Sumner, the Gold Standard, and the Great Depression
Scott Sumner’s new book on the Great Depression is coming out December 1. This is definitely something I will get and digest next year, as I’m swamped. I believe the blurbs when they say this will be a classic in the field. Among other things, Scott has (apparently) interspersed newspaper clippings and real-time financial market reactions to various events, which is not something economic historians often do.
Now to be sure, Scott has a very nuanced theory of how various factors came together to produce the Great Depression. And yet, the title of the book is The Midas Paradox. And here is Tyler Cowen’s summary of the book in his list of the best of 2015: “Boo to the gold standard during the Great Depression.”
Now let me step back and make some big-picture observations:
(1) The classical gold standard was in place from (say) 1880 – 1914, and much earlier depending on your definition. But it broke down during World War I and was replaced with something weaker, the Gold Exchange Standard, which itself broke down in 1931 (all explained at this link). Various countries started “going off gold” through the 1930s, with Japan, Germany and Great Britain doing so by 1931. FDR devalued the dollar in terms of gold in 1933. And yet “the Great Depression” typically refers to the entire decade of the 1930s.
(2) None of the financial panics that occurred during the classical gold standard turned into the Great Depression. It was only in the midst of the other interventions–particularly high-wage policies–that Sumner discusses, did we get the Great Depression.
(3) The Great Recession, which according to some metrics is the worst economic calamity second only to the Great Depression, happened when all the countries were on fiat money–so no link to gold whatsoever–yet had plenty of other government regulations on labor markets and the financial sector.
To me, this is a bit like writing a book called The Steam-Powered Curse, showing how the railroads caused the Great Depression.
But didn’t rail shipments increase in the months and years after April 1933?
Ba-dum-tisch.
“And the new login system, which MPL launched in February 2015, is remarkable. It is faster and it is cheaper than the old one: The old system responded to requests somewhere between two and 10 long seconds; the new one takes 30 milliseconds, on average. The old login system cost $250 million to build and would have required another $70 million annually to stay online. The new system cost about $4 million to build, and its annual maintenance cost is a little less than $1 million.”
– http://www.theatlantic.com/technology/archive/2015/07/the-secret-startup-saved-healthcare-gov-the-worst-website-in-america/397784/
Your tax $ at work.
If you ever feel it’s time to retire and take it easy on a world cruise or something… there’s your ticket.
Should you have any moral pangs over fudging the data, you can ask that French guy to help you out with it. Don’t forget to include some random deep and meaningless philosophy and a few angsty comments about injustice somewhere in the first chapter (most of your customers won’t read past that bit).
He’s obviously not arguing that the gold standard will always causes depressions, or that recessions can’t happen on a fiat system.
You can certainly argue that it wasn’t a true gold standard, but it’s pretty hard to deny that the Depression was caused and exacerbated in large part by a monetary deflationary shock.
Rather the other way around. Both the Depression and the deflation were caused by an inflationary monetary bubble creating vast malinvestment.
The Depression became “Great” due to the responses of Hoover and FDR, most of which amounted to “DO SOMETHING NOW!” without ANY sort of theory, but when guided by theory amounted to, basically, Keynesian fascism.
“The Depression became “Great” due to the responses of Hoover and FDR, most of which amounted to “DO SOMETHING NOW!” without ANY sort of theory, but when guided by theory amounted to, basically, Keynesian fascism.”
-Doubt it. Hoover’s interventions were too mild to cause such a great depression.
AD wrote:
“but it’s pretty hard to deny that the Depression was caused and exacerbated in large part by a monetary deflationary shock.”
I deny it. What’s the next challenge?
I guess to read Sumner’s book and debate him
After he reads it and still denies it, then what?
Provide evidence that the monetary deflationary shock didn’t matter.
E. Harding now we go from “the monetary deflationary shock so obviously caused the Great Depression that it’s hard to deny it” to “it didn’t matter”? That’s a lot of goalpost moving.
My whole OP is showing that a deflationary shock because of gold can’t be the primary cause of the GD, because such shocks happened several times during the prior decades. It would be like blaming the Russian plane crash on gravity.
Here, the 1920-21 episode had far worse deflation in the opening years than any period in the GD. And yet it was over in 2 years; the decade was “the Roaring Twenties.”
Look, all I’m doing here is the same trick that Sumner uses to show that the 1929 stock market crash can’t be the explanation. He points to the 1987 stock market crash, says it’s bigger and no Depression, so therefore that couldn’t be the reason.
So I’m doing the same thing with the gold standard.
“but it’s pretty hard to deny that the Depression was caused and exacerbated in large part by a monetary deflationary shock.”
-Ah, Bob, he said “monetary” deflationary shock, not necessarily one having anything to do with gold.
Also, he said “caused” “in large part”. So that’s something over 30%, at least, by my interpretation. Are you arguing an effect between 30 and 0%?
“Here, the 1920-21 episode had far worse deflation in the opening years than any period in the GD. And yet it was over in 2 years; the decade was “the Roaring Twenties.””
-True. But it was shorter. It was under two years of deflation, not, as in the case of the Great Depression, over three. And (as is obvious from this graph) most of the deflation was supply-side:
https://research.stlouisfed.org/fred2/graph/?g=2Fwj
The pretty blatant supply-side aspect to the 1982-3 disinflation is also under-appreciated (by everyone). Both Sumner and I have pointed this out in different forms, though I drew the conclusion that monetary policy in the 1970s wasn’t that bad, and Sumner continued to disagree.
A more convincing example of a stock market crash not causing a recession is the massive stock market crash of 2000-2003.
You can’t use an exception to disprove the rule. You can’t use a strong NGDP contraction with a strong positive AS shock to prove that a strong positive AS shock will happen with every strong NGDP contraction. That’s just not the way it works.
“Ah, Bob, he said “monetary” deflationary shock, not necessarily one having anything to do with gold.”
No, that’s wrong. Sumner blames the gold standard for the monetary contraction. It definitely is related.
“You can’t use an exception to disprove the rule.”
Of course you can. That is what Sumner does with 1987. He uses that as an exception to disprove the rule he’s critiquing.
Freedom, by “he”, I meant the commentor “AD”, not Sumner.
What was so exceptional about 1987 that makes it so that Sumner can’t use it to make his point on stock markets and the economy?
BTW, Sumner does consider 1987 to be one of the strongest arguments against the EMH.
You denied that the deflationary shock exacerbated the problem. That particular goalpost is right where he says it is.
Incorrect. Bob denied that it was “caused and exacerbated”. Thus, if it was caused but not exacerbated then Bob would be correct. If it was exacerbated but not caused Bob would also be correct. And of course if it was neither then once again Bob would be correct.
Possibly correct, if Murphy meant to deny the conjunction, not the parts. But he also accused EH of moving the goalposts while also characterisinf EH’s position as ” “the monetary deflationary shock so obviously caused the Great Depression that it’s hard to deny it” . No talk of exacerbation there. I am simply serving Murphy the same dish he just cooked.
“Provide evidence that the monetary deflationary shock didn’t matter.”
Provide evidence for what caused the sudden rise in cash preference.
First time for everything.
I don’t know much about this stuff. At least some of it was caused by central bank hoarding in the early days.
AD, maybe a good way to think of it is this: A deflationary shock is what logically happens after an inflationary shock (if I can piggy-back off of M. Tanous’ comment).
People went into debts that left them vunerable to “shocks” because interest rates were artificially set to seem profitable. When those rates return to normal, those in debt get caught off guard.
This is how Austrians understand “deflationary shocks”.
May I suggest the following resource:
An Introduction to Sound Money
http://www.libertyclassroom.com/soundmoney/
The first video in that resource will, at the very least, help you understand *why* we reject deflation as a cause for economic crashes.
AD:
“You can certainly argue that it wasn’t a true gold standard, but it’s pretty hard to deny that the Depression was caused and exacerbated in large part by a monetary deflationary shock.”
There is nothing to “deny” there. It is relatively straightforward to refute it by not ignoring the previous inflationary *causes* for the subsequent monetary contraction.
The previous inflation is what set the economy up for deflation. Money doesn’t just disappear, unless it was created out of thin air (credit expansion).
The great inflation of the 1920s:
https://research.stlouisfed.org/fred2/graph/?g=2FvM
So lack of inflation is inflation? 🙂
Hold on, are you telling me that this whole time you’ve been commenting on this site that you thought Austrians were saying increases in the CPI sets in motion an unsustainable boom?
No, I thought Austrians thought lower-than-advisable interest rates set in motion unsustainable booms. Plausible idea; hard to test. In any case, NGDP targeting is still a good idea, if only to provide potential test cases for ABCT. Murphy should be for Sumnerism.
No, NGDP targeting is not a good idea because the means by which that would be attained also sets in motion malinvestment.
Just because the Fed isn’t targeting interest rates, it doesn’t mean it would have no effect on them.
You know, like you blame the Fed for large changes in NGDP which allegedly causes this that and the other, despite the fact that the Fed is not targeting NGDP.
Yeah, I get that, but under NGDP targeting, those would look like inflationary recessions and lead to better supply-side policy than otherwise.
Also, Sumner could be at last proven wrong that reallocation wasn’t important.
So why did you post a chart showing CPI in response to MF’s comment?
Also, what do you mean by lower than advisable?
Nobody knows what Austrians mean by “inflation” when they use that term. So I just used the most commonly used measure.
So did you just assume MF doesn’t have any clue how Austrian business cycle theory works, and that he was ignorantly blaming the Great Depression on a rise in CPI?
No, Dan, I wasn’t. In any case, what, specifically, do Austrians count as inflation?
“In any case, what, specifically, do Austrians count as inflation?”
From ToM&C:
“In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur. Again, Deflation (or Restriction, or Contraction) signifies: a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange-value of money must occur.”
Other than that last bit, Mises defines inflation without reference to prices at all, and in that last bit only obliquely.
Andrew, that sounds like he’s defining inflation as either price hikes or NGDP growth.
Closer to PT than than Py is probably a more accurate way of thinking about it. But he’s not really stating either, which is important in and of itself.
“… which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange-value of money must occur.””
I can see why this (correct) explanation would not help Keynesians understand our position on inflation:
The demand for money is infinite, and value is subjective. To say that there is an objective exchange value for something that’s subjectively valued and has infinite demand seems like a contradiction.
Again, the only way an “objective exchange-value” makes sense is if the “object” is the current highest-ranked preference of the individual – that is, it’s link to a use-value.
When the preference of an individual changes, the subjective value for a good changes with it.
If I can rephrase the answer to the inflation question:
Inflation is not just an increase in the money supply (demand for money is infinite), and Austrians say that, strictly speaking, the supply doesn’t matter.
Rather, inflation is an increase in the supply of money-substitutes (which is why “fiduciary media” is mentioned in the quote, above) in excess of the actual money (a commodity good, such as gold) that is supposed to be backing them.
You’re reasoning from a price change E Harding.
The great inflation of the money supply caused prices to remain stable instead of calling due to the huge productivity gains.
https://research.stlouisfed.org/fred2/graph/?g=2Fwj
IP serves as a substitute for RGDP, IP*PPI serves as a substitute for NGDP.
I mean, NGDP growth was real in the 1920s, but was not huge until after 1927. There was no inflation in the 1920s, measured in any way you can think of, that wasn’t paralleled by either earlier or later periods.
Rothbard, “America’s Great Depression” page 171:
Within the overall aggregate of wholesale prices, foods and farm products rose over the period while metals, fuel, chemicals, and home furnishings fell considerably. That the boom was largely felt in the CAPITAL GOODS INDUSTRIES can be seen by (a) the quadrupling of stock prices over the period, and by (b) the fact that durable goods and iron and steel production each increased by about 160 percent, while the production of non-durable goods (largely consumer goods) increased by only 60 percent. In fact, production of such consumer items as manufactured foods and textile products increased by only 48 percent and 36 percent respectively, from 1921 to 1929. Another illustration of Mises’s theory was that wages were bid up far more in the capital goods industries. Overbidding of wage rates and other costs is a distinctive feature of Mises’s analysis of capital goods industries in the boom. Average hourly earnings, according to the Conference Board Index, rose in selected manufacturing industries from $.52 in July 1921 to $.59 in 1929, a 12 percent increase. Among this group, wage rates in consumer goods’ industries such as boots and shoes remained constant; they rose 6 percent in furniture, less than 3 percent in meat packing, and 8 percent in hardware manufacturing. On the other hand, in such capital goods’ industries as machines and machine tools, wage rates rose by 12 percent, and by 19 percent in lumber, 22 percent in chemicals, and 25 percent in iron and steel.
https://mises.org/library/americas-great-depression
“That the boom was largely felt in the CAPITAL GOODS INDUSTRIES can be seen by (a) the quadrupling of stock prices over the period, and by (b) the fact that durable goods and iron and steel production each increased by about 160 percent, while the production of non-durable goods (largely consumer goods) increased by only 60 percent.”
-That’s called a “boom”. Non-durable sectors are generally less sensitive to changes in RGDP than durable ones, for obvious reasons. You aren’t going to think about stopping buying replacements for worn-out clothing in a recession before thinking about stopping your plans to buy a new piece of fine furniture.
That’s not durable vs. non-durable, that’s luxury vs. non-luxury.
They’re related.
“Since money cannot breed more money, in order to be able to earn an interest return and a pure profit on top of it, the borrowers will have to convert their borrowed funds into investments. That is, they will have to purchase or rent factors of production—land, labor, and possibly capital goods (produced factors of production)—capable of producing a future output of goods whose value (price) exceeds that of the input”
Excerpt From: Hans-Hermann Hoppe. “The Economics and Ethics of Private Property.”
Wouldn’t this be a reason why there might be a greater boom in capital goods industries relative to consumer goods?
Why couldn’t they just lend to consumers? But, sure, plausible. You just need empirical evidence to substantiate it.
Monetary manipulation stretching the economy too much towards consumption or too much towards higher order capital is an empirical question yes, but the theory for why that stretching takes place at all is not entirely empirical, since it is constrained by a priori categories of human action.
Your seeming belief that we can only know the world via empiricism, is definitely not an empirical statement, so it’s not as if the use of a priori conceptions somehow nullifies Austrianizm but not your Monetarism.
What is the empirical basis for this statement: “You aren’t going to think about stopping buying replacements for worn-out clothing in a recession before thinking about stopping your plans to buy a new piece of fine furniture.”?
Ben, here’s the evidence:
https://research.stlouisfed.org/fred2/graph/?g=2Gaw
Of course, the discrepancies during the 2001 and 2008 recessions were caused by a mass offshoring of the U.S. apparel industry to foreign competitors in times of trouble.
Sure, I’m not suggesting that I know apriori that consumer loans will not be made during periods of credit expansion; however, it seems to me like it’s more likely that lenders will make a greater amount of loans to individuals purchasing durable goods than those purchasing non-durable goods, especially if the intent of those buying durable goods is to generate a return on investment.
MF, if the empirical evidence indicated empiricism was unreliable, I would abandon it. 🙂
I’m not anti-ABCT per se, I just find Sumner’s a much simpler, more grounded in experience, and more empirically verifiable story.
Ok, so during this particular time period, individuals increased their demand for clothing, while decreasing their demand for fine furniture whenever there was also a recession. But what empirical evidence links the recession as the cause for the change in buying habits?
“Wouldn’t this be a reason why there might be a greater boom in capital goods industries relative to consumer goods?”
Wouldn’t this be *moreso* the case with an inflated money supply that affects interest rates for multiple industries at the same time?
Sure, investments will be made since money doesn’t breed money; But if money is a commodity (i.e. has a link to use-value), then the rates at which you lend won’t conflict with consumer time-preference and lead to over-investment on a system-wide scale.
Your investment would naturally be restrained by consumers’ real, rather than fake, ability to pay in terms of real goods and services, because consumers would know how much real wealth they had, rather than mere paper claims.
Someone should ask Sumner when in history the market failed such that it requires the type of violent intervention Sumner advocates.
Oh wait. Maybe someone has already asked him that.
http://www.themoneyillusion.com/?p=17692&cpage=1#comment-205619
It can be a challenge to have one’s entire worldview come under question, especially when it is learned that an elaborate and complex set of beliefs all depend ultimately on a basis of naked aggression, which is to say there is no rational grounding.
Reminds me of this quote from Fichte:
“Supposing somebody were to build up ever so systematic a natural history of certain spirits of the air, on the unproven and improvable assumption, that such creatures exist in the air, with human passions, inclinations, and conceptions, should we call such a system a science, no matter how closely its several parts might be connected with each other into a whole? On the other hand, supposing somebody were to utter a single proposition – a mechanic for instance, the proposition that a pillar erected on a horizontal base in a right angle stands perpendicular, and will not incline toward either side, however far you extend it into infinity – a proposition which he may have heard at some time and approved as true in experience: would not all men concede that such a person had a scientific knowledge of the proposition, although he should not be able to evolve the deduction of his proposition from the first fundamental principle of geometry? Now, why do we call the fixed system, which rests on an unproven and unprovable first principle, no science at all, and why do we assert the knowledge of the mechanic to be science, although it does not connect in his reason with a system?”
“Evidently, because the first, in spite of its correct form, does not contain any thing that can be known; and because the second, although without a correct form, asserts something which is really known and can be known. The characteristic of science, therefore, seems to consist in the quality of its content and the relation thereof to the consciousness of the person of whom a knowledge is asserted; and the systematic form appears to be only accidental to the science; is not the object of science, but merely a means to attain that object.”
And lest LK take that the wrong way: Yes, you have to have some kinds of experience to gain knowledge.
But the relationships between pieces of knowledge are not gained by experience, but through reason.
This is why we believe in a priorism and hold that experiments cannot trump logic.. It can exemplify already existing laws, but it is only those laws which can trump faulty logic – not the experiments, themselves.
Or, the facts never speak for themselves.
I enjoy reading one “school” which suppresses the idea of economic calculation criticizing a different “school” that also suppresses the idea of economic calculation. The MMTers do Sumner:
http://mikenormaneconomics.blogspot.com/2015/11/jason-smith-does-market-monetarism.html
Yes, but…..when did the market fail requiring your brand of violent intervention?
Ok fine, knuckle-headed credit expansion can really screw up an economy. Does gold money have a part to play in preventing knuckle-headed credit expansion? I doubt it. The bank panic of 1907 happened under the classical gold standard per Dr. Murphy’s timeline. The reason why it didn’t turn into the Great Depression was that there was an intervention from a de facto central bank – namely the credit cartel of Morgan. Gold alone would have let all the banks fail one after another. As for the great Recession, I’d argue that the ECB at least acted like it was gold constrained – with price stability the single goal of Euro area monetary policy. So, Sumners dig at gold, even though the Depression is a pretty involved economic story is fine with me.
I am eager to read the book. When I was 12 my mother, who lived through the Depression explained it to me like this: The stock market crashed and after that lots of people lost their jobs. It didn’t make any sense to me. It’s still all that’s being taught in high school. That, and how FDR and WWII “saved” everything.
// The bank panic of 1907 happened under the classical gold standard per Dr. Murphy’s timeline. The reason why it didn’t turn into the Great Depression was that there was an intervention from a de facto central bank – namely the credit cartel of Morgan. //
Post hoc ergo propter hoc fallacy. The credit cartel of Morgan intervened to keep the credit cartel afloat. And I’ve never seen anything beyond an assertion that Morgan’s intervention prevented anything in 1907 beyond the failure of a few financial trusts that frankly deserved bankruptcy.
// As for the great Recession, I’d argue that the ECB at least acted like it was gold constrained – with price stability the single goal of Euro area monetary policy //
The big spikes on this chart indicate to you a central bank acting “as if it were gold constrained” and going for price stability (those two statements are contradictory, as well, you know).
http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=123.ILM.M.U2.C.LT01.Z5.EUR
“Gold alone would have let all the banks fail one after another.”
All that means is that all the banks were already insolvent, and they were onlly surviving because people had misplaced faith in their bank notes.
Those kinds of banks *should* fail, because only production processes which serve the consumer need be financed, and debasing a currency to prop up certain processes hurts the consumer.
guest and M Tanous,
Can we all agree that the classical gold standard in and of itself does not prevent financial institutions from failure due to insolvency or illiquidity (proven by 1907)? Can we also agree that if enough financial institutions fail simultaneously you can hurt the real economy and have a great Recession or possibly a Depression (proven by 2008)? If so it leaves us to argue about:
Does the classical gold standard 1)prevent the simultaneous failure of multiple institutions and 2)provide the quickest and most permanent recovery from a recession.
The depth of the 30’s depression and the 2008 recession compared to late 19th early 20th century downturns is a favorite argument against pure fiat money and an argument that gold prevents systemic failure. Maybe there is something there but on its face it is a post hoc ergo propter hoc argument.
As for speed and permanency of recovery, i’m open to an argument but I think without an airtight case that systemic financial failure is prevented by gold you will have a hard time convincing me that entrepreneurs will be able to take advantage of the new price signals any time soon if everyone has just seen their financial assets vaporize.
Wasn’t the “classical gold standard”, with its reliance upon fractional reserve banking, the subject of the “classical ABCT” and the cause of the “classical Austrian Business Cycle”?
Bob, Roddis, I’m not versed in ABCT but I think you bring up a important topic, namely: that even during the “classical gold standard” gold reserves were only a fraction of the total government issued currency or bank notes in circulation. So the difference between the “classical gold standard” and the fiat money era is more one of degree and less one of kind. In both systems you have to rely on people to follow the rules to avoid disasters. So, disasters can and do happen under both systems.
Yes. My proposal to solve these problems is below. “Full disclosure in bank note language”.
http://consultingbyrpm.com/blog/2015/11/sumner-the-gold-standard-and-the-great-depression.html#comment-1611834
“Can we all agree that the classical gold standard in and of itself does not prevent financial institutions from failure due to insolvency or illiquidity (proven by 1907)?”
This is not the question one should ask oneself. You’re asking “gold alone” to perform a function it is not supposed to and concluding from that, that the gold standard ipso facto is a bad thing. Instead the question you should be asking is what sorts of institutions could have performed these functions and why didn’t they arise or perform those functions.
Milton Friedman blamed the Fed and not the Gold Standard itself for the Great Depression because he knew that in the economy that existed before the Fed, the clearinghouse association would have performed the function he faulted the Fed for not performing. So even here, we have a serious change in the monetarist argument, and a definite change for the worse.
Echoing somewhat above several commenters demands for an explanation when exactly the market failure occurred justifying violent intervention, but with a bit of modification, I have to ask you whether you are under the impression that “gold alone” constitutes in and of itself monetary laissez faire-it certainly seems so.
To put it another way, if gold doesn’t do something by itself it is not meant to do, but because of various government interventions the institutions which actually would perform those functions do not exist, do you blame gold, or the government interventions? I think the obvious answer is you blame the government interventions. For some bizarre reason you and Sumner prefer to blame gold even though that doesn’t make any sense.
Friedman said the Fed should have provided more liquidity to struggling banks. His complaint was monetary policy was too tight. One reason it was too tight is the Fed was worried about its gold reserves. Here’s Bernanke talking about Frriedman and Schwartz’s work.http://www.federalreserve.gov/boardDocs/speeches/2004/200403022/default.htm Paragraph 14 and on talks about gold
So, it seems that gold doesn’t act to maintain bank solvency and it can also impede the action of a central monetary authority in keeping banks solvent. So, what exactly is gold supposed to do and how is it supposed to do it?
No, the Fed did less than what it could have done within the constraints of the gold standard. Again, you can’t blame gold for something it was not responsible for, just because it didn’t also make it impossible.
I’m not going to explain what gold is supposed to do to you, read a freaking book.
“Can we also agree that if enough financial institutions fail simultaneously you can hurt the real economy and have a great Recession or possibly a Depression (proven by 2008)?”
What you’re scenario is trying to imagine is that everyone’s seeking profit without defrauding anyone, but all fo a sudden a bunch of financial institutions fail.
But in order for that to happen, a bunch of people would have to have multiple personalities with conflicting preference rankings.
A financial institute which is making profits off of rates that conform to consumer preferences logically cannot fail.
And even if they did fail, the desire for banks would ensure that *someone* would be able to profitably take over – otherwise we would have to say that the risk of banking services are too great to be economically beneficial, and then they wouldn’t even be needed at the moment.
Regarding 2008.
Ron Paul and Peter Schiff were trying to warn people about the coming housing crash as early as 2001 and 2004, respectively (I’ve heard of earlier accounts for both of them, but don’t have the references).
As for 1907.
I looked up some stuff, and this is what Rothbard had to say:
The Case Against the Fed
https://mises.org/library/case-against-fed
“17. Putting a Central Bank Across: Manipulating a Movement, 1897–1902 …
“… As a result, the McKinley Administration now could submit its bill to codify the single gold standard, which Congress passed as the Gold Standard Act of March, 1900. Phase One of the reformers’ task had been accomplished: gold was the sole standard, and the silver menace had been crushed. Less well-known are the clauses of the Gold Standard Act that began the march toward a more “elastic” currency. Capital requirements for national banks in small towns and rural areas were now loosened, and it was made easier for national banks to issue notes. The purpose was to meet a popular demand for “more money” in rural areas at crop-moving time. …”
“… The political pressure for reform after 1900 was poured on by the large bankers. A. Barton Hepburn, head of Morgan’s Chase National Bank, drew up a bill as head of a commission of the American Bankers Association, and the bill was submitted to Congress in late 1901 by Representative Charles N. Fowler of New Jersey, chairman of the House Banking and Currency Committee. The Hepburn–Fowler Bill was reported out of the committee the following April. The Fowler Bill allowed for further expansion of national bank notes; it also allowed national banks to establish branches at home and abroad, a step that had been illegal (and has still been illegal until very recently) due to the fierce opposition of the small country bankers. Third, the Fowler Bill proposed to create a three-member board of control within the Treasury Department to supervise new bank notes and to establish clearinghouses. This would have been a step toward a central bank. But, at this point, fierce opposition by the country bankers managed to kill the Fowler Bill on the floor of the House in 1902, despite agitation in its favor by the executive committee and staff of the Indianapolis Monetary Convention.
“Thus, the opposition of the small country bankers managed to stop the reform drive in Congress. Trying another tack, Theodore Roosevelt’s Secretary of Treasury Leslie Shaw attempted to continue and expand Lyman Gage’s experiments in making the U.S. Treasury function like a central bank. In particular, Shaw made open-market purchases in recessions and violated the Independent Treasury statutes confining Treasury funds to its own vaults, by depositing Treasury funds in favored large national banks. In his last annual report of 1906, Secretary Shaw urged that he be given total power to regulate all the nation’s banks. But by this time, the reformers had all dubbed these efforts a failure; a central bank itself was deemed clearly necessary. …”
“18. The Central Bank Movement Revives, 1906-1910 …”
“… The Panic of 1907 struck in October, the result of an inflation stimulated by Secretary of the Treasury Leslie Shaw in the previous two years.“
Ok, so even under the “classical” gold standard which was in place in 1907, at least according to Dr. Murphy, you had a central planner causing a banking disaster. So, what is the magic of gold? what is it doing for you?
The above was worded poorly. I invoke Dr. Murphy as saying only that the classical gold standard wa in place in 1907. The central planner stuff is from guest’s quote.
Captain Parker, are you really taking Sumner (echoed by Cowen et al.)’s implied claim that gold caused the Great Depression, and saying that if I want to knock that down, it’s my job to show that gold is magic that prevents all recessions?
Capt. Parker let me make sure you’re getting what I’m saying: Suppose somebody really *did* say that the railroads were a major cause of the Great Depression. Wouldn’t you agree with me that I could dispose of that claim by saying:
(1) Railroads were around for decades before then, so that’s kind of a weird claim. Surely there was some other important factor.
(2) Railroads are not nearly as important in 2008, so why did we have the Great Recession? Maybe whatever caused the Great Recession is also related to the Great Depression?
I think you could see the argument when it comes to railroads. Now what if, after I said the above, someone else comes along and says, “Oh ho ho, Murphy, you think railroads are a magic shield against economic downturns? Well railroads were quite dominant in 1907, where they not? Checkmate.”
Do you see the problem now?
Dr. Murphy,
No, but I think the “no other panics turned into a GD” is a weak reason to bash Sumner’s book title. That reasoning doesn’t factor in the major monetary upheavals happening post WWI. France was hoarding gold and undervaluing its currency, the Pound had collapsed after the BOE could no longer stay on the gold standard and people were freaked that the dollar was next. I think Sumner and Cowen have a lot of company in thinking gold hurt and did not help. Bernanke, Friedman and Peter Temin have written about the problems gold caused. I’m not denying that FDRs industrial and labor policy did some real damage too but, what is the magic with gold that “none shall dare say it was a big problem?”
Dr. Murphy,
My argument is more like:
1)Railroads caused the GR.
2)Railroads might have cause a GR in 1907 but Morgan showed up with some automobiles.
3)In 2008 the ECB said their price stability mandate required them to employ our automobiles in a manner similar to how railroads were employed in the GR.
3)Sumner, Friedman, Bernanke, Temin have all written about how bad Railroads are.
4) Why is a handsome and intelligent guy like Dr. Murphy such a Railroad buff? What have Railroads done for him lately?
“The depth of the 30’s depression and the 2008 recession compared to late 19th early 20th century downturns is a favorite argument against pure fiat money and an argument that gold prevents systemic failure. Maybe there is something there but on its face it is a post hoc ergo propter hoc argument.”
Rather than being a post hoc ergo propter hoc argument, it logically follows from the function of money, which is to enable the economic calculations of barter to be done through indirect exchange when direct exchange is rejected by one party of a transaction.
That is, to enable a double coincidence of wants through an intermediary good the later trade of which maintains the desired profit margin between the good sold for it and the good bought with it.
Only money that has a link to use-value can do this, since, ultimately, use-value is the means by which preferences are satisfied. People don’t want the money, but the goods it will buy.
It’s use-value is *why* it can be used to buy goods.
But non-commodity money (such as the FRN) can’t express use-value since it’s not being traded for its use-value. Why *would* such a money be thought capable of enabling economic calculation.
Sure, we *see* people using it all the time, but what is unseen is all the losses being diffused among many people – especially foreigners to whom we export our inflation.
Our fiat money robs other countries, in effect.
Imagine salt being traded as money, then imagine inflated paper claims to salt (counterfeiting) being traded as money, then imagine paper claims to nothing at all being backed by inflated paper claims to salt.
Take away the salt, itself, and the US is the one printing the claims to salt, while other countries back their monies – which they are also continually inflating – with these printed claims.
The US is robbing its own citizens to be sure, but the rest of the world is being robbed even more.
Sorry, There wasn’t inflation in 2008 or the GD. There was deflation during the GD. So, no one holding FRNs was being robbed, they were being gifted.
I’m going to Dunkin Donuts now. I am going there with a firm expectation that today, four FRNs has a “use-value” of one medium hot coffee plus one glazed donut. I will return shortly with a physical demonstration that my expectations were rational. When I return you can tell me why I actually had no clue how many FRNs I would have to trade for a coffee and donut and I wlll tell you nope, it was four bucks just like I expected.
While studying for the Texas Bar Exam in 2010 (I passed) and while specifically studying Commercial Paper, I tried to solve the Austrian dispute regarding fractional reserve banking.
For these purposes, I assume that the problems in FRB with the contract between the banker and depositor can be resolved. They just need to have a meeting of the minds (which is the requirement for all contracts). The problems of fraud arise between the payee of an FRB note and the bank that issued it. To understand the problem, one must differential four distinct types of money:
1. A real “dollar” is a coin containing 371.25 grains (troy) of fine silver. That is what the U.S. Constitution means by the term “dollar”.
http://fee.org/freeman/what-is-a-dollar/
(A private firm might also issue its own gold and silver coins and issue similar notes for those coins)
2. A firm might issue a warehouse receipt for a specific real dollar.
3. A firm might issue a bearer note for any real dollar in storage with a 100% reserve requirement.
4. A firm might issue a bearer note for any real dollar in storage where the issuer knowingly does not have 100% reserves to cover all of the notes issued.
The notes described in 2-4 are nothing other than written contracts. It is important that they state on their face exactly what they are promising. Note #4 must state on its face that it is not the equivalent of #2 or #3 so that the payee is not misled. If such “truth in FRB notes” are accepted for use by the public, I would think they would necessarily pass at a discount from #1, #2, and #3. Further, it would not be wise to call them “dollars”. I am not certain if there would even be a market for a #4, but there might be. So long as the payee is not misled, there is no fraud. So long as these are not called “dollars”, I do not think a problem with mispricing (for economic calculation purposes) exists.
Historic FRB notes essentially passed off #4 notes on their face as the equivalent of #3. That is both misleading and fraudulent and can caused economic miscalculation because those notes were improperly called and treated as “dollars”. Whatever you might want to call #4, it should not be called a “dollar”.
The Great Depression is an open-and-shut case: it was the collapse of NGDP.
The EZ, on the other hand, is not. Cf., the missing deflation (until 2013 in Greece).
But collapse of NGDP =/= The Gold Standard
What happened man, why did Monetarists go from blaming the Fed to absolving the Fed by falsely claiming its hands were tied by gold?
“But collapse of NGDP =/= The Gold Standard”
-Yeah. The Great Depression was unique in history. Even the 1870s recession wasn’t nearly as bad.
That’s a non-point. Every recession is a collapse of NGDP. That’s exactly what makes it a recession.
For the life of me, I cannot figure out why ordinarily smart people get duped into such an obviously circular monetary theory.
The recession caused the recession, dummy.
“Every recession is a collapse of NGDP. That’s exactly what makes it a recession.”
-LOL. Ever heard of 1973-5? The Argentine Great Depression of the 1980s? The post-Soviet collapse? 1980s Greece? There have been hundreds of inflationary recessions throughout history with no NGDP collapse.
No, it’s not a non-point. The Great Depression was a uniquely large collapse of RGDP because it was a uniquely large collapse of NGDP.
Long, you’re even more ignorant and stubborn than I thought.