03 Dec 2014


Potpourri 19 Comments

==> Tom Woods has some great material (cribbed from Jeff Herbener) on the claim that the recovery from the 1920-21 depression was merely caused by loose monetary policy. Just to clarify, no Austrian is denying that the Fed inflated during the 1920s and that the “Roaring Twenties” was partially built on an unsustainable illusion. After all, the standard Austrian explanation for 1929 is that “the Fed did it.” But the conventional Keynesian and even monetarist explanations of the Great Depression (and the “lessons” they draw for our times) don’t fit the facts of 1920-21.


==> The Vox author thinks this article is cute and shows how unreasonable Republicans have always been, but I was actually outraged at FDR. Not only did he make up the price of gold on the spot, apparently he decided when Thanksgiving would be, year by year.


==> A good paper on the inequality stuff. It’s not just rabid right-wingers who think Piketty & Co. are overstepping; his results challenge what used to be the accepted paper in this literature, as of 2004 I believe.

19 Responses to “Potpourri”

  1. Rick Hull says:

    Easy on the potpourri there, Martha.

    Have you seen this one: http://www.forbes.com/sites/johnkartch/2014/11/03/vegas-uber-drivers-hounded-by-ski-masked-agents/

    An addendum of sorts to the @blakeross piece on Medium.

  2. Tel says:

    Regarding interest rates in the early 1920’s, remember that (price) inflation was a problem after WWI and the higher rates were a direct consequence of that. As this inflation was brought under control, it is perfectly natural that nominal interest rates will fall. From a saver’s perspective high nominal rates coinciding with high (price) inflation doesn’t really mean anything different compared to lower nominal rates and lower (price) inflation.

    It’s difficult to find a chart of prices covering that period, but many sources comment that there was a clear target of bringing inflation under control. Seems that the rate cuts (in real terms) were pretty much insignificant.

    • Enopoletus Harding says:

      Tel, use FRED:
      I think Gibson’s Paradox applied during this time, so the price level was better correlated with long-term interest rates than inflation. The yield curve was severely inverted before and during the 1920-21 recession and flattened out as it ended. Use M13019USM156NNBR for long-term rates.

  3. Enopoletus Harding says:

    Guys, I figured out when and why the five-month recovery from the Great Depression came into flourishing and when and why it died:
    Look at Meeting 5:
    Then look here (note the July 18, 1933 high):
    and the Fed’s INDPRO
    Then look at what the market expected to happen (and did):
    Curiously enough, the stock market strongly supported the original NIRA, but strongly opposed the July wage increases.
    I’m starting to like Sumner more and more every day of the week:
    The five-month recovery only really got going when the Treasury Secretary blocked gold exports from the U.S. on April 18, 1933. Before this, it was only fleeting.

    Bob, you discuss some of this in your book, but not in this level of detail.

  4. LK says:

    “Each Federal Reserve bank set its own discount rate in the 1920s. The first chart at the link below shows the discount rates through the 1920s. The rates generally rose during 1920 from 6 to 7 percent where they stood until the spring of 1921, then the FRDBs lowered their rates to 4 1/2-5 percent by the end of 1921. Then they were steady until mid-1924, just like the Fed’s balance sheet.”

    So the Fed clearly lowered interest rates from quite high levels to significantly lower levels. In any other circumstances Austrians would be screaming that this must have induced a unsustainable boom and ABC. But then Tom Woods leaps to his utterly bizarre non sequitur:

    Clearly, Fed policy was not expansionary during the recovery.

    Austrians are incoherent on this subject.

    • Tel says:

      Wrong, they lowered nominal interest rates, and it was reactionary, not causal. EH provided the link above, so CPI peaked around June 1920 and then was falling for the next two years (i.e. price deflation) so real interest rates for savings had already got a boost just because prices stopped rising and started falling. The banks only started dropping their nominal rates 9 months after that peak.

      In terms of percent change Y-o-Y the price inflation for consumers hovered around 18% from the end of WWI up to June 1920. That would have made it impossible to save. Then there was a swing across to deflation partially undoing the earlier inflation (peak price deflation was 16% Y-o-Y at June 1921). The deflation peak was almost at the same time nominal interest rates started dropping.

      Then afterwards, nominal interest rates dropped dangerously low in 1924 at a time when CPI was holding steady, so these rates were equivalent to real rates at the time. That was years after the economy was out of recession, no deflation to speak of, and the evidence completely fits the Austrian theory of mal-investment. The rates dropped down to 2% in 1924, with absolutely no justification for that. That’s where the damage was done.

    • Major.Freedom says:


      Austrians define expansionary and contractionary monetary policy based on the money supply.

      Still ignorant after all these years.


      • Enopoletus Harding says:

        is a close-enough equivalent to M1.
        Real M1 growth was very closely correlated with growth in investment a year or two into the future between 1960 and 2008 (even during the Great Inflation); less so between 1919 and 1945.

  5. LK says:

    “Just to clarify, no Austrian is denying that the Fed inflated during the 1920s and that the “Roaring Twenties” was partially built on an unsustainable illusion. “

    And if you were consistent you would admit that already in 1921 the Federal reserve regional banks were lowering interest rates significantly. Why did this not induce an unsustainable boom ALREADY in 1921??

    • Tel says:

      Because in real terms the interest rates in 1920/1921 were actually rising. The shift in CPI from price inflation to price deflation was a swing from +18% over to -16% which made the nominal change in reserve bank rates quite trivial in comparison.

      • LK says:

        First of all, it is unlikely that most businesses were interested in the real rate: most would have taken the nominal rate as their reference.

        And secondly even real rates were falling just as the recovery began:

        Real rate: New York Fed
        January 8.55%
        February 12.54%
        March 14.11%
        April 17.84%
        May 20.58%
        June 21.79%
        July 20.4%
        August 18.31%
        September 17.5%
        October 17.6%
        November 16.62%
        December 15.32%

        January 15.55%
        June 9.11%

        • Joseph Fetz says:

          What was it again that you wrote above, something about Fed rates … I cannot remember. Perhaps you can enlighten me …

          • Joseph Fetz says:

            Perhaps I’m out of my sphere, but I would tend to think that ABCT generally focuses upon low interest rates (and specifically their effect on money supply). So it really doesn’t seem odd to me that interest rates would increase during a downturn–peak at some point–and then come back to a normal state.

            I’m sorry, but I fail to see your point in emphasizing the decline of interest rates at the ebb of a depression; this would be expected in a more natural state of affairs.

    • Ben B says:

      Was the demand to hold cash balances increasing at this time due to the heightened level of uncertainty that comes with depressions? I imagine the demand to take on new debt would also be affected by the heightened level of uncertainty as well. Is this not theoretically possible?

      I mean, if you’re trying to sell me something, and I just don’t want it, you can make the price dirt cheap, but I’m still not going to buy it. So it seems perfectly possible that the banks could lower their interest rates during a depression without creating an unsustainable boom. It seems more likely that once the recovery was completed, and individuals became more certain about economic conditions, that then their demand to hold cash balances would decrease, and their demand for credit would increase.

    • Major.Freedom says:


      Look at the money and supply.

    • Mike T says:


      That post notes the recovery beginning around the 2nd quarter of ’22 when NGDP begins to take off. However, prices were still falling for the next 6 months after the business cycle trough (an additional 4.5% from Jul ’21 – Jan ’22) and then pretty much plateaued thereafter. Wouldn’t a reasonable response be that the recovery in real terms preceded the jump in M0 and M2 by about 6 months, as each didn’t begin rising until early ’22?

      In Bob’s link to Woods’ post, Tom quotes Jeff Herbener seemingly addressing this point:

      “Calculations from Friedman and Schwartz data sets show that high-powered money fell 17 percent from its peak in October 1920 to its trough in January 1922 and M2 fell 7% from its peak in September 1920 to its trough in January 1922. So, the economy was in recovery for six months while the Fed’s policy was contractionary. For 1922, HPM increased 6.4% and M2 increased 11.6%. So, the expansion of the money stock was disproportionate to the policy of the Fed. In other words, there was a rebound of business confidence, investment, lending, and deposit creation.”

  6. Bob Roddis says:

    I note from reading the post by Mr. Nunes from the link provided by Maurizio that the interventionists still cannot point to any antecedent market failure to justify their interventions. The entire 1920 event is completely consistent with the Rothbardian analysis that our problems are caused by central banking, war and violent intervention. The crisis was precipitated by the sharp shifting of government policy away from war financing back to “normalcy”. The distortions were quickly cured by the market. Allegedly loose money did not cause the massive re-pricing of goods, services and labor that clearly did occur

    The interventionist analysis requires an antecedent market failure that needs to be cured with intervention. They can never find that event because it does not exist. That’s just another reason why the Keynes’ “analysis” started in the middle with no beginning.

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