Economics Questions

Re: Is the Fed really at fault for the 1929 market crash?

Bobby — Wed, 17 Dec 2008 20:24:52 GMT

maxpot46 wrote me:

Austrian theory holds that the '29 crash was primarily caused by the Fed,
which via money/credit expansion was responsible for the boom period of
the '20s (as well as all the malinvestment that accompanies booms). This
was enabled by the rest of the world going off the gold standard between
1914 and 1924(to fight WWII with newly created fiat money), resulting in
all the gold flowing to the US and allowing us to create more credit/money
on top of it. Then deflationary conditions were created (in the world,
not yet in the US) when the European countries went back to the gold
standard but at the pre-war rate -- since there was 10 years of heavy
inflation during the war, this price was far too low and helped foster
deflationary conditions.

Also, while the end of money/credit expansion set things up for a crash,
the severity of it was greatly exacerbated by the Smoot-Hawley Tariff Act
of 1930 (which, despite the date of the bill, was passed in 1929), which,
by placing many new barriers to international commerce (most of which were
unforeseen and thus not factored into company plans) pushed many companies
over the edge into bankruptcy.

Then, of course, there is a long list of mismanagement and misguided
policies that led to the Great Depression. However, your question was
about the market crash of '29, so hopefully the above is helpful.

It doesn't answer all my questions, but it generally answers my primary one, so I'm marking this as the verified answer.

Re: Is the Fed really at fault for the 1929 market crash?

nibbler491 — Sun, 14 Dec 2008 03:02:58 GMT

I call BS on that 2% statistic. That means that there's an increasing amount of gold being mined every year. Obviously this can't be perpetuated forever(as that would mean the supply of gold is infinite), and I don't think it could be perpetuated for any extended period of time because every year you mine, there's going to be less and less gold left, so to be able to mine more and more every year doesn't make any sense.

Re: Is the Fed really at fault for the 1929 market crash?

Bobby — Sat, 13 Dec 2008 16:00:10 GMT

nazgulnarsil:

doesn't the fact that you can have a debate stand as pretty damming evidence that our current money system is messed up?

Nope. Perhaps it's not the Fed. Perhaps our current monetary system would work just fine if we had the proper regulations keeping the market in check.

I'm claiming that these proposed regulations that will supposedly keep the market in check would be unnecessary if we had a hard money system. That hard money is the crucial check against market imbalences in a free market.

Re: Is the Fed really at fault for the 1929 market crash?

nazgulnarsil — Sat, 13 Dec 2008 14:10:17 GMT

doesn't the fact that you can have a debate stand as pretty damming evidence that our current money system is messed up?

just the idea that it's possible for the fed to create depressions whenever they want?

Re: Is the Fed really at fault for the 1929 market crash?

Bobby — Sat, 13 Dec 2008 13:21:29 GMT

sthomper:

how much of the claimed 2% increase of gold supply went into money usage?

I'm not sure, nor have I validated his claim that the gold supply was increasing 2% annually. maxpot46 claim interests me a lot more though. If, because of abandoning the Gold Standard, there was a huge transfer of Gold from Europe to banks in the U.S., that would imply a massive increase in gold used as money (i.e. the monetary base).

Mind you, I could still argue that the resulting change in dollar value and interest rates was not a natural market occurrence, but I would still have to concede my claim that the actions of the U.S. Fed was at the root of the 1929 market crash.

liberty student, gcopenhaver, thank you, I did not realize that book was available online for free. I'll definitely check it out, but I also want to send a response by tomorrow; is there a section of the book you can refer me to? Specifically in regards to the actions the Fed took that lead to the crash.

Does anyone, off the top of his or her head, have answers to the 3 questions I asked in my original post?

Re: Is the Fed really at fault for the 1929 market crash?

sthomper — Sat, 13 Dec 2008 05:50:07 GMT

how much of the claimed 2% increase of gold supply went into money usage?

Re: Is the Fed really at fault for the 1929 market crash?

gcopenhaver — Sat, 13 Dec 2008 05:33:09 GMT

I think you can find all of your answers in Murray Rothbard's book, America's Great Depression (the entire book is available online and in downloadable PDF). It was another Fed created boom and resulting bust, and then all the government action resulted in delaying the recovery, unecessarily prolonging the depression.

Re: Is the Fed really at fault for the 1929 market crash?

liberty student — Sat, 13 Dec 2008 05:32:44 GMT

Read Rothbard's "America's Great Depression", found on Mises.org in HTML and PDF.

Re: Is the Fed really at fault for the 1929 market crash?

Bobby — Fri, 12 Dec 2008 19:20:57 GMT

scineram:

It should not have let the money supply contract with 30% in short time.

Can you be more specific?

Also, to clarify, in my debate, I'm defending hard money :)

Re: Is the Fed really at fault for the 1929 market crash?

scineram — Fri, 12 Dec 2008 19:10:09 GMT

It should not have let the money supply contract with 30% in short time.

Is the Fed really at fault for the 1929 market crash?

Bobby — Fri, 12 Dec 2008 18:20:45 GMT

I'm in the middle of a Hard Money debate with a friend defending our current monetary system, and could use some help. During the course of this debate, I've argued that the Fed's massive increase in the money supply (and, consequently, credit) prior to 1929 was the root cause of that market crash. We've been using this graph from the St. Louis Fed's website (usually changing the settings to zero in on 1918-1930).

Indeed, I've always been under the assumption that the Austrian economist take on the 1929 market crash is that it was caused by malinvestment triggered by Federal Reserve instigated interest rate cuts. Now that I think about it though, I don't know if I ever actually read an account like that. Looking through these forums, I think I may have been mistaken.

As background, here is my friend's argument:

"You haven't defined what you mean by MASSIVE, you haven't shown that the increase in money supply is in any way causally related to recessions/great depression. All you are saying is look, the line goes up. There are very serious problems with that sort of analysis. The most problematic in my mind, is the fact that aboveground gold supply is currently increasing at approximately 2% per year (the story is far worse if you consider the discovery of gold mines in johannesburg around 1896). Assuming a 2% per year increase (w/o the sort of volatility found towards the end of the 19th century, and the beginning of the 20th), can you show me how much more massive the monetary base expanded under the fed than it would have under a gold standard? Between the years 1920-1929 the monetary base (while fluctuating) remains unchanged (at approximately 6 billion$). If we look at 1922-1929 (https://research.stlouisfed.org/fred2/fredgraph?graph_id=10951&category_id=0#) the monetary base goes from ~5.3 to ~6 billion $. At 2% inflation per year (assuming gold supply) we go from 5.3 billion $ to 6.08 billion. The monetary base would actualy have increased more under a gold standard than it did with the fed"

In researching his claims, a couple of questions have arose.

1) That graph we are looking at purports to show the monetary base from 1918 to 2008. But what is used as the monetary base has changed during this time period, has it not? I thought gold was held as reserves back in 1918, while printed dollars are held in reserves now. If that's the case, then, when viewing this graph from 1918 to 1930, are we seeing a change in the gold supply held by the Fed?

2) Today, the Fed increases the money supply buy purchasing a security from a Primary Dealer using a check that can be redeemed for "newly printed money". The primary dealer deposits that check with its bank, who redeems that check with the Fed and has the newly printed money stored in its reserve at the Fed. Was this the manner in which the Fed controlled expansion of the money supply in the 1920s?

3) Searching through these forums, I found this thread: Causes of the depression of 1929. In it, maxpot46 claims:

"The stage for the Great Depression was set by money expansion, but we should recall the circumstances. In any war, the first thing to go is the gold standard, as it limits the amount of munitions the government can produce (confiscate). In WWI, all the European nations went off the gold standard, while the US remained on it. This set up a solid flow of gold from EU to US, in exchange for munitions. By 1920, the US had almost all the gold in the world, while the EU nations suffered from hyperinflation."

Banks held more gold, so they legitimately could lend out more notes. In which case, interest rates should have naturally dropped. If this is indeed the case, the expansion of the money supply during the 1920's wouldn't have been the Fed's fault, would it?