Krugman on the 1920s: A One-Act Play
TOM WOODS & BOB MURPHY: The Keynesians are all wet when they distill their “lessons from the Great Depression” and recommend bigger deficits and looser money for today’s crisis. After World War I, the U.S. government had run up a massive debt, and yr/yr consumer price inflation was higher than 20%. In this grim situation, the US government actually followed an Austrian remedy: It slashed spending 65 percent in a single year, with a constant string of budget surpluses throughout the rest of the 1920s, and the Fed jacked up interest rates to record highs, crashing the monetary base in the process. What followed was massive price deflation: CPI fell 15.8% in 12 months, far greater than any 12-month drop in the Great Depression. Unemployment shot up to almost 12 percent. But, far from being “sticky,” wages fell even more than consumer prices, and unemployment was down to 2.4 percent by 1923. This unimaginable dosage of “austerity” ushered in the Roaring 20s. If the Keynesians (and monetarists) were right about the “inadequate” expansion of budget deficits and interest-rate cutting by the Fed in the early 1930s, then the 1920s should have been far, far worse. So clearly, the Keynesians (and monetarists) don’t know what they’re talking about.
PAUL KRUGMAN: I can’t believe anybody would look to the post-World War I situation as having any relevance for today. Look, the alleged miracle under Warren Harding was a totally different situation. That recession was brought on by the Fed deliberately, in order to bring down the price level after the wartime inflation. There was no banking crisis, and interest rates were still positive, meaning no liquidity trap. So what can we learn from the macroeconomics of the US following World War I? Nothing.
IMF REPORT: Following World War I, Great Britain had run up massive government debt and had inflated too much. So its government tried to balance the budget–it actually had a surplus for a year or two!–and the BOE tried to push down prices with tight money. The 1920s were bad for the British economy.
PAUL KRUGMAN: Wow, everybody needs to read this IMF report! The historical lessons for today are crystal clear: Austerity is a bad idea. The right wingers who recommend budget-slashing and tight money are ignoring the lessons we can learn from the macroeconomic of Great Britain following World War I.
TYLER COWEN: Uh, Paul, I don’t want to start a fight or anything, but I sense an inconsistency in your posts. If you’d like, we can go to a restaurant that doesn’t even spend money on wallpaper, to talk it out.
DANIEL KUEHN: What?! An accusation of a Krugman Kontradiction? Here I come to save the daaaaaaay!
Hilarious and sad. My kind of play.
Um, I hate to sort of contradict you Bob, but after a certain point, the discount rate WAS BROUGHT DOWN. Aren’t Austrians always and everywhere against “artificially low” [ 🙂 ] Interest rates? You cannot speak out of Both sides of your mouth here. the fed lowering the discount rate contaminates the sample. What the Fed did back then was virtually the same as what Volcker did sixty years later. Also, yes wages were more flexible, but that was sui generis for the time. There wasn’t that much of a private debt overhang, as their was on the eve of the great depression.
Edward,
I think you’re missing the larger point here. The Fed’s discount rate was raised during the entire deflationary spiral and economic downturn. I believe money rates were actually at their lowest at the business cycle peak and highest at the trough in ’20.
So the question for Keynesians would be: shouldn’t this type of monetary policy have exacerbated the downturn from a Keynesian perspective rather than have preceded a quick, robust private sector recovery? Especially when conducted while slashing federal spending throughout the entire downturn and into the recovery?
“but that was sui generis for the time”
>> Unreal. Whenever the historical example doesn’t fit your narrative,…” well, that one time was unique!”
Discount rate increases began at the peak of industrial production, in January 1920, and five months before the peak in the price level. If we agree that there were factors pushing us into a recession anyway, the five month, slightly accelerated “long and variable lags” schedule seems pretty reasonable.
I don’t see what you think the issue here is.
Most of the fiscal cuts – the vast majority – occurred before the downturn. The fiscal data looks truly awful for you if you want to argue that cuts helped the economy.
And this was a long recession – can we stop calling it “quick” please? I’ve probably been guilty of this too, so I apologize for any cases I’ve talked about it that way. But let’s all agree not to talk like that.
Agree with you on the fiscal cuts. But do you have evidence for the recession being a long one?
The contraction went on for 18 months. Before the Great Recession it was second only to the Great Depression in terms of length of contraction during the Fed era (longer ones occurred before the Fed). 18 months of contraction is pretty bad.
I’d rather have 18 months of hell with heaven on the other end, than 12 months of purgatory with more purgatory on the other end.
The Austrian argument isn’t so much a time frame of recovery argument (since we don’t do such temporal predictions, but to be fair many Austrians do often say austerity recoveries would be “quick”, but then again, it is supposed to be taken as quick—er than if the state tries stimulus), but rather it is that the recovery will be REAL, albeit painful, with healthy growth coming out of it.
It took 18 months in the early 1920s because the prior boom was just so big. The market process takes more time the more expansive the prior boom is.
This latest boom and bust cycle was the greatest ever, and so those in the know should have expected a long recovery, using either a market process or political process medicine. In this sense, I think it may have been a little unfair for Austrians to say after say 2 years of depression (up to 2010) that if the government stayed out, the economy would have recovered by then. But, considering how 4 years have elapsed, I think it is no longer unfair for Austrians to say that the market process would have healed the economy by now.
True, but the difference between hell and purgatory here is not the difference in policy. In fact that causality is reversed.
Intentional-wise, I’ll give you that.
Actuality-wise…hmmm.
Thanks for pointing that out. I guess the V shaped recovery and the pre-Fed era skewed my perception.
I’m not arguing causality and those fiscal cuts continued through the downturn and into the recovery.
Let me put it another way (at risk of deviating from Bob’s plotline involving BOE):
Take 3 events that precipitated the most severe downturns of the past 100 years: 1920, 1929, 2008. Public policy in 1920 was virtually opposite (or at the very least, fiscal/monetary stimulus was virtually absent in comparison) of what followed ’29, ’08. Yet, only one of those events was relatively short, while the others were two of the most prolonged, however inadequate the policy measures presumably were. How does this correlate best with the Keynesian worldview?
http://www.springerlink.com/content/5683j4v650187261/
Maybe not all downturns are created equal?
For the sake of argument, what would the evidence have had to look like IF the Keynesians were wrong and the Austrians were right?
To me, the evidence would have to look a lot like what actually happened.
I agree – it is very hard to distinguish, primarily because Austrians (often) predict the same short run consequences that Keynesians do, and parsing out the long term effects is a lot harder.
It’s much easier to dispatch, say, a strict Ricardian equivalence position which denies the short run impact of fiscal stimulus.
Yes, that easier route is rather sloppy. Seriously, how many people save more when the government borrows more because they expect taxes to rise in the future?
I’m not saying I believe Keynesian stimulus works, just that the argument Keynesian make against Ricardian equivalence has merit.
it isn’t a question of how many people, it is a question of where the investment dollars go.
Sure, there are lots of people at the bottom end of the scale who live from day to day and don’t plan ahead for high tax in the future… but those people don’t make up the investment base of the country either.
Those rate cuts did not happen until the tail end of the recession. The data (HT2 LK):
http://fraser.stlouisfed.org/download-page/page.pdf?pid=38&id=1477
1. I think I should have come in earlier in the exchange
2. I have no interest in defending Krugman here because I really have no idea what was going on in the UK. But I will note this: after the war the dollar wasn’t nearly as overvalued as any of the European currencies, including the pound right?
That’s why (as I pointed out in my RAE paper) in 1923 Keynes said he approved of what the Fed was doing but not what the BOE was doing, advising the BOE not to rely on internal devaluation.
Is this a wrong impression of the situation on my part?
So I guess I don’t have “no idea”. I have only a very modest idea but I do know of at least one difference that seems to matter a whole lot for how to interpret all this.
Daniel, you’re misspelling your name!
I know. Had to reinstall Windows recently and all the old settings were gone, and I guess I typed it in wrong the first time I commented and it’s the new default.
Hopefully fixed.
Kind of a crappy pseudonym, huh? 🙂
It wasn’t that bad. Not sure how that would be pronounced though. Daniel Q.A.?
“Kuehn” is actually pronounced “Keen”, believe it or not.
You should hear how I pronounce “Murphy”.
OK you made me chuckle with that one, Ken B.
Yeah, I know. But without the N to put it in context, I would have no idea how to pronounce it.
Hewitt, the way you pronounced Kueh reminds me of that Dune character.
“Remember the tooth. THE TOOTH!”
PS Daniel Kuehn, in case you didn’t know (you probably do) your last name is derived from the Middle High German word “küene”, which means “bold.” That is why it has the “ee” sound as in “Keen”.
It’s pronounced ee because it means bold? I’m afraid I can’t follow.
Anyway, you don’t have to go all the way back to Middle High German. ‘Kühn’ (transcription kuehn) is a contemporary German word. It’s not pronounced ee, though.
Christopher – that’s how we spelled it before getting off the boat. It’s not exactly “ee”, but then again Americans sometimes can’t manage their umlauts.
One way of teaching people how to pronounce ü is to have your tongue shaped like it is when you say “ee” and your mouth shaped like it is when you say “oo”. I’m not sure if a Hessian accent would steer you towards the former after a while, living around Americans.
Sorry, should have been more clear. It’s not pronounced “ee” because it means bold. It’s pronounced “ee” because it is derived from a High Middle German word that is pronounced similar to “een”.
When I said “That’s why”, I was referring to the pronunciation of “küene”.
It sounds more like…how do I type this…if you know Dutch it sounds like the name “Duijn”, but with less “oy”.
Nevermind…
Sorry MF, I’ve never read or seen Dune. I guess I’ve had a sheltered life…
BTW, my last name sounds horrible, which is probably why I got interested in names in the first place.
The true pronunciation of my surname sounds like hocking a loogy.
Sorry MF, I’ve never read or seen Dune. I guess I’ve had a sheltered life…
Nah, there are so many good stories out there that everyone hasn’t read at least one of them.
Daniel, does the pronunciation differ from the German pronunciation of kühn?
MF, I only know the contemporaray pronunciation. It it the same?
The true pronunciation of my surname sounds like hocking a loogy
Now I’m currios.
Now I’m currios.
My bad, I should not have said that. I try to stay anonymous online. No more for you!
MF
It is called “kühn”.
ue=ü
ae=ä
oe=ö
And I doubt that they way DK describes the pronunciation would work. Since there is nothing that sound like an ü in English I doubt one can explain in a comment how to pronounce it…
Anyway I needed to laugh when I tried Daniels explanation 😉
(1) as the imaginary Krugman points out: 1920–1921 had no serious financial crisis, no mass bank runs and collapses (Brunner, K. 1981. The Great Depression Revisited, Nijhoff, Boston and London. p. 44), nor a previous huge asset bubble caused by excessive private debt and leveraged speculation as in 1929. Therefore there was no serious debt deflationary collapse as in 1929-1933.
(2) the deflation in 1920-1921 was caused not just by a decline in aggregate demand but also by a positive aggregate supply shock. Another factor is that deflationary expectations were high after the war, as prices over the 1914–1920 period had increased by 115% (Vernon, J. R. 1991. “The 1920–21 Deflation: The Role of Aggregate Supply,” Economic Inquiry 29: 572–580 at 577). This means that business was expecting deflation. We can contrast this with the 1929–1933 period when severe deflation was largely unexpected, and had much more harmful consequences when private debt had reached huge levels.
(3) The real output collapse in 1920-1921 was only mild or moderate:
Year | GNP* | Growth Rate
1919 | $503.873 | 1.08%
1920 | $498.132 | -1.13%
1921 | $486.377 | -2.35%
1922 | $514.949 | 5.87%
1923 | $583.105 | 13.23%
* Billions of 1982 dollars
(Romer 1989: 23).
Romer’s figures show a GNP contraction of 3.47% from 1919 to 1921.
Year | GNP* | Growth Rate
1919 | $507.1 | -2.89%
1920 | $496.3 | -2.12%
1921 | $478.8 | -3.52%
1922 | $513.2 | 7.18%
1923 | $585.0 | 13.99%
* Billions of 1982 dollars
(Balke and Gordon 1989: 84–85).
Balke and Gordon’s figures show a GNP decline of 5.58% from 1920–1921.
Whatever way you look at it, this nothing like the debt deflationary collapse of 1929-1933, where real output collapsing by 26.8%.
(4) The 1920-1921 recession lasted 18 months. This is in fact a long time by the standards of the post-1945 US business cycle. By contrast, the average duration of US recessions in the post-1945 era of classic Keynesian demand management (1945–1980) and the neoliberal era (1980–2010) has been about 11 months.
(5) The Fed cut the discount rate from May 1921 and continued cutting not just right to the end of the recession but right into 1922, helping the recovery:
Discount Rate of the Federal Reserve Bank of New York
Date | Rate
1920
May | 6%
June | 7%
Dec. | 7%
1921
Jan. | 7%
Apr. | 7%
May. | 6.5%
Jun. | 6%
Jul. | 5.5%
Sep. | 5%
Nov. | 4.5%
1922
Jan. | 4.5%
Jun. | 4%.
http://fraser.stlouisfed.org/download-page/page.pdf?pid=38&id=1477
Why do Austrians even call this a recovery? Why didn’t this cause just another Austrian trade cycle??:
http://socialdemocracy21stcentury.blogspot.com/2011/06/there-was-no-us-recovery-in-1921-under.html
(5) And finally the continued development and strength of the recovery was aided by unprecedented open market operations by the Fed:
““Member bank reserves increased during the 1920s largely in three great surges—one in 1922, one in 1924, and the third in the latter half of 1927. In each of these surges, Federal Reserve purchases of government securities played a leading role. “Open-market” purchases and sales of government securities only emerged as a crucial factor in Federal Reserve monetary control during the 1920s. The process began when the Federal Reserve tripled its stock of government securities from November, 1921, to June, 1922 (its holdings totaling $193 million at the end of October, and $603 million at the end of the following May). It did so not to make money easier and inflate the money supply, these relationships being little understood at the time, but simply in order to add to Federal Reserve earnings. The inflationary result of these purchases came as an unexpected consequence. It was a lesson that was appreciatively learned and used from then on.”52
52.Yet not wholly unexpected, for we find Governor Strong writing in April, 1922 that one of his major reasons for open-market purchases was “to establish a level of interest rates . . . which would facilitate foreign borrowing in this country . . . and facilitate business improvement.” Benjamin Strong to Under-Secretary of the Treasury S. Parker Gilbert, April 18, 1922. Chandler, Benjamin Strong, Central Banker, pp. 210–11.”
Rothbard, Murray N. 2000. America’s Great Depression (5th edn.), p. 133.
http://socialdemocracy21stcentury.blogspot.com/2012/10/the-recovery-from-us-recession-of.html
The economy was already recovering by the time the Fed purchased securities. And they were sterilized anyway. They didn’t add much to the monetary base
So the same “sterilization” argument applies to those purchases made 1929-1932?
“They didn’t add much to the monetary base”
And you’ve not answered the question: Why didn’t interest rate cuts cause just another Austrian trade cycle?
LK, are you sure they didn’t.? There was a crash at the end of that decade.
So you think there was?
Certain things follow:
(1) the recovery of 1921 was no “real” recovery, for (by the logic of ABCT) it was just another Austrian trade cycle.
(2) yet somehow other Austrians are writing that the wonderful market and austerity led to a *real* recovery in 1921, despite the fact that under their ABCT it can’t done been.
The Austrian narrative about 1921 is self-contradictory.
Since when was Daniel Hewitt’s arguments “the Austrian narrative”?
Talk about caricaturizing a perceived monolithic boogeyman.
It depends on what the free market interest rate was, which was unobservable.
Not all “cuts” generate a business cycle, because the cut could be from one higher than market rate to another higher than market rate.
“Not all “cuts” generate a business cycle, because the cut could be from one higher than market rate to another higher than market rate.“
Having said ad nauseum that the ABCT does not require a non-existent unique Wicksellian natural rate, suddenly there us such a rate!
What’s more, the mid and late 1890s had no central bank, no monetary stimulus, with fiscal austerity too.
Yet that period had a double-dip recession and then soaring unemployment right up until 1898:
http://socialdemocracy21stcentury.blogspot.com/2012/01/us-unemployment-in-1890s.html
Year | GNP | Growth Rate
1891 | $189.9 | 3.26%
1892 | $198.8 | 4.68%
1893 | $198.7 | -0.05%
1894 | $192.9 | -2.91%
1895 | $215.5 | 11.7%
1896 | $210.6 | -2.27
1897 | $227.8 | 8.16%
1898 | $233.2 | 2.37%
Billions of 1982 dollars
(Balke and Gordon 1989: 84).
Note: Romer’s estimates show only a recession in 1893-1894, but all unemployment figures ever estimated show rising unemployment for years afterwards:
Romer’s unemployment estimates:
Year | Unemployment Rate
1892 | 3.72%
1893 | 8.09%
1894 | 12.33%
1895 | 11.11%
1896 | 11.965
1897 | 12.43%
1898 | 11.62%
1899 | 8.66%
1900 | 5.00%
(Romer 1986: 31).
Vernon’s (1994) unemployment estimates:
Year | Unemployment Rate
1890 | 3.97%
1891 | 4.34%
1892 | 4.33%
1893 | 5.51%
1894 | 7.73%
1895 | 6.46%
1896 | 8.19%
1897 | 7.54%
1898 | 8.01%
1899 | 6.20%
(Vernon 1994: 710).
So tell us please: why did the comparatively more laissez faire 1890s not result in a swift return to full employment or recovery?
And I can make exactly the same argument about the 1870s:
http://socialdemocracy21stcentury.blogspot.com/2012/09/rothbard-on-us-economy-in-1870s.html
“What’s more, the mid and late 1890s had no central bank, no monetary stimulus”
Except for the National Banking System and its pyramiding of notes. Are you also going to tell us how there was no fiat currency then? Because you would be wrong on that one too.
No “monetary stimulus” in the sense of no central bank lowering a discount rate and engaging in open market operations.
As for FRB, of course that existed
You name me a modern capitalist system where FRB has not existed.
Yay No True Scotsman!
No central bank….except, you know…the government centralized planning of banking…
Therefore the market is at fault!
The market is always at fault, MF. The general fact that FRB cannot exist without successively increasing government intervention to support it, ranging from “bank holidays” to outright “lenders of last resort”, and thus isn’t a market phenomenon is inconsequential. As is the claim that it is this FRB that creates booms and busts.
And FRB existed for centuries in the ancient Roman world without any central bank or “bank holidays”.
And (2): FRB IS a market institution, so the fact that it can sometimes cause instability and has a role in business cycles is a demonstration that capitalism is flawed.
The Austrian position is not that ONLY central banking causes problems.
It is the price signal distortions which negatively affects economic calculation that is decisive. You know, the concept that continually eludes your grasp.
FRB is, practically speaking, rarely if ever a free market institution, because rarely if ever do all the parties are informed as to its nature and implications. Even in 2012, supposedly when people are the most intelligent they have ever been, FRB is still misunderstood by the majority of people.
My position is that if there were no FDIC, and no bank bailouts via a central bank, and no “national bank acts”, in short, no government intervention whatsoever, then fractional reserve banking would be minimized, due to a progresively learning public, and the business cycle would all but be eliminated. To the extent that it remains, it would be silly to call is a “flaw” of free markets, because one, humans are not perfect and nobody ever said that an unflawed market has to be problem free, and two, the state exacerbates the business cycle, so it can’t possibly stand as any “cure” for it, so I could just as eaily say GOVERNMENT is “flawed.”
“the government centralized planning of banking…”
A new laughable low.
The banking system in the 1890s was a “government centralized planning of banking”?
Sure/
” FRB existed for centuries in the ancient Roman world without any central bank or “bank holidays””
Tell me how you are aware with every single law handed down in Rome. I sincerely would like to know how it is that a system that has repeatedly demonstrated throughout the modern world that it cannot exist without government intervention existed for centuries in Rome without it. The assertion that, given FRB in Rome which is debated today, they never intervened in the banking system (in an EMPIRE, no less) needs some evidence.
“FRB IS a market institution”
No, it isn’t. It is a form of fraud, and a violation of property rights. It is no more a “market institution” than a Ponzi scheme.
See the work of Rothbard and Selgin for how the banking system was cartelized via the national banking laws during the 19th century.
A new low? Well, it’s still higher than where you are, since you don’t even know about it. You are still at the primitive stage of “No central bank? Derp, that means the free market is at fault!”
“You name me a modern capitalist system where FRB has not existed.”
Since there isn’t really a “modern capitalist system”, but instead a whole bunch of neomercantilist ones, that would be difficult.
On the other hand, that fact bolsters the claim that it is FRB inflation of the money supply – worsened by the institution of government privileges for certain banks, including central banks – that creates the business cycle.
Ooh, a demand to prove a counterfactual!
Every hear of this thing called “logic?”
Not you, Matt, btw.
“On the other hand, that fact bolsters the claim that it is FRB inflation of the money supply – worsened by the institution of government privileges for certain banks, including central banks – that creates the business cycle.”
So a free market institution, inherent to capitalism, leads to capitalism being unstable?!
Quite an admission.
You deserve congratulations.
It is not a free market institution, and it is not “inherent to capitalism”. That much is clear by the history of government intervention to save the banks from their own obligations.
It is a market institution: what government ever invented or enforced FRB?
Just because you have examples of government saving FRB does not prove it is a non market institution.
LK, it is no more a “free market institution” than that of petty theft. It is contrary to market principles. Not only should any government, if existent, not step in to save and thus enforce it, they should be – if enforcing a just law – be legally restricting it.
Honestly, you are like a blind boxer, hitting the post in the corner and thinking you are landing blows on your opponent.
One more note. The Austrian business cycle theory relates to the expansion of the money supply. It really is irrelevant, in terms of the theory, whether a central bank that is “lowering a discount rate and engaging in open market operations” thereby expands the supply or it is the National Banking System of fractional reserve banks that expanded the money supply from $835 million in 1865 to almost $2 billion in 1873, which caused that crash.
To quote John J. Klein, “The financial panics of 1873, 1884, 1893, and 1907 were in large part an outgrowth of … reserve pyramiding and excessive deposit creation by reserve city and central reserve city banks. ” (Money and the Economy, pp. 145-146)
I can guess at things that would confirm my theory to confirm my theory as well. I see no validity to this point either.
These economists are just guessing, and they are just guessing as to a myriad of factors – some of which are entirely political (i.e. who counts as part of the labor force in the first place), which makes any consideration of it completely arbitrary.
For instance, I could argue that children counted as laborers often then, but there were laws passed restricting what they could do – causing, as the minimum wage does, compulsory unemployment for children that had to find work to survive. Immigration was high, as well, especially during these periods of high growth, creating a nearly constant influx of people to find work. (The population increased by 30% in the 1870s, and 21% during the 1890s, according to the US Census – a level more than twice the average for recent population growth.)
Also, Vernon’s numbers aren’t that high. Certainly much lower than, say, now. Or during the Great Depression.
The Keynesian fetish with employment as an end in itself is foolish. But, then, so is the vast majority of what Keynes wrote.
DK and LK: the point of this post isn’t to argue that the 1920-21 depression proves that the Obama stimulus package, or QE3, were bad ideas. Rather, the point of this post is to show that Krugman grabs whatever argument he needs on a Monday to make the case for more spending, and then he’ll use the opposite argument on Wednesday to make the case for more spending.
If you think the 1920-21 depression in the US has no lessons for today, OK fine. But then join Tyler Cowen in saying that Krugman and the IMF shouldn’t be looking at 1920s Great Britain for lessons for today.
No thoughts on differential overvaluation?
I honestly don’t know who I should side with – I’m not siding with Krugman. But Keynes thought there was good reason to side with Krugman and I take his view of things, on the ground at the time, pretty seriously.
I honestly don’t know who I should side with – I’m not siding with Krugman. But Keynes thought there was good reason to side with Krugman and I take his view of things, on the ground at the time, pretty seriously.
For someone who has no opinion on this, and doesn’t know who to side with, and who isn’t siding with Krugman…you sure are voicing an opinion that Krugman is right.
One last time, for posterity: This post isn’t about the Fed or BoE’s policies in the 1920s. It is about Krugman giving us a list of reasons that the 1920-21 episode has nothing to teach us about today’s crisis, and yet he thinks the British experience is quite pertinent, when every single reason he listed is applicable to both cases. Daniel I haven’t looked myself, but are you saying according to Krugman’s posts on the problems in Spain et al., that if Spanish wages fell as much as US wages did from 1920-1922, that it wouldn’t be enough for them to regain competitiveness? And so the US in 1920 would be closer to Spain right now, than Great Britain in 1920?
Just admit that Krugman ruled out 1920-21 with (plausible on the face) distinctions, but then ignored those same distinctions when it came to UK post-war austerity because that episode bolstered his current policy views.
The claim on 1920-21 is that the depth of the downturn was deliberate policy of the Federal Reserve.
If the pound was more substantially overvalued then the BOE response and going back on the gold standard represented a continuation of a deliberate policy of depression in the UK: something that did not happen in the U.S.
If the Fed did not let up in 1921 the way they did – if they followed the BOE in a contractionary policy – I imagine Krugman would be sounding very much like Milton Friedman on both episodes.
That is not what happened, which let’s us draw metaphors between 1920-21 and 1981, rather than 1920-21 and 1929-1933.
Right?
I honestly don’t know who I should side with – I’m not siding with Krugman. But Keynes thought there was good reason to side with Krugman
Keynes thought that the 1920-21 U.S. was relevant to the economic situation in 2012 but the U.K. experience in the 1920s wasn’t?
In death we all understand the long run.
Nice!
Huh?? I don’t think Keynes had much of an opinion on 2012 except for a rosy long-term growth estimate.
Huh?? I don’t think Keynes had much of an opinion on 2012 except for a rosy long-term growth estimate.
Precisely. So why do you say that “Keynes thought there was good reason to side with Krugman”?
…because he seemed to side with Krugman.
I really don’t see what you’re driving at. We’re talking about the UK in the 1920s, Blackadder. Keynes agreed with Krugman that the circumstances of the policy choices facing the two countries were somewhat different. He approved of a contractionary policy in one and not the other.
Dan,
Bob claimed that Krugman had contradicted himself by claiming that the U.S. experience in 1920-21 was not relevant to the present day but the U.K. experience in the 1920s was relevant to the present.
Needless to say, it would be hard for Keynes to have sided with Krugman on this, given that he died in 1946. What’s not clear is why you think Keynes sided with Krugman.
Blackadder, I understand what DK is trying to say. If Keynes at the time thought it was a good idea for Fed Reserve to engage in austerity, but not for BoE, then it’s not crazy for Krugman today to be saying that there are important lessons about the dangers of austerity from UK, but that there aren’t any important lessons about the benefits of austerity from US.
However, as I typed this out to you Blackadder, I just convinced myself that no, it is indeed crazy, Daniel. Whatever it was that led Keynes to disapprove of the BoE might be true today, but on the other hand, whatever it was that led Keynes to approve of the Fed might be true today. So how do we figure out what the difference was, in Keynes’ mind, between the two cases at the time, and how do we figure out which case is applicable today? It’s useless to start listing “bank crises, demand shortfall,” etc., because neither of those was applicable in either case back then. One plausible argument is that the British pound was more overvalued after World War I than the US dollar, and so austerity would be too painful in UK while it was acceptable medicine in US. OK, so then we have to ask, how much internal devaluation is necessary today, to “fix” Europe? Using Krugman’s own charts, I will be shocked if it shows Spain/Greece need to have workers’ wages go down 20% to regain competitiveness. No way is Krugman saying, “Germany needs to have 20% price inflation before this is solved.”
I really have no idea why you are having trouble with this, Blackadder.
Keynes agreed with Krugman on the UK in the 1920s. Keynes was alive in the 1920s. I never said Keynes had an opinion on the present day. Bob is wondering what is motivating Krugman to treat the UK and the US in the 1920s differently. I am pointing out that Keynes agreed with him on that difference.
What could possibly be so hard about this? Why do you keep talking about Keynes’s views on the current crisis.
It’s not hard to speculate, of course. Keynes and Krugman would likely be on the same wavelength. But I don’t know why you keep bringing that up.
Dan,
Read Bob’s comment above. It explains my thinking nicely.
I mean, think about what you would have to assert to require that this be a contradiction simply on the information that you’ve presented.
You would have to assert that all economic downturns everywhere and always have the same causes and are of the same magnitude and character.
Without that underlying assumption, you can’t claim on the information presented to have a contradiction.
Now it may be a contradiction if the circumstances are similar enough. I don’t know.
I mean, think about what you would have to assert to require that this be a contradiction simply on the information that you’ve presented.
You would have to assert that all economic downturns everywhere and always have the same causes and are of the same magnitude and character.
Not at all, Daniel. All I am assuming is that in Great Britain following World War I:
==> There was a deliberate policy to lower the price level because of wartime inflation.
==> There were no major banking crises.
==> Interest rates were positive.
Those were the three reason Krugman listed, to rule out the right-wingers looking to Warren Harding [sic because we know it started with Wilson] for guidance. Every single reason applies to Great Britain.
Oh, and just for a kicker, the US’s fiscal austerity was way more severe than Great Britain’s. That’s why the IMF talks about “structural surplus” in their budget; the graph from Tyler shows that maybe they actually balanced their budget for two years early in the 1920s.
It wouldn’t surprise me either if the BoE’s “harsh austerity” was less intense than what the Fed did in 1920-21.
There is one thing Krugman said about 1920-21 that you missed:
“Money was tightened, then loosened again”
Here: http://krugman.blogs.nytimes.com/2011/04/01/1921-and-all-that/
I do not know if this was also true of the BOE. I know Keynes didn’t think so. Looking at Figure 3.7 in the IMF report I am leaning towards believing him, yes.
We had deflation in the UK from 1920 until they went off the gold standard in the 1930s.
That looks different to me. Does it look different to you?
Is it just a coincidence – do you think – that the UK was going through its Great Depression during our Roaring 20s, long before the Wall Street crash or the so called “Great Contraction”.
Do you have info on the UK price level from 1919 onward? (I’m not asking with bitterness, I’m genuinely asking.)
No – but I’m guessing that’s in the nber macrohistory site I sent you a bunch of links from the other day. If you just pare down the url you should get back to the main page with the list of data series.
I was looking just at the IMF report.
And even taking everything you’ve said at face value, Daniel: OK, so following what you and Krugman agree worked for the US in 1920-1921: All I’m telling Spain and Greece to do, is cut their budgets 82% over the next three fiscal years, I want their CPI to drop 16% in 12 months, and I want workers’ wages to drop 19% in 12 months. That’s what happened in the US from 1919-1921, and you and Krugman agree that that’s OK. After that, Spain can loosen up a bit, like the US did, and run eight consecutive budget surpluses but have lower interest rates to ease the pain.
Right? You’re on board? Krugman will sign off on the above?
So here is where we get back into causes, Bob. Was there wincingly high inflation in 2006 and 2007 as in 1920 and the late 1970s that might give you some cause to throw millions of people out of work?
No? So maybe this is a demand driven recession resulting from a financial crisis and there’s no real point to a contractionary monetary policy that would actually make things worse: that what we need in this case is more demand, not less?
I don’t know too much about what was going on in Europe a decade ago. Even if there was a case for a Spanish deflation perhaps its the ECBs responsibility to weight Germany and Spain equally in their considerations.
No? So maybe this is a demand driven recession resulting from a financial crisis…
Right, so Great Britain in the 1920s has nothing to do with this.
I was under the impression you were asking me whether I think we should do in Spain what we did in the U.S. in 1921. That’s the question I was answering.
If your question instead is whether we should do in Spain what they did in the UK: force an extended internal devaluation, the answer is also no. It’s an even more vigorous no because we do have a financial crisis on our hands and I don’t see this low level activity as returning to normal.
The UK acted badly in the 20s and should not be followed when similar situations arise.
The US was a little hamfisted but acted OK in the 20s and should be followed when similar situations arise.
The US example in the 1920s should not be applied where it isn’t relevant.
I was under the impression you were asking me whether I think we should do in Spain what we did in the U.S. in 1921. That’s the question I was answering.
OK here’s what happened from my (biased) POV, then I am going to end this because we will go on forever:
==> Austrians say 1920-21 led to great economy, so austerity not bad. Krugman says 1920-21 has no lessons for today.
==> IMF says austerity in Britain in 1920s led to awful economy. Krugman says this has lessons for today.
==> I call Kontradiction.
==> You say no, the situations in US and UK were different in 1920s, because (as Keynes said “on the ground”) the US didn’t need as much internal devaluation as UK did.
==> So I say, “Oh OK, you’re saying it’s just a matter of how much their price levels had to fall? OK, budget was cut 82% in three years, CPI fell 16% in 12 months in US, and wages fell 19%. I am willing to just ask for that in Greece and Spain, but no more. Since you just said it was a matter of degree, and that’s why deflation/budget slashing was OK in US, then all I’m asking for WRT Europe right now is how much internal devaluation US had in 1920s. I’m not asking for how much UK was trying to achieve. So, you, Keynes, and Krugman should agree with me now that it will work, right? Either that, or your last response to me isn’t really what you want to say, and you’re back to Square 1 in explaining why Austrians can’t cite 1920s US, but Keynesians can cite 1920s UK.”
==> You can’t understand why I am comparing US in 1920s to Europe today. Situations are totally different. Man these Austrians are thick.
This is all assuming Keynes and Krugman are correct about what was different about the UK – which I am now more inclined to assume after looking more closely at the IMF report and googling a few things.
“OK here’s what happened from my (biased) POV, then I am going to end this because we will go on forever”
Don’t fret. Most of us got it Bob. And the kontradiction is quite cluehr.
But in the US in 1920-21 they were undoing an inflation that had occurred only a few years before. Prices were falling to get back to something closer to pre-inflation equilibrium.
That is not why Greece and Spain are in trouble today. Greece and Spain are not in trouble today because they ran up double digit inflation to finance the first world war. Greece and Spain are in trouble today because of a financial crisis leading to a shortfall in aggregate demand.
The UK at the time was more out of whack than the US was. Keynes wondered why the hell they were so obsessed with going back on the gold standard at pre-war parity. External devaluation was more humane than internal devaluation.
If it had all come about as a result of an exogenous aggregate demand shortfall the policy of deflation would have been that much more inhumane.
Contractionary policy is contractionary. You’re not restricted to citing UK 1920 for that. Cite US 1920 for all I care. Tight money and probably the budget cuts contributed to the depth of that depression. I’ve never said you can’t cite it to say that contractionary policy is contractionary.
PK said that the 1920 US example doesn’t count because it isn’t the same as what is going on today. Well, neither is the 1920 UK example. So why does Krugman get to wave off 1920 US as useless for today, but use the1920 UK example to explain what is going on today?
Daniel Kuehn wrote:
But in the US in 1920-21 they were undoing an inflation that had occurred only a few years before. Prices were falling to get back to something closer to pre-inflation equilibrium.
That is not why Greece and Spain are in trouble today.
Have you not been reading Krugman? He says explicitly that the problem with Spain is that during the housing bubble years, they had capital inflows that pushed up relative wages in Spain compared to Germany, and so the solution right now is for their prices/wages to come down, relative to Germany.
Greece and Spain are not in trouble today because they ran up double digit inflation to finance the first world war.
I agree, Greece and Spain are not in trouble right now because of spending on World War I. You got me.
I don’t know the situation in Europe particularly well, but I was under the impression they were having banking and housing crises in Spain.
This is not simply a price level issue, right?
It’s pretty fun watching Daniel_Kuehn squeal when pinned down.
Perhaps you think I ought to be squealing, but you are reading this into my comments yourself. I haven’t felt “pinned down” the whole discussion.
@Silas
Indeed it is, but speaks volumes about Bob that he craves respectability so much he won’t call this [excrement-shooter] DK out, except in very mild terms. What a phony.
1. What’s wrong with respectability as long as you don’t give up your principles to get?
2. He did call him out. He just didn’t attack him personally while calling him out. Why does he need to insult DK?
I can understand why Silas, you, and others get so upset with DK. He is extremely frustrating to debate with, especially on topics like these, but I don’t understand why you would be upset with Murphy here.
Dude, what is it with you continuously living in a complete state of jerkery? It may be frustrating debating Daniel, but he certainly has much more respect for the individuals he engages with then your sorry ass.
The wallpaper thing is hilarious.
Is it a reference to something?
Cowen often writes about how he looks for restaurants that skimp on decor, on the theory — derived from equilibrium arguments — that this means the food will be better.
Shoot, I was going to link to his thing on that, but then I thought I would be overselling the joke. If Silas didn’t get it, then it was way too subtle.
Even if I had known the reference, I wouldn’t have thought it was very funny.
Silas you don’t have to hurt my feelings.
@Lord Keynes,
If you’re genuinely curious, try Rothbard’s History of Money and Banking. Free online, and just do a search for “1893” to get relevant areas.
Matt Tanous,
By the way, it IS possible for frac-resrve banking to exist without government intervention. All a bank has to do when it creates more notes, (paper or electronic) that it has the commodity in its vaults, to say redeemable at the market price” and NOT redeemable on demand. There were some banks that had their own solutions to surviving a bank run, they suspended payments in gold. Merchants and customers would “discount that banks notes as being worth less on the open market. Fro example, Bank A has a million ounces of gold in its vaults, but 3 million worth of banknotes floating around, all it has to say is that those notes are not redeemable on demand, but worth the market price in relation to gold. (gold will probably trade about around three times the value of those notes) It can’t print TOO much or its notes won’t be accepted at all, but their is no reason that reasonable monetary inflation won’t prevail under such a system.
Thats the REAL way a FMMP (Free market in monetary production would work) Not necessarily only falling prices in terms of gold itself, but more private banknotes in circulation, at a floating exchange rate with the metallic base, of course
“All a bank has to do when it creates more notes, (paper or electronic) that it has the commodity in its vaults, to say redeemable at the market price” and NOT redeemable on demand.”
The lack of a fixed value and the inability to obtain the reserve currency on demand would stop this from becoming a general medium of exchange. People would naturally prefer the gold/silver (and perhaps copper) coin instead.
There’s no real reason for me to accept a bank note that is going to depreciate when I can get money that won’t depreciate (and will likely slightly appreciate) instead.
“There were some banks that had their own solutions to surviving a bank run, they suspended payments in gold.”
In violation of their contract with those that took the notes, and only when the state enforced such an abrogation of property rights (which was basically every time there was a problem). Bankruptcy on account of not being able to pay their liabilities on time should have been the result.
One last note: if you have a note redeemable at the market value, it isn’t quite fractional reserve banking anymore. It is also likely that banks *would* print so much their notes are no longer accepted in this situation – provided that anyone accepted them in the first place, as their value in relation to the monetary unit is so fluid and easily changed.
1. Oh look! Even “The American Conservative” has gone Keynesian.
http://www.theamericanconservative.com/millman/one-cheer-for-production-versus-spending/
I think this is a job for that mysterious super hero, Major Freedom.
2. My ex-inlaws (all 134 of them) are named Kuhn. For 45 years, I’ve been getting in trouble for saying things like, “Those freakin’ Kuhns are nuts, aren’t they?” In Detroit.
Now Bob, don’t snuehr.
Ken, please kuehp your smart comments to yourself.
Holy eff, what is this world coming to. Now I see why economists just shrug and work for Romney.
And don’t all those subsidized canals and infrastructure lead to SPRAWL and cause Global Warming?
“The lack of a fixed value and the inability to obtain the reserve currency on demand would stop this from becoming a general medium of exchange”
Not at all. In times of metal shortages paper or electronic substitutes will do just fine
“There’s no real reason for me to accept a bank note that is going to depreciate when I can get money that won’t depreciate (and will likely slightly appreciate) instead”
But you, or anyone, Can’t always get that money, thats the whole point of a bank run!. And the depreciation rate can be beaten by investing those banknotes in stock, bonds etc,
“In violation of their contract with those that took the notes, and only when the state enforced such an abrogation of property rights (which was basically every time there was a problem). Bankruptcy on account of not being able to pay their liabilities on time should have been the result.”
Not necessarily. Some banks had prior clauses and agreements with their customers. those were the banks that survived.. And anyway, it is coercive to ban a banks’s right to suspend payments, IF the depositors are aware of this and agree to it of their own informed free will.
“One last note: if you have a note redeemable at the market value, it isn’t quite fractional reserve banking anymore. It is also likely that banks *would* print so much their notes are no longer accepted in this situation – provided that anyone accepted them in the first place, as their value in relation to the monetary unit is so fluid and easily changed.”
Again, not at all. Banks wouldn’t be able to profit if they printed so MUCH that their notes became worthless. If they followed a min-inflationary policy.- Central banks expanding the money supply don’t always lead to hyper-infaltion, do they?
Look, as long as everyone is aware of what was going on, and prices float and are not fixed, then nobody is hurt, are they?
It’s freedom people! Let freedom ring!
😉
And besides, it is a myth to believe in the market, there is a fixed value to anything!
By the way MF,
On theMoneyillusion.com “the question is not why the Fed doesn’t do more”
you said “Edward’s proposal is more fair then yours.”
WOW! Is that a compliment. We’re at each other’s throats so often its hard to tell. Still, I was taught to grateful when someone does good to you, so… thanks 🙂