movements/clustered failures to have ever happened (along with the harder hit in capital goods) in all of these cases, that would constitute a watertight defense of both theory and anti-interventionist policy prescriptions. On the other hand, if it turns out the factors behind the concerted movements/clustered failures and a harder hit in capital goods were NON-governmental, that might leave an unfortunate opening for others to criticize anti-interventionist economic and monetary policies, advocating any kind of arbitrary government intervention instead. :-/ That's why I'm trying to figure out the root causes of each of those depressions.
Mini-Me:Thanks for the link! I'll check it out after I get some sleep.
It's an interesting paper, albeit one I do not agree with.
Mini-Me: I'm not sure if you're saying that you know of no explanation (including the ABCT) that satisfies both conditions, or if you're saying you know of no non-governmental explanation that satisfies both conditions.
What I'm saying is that besides the ABCT, I know of no explanation that satisfied both conditions, keep in mind that the ABCT is not contingent upon government intervention. Indeed, there may well be an event that can cause some sort of a shock, but to cause such a large cluster of errors that is more significant in the capital goods industry? I don't buy it.
Mini-Me:I can really only think of one hypothetical event that would clearly trigger the ABCT and satisfy both conditions of an explanation: If we had commodity money (such as gold), a large stash of that commodity was magically discovered, and it began flooding the market
Why? The interest rate is determined by demand for present goods with regards to future goods, the higher the demand, the higher the interest rate. On the other hand, if gold flooded the market this would simply increase the supply of cash, not the supply of future goods and would therefore have no impact on the interest rate, it may cause intratemporal discoordination, but it would not cause the business cycle.
As for FRB, yes, that might be a problem, but as I will get too later, FRB is sufficient by itself to cause the ABCT.
Mini-Me:I suppose you're correct that the ABCT only really requires fractional reserve banking, but fractional reserve banking by itself will not account for the business cycle (because it can't by itself account for clustered failures of entrepreneurs...or banks themselves).
Why not? All that is required for the business cycle is that the interest rate is pushed by what it actually is by banks who desire to get rid of excess funds that have been created through FRB. Government intervention simply is not necessary.
Mini-Me: Even in a completely free market, fractional reserve banking would still exist, but without some overriding factor that allowed competing banks to all pursue credit expansion in concert, it wouldn't cause the business cycle.
Well, yes, this is a valid point you bring up. But it doesn't answer the question, there's no particular reason why banks couldn't simply agree to expand credit in unison.
All this means is that the boom will last longer and the bust will be more severe.