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We've been looking at various "interpretations" of the Interwar Period,
which of course focuses on the Great Depression.
October
23, 2016: Nonmonetary Perspectives on the Great Depression 2: Steindl,
Schwartz, and Eichengreen
October
16, 2016: Nonmonetary Perspectives on the Great Depression
Some of the conclusions thus far:
1) You can't really get a "monetary deflation" unless there is a change
in currency value. This can only happen in two ways: a rise in currency
value vs. gold, or a rise in the value of gold itself. The first
demonstrably did not happen; the second, though plausible, has not
really been embraced by very many. We saw earlier that there is a
reason for this: it is very hard to come up with any kind of
supply/demand causative factor that might result in such a destructive
and unprecedented event.
September
25, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s 3:
Supply and Demand
September
18, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s 2:
Never Happened Before
September
11, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s
2) Central banks had two complementary objectives at the time: to
maintain their gold standard parities, and to prevent any kind of
"liquidity shortage crisis" in the nineteenth-century meaning of the
term, typically indicated by very high short-term lending rates between
banks of high solvency. This they did rather well. People understsood
that, which is why they say that there really wasn't much that central
banks could have done, while remaining on a gold standard system. They
didn't identify any kind of "central bank error."
3) This was the basis of the common Keynesian interpretation, popular
until the 1960s and still popular to this day. Keynes and his
descendents (such as Peter Temin or Barry Eichengreen) are quite
aggressive in suggesting a devaluation and floating fiat currencies,
and perhaps interest rate manipulation, in response to the economic
problems of the time. However, they did not blame central banks for
causing these problems. Instead, they describe the onset as a "decline
in aggregate demand," which doesn't really mean anything, but is not a
monetary cause. They don't really identify any clear cause at all.
After a while, I think they were too scared to look for a cause,
because that would invalidate a half-century of supporting a view in
which there essentially were no causes.
4) After the 1960s, monetary "causes" become more common, in the model
of Milton Friedman and Anna Schwartz. However, this "cause" is still
not really a cause, but more of a reframing of the idea that central
banks should have addressed the problems of the time with devaluation
and floating currencies. Thus, the Monetarists are really not much
different than the Keynesians, in the end.
What to make of all this?
I have been summarizing entire books of mostly confusing and fallacious
argle-bargle in a few sentences. But, I want to show that these
summaries have a basis, and indeed, that they coincide pretty closely
with the conclusions of other academics who have also summarized the
course of argument
spanning decades. I am not really very far out of consensus on these
topics. Mostly, I just like to use clear language so you can tell what
I am saying.
Maybe you share my disappointment with these supposed "experts," who
complain for decade after decade that the "it just happened and we
don't know why" story is a little skimpy. But, do they then go an try
to find some kind of explanation, even a stupid and wrong explanation?
Nope. Even Friedman, whose popularity seems to be related to the fact
that he satisfied this burning desire for some kind of explanation,
doesn't actually provide anything. Why did M2 decline in the U.S.
1929-1933? Why did M2 decline in Greece in 2010-2015? Friedman's
"explanation" is really more in the nature of a suggested solution, and
it is really the same solution as the Keynesians, with a little
different verbiage surrounding it. For Friedman too, the downturn is a
"deus ex machina, lowered from the rafters."
The basic problem here, as I see it, is the "Tyranny of Prices,
Interest and Money," which scrubbed all nonmonetary elements of
government policy from economists' models and minds beginning in the
1870s. This was related to the small-government consensus of the day,
with no income taxes in the U.S., and a 3% income tax in Britain.
Nonmonetary factors really were somewhat minor, in the 1870-1913
period. Once
you eliminate nonmonetary factors from your consideration, then if
there is a downturn caused by nonmonetary factors,
and no particular problem with the money, then you either see "a
recession from nowhere" like the Keynesians, or you make up some
monetary factors, like the Monetarists and others. The Keynesian view
tends to be held by people who like big government in general. The
solution to a problem of "capitalism that blows up for no reason" must
be some kind of government intrusion. However, if you are more of a
small-government person, you are then drawn to the idea that the
government was making a mistake, or was somehow too intrusive. Since
there was no obvious government intrusion into Prices (such as price
controls) or Interest (capital markets), the only option left, when you
are in the Prices, Interest and Money box, is money. Thus, some kind of
mistake with the Money, caused by government intrusion ("Austrian") or
a government that wasn't doing its job properly ("Monetarist").
July
10, 2016: The Tyranny of Prices, Interest, and Money
Over 1000 U.S. economists opposed the Smoot-Hawley Tariff, which gained
majority support in Congress in September 1929 and was passed in 1930.
And yet, when exactly the results they predicted indeed appeared --
basically, a recession in 1930 -- they sort of forgot about it. Part of
the reason why was because the small-government conservatives of the
time (the Republican Party) tended to favor a tariff as big-business
protectionism, and they also saw protectionism as an appropriate
anti-recession tool. The Democrats had been tariff opponents, but the
idea that capitalism was "inherently unstable" and had to be tamed by
Big Government was an attractive idea at the time, and perhaps not one
that they wanted to undermine.
Here is an interesting little account of that letter, the one signed by
the 1000+ economists. It includes the full text of the letter.
1000 economists' letter
In the 1970s, the Supply Side group was rallying around the idea that
the existing tax policy was a major impediment to economic expansion,
and that reforms here could lead to big improvements -- ancient wisdom
that had become a radical new idea in those dark days of economic
confusion. They looked back to the Kennedy 1964 tax cut and the Mellon
tax cuts of the 1920s for historical examples. From this, it naturally
follows that tax rate increases can be a big economic negative. Looking
back, they found the huge tax hikes of the 1930s, not only in terms of
tariffs worldwide (a tax on international trade), but also big domestic
tax rate increases, especially in the U.S., Britain and Germany,
although also around the world among all those countries whose
governments followed the policy direction of the U.S., Britain and
Germany, just as
they do today. We're not going to investigate the tax policy history of
Brazil, Australia, Canada, Mexico, Spain, Italy, Turkey, South Africa
or India, but it was probably a lot like Britain, Germany and the U.S.,
and thus added to the cumulative effect. On top of this were a barrage
of business-unfriendly
regulations, and a general anti-business tone to government in general,
which hardly inspired anyone to invest money. The monetary turmoil that
emerged in 1931 added a new factor.
All of this is a topic that is far too large to go into here --
especially since I think it needs to be written on a global scale,
including fiscal policy in many countries, and also the wave of
sovereign defaults and bank breakdowns in 1931. Amity Shlaes' The
Forgotten Man: a New History of the Great Depression
(2008), promises to be that in-depth examination, at least as regards
the U.S. However, I can't quite recommend it, because I haven't read it
yet. Maybe I need the comic-book
edition.
June
27, 2010: U.S. Tax Hikes of the 1930s
Nevertheless, the coincidence of the 1929 stock market crash and the
moment when the Smoot-Hawley Tariff gained a majority in Congress is a
historical synchronicity of such rare perfection that it deserves
attention. Here is Alan Reynolds on the topic, in 1979 -- thirty-seven
years ago, if you can believe that.
http://object.cato.org/sites/cato.org/files/...ch_19791109.pdf
The paper also has many other insights, and I recommend reading all of
it.
Well, that is certainly a sufficient cause, at least for the initial
downturn (1929-1930) of the Great Depression, and also (combined with
the rather excessive margin leverage common at the time) the stock
market crash of 1929. As Reynolds said, a great many other policy
mistakes followed, plus "systemic issues" such as bank failure and
sovereign default, plus the monetary chaos that followed the
devaluation of the British pound in 1931. So, it is not about the
worldwide tariff war alone. But, that seems to have turned the booming
1920s toward the initial bust.
Finally, nonmonetary factors again enter the picture, after having been
scrubbed a hundred years previous. This didn't make much dent in
academia, however. But, academia had always been about repeating
received dogma for generation after generation. Temin clearly felt that
the Keynesian explanation -- the explanation resulting from forty years
of repeated dogma -- was unsatisfying. But did he try to remedy it ...
to somehow assuage his dissatisfaction? Not really. Friedman's
assertions somehow attained the status of new dogma, perhaps reflecting
the structure of the left-right divide of politics in general: the
right needed its own dogma. (This left-right divide is in turn a
product of the U.S.'s winner-take-all Congressional representation
system, instead of parliamentarian proportional representation.) Yet,
this dogma too was repeated for decade
after decade, without much interest in probing its obvious
inconsistencies.
The Keynesian idea was that there was something like a minor recession,
with no clear cause, that somehow "multiplied" itself out of hand. The
logical conclusion was that capitalist economies can somehow
self-destruct on any sunny day. That this had never happened before
didn't bother them; but, as we know, not very much of anything bothers
them. All of Keynesianism was never really a conclusion reached by
carefiul reasoning. It was always, from the beginning, a
plausible-sounding justification for doing something that people just
wanted to do anyway. The natural solution was contant government
intervention or "management" to prevent any little thing from
snowballing into a disaster. This led to the idea of constant
manipulation of currencies and interest rates, not just as an emergency
measure during a once-a-century crisis, but at any threat of recession.
A
similar conclusion was reached, albeit from a different direction, from
the Monetarist standpoint. Central banks had to stand ready to
"stabilize the money supply," which was a rhetorical smokescreen for
saying: to prevent any contraction in bank credit, which is a common
element in any recession. This also required constant central bank
intervention, and thus implied a continuous floating currency, not just
a one-time devaluation in the midst of disaster.
However, if a once-a-century disaster can be shown to be caused by an
identifiable once-a-century cascade of bad economic policy, then we can
conclude that capitalist economies are not constantly on the brink of
self-destruction. Even if you argued that things had gotten to the
point, in 1933 or even 1931, where a devaluation of the dollar was
justified (and a return to a gold standard at a devalued rate
afterwards, as the U.S. did), this did not naturally lead to the
conclusion of constant central bank currency manipulation, and floating
currencies.
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July
17, 2014: Devaluations of the 1930s Don't Justify Today's Funny Money
Excess
Also, we don't have to make up spurious monetary explanations. Once you
do that, then not only are you completely ignorant of nonmonetary
factors -- the Prices Interest Money box -- but you have made a mess of
your monetary understanding as well. This is dangerously close to being
"good for nothing." At this point, now you couldn't even establish or
manage a Stable Money system (a gold standard system) even if you
wanted to. And that was the situation in the 1960s, continuing up to
the present. People's understanding of monetary issues was pretty good
in the 1920s and 1930s. It had some flaws, and was clearly on a path of
deterioration, but I think they got to the right conclusion: that there
was no monetary problem. To later imagine that there was a monetary
problem, people had to somehow forget all that they knew earlier -- the
learning that formed the basis of the gold standard systems of the day.
This is the reason why I have spent so much time this year draining the
swamp of "interpretations" of the Great Depression. Until the gold
standard advocates can sort through these issues, I think they will
tend to have a rather dysfunctional grasp of all things pertaining to
money. Also, maybe some Keynesians and Monetarists (who have actually
mushed together somewhat) might begin to see that things have really
moved on since the dark days of the 1960s (or 1990s). They don't have
to be like Temin or Eichengreen, who grumble that their received
Keynesian dogma really is an empty paper bag ... but ... dogma is
dogma, and there doesn't seem to be anything better, so let's be
dogmatic about it.
I think Temin and Eichengreen both saw enough to understand that
Monetarist
dogma was even more empty. Temin -- correctly, I would say --
interpreted Friedman's "monetary contraction" as something like a
banking collapse; in other words, a nonmonetary event. Eichengreen
could see that Friedman's claim that central banks should have done
this or that was not really possible, because central banks were
committed to a gold standard policy. In the land of the blind, the
Keynesians had one eye. So, maybe they will be the first to step out of
the Prices Interest Money box.
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