20 Dec 2014

U.S. Monetary History Bask

Market Monetarism 24 Comments

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.)

24 Responses to “U.S. Monetary History Bask”

  1. Keshav Srinivasan says:

    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:


    • Keshav Srinivasan says:

      Based on the numbers in Sumner’s post, I guess the relevant column is column 4.

      • Bob Murphy says:

        Great thanks everyone! (Someone also sent me the entire book in PDF.)

      • Mike T says:

        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.

  2. Enopoletus Harding says:

    Let’s see if I can comment now…

    • Bob Murphy says:

      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…”

      • Ag Economist says:

        Now that’s scientific.

        • Major.Freedom says:

          It must be luck! If we cannot ascribe the cause to the state in any respect.

      • LK says:

        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.

        • Tel says:

          …a clear sea-change in Fed rate policy from May 1921 **before** the start of the recovery in July 1921…

          Real interest rates, or nominal interest rates?


          • LK says:

            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.

            • Tel says:

              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.

          • Transformer says:

            “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 ?

            • Major.Freedom says:

              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.

        • Tel says:


          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.

          • Tel says:

            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.

        • Ag Economist says:


          Selgin put the interest rate defense to bed with his post on the subject. Sorry!

  3. LK says:

    “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.

    • Major.Freedom says:

      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!


      • Ag Economist says:


        Obfuscation is the Keynesian game. Always has been.

  4. Tel says:

    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:


    Thus, the main borrowers for overnight loans were stock brokers. These loans were made on the floor of the New York Stock Exchange, so they are also known as “Stock Exchange loans.” There was apparently one rate for newly-initiated loans and another for rollovers.

    In the midst of this was the Federal Reserve, which also made loans from its discount window. The rate of those loans was the discount rate.

    As we can see, the Fed’s discount rate was generally below the overnight rate. This was not really as it was intended when the Federal Reserve was being set up. The idea was that the discount rate would be set well above the prevailing rate. In practice, this might be about 10%. Thus, nobody would borrow from the Fed during normal times. However, if there was a liquidity shortage crisis like 1907, the rate on overnight loans would rise above the discount rate, and the Fed would make loans. These Fed loans would increase the monetary base, thus “adding liquidity” and resolving the liquidity shortage.

    However, by the early 1920s, the Fed had already gotten into the habit of being involved in the lending market on a day-to-day basis. During WWI, the Fed had been pressured by the Treasury to keep a lid on short-term and long-term interest rates to allow the Federal government to more easily finance its big wartime deficits. This of course required daily action. The Treasury stopped telling the Fed what to do after the war, but by then the Fed had become accustomed to being regularly involved. Bureaucratic expansion itself would have prevented any migration to the kind of largely dormant institution as the Fed was originally envisioned.

    Money for war, same as it ever was.

  5. Tel says:

    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):


    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.

    What, then, are the facts of the matter? One fact, or set of them, to which Barkley and Co. refer, is that the Fed banks did indeed lower their discount rates, from 7%, where they’d stood since June of 1920, to 6.5% in May 1921, and then all the way to 4.5% in November 1921. (The further reduction to 4% to which Barkley refers did not occur until June 1922.) But, as Scott Sumner has been tirelessly observing for some years now, even under an interest-rate targeting regime, a low policy rate doesn’t necessarily mean easy money. Instead, low rates can reflect slack demand for funds, and indeed tend to do just that in any slump. A Wicksellian would say that what matters isn’t where rates stand absolutely, but where they are relative to their “natural” counterparts.

  6. Tel says:


    Worth a read, comparison of the British recovery as compared with the USA during the Great Depression.

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