We have spent a lot of time over the past two years looking into various
aspects of the “Interwar Period,” 1914-1944, which includes the Great
Depression.
October
10, 2016: The Interwar Period (contains many links)
October
6, 2016: Team Gold Needs To Get Over the Great Depression
October
16, 2016: Nonmonetary Perspectives on the Great Depression
October
23, 2016: Nonmonetary Perspectives on the Great Depression 2: Steindl,
Schwartz and Eichengreen
October
30, 2016: Nonmonetary Perspectives on the Great Depression 3: Nonmonetary
Causes
November
6, 2016: Robert Mundell’s Interpretation of the Interwar Period
November
13, 2016: Robert Mundell’s Interpretation of the Interwar Period 2: the
“Mundell-Johnson Hypothesis”
July
10, 2016: The Tyranny of Prices, Interest and Money
November
27, 2016: The Tyranny of Prices, Interest and Money 2: The Old Historicism
February 19,
2017: “Prices” And Value
February
23, 2017: James Grant Explains How A Crash in 1921 “Cured Itself” — With The
Help of Good Policy
May
14, 2017: More on the Depression of 1921
May
21, 2017: The Fed’s 1932 Bond-Buying Experiment
May
29, 2017: The Fed’s 1932 Bond-Buying Experiment 2: Automatic Adjustments Via
Gold Conversion
June
18, 2017: The “Gold Sterilization” of 1937
June
26, 2017: The “Gold Sterilization” of 1937 2: Fumbling and Bumbling
July
9, 2017: The “Gold Sterilization” of 1937 3: The View From 2011
That sure is a lot of water under the bridge, even after I thought I had
wrapped things up in the item from October 10, 2016. This material also made
up a prominent part of my new book, Gold: the Final
Standard.
Today, we will begin our look at The
Midas Paradox (2015), by Scott Sumner. Sumner is a Fellow at the
Independent Institute and also the Mercatus Center, where he is the “Ralph G.
Hawtrey Chair of Monetary Policy at the Mercatus Center at George Mason
University, where he is the director of the Program on Monetary Policy.”
Mercatus is a university-attached think tank with a strong conservative
leaning, that embraces the Austrian tradition (Ludwig von Mises and Friedrich
Hayek, among others) with some enthusiasm. The regular economics department
of George Mason has similar leanings, and provides a home for the
gold-friendly professor Larry White. This is rather uncommon among academic
economic departments.
Sumner, however, is not an “Austrian,” but rather a nominal-GDP-targeting
fan, which is basically third-generation Monetarism. The Austrians always
embraced the Classical principle of Stable Money, money that maintains a
stable value — in practice, a stable value relationship with gold, which in
turn is used as a proxy for stable monetary value in general. Monetarists,
however, typically aim for “domestic macroeconomic stability,” which they
believe can be attained with some sort of smooth expansion of some measure of
“money.” The early 1960s version of this was a stable growth rate in the base
money supply, as described by Milton Friedman although the basic idea goes at
least as far back as the late 19th century. Adam Smith, in the Wealth of
Nations (1776), said that many of his day were making similar arguments,
and cited Montesquieu (1689-1755) as one prior example, so the idea is very
old indeed. Today, it has re-emerged in the form of Bitcoin.
March
6, 2014: Bitcoin Proves Friedman’s Big Plan Was a Joke
This did not work out very well, so second-generation Monetarism focused
on broader credit measures, particularly M2, which consists mostly of bank
deposits. This also did not work — the idea was largely abandoned after Paul
Volcker’s “Monetarist Experiment” in 1979-1982 — and so, from the mid-1980s,
third-generation Monetarists decided that if “domestic macroeconomic
stability” was the goal, then they should just target nominal GDP, and apply
whatever monetary expansion or contraction (of base money) is necessary to
hit that target.
The goals of Monetarism are really indistinguishable from Keynesian
funny-money schemes, which in turn are indistinguishable from the funny-money
schemes of the 18th century Mercantilists, in particular James Denham Stuart,
who I’ve quoted in all three of my books.
[The statesman] ought at all times to maintain a just
proportion between the produce of industry, and the quantity of circulating
equivalent, in the hands of his subjects, for the purchase of it; that, by a
steady and judicious administration, he may have it in his power at all
times, either to check prodigality and hurtful luxury, or to extend industry
and domestic consumption, according as the circumstances of his people shall
require the one or the other corrective … For this purpose, he must examine
the situation of his country, relatively to three objects, viz. the
propensity of the rich to consume; the disposition of the poor to be
industrious; and the proportion of circulating money, with respect to the one
and the other. If the quantity of money in circulation is below the
proportion of the two first, industry will never be able to exert itself;
because the equivalent in the hands of the consumers, is then below the
proportion of their desires to consume, and of those of the industrious to
produce.
James Denham Steuart, An Inquiry Into the Principles of Political
Economy (1767)
I talked about the similarities between Monetarism and Keynesianism here:
August
12, 2012: The Dying Gasp of Monetarism
Here’s another item on the topic:
Monetarism
and Keynesianism: Identical Sides of the Same Adolescent Coin, by John
Tamny
But Murray Rothbard had this all figured out a long time ago. Here is a piece
from 1971:
Thus, Milton Friedman is, purely and simply, a statist-inflationist,
albeit a more moderate inflationist than most of the Keynesians. But that is
small consolation indeed, and hardly qualifies Friedman as a free-market
economist in this vital area.
But Friedman himself said
in 1965 that Keynesians and Monetarists were essentially indistinguishable.
Sir: You quote me [Dec. 31] as saying: “We are all Keynesians now.” The
quotation is correct, but taken out of context. As best I can recall it, the
context was: “In one sense, we are all Keynesians
now; in another, nobody is any longer a Keynesian.” The second half is at
least as important as the first.
MILTON FRIEDMAN
The University of Chicago
Monetarists, in general, are very heavily warped by the “Prices, Interest,
Money” box that all economists fell into beginning in the 1870s, and which,
for the most part, they are still stuck in.
July
10, 2016: The Tyranny of Prices, Interest and Money
November
27, 2016: The Tyranny of Prices, Interest and Money 2: The Old Historicism
Obviously, their Nominal GDP Targeting scheme is basically a one-variable
model for economic prosperity. Any decline of nominal GDP below some
trendline is considered a failure of monetary policy, pretty much by
definition. It doesn’t matter what might have caused the decline. Perhaps it
was the nationalization of the U.S. electric power industry (a stated goal of
the Roosevelt administration), and businessmen’s natural worries that they
could be the next target. Doesn’t matter — if nominal GDP declines as a
result, it is a failure of the central bank. I have the impression that it
wouldn’t matter to the NGDP people even if they agreed that the
downturn was caused by nationalization of industry. This makes sense: once
you demand that a central bank follow an NGDP policy, you can’t exactly hand
out caveats like “unless we agree that the downturn was caused by
nationalization of industry.” Actually, I think the NGDP people would want to
maintain an NGDP target even if they agreed that there was a downturn caused
by nationalization of industry. A downturn is a downturn; the central bank
must react. This opinion is reinforced by the fact that monetary policy and
legislative/executive policy operate largely independently of each other. The
central bank says: “Yes, those government people are stupid. We agree. We
wish they wouldn’t do such things. But, there is nothing we can do about
that. We can, however, help to lessen the effects, and help to soften the
blow upon the people, by maintaining a stable NGDP with our easy-money
mechanism. We have that responsibility toward the people. If we did not act,
then we would be responsible for all the outcomes that one might naturally
expect in the wake of such stupidity, if it were not counteracted with
expansionary monetary policy. We would, arguably, be the ’cause’ of these
effects that follow from the nationalization of industry, in the absence of a
monetary response.”
When you put it like that, it seems rather noble, doesn’t it? This too is
straight out of 18th century Mercantilism.
A statesman when he intends to suddenly augment the taxes of his people,
without interrupting their industry, which then becomes still more necessary
than ever, should augment the circulating equivalent in proportion to the
additional demand for it.
James Denham Steuart, An Inquiry Into the Principles of Political
Economy (1767)
The same principle applies to history: once you go blaming money for any
decline in NGDP, from first principles, you can’t then go blame other things
and say “except in this circumstance.” Higher-than-trend nominal GDP is
considered an inflationary threat, if not the definition of inflation itself.
The fact that high-growth economies sometimes have nominal GDP growth rates
in excess of 15%, and sometimes even in the neighborhood of 30%, even with
stable currency values (especially following a previous decline in currency
value, so that some of the rise in NGDP is a reaction to prior devaluation)
is one of those messy realities that have no place in their neat and simple
equations, which in turn reflect their neat, simple, and totally fallacious
mental models.
March
24, 2016: The Simple Simplistic Simplicity of “Nominal GDP Targeting”
November
18, 2016: JFK Vs. Nixon = Gold Vs. NGDP Targeting
This is a little background to the book itself, which, as we will see, has
many of these characteristics, these intellectual trends, that we have seen
throughout discussion of economics in general, and the Great Depression in
particular, since the 1930s, or even the 1870s.