27 Sep 2012

Does Anyone Deny That There Were Unprecedented Credit Stimulus Policies During Hoover Administration?

Economics, Federal Reserve, Krugman, Market Monetarism 80 Comments

Here’s something I want to pin down. In my book on the Great Depression, I quote Lionel Robbins saying (I think in 1934) that central banks around the world had tried unprecedented measures to stimulate a recovery through cheap credit, and that this was a complete reversal of traditional central bank doctrine.

Then Daniel Kuehn gives us this quote from Hayek (“The Fate of the Gold Standard”) in 1932:

Although there can be no doubt that the fall in prices since 1929 has been extremely harmful, this nevertheless does not mean that the attempts made since then to combat it by a systematic expansion of credit have not done more harm than good. In any case, it is a fact that the present crisis is marked by the first attempt on a large scale to revive the economy immediately after the sudden reversal of the upswing, by a systematic policy of lowering the interest rate accompanied by all other possible measures for preventing the normal process of liquidation, and that as a result the depression has assumed more devastating forms and lasted longer than ever before.

Lastly, FT Alphaville has a neat post out showing a bunch of commentary in the NYT from 1929-1933 (HT2 Krugman). A few of the people in there are complaining of what they consider to be unprecedented (not necessarily their term but it fits) credit stimulus.

So here’s my question: Do any of today’s Keynesians deny this? Obviously you think that these measures were woefully inadequate, in light of the shortfall in Aggregate Demand in the early 1930s. But I’m asking, do you agree with Robbins, Hayek, and the random Joes writing letters to the NYT, who at the time were claiming that the central banks of the world were fighting the downturn differently from how things were handled in previous crises?

Note well, I’m speaking here in absolute terms, not in a Sumnerian view whereby the Fed–by definition–has been “tight” the last few years because NGDP is below trend. Rather, I’m asking (for example) if it’s true that central banks in the early 1930s were actively trying to ease credit (by lowering interest rates, setting up special asset purchases or loan programs, etc.) when they had never done things like this in earlier crises?

80 Responses to “Does Anyone Deny That There Were Unprecedented Credit Stimulus Policies During Hoover Administration?”

  1. Jonathan M.F. Catalán says:

    It’s been a while since I’ve looked at the data, but, if I remember correctly, the Fed raised interest rates in 1932(?). I think advocates of “loose” credit tend to look at that, rather than the preceding three years of lowering interest rates and liquidity injections. I mean, this doesn’t directly address your point, but it suggests that some economists find the “unprecedented” Fed policy as irrelevant (or, that they’re just ignoring the preceding three years — like people who call Hoover a “liquidationist”).

  2. Daniel Kuehn says:

    I don’t know the data well enough. Certainly they didn’t loosen credit in 1920-21 and while I think there was a small recession a couple years later, that’s pretty much the only pre-Depression crash to speak of with the Fed.

  3. Daniel Kuehn says:

    I pulled out the Bible (Friedman and Schwartz)… I’m not sure what to say. Discount rates drop, but you should never reason from an interest rate change – that might be tight relative to the natural rate. High powered money doesn’t look like it’s doing anything notable (pg. 336-337), but there does seem to be some action (I’m not sure it’s “unprecedented”) in mid-1931 in the charts on various types of Fed credit on page 338. Page 339 describes it as a Bagehotian action of lending freely in a panic.

    I am not sure how appropriate it is to call that “loose”, and I don’t know the prior history of applying Bagehot’s principles to say whether or not it’s “unprecedented”. But that’d be the place to start I guess.

  4. Daniel Kuehn says:

    Now Hoover;s fiscal policy couldn’t be fairly described as “unprecedented” I think, unless you want to talk about some specific programs as being innovative and in that sense “unprecedented” (the overall fiscal stance wasn’t):

    http://factsandotherstubbornthings.blogspot.com/2012/02/depression-era-austerity.html

    • Bob Murphy says:

      Daniel, I realize we’ve had this argument before, but by saying Hoover’s policies were unprecedented, it means things like jacking up spending as the economy goes into Depression and budget deficits soar. In contrast, they were slashing spending during the 1920-21 Depression (arguably that’s what caused/exacerbated the crash, I will concede).

      You’re right, total federal spending was higher in (say) 1918 than in 1931, but that was because of World War I and hardly harms Robbins’ or Hayek’s point that governments/central banks had never tried to fight a depression the way they had done in 1930.

      • Daniel Kuehn says:

        Spending under Hoover was just under the FY 1921 budget.

        I don’t think that was war spending.

        Right, this was just a reminder of the fiscal point since you mention the Hoover administration in your post. It’s a different matter from monetary policy.

        I’m not sure if this is just normal Bagehot or if it deserves the term “unprecedented”. I’m honestly don’t have a strong view on that. It certainly wasn’t a modern central bank’s outlook, and the only prior case for the Fed was a somewhat different situation. So the question is, I guess, would it have been an unprecedented position for something like the BOE? I don’t know.

  5. Major_Freedom says:

    “If Hoover stood ready to impose an expansionist and interventionist New Deal, Morgan man George L. Harrison, head of the New York Fed and major power in the Federal Reserve, was all the more ready to inflate. During the week of the crash, the last week of October, the Fed doubled its holdings of government securities, adding $150 million to bank reserves, as well as discounting $200 million more for member banks. The idea was to prevent liquidation of the bloated stock market, and to permit the New York City banks to take over the loans to stockbrokers that the nonbank lenders were liquidating. As a result, member banks of the Federal Reserve expanded their deposits by $1.8 billion—a phenomenal monetary expansion of nearly 10 percent in one week! Of this increase, $1.6 billion were increased deposits of the New York City banks. In addition, Harrison drove down interest rates, lowering its discount rates to banks from 6 percent to 4.5 percent in a few weeks. Harrison conducted these actions with a will, overriding the objections of Federal Reserve Board Governor Roy Young, proclaiming that “the Stock Exchange should stay open at all costs,” and announcing, “Gentlemen, I am ready to provide all the reserve funds that may be needed.”

    “By mid-November, the great stock break was over, and the market, artificially buoyed and stimulated by expanding credit, began to move upward again. With the stock market emergency seemingly over, bank reserves were allowed to decline, by the end of November, by about $275 million, to just about the level
    before the crash. By the end of the year, total bank reserves at $2.35 billion were almost exactly the same as they had been the day before the crash, or at the end of November, with total bank deposits increasing slightly during this period. But while the aggregates of factors determining reserves were the same, their distribution was very different. Fed ownership of government securities had increased by $375 million during these two months, from the level of $136 million before the crash, but the expansion had been offset by lower bank loans from the Fed, by greater money in circulation, and by people drawing $100 million of gold out of the banking system. In short, the Fed tried its best to inflate a great deal more, but its expansionary policy was partially thwarted by increasing caution and by withdrawal of money from the banking system by the general public.”

    “Here we see, at the very beginning of the Hoover era, the spuriousness of the monetarist legend that the Federal Reserve was responsible for the great contraction of money from 1929 to 1933. On the contrary, the Fed and the administration tried their best to inflate, efforts foiled by the good sense, and by the increasing distrust of the banking system, of the American people.”

    “By the end of 1929, Roy Young and other Fed officials favored pursuing a laissez-faire policy “to let the money market ‘sweat it out’ and reach monetary ease by the wholesome process of liquidation.”18 Once again, however, Harrison and the New York Fed overruled Washington, and instituted a massive easy-money program. Discount rates of the New York Fed fell from 4.5 percent in February to 2 percent at the end of 1930. Other short-term interest rates fell similarly. Once again, the New York Fed led the inflationist parade by purchasing $218 million of government securities during the year; the resulting increase of $116 million in bank reserves, however, was offset by bank failures in the latter part of the year, and by enforced contraction on the part of the shaky banks remaining in business. As a result, total money supply remained constant throughout 1930. Expansion was also cut short by the fact that the stock market boomlet early in the year had collapsed by the spring.”

    “In the meantime, Eugene Meyer was promoting more inflationary damage as governor of the Federal Reserve. Meyer managed to persuade both Hoover and Virginia conservative Carter Glass, leading Democrat on the Senate Banking Committee, to push through the Glass-Steagall Act at the end of February, which allowed the Fed to use U.S. government securities in addition to gold as collateral for Federal Reserve notes, which were of course still redeemable in gold. This act enabled the Federal Reserve to greatly expand credit and to lower interest rates. The Fed promptly went into an enormous binge of buying government securities, unprecedented at the time. The Fed purchased $1.1 billion of government securities from the end of February to the end of July, raising its holdings to $1.8 billion. Part of the reason for these vast open market operations was to help finance the then-huge federal deficit of $3 billion during fiscal year 1932.”

    “Thus, we see the grave error of the familiar Milton Friedman monetarist myth that the Federal Reserve either deliberately contracted the money supply after 1931 or at least passively
    allowed such contraction.” – Rothbard, History of Money and Banking in the United States.

    • Daniel Kuehn says:

      Does it bother you at all, MF, that Rothbard here recounts the detailed banking history of a few months in 1929 and then leaps from that to the conclusion that between 1929 and 1932 the Fed didn’t allow a contraction?

      • Major_Freedom says:

        Not as much as it bothers me that I only included snippets, and that these comments are not found in the book one after another.

        I guess I should have made that more clear.

        • Daniel Kuehn says:

          Yes the section on 1929 came immediately before the point about 1929-1932. I checked to make sure you weren’t just omitting an ellipsis there.

    • Bob Roddis says:

      Here’s a chart of discount rates 1928-1934. How was the Fed supposed to re-inflate a bubble with low interest rates when there was no one who wanted to borrow and the inflated funny money was redeemable in gold?

      http://www.flickr.com/photos/bob_roddis/4164589632/sizes/o/in/set-72157600951970959/

      And why do we care? We know the world does not work the way the Keynesians say it does and nothing about Hoover or FDR suggests that it does. Give the Keynesians an inch and they take a mile. Oh, and let’s worry about whether Hayek changed his mind about stopping “secondary inflation” during a bust. Hayek was clear in stating that you wouldn’t have to ask him for advice about curing a bust if you hadn’t created a Keynesian boom in the first place.

  6. Lord Keynes says:

    (1) “FT Alphaville has a neat post out showing a bunch of commentary in the NYT from 1929-1933 (HT2 Krugman). A few of the people in there are complaining of what they consider to be unprecedented (not necessarily their term but it fits) credit stimulus.

    So here’s my question: Do any of today’s Keynesians deny this? “

    By credit stimulus you mean creation of reserves by the Fed? Or lowering discount or Fed funds rate? That was not an “unprecedented … credit stimulus”, for the simple reason that extra reserves and lower interest rates did not translate into extra private debt flows to consumers and businesses, and certainly not when banks were collapsing left, right, and centre.

    In reality, private debt fell off a cliff from 1929-1933, as you can see from the graphs Steve Keen assembles here:

    “So during the 1920s boom, the change in debt was responsible for up to 10 percent of aggregate demand in the 1920s. But when deleveraging began, the change in debt reduced aggregate demand by up to 25 percent. That was the real cause of the Great Depression.”

    http://www.debtdeflation.com/blogs/2010/01/24/debtwatch-no-42-the-economic-case-against-bernanke/

    What also strikes me is how incredibly ignorant this post is. What Keynesians has ever said monetary policy will be effective in a severe crisis like a debt deflationary depression? Do the words “pushing on a string” mean anything to you”?

    (2) “but by saying Hoover’s policies were unprecedented, it means things like jacking up spending as the economy goes into Depression and budget deficits soar. “

    Total US government spending from 1929-1933 was not “unprecedented”. Spending hardly deviated form its 1920s trend line and growth path. Also, in 1929 total federal expenditures were about 2.5 per cent of the GNP. The percentage rose from 1929-1933 mostly because GNP collapsed not because of huge spending.

    Hoover’s actual Federal budgets:

    Fiscal 1929 | $3.127 billion (5.60% increase on 1928)
    Hoover (March 4, 1929–March 4, 1933)
    Fiscal 1930 | $3.320 billion (6.17% increase on 1929)
    Fiscal 1931 | $3.577 billion (7.74% rise on 1930)
    Fiscal 1932 | $4.659 billion (30.25% rise on 1931)
    Fiscal 1933 | $4.598 billion (1.31% fall on 1932).

    In fiscal 1930, Hoover ran a budget surplus of $0.7 billion. Despite spending, overall federal fiscal policy was contractionary. In fiscal 1933, Hoover cut total spending – again contractionary.

    That leaves you with fiscal 1931 and 1932. The only year where there was significant rise was fiscal 1932 (a 30% rise of about $1 billion).

    But once you look at total state local and federal spending (with state and local austerity), you can see that total spending never departed from its 1920s trend line:

    Year | Total spending | increase
    1928 | $11.44 | $0.22
    1929 | $11.68 | $0.24
    1930 | $11.92 | $0.24
    1931 | $12.18 | $0.26
    1932 | $12.44 | $0.26
    1933 | $12.62 | $0.18

    http://socialdemocracy21stcentury.blogspot.com/2011/05/herbert-hoovers-budget-deficits-drop-in.html

    http://socialdemocracy21stcentury.blogspot.com/2012/01/what-hoover-should-have-done-in-1931.html

    http://socialdemocracy21stcentury.blogspot.com/2012/02/steven-horwitz-on-herbert-hoover-mostly.html

    • Bob Murphy says:

      Lord Keynes, I don’t want to focus on fiscal policy here; I think that came up because Daniel said something and I couldn’t keep my mouth shut. I’m talking in this post about Robbins’ and Hayek’s claims that central banks were doing things qualitatively different from what had been done in any previous crisis. When you say this:

      What also strikes me is how incredibly ignorant this post is. What Keynesians has ever said monetary policy will be effective in a severe crisis like a debt deflationary depression? Do the words “pushing on a string” mean anything to you”?

      …it leads me to believe that they are correct in saying that, since, when you think you have the numbers on your side, you post them here ad nauseum. Because when it came to monetary policy you just insulted me with no numbers, I’m assuming you are agreeing with Robbins and Hayek?

      • Lord Keynes says:

        OK, you complain about lack of “numbers”.

        Please enjoy all the numbers to your heart’s content in this refutation of your post:

        http://socialdemocracy21stcentury.blogspot.com/2012/09/more-fake-history-of-great-depression.html

        • John S says:

          “But when deleveraging began, the change in debt reduced aggregate demand by up to 25 percent. That was the real cause of the Great Depression.”

          But on your blog, you told me that if branch banking had been allowed in the US, there would have been fewer bank failures than there would have been had branching been allowed. Considering that Canada had no bank failures and the US had thousands, doesn’t the lack of branching also explain a significant amount of the bank failures and contraction in the money supply from 1930-33?

          http://www.econ.yale.edu/seminars/echist/eh03/mitchener-033103.pdf

          • Lord Keynes says:

            They may well have been fewer failures if branch banking had existed.

            But I doubt whether it would have made a very significant difference, however.

            What was needed was intervention by the Fed to stop financial sector collapse.

            • John S says:

              “But I doubt whether it would have made a very significant difference, however.”

              I’m sorry, but this is not persuasive in the least. Can you provide more support, either empirically or through logical argument, of why you feel this way?

              “There may well have been fewer failures if branch banking had existed.”

              Canada had zero failures, and the US had thousands from 1929-33. Also, empirical research shows that state laws re: branching and systemic stability were positively correlated. To conclude that branching was unrelated to bank failures seems like a willful rejection of the evidence.

              Mass bank runs and losses of reserves surely contracted the money supply, no? (Please correct me if I’m wrong.)

              • Lor d Keynes says:

                There were major runs on many banks in late 1932 through early 1933, which caused the banking system to collapse.

                It doesn’t matter how many branches you have: a fractional reserve bank with branches still has more debts owed than reserves on hand. If enough of your clients panic in many states, you face insolvency.

                As for Canada, we’d had this argument before.

                The Canadian government showed a willingness to bail out insolvent banks from the 1920s.

                Indeed, the “Finance Act” of 1914 gave the Canadian government the authority to issue its own paper, so that it had lender of last resort powers: and state ministers said publicly that they would use these powers if banks needed to be saved from collapse:

                http://socialdemocracy21stcentury.blogspot.com/2012/09/why-did-canada-have-no-mass-banking.html

              • Bala says:

                “There were major runs on many banks in late 1932 through early 1933, which caused the banking system to collapse.”

                Yeah! Bank runs caused the banking collapses, but what caused the bank runs? Blank out…..

            • John S says:

              “What was needed was intervention by the Fed to stop financial sector collapse.”

              But Canada didn’t have a central bank, while the US did have a central bank! And even if the Bank of Montreal acted in “some ways” like a central bank, that doesn’t prove that it was the Bank of Montreal, or govt assurances, that kept the Canadian system stable. How do you know it wasn’t branching? (Not Australia again, please!! Remember “instances as evidence”?)

              Truly, I don’t mean to be snide, but I don’t feel you have adequately refuted the branch banking hypothesis.

              • Lor d Keynes says:

                See above:

                the “Finance Act” of 1914 gave the Canadian government the authority to issue its own paper, so that it had lender of last resort powers: and state ministers said publicly that they would use these powers if banks needed to be saved from collapse:

                http://socialdemocracy21stcentury.blogspot.com/2012/09/why-did-canada-have-no-mass-banking.html

              • John S says:

                “a fractional reserve bank with branches still has more debts owed than reserves on hand.”

                Of course. That doesn’t mean that fractional reserve banks are constantly on the brink of runs.

                “If enough of your clients panic in many states, you face insolvency.”

                That’s my point. States that allowed branching showed more stability. If the entire country had allowed branch banking for decades, the system as a whole would have been more stable and resilient (both b/c of the effects of competition on weeding out weak unit banks, and as you stated on your blog:

                “diversified branch banking would have given banks a better asset portfolio and a greater stock of reserves.”)

                Don’t you think that fewer failures, as well as a slower pace of failures, would have mitigated the public’s “panic” considerably? Or, to state it differently, a rash of sudden bank failures is likely to be calmly accepted by depositors?

                Just to clarity–do you believe that the difference in the number of US bank failures would have been NEGLIGIBLY LESS had the US allowed nation-wide banking, as Canada did?

              • John S says:

                “the “Finance Act” of 1914 gave the Canadian government the authority to issue its own paper, so that it had lender of last resort powers”

                And the Federal Reserve Act provided for the “furnishing of an elastic currency.” Yet the presence of a central bank, explicitly created to provide liquidity during crises, evidently was not sufficient to prevent mass bank failures in the US.

    • Adrian Gabriel says:

      I find it hilarious that Lord Keynes keeps pointing out bank runs as a bad thing during the recession, and then counters it with the idea that more stimulus was needed. HAHAHA, does he not see that stimulus was useless and that the bank runs were due to the credit expansion and the loss of trust people had int he banks. Lord Keynes, I told you before Rothbard showed that insolvent banks would be weeded out with bank runs to correct the markets. How is it that in this case it occurred, and was a testament to market correction, yet the government proceeded to buy up bons like a fat girl after the last hershey’s bar in wal mart? The scenario today is similar, yet the deposit insurance is preventing the bank runs to correct the market. Sorry, government has been very bad for the economy. Rothbard, win!

  7. Lord Keynes says:

    (1) The comments are not meant to “insult” you.

    (2) ” Robbins’ and Hayek’s claims that central banks were doing things qualitatively different from what had been done in any previous crisis. “

    What, “qualitatively different” in terms of lowering rates and bond buying programs?

    You want numbers?

    The Fed cut rates and bought bonds in 1921, 1924 and 1927-1928 to fight recessions.

    The bond purchases in late 1929 were “unprecedented” either:

    Following the stock market crash in October 1929, the New York Fed purchased $160 million of government securities and, by the end of December, the System had purchased an additional $150 million.
    But, from January 1930 to October 1931, the Fed made only modest purchases, particularly in
    comparison with those made in 1924 and 1927, when the declines in economic activity were
    less.

    David C. Wheelock, “Monetary Policy in the Great Depression: What the Fed Did, and Why,” p. 22
    http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf

    The 1924 recession:
    By April 1924, the Fed bought $156 million in bonds and by July 1924 had bought about another $193 in bonds to fight recession.

    The 1927 recession:
    By October 1927 the Fed bought $127 million in bonds to fight recession.

    The policy actions in 1929-1931 were not “qualitatively different,” just different in terms of quality: lower rate cuts and some more bond purchases than previously.

    Anyway, in 1931, the New York Fed raised the discount rate to 3.5% from 1.5% by October: right in the midst of the worst depression ever seen.

    What’s more if you look outside the US, central banks in many other nations (e.g., UK) were cutting rates and pursuing loose monetary policy well before 1929 to fight recessions.

    • John S says:

      “The comments are not meant to ‘insult’ you.”

      But surely, you must realize that anyone would feel insulted by your word choice? Or perhaps you really don’t?

      I assume you post here b/c you want to persuade people. Just be aware that your arrogant tone assures that you will fail.

    • Bob Roddis says:

      What’s more if you look outside the US, central banks in many other nations (e.g., UK) were cutting rates and pursuing loose monetary policy well before 1929 to fight recessions.

      That worked, didn’t it? It’s just a coincidence that the Great Depression followed. They just didn’t get to do enough due to pushback from those wacko liquidationist types.

      • Lord Keynes says:

        (1) Did the policy very akin to liquidationism work in Germany from 1929-1932?

        (2) ABCT is false. So your explanation of what caused the Great depression is also false.

        • Bob Roddis says:

          Since LK does not comprehend the problems of economic calculation and miscalculation upon which the ABCT is based, he is in no position to understand the ABCT or claim that it is false.

          http://tinyurl.com/camafxw

          Of course, there is always the alternate possibility that Keynesians actually anticipate the implications of the nature of economic calculation and purposefully avoid allowing bad thoughts into their brains.

        • Major_Freedom says:

          (1) Liquidationism is not the cause of the rise of fascism in Germany. That is an extremely crude and sloppy ex post ergo propter hoc assertion. Fascism arose in Germany due to many factors:

          Philosophical (Fichte, Nietzsche and Heidegger had huge intellectual influences),

          Political (war devastated the country, and to make matters worse, western powers imposed war reparations on the German people to pay for the devastation all of them allegedly caused),

          Sociological (19th and early 20th century revolutionary spirit was concentrated in Germany in part due to the oppressive monarchy meddling in people’s lives, which Hegel had a lasting impact in advancing),

          Racial (anti-semitism due to a perceived Jewish banking conspiracy, and spoiling of the German aryan race),

          Economic (hyperinflation during Weimar had long lasting effects and unleashed economic chaos).

          Fascism was an extension of extreme nationalism, militarism, and statism.

          Hitler was already gaining massive popularity by the time the early 1930s deflation came around. He garnered a following during the 1920s and into the 1930s because fascist tendencies were already on the rise.

          Kaiser Wilhelm II was already by 1925 rabble rousing for Germany to adopt Mussolini’s foreign policy. (Look up The Spirit of 1914)

          Only inflationist cultists are trying to pin fascism on a 3 year austerity experiment. It’s represents a new low in modern day discourse.

          (2) You have not shown ABCT is false. Indeed, you have not even shown any evidence you understand the concepts behind ABCT, but rather, you have shown evidence of confusion.

          • Lord Keynes says:

            “Hitler was already gaining massive popularity by the time the early 1930s deflation came around.”

            And yet the Nazi party did not get massive gains in the Reichstag until the disastrous depression of the 1930s: the Nazis representation in the Reichstag rose from 12 deputies in 1928 to 107 in 1930, making it the second largest party, and then 230 in June 1932, when it became the largest party.

            So the depression had nothing whatsoever to do with the Nazi’s political success? Is that correct?

            http://socialdemocracy21stcentury.blogspot.com/2011/06/austerity-and-weimar-republic.html

            • Bala says:

              “And yet the Nazi party did not get massive gains in the Reichstag until the disastrous depression of the 1930s:”

              Yeah!! Support for the Nazi Party was non existent until just before the deflation of the 1930’s. They magically got all their support as a result of the deflation of the early 1930’s.

              What goop!!! Typical of LK.

              • Lord Keynes says:

                “Support for the Nazi Party was non existent until just before the deflation of the 1930′s.”

                Straw man argument.

                Nobody asserted that “Support for the Nazi Party was non existent until just before the deflation of the 1930′s”.

                What was said is this: “the Nazi party did not get massive gains in the Reichstag until the disastrous depression of the 1930s”

                That is a plain fact.

              • Bala says:

                LK,

                Learn to read and to stop lying. MF said this –

                “Hitler was already gaining massive popularity by the time the early 1930s deflation came around. He garnered a following during the 1920s and into the 1930s because fascist tendencies were already on the rise.”

                to which you responded as you did.

                I guess lying is a fundamental characteristic of whatever Keynesians.

              • Bala says:

                LK you pathological liar,

                Just to make it adequately clear, the only proper way to interpret your response is that gains in the Reichstag that happened in the 1930’s were most influenced by the deflation of the 1930’s and very little by the prior economic troubles. So stop trying to squirm out of this mess that you put yourself in.

            • Major_Freedom says:

              You’re just using rhetorical flourishes and using language as a weapon. This time is it’s “massive” gains. I am supposed to ignore all of what actually generated fascism in Germany, and focus on that which you call “massive” gains by the Nazi Party in particular.

              No LK, fascism had already spread throughout Germany by the time the early 1930s rolled around. Large social movements take decades to form. The way you are making it out is that Germany was non-fascist in ideology, then in just 3 years, the entire German population changed their ideology and welcomed fascism.

              Even today, with instant communications on a world-wide scale, great social upheavals take many years, and you are saying that in the early 1930s Germany, where the only communication was by phone and letter, that the entire population learned about, pondered, and then adopted, fascism, from a non-fascist beginning? Don’t be ridiculous.

              The Nazi party in particular was the political manifestation of an already existing ideology.

              You don’t seriously believe that governments are not influenced by social forces, and that social forces are determined solely by the government do you? That the people in Germany did not welcome Hitler, that Hitler introduced an ideology completely foreign to the German people? Have you ever studied history? He was treated as a hero upon inauguration (of course there were dissenters who were killed), but the German people were already nationalistic, militaristic, and desiring a fascist leader to bring the German people to the promised land.

              I didn’t say the depression had nothing to do with it. Just that you cannot claim that it caused fascism in Germany. That is just crude and historically inaccurate. If anything, the depression only contributed to an acceleration of an existing social movement.

              The US had many depressions, but did fascism arise here? No. Why? Because the prevailing ideology among the populace here was not fascistic. It was republican-democratic.

              It seems by your logic, we should expect fascism to arise wherever austerity and depressions arise.

              You are not suggesting that I hope.

          • Bob Roddis says:

            The economic problems that led to Hitler’s rise were caused by interventionist and inflationist policies. It was certainly not caused by the results of a prior imposition of Rothbardian principles of meticulous respect for private property and self ownership. The entire Keynesian narrative is a garbled mess of lies, doubletalk and totalitarian wishful thinking.

            • Lord Keynes says:

              ” It was certainly not caused by the results of a prior imposition of Rothbardian principles of meticulous respect for private property and self ownership”

              This is the perfect example of the straw man argument.

              Rothbardian anarcho-capitalism has never existed in the real world and nobody ever blamed Hitler’s rise on the existence of anarcho-capitalism in 1920s Germany.

              • Bala says:

                Ha! Ha! Ha! As usual, ignoring the core point, are you? What a crook!!

                Bob said this

                “The economic problems that led to Hitler’s rise were caused by interventionist and inflationist policies.”

              • Richie says:


                Rothbardian anarcho-capitalism has never existed in the real world and nobody ever blamed Hitler’s rise on the existence of anarcho-capitalism in 1920s Germany.

                You just made Bob’s point, thank you very much.

                LK is great at accounting, but reading comprehension is obviously not his strong point.

              • Bob Roddis says:

                Rothbardian anarcho-capitalism has never existed in the real world and nobody ever blamed Hitler’s rise on the existence of anarcho-capitalism in 1920s Germany.

                Everyday life in most countries with the English common law system resembles the Rothbardian system. Most people know what private property means, what contracts are and most people know you cannot assault your neighbor’s body or steal their property. The basis for the Keynesian hoax is that the English common law system of private property and contracts allegedly fails and requires centrally planned policies imposed by technocrats that obliterate the protections of the English common law system. Hitler’s rise was not caused by the failure of a rough application of the English common law system of private property and contracts. Your perpetual argument that a pure Rothbardian system has never existed is irrelevant and thus bogus, just like most of the rest of your “analysis”.

              • successfulbuild says:

                “Everyday life in most countries with the English common law system resembles the Rothbardian system.”

                “Fascism may be defined as a form of political behavior marked by obsessive preoccupation with community decline, humiliation, or victim-hood and by compensatory cults of unity, energy, and purity, in which a mass-based party of committed nationalist militants, working in uneasy but effective collaboration with traditional elites, abandons democratic liberties and pursues with redemptive violence and without ethical or legal restraints goals of internal cleansing and external expansion.”

                “We stand for the maintenance of private property… We shall protect free-enterprise as the sole economic order.” — Adolf Hitler

                Yep. It seems Adolf Hitler understood the totalitarian Libertarian system just fine, right down to the rejection of democracies and free communities.

                In fact, without private property, and with equality, nazism could never have even existed.

                You have to wonder why Libertarians don’t bring up their best philosopher — Adolf Hitler — more often.

              • Bob Murphy says:

                You have to wonder why Libertarians don’t bring up their best philosopher — Adolf Hitler — more often.

                Because he polls terribly in focus groups.

        • John S says:

          “(2) ABCT is false”

          You still haven’t *proven* this, I believe. Your argument boils down to (correct me if I’m wrong):

          1) Multiple “natural” interest rates exist in the economy
          2) There is no one true “natural” interest rate
          3) Thus, ABCT cannot be true

          But even if one acknowledges that multiple interest rates exist in the economy, that doesn’t mean that these rates can’t be manipulated by central bank policies. Bernanke just said that he intends to drive and hold down a wide variety of interest rates over the next few years. *IF* ABCT were true, that would just mean that multiple rates, rather than one “natural rate,” would be affected, with accompanying deleterious effects.

          This is course does not serve as proof for ABCT, but neither does your argument constitute a satisfying refutation.

          • Lor d Keynes says:

            John S,

            My critique of ABCT runs well beyond the points you mention, as have critiques of ABCT in general, such as those of Robert Vienneau.

            Try this one:

            http://socialdemocracy21stcentury.blogspot.com/2012/01/hayeks-trade-cycle-theory-equilibrium.html

            For links to all posts see here:

            http://socialdemocracy21stcentury.blogspot.com/2012/03/my-posts-on-austrian-business-cycle.html

            Also, as Robert Vienneau has argued, there is no necessary reason why lower interest rates would cause production to be significantly re-oriented to higher-order capital goods anyway, and even classifying capital structure into well-defined, strict higher orders is dubious in itself:

            Vienneau, R. L. 2006. “Some Fallacies of Austrian Economics,” September
            http://papers.ssrn.com/sol3/papers.cfm?abstract_id=921183

            Vienneau, R. L. 2010. “Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory,” September 4
            http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1671886

          • Bala says:

            Oh!! These have been refuted many times over. He just ignores all the mauling and repeats his nonsense ad nauseum.

          • Bob Roddis says:

            The fact that there are or would be multiple rates as opposed to a single natural rate does not change the requirement that unimpeded economic calculation is necessary to discover them. One needs no more proof of LK’s inability to understand basic Austrian concepts than his insistence that multiple natural rates of interest refute Austrian analysis.

            • Matt Tanous says:

              You know, I just got done reading Man, Economy, and State, and I got the impression that, according to Rothbard, the single natural rate could only exist in the ERE – that varying amounts of uncertainty in various areas would result in different rates in a realistic market.

              If that’s a correct impression, then the multiple interest rates don’t only have no bearing on Austrian analysis, but are in fact a core concept included in it.

              • Major_Freedom says:

                Shut up with those facts Tanous! We have a false Keynesian ideology to spread like the plague!

    • John S says:

      By the way, I would like to ask you–which exact years were you referring to when you wrote this on freebanking?

      “Regarding the past, its called empirical evidence: for decades when interest rates were low, the Western world had no massive asset bubbles or serious financial crises.

      Before that period, financial crises were ubiquitous.”

      • Lord Keynes says:

        1945-1970s

        • Bob Roddis says:

          Weren’t US dollars convertible into gold and silver during that period? I would think that such a policy would have kept the Keynesians on a shorter leash during that period and unable to engage in more destructive behaviors.

        • Matt Tanous says:

          According to the “empirical evidence”, the interest rate steadily rose over that period. The 10-year bond rate, for instance, rose from under 2% in 1945 to over 15% by 1980. See for yourself: http://www.ritholtz.com/blog/2010/08/history-of-us-interest-rates-1790-present/

          The same trend was evidenced by the Federal Funds rate: http://en.wikipedia.org/wiki/File:Federal_Funds_Rate_1954_thru_2009_effective.svg

          Honestly, even the emiprical evidence is against you, LK. Care to try again, or will you admit you are full of it?

          • Bala says:

            You are asking for too much. Expect a further volley of absolutely meaningless data on GDP.

            • Matt Tanous says:

              You’re right. I should have just asked in what universe rising double-digit interest rates are “low”.

          • Lor d Keynes says:

            (1) the rising trend does not contradict anything I have said: rates were historically low for most of the 1945-1973 period.

            (2) The federal funds rate:

            http://research.stlouisfed.org/fred2/series/DFF?cid=118

            (2) the discount rate was historically very low from 1950-1958 and for most of the early 60s:

            http://research.stlouisfed.org/fred2/series/MDISCRT?cid=118

            The “empirical evidence” most decidedly supports me, and is against you.

            • Matt Tanous says:

              I notice you make a claim about how things were historically very low, without showing anything before the period you are talking about. Are we supposed to take your word for it?

              According to this chart here (http://www.ritholtz.com/blog/wp-content/uploads/2010/08/1790-Present.gif), which covers all of US history, the treasury bond yields (which map very similarly to other rates such as the discount rate, according to your references) stopped being “historically low” around the mid-50s, and by the late 60s had reached all-time highs.

              To say the “empirical evidence” fits your claims is to deny the facts.

              • Lord Keynes says:

                (1) your link shows “nothing found”

                (2) the original point of this whole argument was that central bank base rates (= fed funds rate or in the earlier period discount rates) were historically low for the most of the 1945-early 1973 period, not yields on Treasuries.

                Low rates occurred in these years and yet there were no huge asset bubbles or global financial crises.

                So the data on yields is utterly irrelevant, anyway.

                What Austrian has ever argued that low bond yields induce huge asset bubbles?

              • Matt Tanous says:

                1) Really? Every computer I have used to get me to the link worked. Try this: http://www.ritholtz.com/blog/2010/08/history-of-us-interest-rates-1790-present/

                2) central bank base rates (= fed funds rate or in the earlier period discount rates) were historically low for the most of the 1945-early 1973 period, not yields on Treasuries.

                Right, but rates on Treasuries, being an interest rate based off the Fed’s base rates, track pretty well with the funds and discount rates.

                “Low rates occurred in these years and yet there were no huge asset bubbles or global financial crises.”

                Low, according to what metric? You claim these were historically low, yet provide no data further back with which to judge that claim. I contend they were low only for a short time, and were drastically and steadily increased through the period you claim was the entirety of them being low (through 1973, absurdly).

                Contrary to your second claim, the Fed tightened monetary policy periodically (with those rising rates you say don’t matter), “plunging the US into recession” (i.e. popping the bubbles you say didn’t exist) in 1953, 1957, 1960, and 1969, according to the NBER, followed by the stagflation of the 70s.

                The lack of “huge” bubbles and “global” crises is both a relative term, and one that doesn’t have much bearing on the discussion. If that is the metric we are trying to reach, then we should go back to the gold standard as we had neither there – only under inflationary central banking have we had such things….

  8. Lord Keynes says:

    Correction:

    The bond purchases in late 1929 were NOT “unprecedented” either:

  9. RPLong says:

    My impression based on the discussions I’ve had is that there is no such thing as “absolute terms” to any style of Keynesian. It’s always all relative, and therefore there’s no such thing as “monetary stimulus that didn’t work.” Instead, it’s always either “sufficient” or “insufficient” levels of monetary stimulus.

    In other words, Sumner’s perspective is the only one people take. I flat-out asked Sumner whether it was possible for a central bank to *neither* expand *nor* contract the money supply, and he said no. That shows you what you’re dealing with.

  10. Lord Keynes says:

    Bob Murphy,

    My previous comment needs to be deleted: the italics HTML tags are wrong and will affect all folllowing comments.

    Bala,
    >”LK,

    >Learn to read and to stop lying. MF said this –

    >“Hitler was already gaining massive popularity by the time the early 1930s deflation came around. He
    > garnered a following during the 1920s and into the 1930s because fascist tendencies were already on
    > the rise.”

    And I never denied that Hitler had considerable popularity in the 1920s, nor that he “garnered a following during the 1920s “.

    But in the 1920s, the Nazi had little electoral success, as is easily verified:
    Date Total Votes | Votes percentage | Reichstag seats
    May 1924 1,918,300 6.5% 32
    December 1924 907,300 3.0% 14
    May 1928 810,100 2.6% 12
    September 1930 6,409,600 18.3% 107
    July 1932 13,745,000 37.3% 230
    November 1932 11,737,000 33.1% 196
    March 1933 17,277,180 43.9% 288

    http://en.wikipedia.org/wiki/Nazi_Party#Federal_election_results

    The Nazi percentage of the vote was small in the 1920s: and it slumped both in absolute terms and in percentage terms from 6.5% in 1924 to just 2.6% in 1928.

    You think that rise in 1930 has nothing to do with the depression?

    • Bala says:

      Same reply…

      Yup genius!!

      The increase from 2.6% in May 1928 to 18.3% in Sep 1930 had nothing to do with what happened in the period till Dec 1929 and everything to do with what happened since Jan 1930.

      How much more stupidity do you want to reveal? I’ve exposed you many a time, but this one is actually too easy!!

    • Bala says:

      And then there is the point that the depression of the 1930’s had nothing to do with the policies followed before the 1930’s. The deflation was just an isolated moment of insanity.

  11. bill woolsey says:

    Isn’t it obvious?

    Nominal interest rates were very low by historical standards during teh Great Depression.

    The was decribed as an expansionary credit policy.

    Of course, we would now say that due to expected deflation these low nomimal rates were very high real interest rates.

    I would also say that because of poor employment and investment propsects, the supply of saving was high and the demand for investment low, and so the natural interest rate was very low.

    Real interest rates were high and the natural rate was low, with the real rate way above the natural rate, conditions were contractionary.

    And finally, bank lending is not what is important about central bank policy anyway, it is rather the quantity of money they create relative to demand to hold it. The quantity of money was quite low and the demand to hold money very high. The banking system was generating very contractionary montary conditions.

    Of course, there was the gold standard, but in the U.S., anyway, during most of the period, gold reserves were rising relative to the quantity of base money created by the Fed. The Fed’s contribution was actually negative.

    That all of these factors were ignored and instead they just focused on short term nominal interest rates being very low compared to “normal” is pretty bad really.

    But then, we see the same thing today,. The Fed is very accomadative. See, the Fed funds rate is .25 percent. At least we don’t have expected inflation or an absolute decrease in most measures of the quantity of money.

    • John S says:

      Prof. Woolsey,

      You write, “The banking system was generating very contractionary monetary conditions.”

      Do you believe that the lack of branch banking in the US (as opposed to the Canadian system) was a cause of monetary contraction from 1929-33?

  12. Bob Murphy says:

    Hey Bala, can you please tone it down? It’s hard for me to get huffy about LK’s tone when you’re literally calling him a pathological liar and an idiot.

    • Bala says:

      Sure. How can I refuse your request? 🙂

    • Bala says:

      But I also think you take him too seriously. My objective is simply to have some fun by pointing at the obvious errors he makes. This is apart from all the serious conceptual errors that I have pointed out in lengthy arguments on his own blog. On his own blog, he has been shown to be incorrect and inadequate many a time by many different people. Enough holes have been shot through his ramblings. However, he keeps repeating his “stuff” with the persistence of a mule. It does get irritating at times.

      Sorry if I caused you some trouble.

      p.s.: LK is not going to change his tone. The only thing that I have seen working is a taste of his own medicine.

  13. Bob Murphy says:

    LK: Thanks I will check out your post. Just to be clear, although I would prefer the answer to be “yes, these were unprecedented measures,” I wasn’t being sarcastic when asking. I am genuinely curious for an objective assessment of Robbins’ and Hayek’s claims here.

    Bill Woolsey: Hang on a second, there are at least two things. First, it’s not enough to say, “Because of price deflation, real rates were higher than nominal, so the Depression-era central banks weren’t engaged in loose money.” This is because it was standard for there to be outright deflation in panics/depressions back in the day, right? The only one I know for sure is 1920-21, where prices fell faster in the first 12 months than at any 12-month stretch during Great Depression.

    Second, Robbins and Hayek are saying that the *philosophy* changed, and that gov’ts/central banks were deliberately trying to prop up businesses/commercial banks. This departs from Bagehot’s famous injunction to “lend freely, but at a high rate of discount” (maybe not exact quote). The idea was to provide liquidity yes, but only to solvent firms. Let the other ones go under. That’s not what we do now, and Robbins and Hayek make it sound like this change in approach came in during the Great Depression.

  14. JP Koning says:

    “I’m asking (for example) if it’s true that central banks in the early 1930s were actively trying to ease credit (by lowering interest rates, setting up special asset purchases or loan programs, etc.) when they had never done things like this in earlier crises?”

    That’s a big question because you’re asking not just about the Fed but also other central banks. I’ll just respond with the Fed in mind. It will help if you open the History of the Fed chart which is available as a PDF here:

    http://www.financialgraphart.com/history_of_fed_free.pdf

    You can see from the first row that the amount of new powers in the Federal Reserve Act crescendoed beginning in 1932 with the passage of the Glass Steagall Act and continued till 1935 or so. There were no changes to the Act during the 1920 recession. The new powers, which included sections 13.3, 10a, 10b, and 13.13, and 13b, dramatically broadened the power of the Fed to directly lend to banks, businesses, and individuals. These programs were never widely used, partly due to the simultaneous creation of the Reconstruction Finance Corp in late 1931.

    You asked about special asset purchase programs. Beginning in mid 1933 Roosevelt began to buy up gold, moving its price from $20 or to almost $35. Even before this, as part of the Feb 1932 Glass Steagall Act, the Fed was permitted for the first time to purchase government securities outright (without having to sterilize these purchases). As the chart shows, this new power allowed the Fed to dramatically increase its government bond portfolio beginning in 1932, an early form of QE. Again, this didn’t happen in 1920.

    So yes, the Fed’s reaction in the early 1930s was certainly unique relative to 1920, the only comparable period since then being 2008.

    • Bob Murphy says:

      Great stuff JP. Lord Keynes, how do you feel about his claims? I personally don’t understand the sterilization point. JP are you saying that when LK shows, e.g., the Fed purchases of gov’t bonds during the 1920s, that each time was exactly counterbalanced by what, an outflow of gold from the Fed’s balance sheet?

      • JP Koning says:

        Perhaps sterilize wasn’t a good word.

        Before 1932, all Federal Reserve notes had to be backed 40% by gold and 60% by “eligible paper”. The latter was made up primarily of commercial paper. Glass Steagall allowed government securities to be eligible, and therefore dramatically increased the ability of the Fed to engage in QE with government debt. Prior to then, the government could only engage in QE with government debt to the extent that it already had excess gold and eligible paper. It was constrained.

        Here is Barry Eichengreen:

        “Prior to the passage of the Glass-Steagall Act in 1932, the Fed had to worry about the problem of free gold. Government securities did not qualify as collateral for Federal Reserve notes in circulation; the Fed consequently could engage in expansionary open market operations only to the extent that it possessed free gold. ”

        Or read Marriner Eccles here:

        http://fraser.stlouisfed.org/docs/historical/eccles/014_03_0011.pdf

        I touched on this limit ages ago here: http://mises.org/daily/3828

  15. Bharat says:

    Dr. Murphy, just pointing this out, for some reason clicking on your newest post “Amanda BillyRock Goes to University…Mises University” directs me toward your home page rather than toward the comments page (I wasn’t planning on posting a comment there, but just in case others wanted to, I thought you should know).

    • Bharat says:

      Oh ya, and may or may not have seen this already (different than the link you posted a few days ago)

      http://www.breitbart.com/Big-Journalism/2012/09/25/Paul-Krugman-Refuses-To-Debate-Austrian-Economist-For-73-000-Donation-To-New-York-Food-Bank

      • John S says:

        Just a thought about Krugman/Murphy debate:

        Why don’t you challenge him to a series of 6 essays, Cato-unbound style (3 by him, 3 by you, with a specified page/word limit for each)?

        He said on radio ( http://www.youtube.com/watch?v=cV-ga1oKzC8 ) that a live debate isn’t the correct format b/c econ issues shouldn’t be settled by “who is quicker on the uptake” or “who has the best one liners.” This gives him a legitimate sounding excuse (I won’t engage in a circus, I’m a Nobel Prize winner, dammit!).

        So maybe you should publicly alter your challenge by stating that the money would be released IF the essays ran as his official NYT columns (NOT blog entries). Then he really doesn’t have an excuse for ducking you. It would also give you an even better format to eviscerate him.

        • John S says:

          Publicity-wise, I think a series of columns would be even better. A debate would only be a one-time shot. With a series of columns, massive buzz would build up in the blogosphere btw columns (and not just the econosphere).

        • Bala says:

          Just in case it matters, I tend to agree with John S on this. IMHO, debates are not very effective. It would be better to have a series of essays where each criticises the other and defends himself against the criticism.

          The format should touch upon the foundations of each school of economics for that’s the real problem with Krugman and his “economics”. That’s the ideal point of attack and defence as I see it.

    • Bob Murphy says:

      Lord Keynes’ sabotage no doubt….

  16. skylien says:

    @ Bob,

    I found an interesting chart about the monetary base on a logarithmic chart. I think a normal scale is very misleading quite often. This chart gives you the possibility to actually compare the quantity of base money supply expansion between today and the GD.

    http://theweeklytelegram.com/

    What you see is that so far they did (if you exclude the war time) increase it about the same during the GD, although they started much later and the expansion was stretched out on a much longer time horizon.

    Please note: This guy unfortunately has no archive, or history of his posts, so it could be that at the moment you click on the link there is something new up…

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