Posted on 12/08/2005 2:26:55 PM PST by hubbubhubbub
1) The money growth fell behind manufacturing growth for the entire decade; and the U.S. maintained a balance of trade surplus or, at the worst, was even, throughout the 20s;
2) in addition to that, we had net inflows of gold, for which the Fed was to pump up the money supply proportionally---it didn't;
3) there is NO scholarship that can identify a stock "bubble" as defined by stock prices wildly out of kilter with company values and/or reasonable expectations. The very stocks that were soaring were the same companies that were booming---utilities, cars, radios, and so on. What's interesting is that several economists have asserted a bubble existed, but as of 2000 when I last surveyed the scholarship on this, there were not studies that found a bubble and two that found exactly the opposite;
4) the Fed allowed the money supply to plunge 1/3 after the stock market crash, and failed to perform the role of lender of last resort for crucial big banks like Bank of United States and the big Nashville bank (whose name escapes me).
We came up waaaaayyyy short on money compared to goods---the classic definition of deflation. Bernanke is 100% right.
BTTT
The Great Depression was in truth the "great deflation." It wasn't just stocks that fell in value. Too few dollars, chasing too many goods. Prices had to fall as a result, and did.
1) The money growth fell behind manufacturing growth for the entire decade; and the U.S. maintained a balance of trade surplus or, at the worst, was even, throughout the 20s;
False. If U.S. had balance of trade surplus throughout '20s as you contend, then by definition (Econ 101) money supply grew through this trade.
2) in addition to that, we had net inflows of gold, for which the Fed was to pump up the money supply proportionally---it didn't;
False again. By definition if the U.S. had inflows of gold going into their vaults as you contend, then they printed more money to redeem the gold with. Or, is it your wild contention that citizens made DONATIONS of gold to the government. Point in fact U.S. money supply growth was 60% in the Roaring 20s. It was in fact reckless. It was done to help bail out England from WWI.
3) there is NO scholarship that can identify a stock "bubble" as defined by stock prices wildly out of kilter with company values and/or reasonable expectations. The very stocks that were soaring were the same companies that were booming---utilities, cars, radios, and so on. What's interesting is that several economists have asserted a bubble existed, but as of 2000 when I last surveyed the scholarship on this, there were not studies that found a bubble and two that found exactly the opposite;
False. See my earlier point on money supply growth which led to the bubble and a host of malinvestments. True there were companies that were booming during this time but once every household which had electricity bought a radio, washing machine and car - where were the new customers supposed to come from after that? Hence a business downturn was due.
4) the Fed allowed the money supply to plunge 1/3 after the stock market crash, and failed to perform the role of lender of last resort for crucial big banks like Bank of United States and the big Nashville bank (whose name escapes me).
False. The Fed choked off money supply growth and raised interest rates starting in 1928. In fact, starting in January 1928 the Fed raised rates four times from 3.5% to 6% thus setting the stage for the market downturn. The smart money guys like Joe Kennedy and Bernard Baruch saw the money supply contraction taking place and got their money out of the market well in front of the crash. You did get one thing right in your entire post. The Fed did continue constraining money supply growth right through 1933. I'll give you credit for that. LOL
In the 1920s, however, even the Fed had an additional restraint that we don't have now, namely, it was supposed to keep the paper money supply at some relatively fixed ratio to government gold. By the late 20s, however, many of the major nations abandoned the gold standard; and this placed additional pressure on those nations remaining on gold. It was reverse "gresham's law," in that if France was not on gold, you could buy dollars with francs, exchange dollars for gold, but we could not get gold for francs. So there was a net outflow of gold, which was seriously undermining the whole economy. If ALL had gone off gold, it wouldn't have been a problem. But by 1932, ONLY the U.S. was on the gold standard, and it was rapidly causing the collapse of the U.S. monetary structure, as the gold was just flowing out.
FDR's prohibition against owning gold privately and taking the government off gold are often berated by conservatives, but that action (and no other that he took, really) saved the banking system, which, after two years, was finally on an even playing field with the rest of the world.
You really don't understand this at all, do you? We had foreign trade balances where governments made payments to us to cover the debt in securities. Again, this did not automatically result in "more dollars." It would only do so if the Comptroller printed up more money, which did not happen.
Wrong. You have no evidence, only some crackpot theory that there was a stock market bubble. Find some evidence. Find some actual studies that support anything you say.
4) You agree with me. Thank you. That's exactly what I said in the whole post: the Fed did NOT keep up the money supply. Since you want to cite Econ 101, find me ANY measure of the money supply in the 1920s. You'll see they all fell; that prices fell steadily---not just after 1928. In fact, they fell since 1920, by a lot.
As for your notion about "big money" guys somehow getting off scott free, guess that didn't apply to Samuel Insull or thousands of other millionaires who lost everything.
Wikipedia has a go too at this "Holy Grail" of economics:
http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression
The confusing, and perhaps fatal, thing was that the expansion of the 1920's was superimposed, so to speak, on a period of genuine progress following the First World War. Contrary to the current mythology, technological and economic progress make things cheaper, not more expensive.
I'm amazed.
Really.
Most of the comments on this article are correct, and show a firm understanding of the cause and effects of the use of fiat money. Congratulations, Freepmates!
The article is wrong, as my Mates say above, because the Fed did cause the Great Depression by failing to increase the stock of high-powered money fast enough, as the collapse in bank deposits accelerated.
What they should've done, as Bernanke knows, is to buy government securities as fast as they could, and when they ran out of them, buy anything else they can find: stocks, bonds, wheat, real estate - anything to get money in the hands of the people.
Instead, faced with the Fed's failure to both understand and accomplish its assigned tasks, the US treasury ended up buying all the silver in the world, ruining the Chinese economy, and setting the stage for the Japanese conquest of the Celestial Empire.
The Fed's actions caused the war in the Pacific.
The Fed is the single most powerful entity on earth and it must be watched closely.
I give a brief overview of where all the literature stood as of 1994 in "Business History Review" in an article called "American Commercial Banking: A Historiography," or some such title.
What is important is that most of the research is starting to find a position to the right/center, which is that a) there was no bubble, or not enough of a bubble to cause the GD; 2) the stock market crash was caused by the HS Tariff AND by business expectations of what the HS Tariff would do, 3) COMBINED WITH the ongoing deflation (that few serious scholars deny), which had the effect of making (as Irwin shows) the real effect of HS about a 5% hit on the U.S. economy. (This is the equivalent of 5-10 "9/11s" in terms of damage to the economy, as Irwin and Crucini show).
Friedman was mostly right in that the Fed simply failed to keep up with the productivity and output, but he failed to really tie this into the declining gold stocks, whereby under the old Fed rules and the International Gold Standard, governments were OBLIGATED to print new money in proportion to rising gold stocks, and to take money out of circulation with falling gold stocks.
Keynes was right only that there was a skewed wealth curve, but didn't get that that was normal and desirable in a GROWING economy, especially one filled with inventors pouring out new inventions, as occurred from 1900-1930.
In short, all the modern scholarship points pretty strongly to a consistent story of the GD in which primarily the government is the culprit, exacerbated only by businesses' expectations of what else the government might do.
See my book, "The Entrepreneurial Adventure," (Harcourt, 2000) especially the sidebar section on the most recent economic studies, althoughwe repeat much of the essence of this in "A Patriot's History of the United States."
A better comparison is credit to GDP. In 1929, it reached 260%, today it's more like 300% which the Fed controls mainly by adjusting reserve requirements. You can see in this table http://www.federalreserve.gov/releases/h3/hist/h3hist5.txt that reserves are up about 25% since 1975 while the monetary base (the banks' supply of credit) has increased from 108 billion to almost 800 billion.
The article is basically correct. Creating money to fight deflation is like pouring gasoline on a fire in the hope that it will spread up and not out. By not allowing it to happen, the inevitable contraction is only made worse and worse. In the end the only two remedies are depression and hyper-inflation and we all know which one will be chosen by the spineless politicians and their appointed money-monkey.
But money supply tinkering is an especially good (or bad) way to synchoronize the entire economy which is what happened in the early 20's after the contraction of 1921 which was caused by the post WWI boom. The current overproduction is mostly abroad with China's non-capitalist economy contributing far too much production to the world market. There is unfortunately every incentive for communist businessmen in China to overproduce widgets of every type for both internal and export markets. The inevitable contraction to correct this would be so devastating to the Chinese economy and society that the central government refuses to do anything about it (such as floating the currency).
The bottom line is the current world overproduction will lead to a world contraction irregardless of money supply increases. The money will sit in banks unloaned which will prompt Bernanke to do his helicopter thing which will bring on hyperinflation and economic disaster.
synchronize (which is bad), not synchoronize which is just bad spelling.
"The Fed is the single most powerful entity on earth and it must be watched closely."
But it won't allow us to watch it anymore (M3 going stealth next year). Why? What does the Fed know about '06 that it's not telling us?
Notice how Gold has gone up almost everyday since the M3 announcement and Bernanke was confirmed. Something smells here.
Fellow crackpot. Quit your stammering and spouting and engage your brain.
My sources are Rothbard (America's Great Depression), Reed (Great Myths of Great Depression) and Friedman/Schwartz (Monetary History of the U.S.) What are yours??
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