20
Dec
2014
U.S. Monetary History Bask
Hey kids, sorry to ask this, but Scott Sumner is getting uppity and I really need the monthly M2 figures for the U.S. in the period of 1919 – 1922. I don’t need the figures for every single month in that span, but it would be great to know the peaks and troughs.
Does anybody have Friedman and Schwartz handy and want to type in 8 or so important data points? (If you can find it online that would be even better of course, but I’m just seeing annual averages.)
Bob, I don’t know enough economics to know which of these columns (if any) represents M2, but here are the pages in the appendix to Friedman and Schwartz which cover 1919 – 1922:
gdurl.com/mVnm
Based on the numbers in Sumner’s post, I guess the relevant column is column 4.
Great thanks everyone! (Someone also sent me the entire book in PDF.)
Great link, Keshav.
It looks like Sumner is wrong in his post about M2 numbers. As you mention, he’s only including the sum of columns 2 and 3 (i.e. demand/time deposits at commercial banks). He excludes currency held by the public and savings accounts. He should be using column 9 for a closer M2 approximation, and if so, we see that the peak/trough of M2 money was Sep ’20 / Jan ’22, a drop of around 7%.
He does seem to correct this when responding to me (posting as Michael T) where he writes:
“Michael, My mistake on M2. It rose a bit after September, but then dipped briefly in January 1922, as you said. Here’s a better description. It fell sharply until July 1921, then was basically flat for 6 months, then rose sharply. When it fell sharply the economy contracted. When if was flat the economy began to recover. When it rose the economy recovered even faster. That’s clearly consistent with Friedman’s “natural rate hypothesis.”
That’s basically true depending on how you feel about the additional drop in late ’21 early ’22. Here’s the percentage change from the prior month during the period between the M2 peak (Sep ’20) and trough (Jan ’22)
Oct ’20 -0.303444845
Nov ’20 -0.90811566
Dec ’20 0.810695133
Jan ’21 -1.438525511
Feb ’21 -0.64360826
Mar ’21 -1.336359695
Apr ’21 -0.852999716
May ’21 -0.169460594
Jun ’21 -1.136007521
Jul ’21 -0.79509734
Aug ’21 0.282245181
Sep ’21 -0.647867877
Oct ’21 0.553209685
Nov ’21 0.156810631
Dec ’21 -0.169833351
Jan ’22 -0.568846358
Regardless, the trough of base money and all other money aggregates during this period appears to have occurred in early ’22, not in mid ’21.
Let’s see if I can comment now…
The quarterly data on M2 from 1919 to 1922:
http://socialdemocracy21stcentury.blogspot.com/2014/12/us-monetary-policy-and-recession-of.html
Thanks LK, but I think we need to use monthly to really see whether the recovery started before the change in monetary policy.
Also this was my favorite line from your post: “To some extent too, the US economy was just lucky in 1920–1921…”
Now that’s scientific.
It must be luck! If we cannot ascribe the cause to the state in any respect.
The key element in monetary policy in 1921 was interest rates, and there was a clear sea-change in Fed rate policy from May 1921 **before** the start of the recovery in July 1921, when in May they signalled that the high rate policy had ended and began to lower rates.
Curiously, even that book you libertarians are spruiking at the moment by Grant actually admits this:
“Public policy made one signal contribution, at least, to the improvement in American finances. This was in the all important matter of interest rates. It was welcome news when the Federal Reserve Bank of Boston cut its main discount rate to 6 percent from 7 percent, effective April 15 [1921]. It was the first easing move by any Federal Reserve bank since the previous spring. The Federal Reserve Bank of New York followed on May 4 with a reduction to 6.5 percent from 7 percent. This move the market correctly interpreted as the beginning of the end of the era of ultrahigh interest rates (high enough in nominal terms, extra lofty when adjusted for the declines in prices and wages). III 6 Bond yields, which had been gently falling since May 1920, now began to nosedive.”
Grant, James. 2014. The Forgotten Depression: 1921: The Crash That Cured Itself. Simon & Schuster, New York and London. p. 179.
————-
One important transmission mechanism of the Fed interest rate policy to real investment etc. was simply by changing business expectations.
Real interest rates, or nominal interest rates?
http://en.wikipedia.org/wiki/Fisher_equation
Both real and nominal interest rates were falling in 1921.
Furthermore, where is the evidence that real interest rates were considered as more important than nominal interest rates by business people at that time? It is a well known fact that people in general, even business people, are usually more focussed on nominal values, rather than real values.
See the graph below, the NY Brokers clearly ran ahead of the Fed by 6 to 12 months, implying they were adjusting their nominal rates more rapidly in reaction to inflation / deflation.
Trying to understand 1921 in isolation without looking at the two previous years is ridiculous.
“One important transmission mechanism of the Fed interest rate policy to real investment etc. was simply by changing business expectations.”
Is LK a closet Market Monetarist ?
Hey now, if my expectations turn positive, the almighty state must have been responsible for it.
We must thank the state for our feelings of happiness and optimism.
So says LK.
http://www.newworldeconomics.com/archives/2012/112512_files/1920s%20interest%20rates.jpg
These are nominal rates, so you have to allow for inflation pre 1920 and deflation post 1920. However, the thing to note is that the NY Broker Overnight Call Loan rate was obviously much more volatile than every other loan rate at the time, but also much more reactive to the economy at the time and thus spiked ahead of the other rates (by 6 to 12 months).
This is kind of significant because it shows that the brokers were reacting to the inflation and deflation much better than anyone else at the time, and there isn’t any equivalent fast reactivity in today’s system (that I know of).
Thus, the sequence of events was:
* Inflation in 1919 (typically attributed to end of WWI).
* Private NY broker nominal rates spike up rapidly during 1919 as a reaction to inflation (thus validating the Fisher Equation).
* NY Fed rates step up late 1919, then step again twice during first half 1920.
* Other interest rates approximately follow the Fed, all of them rising during the first half 1920.
* CPI hits peak June 1920, deflation starts.
* NY Broker nominal rates were already falling ahead of CPI deflation (the brokers were the leading indicator).
* Fed nominal rates stay flat during deflationary period.
* During 1921 pretty much all interest rates are falling and the NY Broker nominal rates are tracking the Fed rate.
* CPI deflation levels out June 1921 then deflates a little bit more in 1922, settles back into position by June 1923.
Similar pattern in 1928, the rising NY Broker rates were the leading indicator, then those rates spiked and the the brokers tracked the Fed rate as it turned around and started down again during 1930, 1931.
LK,
Selgin put the interest rate defense to bed with his post on the subject. Sorry!
“Also this was my favorite line from your post: “To some extent too, the US economy was just lucky in 1920–1921…””
Well, I didn’t think it would be these lines, which blatantly contradict the modern Rothbardian position on 1921 which even Rothbard apparently did not agree with:
Another point that seems to be ignored is that the Federal Reserve system embarked on a proto-form of quantitative easing from late 1921 in which the Federal Reserve banks bought government bonds from November 1921 to June 1922 and tripled such holdings from $193 million in October 1921 to $603 million by May 1922 – a fact even noted by Rothbard (2000: 133), who complained that, to the Federal Reserve officials,“[i]nflation seemed justified as a means of promoting recovery from the 1920–1921 slump, to increase production and relieve unemployment” (Rothbard 2000: 133). Strange how modern libertarians seem to have forgotten this.
Hey guys! If you point out an absurd statement I made, then you’ll have to answer for Rothbard!!! Every. Single. Time.
You disagree with me!?? Then answer for Rothbard! Now! Do it!
Lol
M_F
Obfuscation is the Keynesian game. Always has been.
Just out of interest, here’s the whole article with the interest rate charts in it. A bit off-topic given Bob’s original question, but good background:
http://www.newworldeconomics.com/archives/2012/112512.html
Money for war, same as it ever was.
Just doing a bit more reading on the same topic (too hot around here to burn any Yule fire, so have to drink beer and research instead):
http://www.freebanking.org/2014/12/04/a-1920-21-recovery-myth/
Interesting point with the chart on Fed balance sheet. Right from the start of 1921 the Fed was shrinking its total non-gold balance sheet, which continued shrinking almost linearly until the end of 1921. This was a period during which interest rates were falling and also a period where Fed interest rates were very close to the rates the NY brokers were paying (all interest rates fell together). See above interest rate chart.
http://www.capx.co/what-did-britain-really-look-like-in-the-1930s/
Worth a read, comparison of the British recovery as compared with the USA during the Great Depression.