01 Oct 2012

An Interesting Measure of Prices

Federal Reserve, Inflation 10 Comments

I am trying to get some historical statistics to deal with the claims that the Great Depression saw unprecedented action by central banks. Along the way, Daniel Kuehn pointed me to this intriguing chart of the NBER’s “Index of the General Price Level for the United States”:

The constituents of the graph (and their weights) are explained here. Of course there are all kinds of pitfalls when trying to construct a single series on “the purchasing power of the dollar” going back this far, but the above chart certainly matches my intuition: Government inflated like crazy during wars, after which there would be a big depression to knock prices back down.

Oh, and Scott Sumner, according to this metric at least, there was a big surge in (price) inflation during the 1920s, making the crash later on seem obvious.

10 Responses to “An Interesting Measure of Prices”

  1. Scott Sumner in the flesh says:

    NOT AN NGDP GRAPH; DIDN’T ANALYZE.

    • Bob Murphy says:

      Just to clarify, the above comment is not from the real Scott Sumner.

      • Matt Tanous says:

        Are you sure, Bob? It definitely sounds like Sumner.

      • Christopher says:

        Glad you clarified that for us.

  2. Major_Freedom says:

    According to mainstream theory, there was a depression from 1865 to 1895.

    —————-

    If you want a good chart to see unprecedented action by the Fed during the 1930s, this one is fairly revealing.

    As you know, the above chart shows the (inflationary) actions that only the Fed has taken, not the Federal Reserve System as a whole. The (inflationary) actions of the Federal Reserve System as a whole would include this base money plus the additional fiduciary media from fractional reserve banks, the sum of which is the aggregate money supply.

    During the 1920s, the Fed was not very active, but the Federal Reserve System as a whole was very active, seeing as how the aggregate money supply rose 62%, or on average 7.7% per year (not on the above chart).

    During the 1930s, the Fed was very active, as the monetary base rose by almost 250%! To put that into perspective, from 2008 to 2010, the Fed increased the monetary base from $850 billion to $2,000 billion, which is a comparable 235% increase.

    So what the Fed did over a period of 10 years during the 1930s, which we understand as having contributed to delaying real recovery, the Fed did something similar in two years during the recent financial crisis. From a certain point of view, specifically, from a long term view, the difference between a 250% increase in base money over ten years and a 235% increase in base money over two years isn’t that that great a difference, or at least isn’t as great a difference as I would have expected, considering the impression that charts like this convey.

    • skylien says:

      “From a certain point of view, specifically, from a long term view, the difference between a 250% increase in base money over ten years and a 235% increase in base money over two years isn’t that that great a difference, or at least isn’t as great a difference as I would have expected, considering the impression that charts like this convey.”

      Yep that is why I linked to the log chart at the other post:
      http://theweeklytelegram.com/

    • Matt Tanous says:

      “From a certain point of view, specifically, from a long term view, the difference between a 250% increase in base money over ten years and a 235% increase in base money over two years isn’t that that great a difference”

      In the long run, it isn’t that big a difference. In the short run, it could make all the difference. In the case of the Depression, the base money supply increased 250%, which resulted in – in my opinion – the bust in 1937, and other problems during the Depression, which were masked by price controls and the like.

      In the current case, the shorter time period increase would have resulted in a greater, more painful short-term disaster, such as hyperinflation, if the system was lending it out and not keeping it on reserve – and likely still will once the lending starts, and the Fed cannot control the reserves any longer without drastically “tightening” reserve controls and open market operations (something the Fed has not done well in history).

  3. Yancey Ward says:

    Clearly we need another war.

  4. tom says:

    This sheds new light on the GD. Clearly the Federal reserve was just returning NGDP back to its trend from 1895-1912 and making up for all that overshooting from 1913-1929.

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