In an earlier thread where I had been asking about the Great Depression and the conditions prior to it, NewLiberty had kindly given a link that looked to be a pretty strong case for a Laissez Faire handling of such significant downturns in the economy:
Presented by Thomas E. Woods, Jr., at “The Great Depression: What We Can Learn From It Today,” the Mises Circle in Colorado
JeffDB, it’s a misconception that the economy “self-corrected” in 1921. I guess that this view is put about by those that wish to contrast 1921 with the Keynesian policies implemented under FDR in the 30s.
The reality is that the Fed had a lot to do with instigating both the downturn and recovery. Due to post war inflation, the Fed began interest rate rises in Dec 1919. The recession began in Jan 1920. Rates were increased all the way from 4 to 7%. This was an unprecedented increase and no doubt contributed significantly to the deflation that was experienced. Rates came all the way down again in the second half of 1921, which is when the recession ended. There was a matching contraction in the money supply and expansion at the end of the recession.
In fact the 1921 recession is an example of what I was describing. Inflation led to rate rises which led to recession. Where it is different is in recession not leading to higher deficits. In that sense it is unique. It is doubtful if that feat could be repeated because of the post war adjustments that were taking place at the time.
I am no expert by any means but I don’t see how that argument undermines the Austrian argument.
The point is that the malinvestments (brought about by the post war inflation) led to the evaporation of investment funding which caused the recession and interest rates to rise. The fact that interest rates rose one month before the recession officially started is neither here nor there.
Furthermore, interest rates that were allowed to rise (unlike today) and a complete absense of a fiscal stimulous funded by deficits (again unlike today) led to a relatively quick recovery (after an albeit sharp recession). Once malinvestments had been liquidated and the supply of investment funding had been suitably restored, economic recovery ensued and interest rates fell.
In neither case should we see interest rate changes as causing the recession and recovery. They are both symptoms of the same phenomena and their correlation doesn’t disprove that.
That may well be true, but the other poster, chap08, was contending that the Fed had deliberately raised rates:
“The reality is that the Fed had a lot to do with instigating both the downturn and recovery. Due to post war inflation, the Fed began interest rate rises in Dec 1919. The recession began in Jan 1920. Rates were increased all the way from 4 to 7%. This was an unprecedented increase and no doubt contributed significantly to the deflation that was experienced.”
He isn’t as forthright in claiming that the Fed had deliberately dropped rates after the recession began, but he implied it when he started out his post with:
“The reality is that the Fed had a lot to do with instigating both the downturn and recovery.” …
and ended with:
“Rates came all the way down again in the second half of 1921, which is when the recession ended. There was a matching contraction in the money supply and expansion at the end of the recession.”
That really seems to be the crux of the matter. I wonder if there is any original source material to try and document whether the Fed had deliberately tinkered with the interest rates there or if it was a natural function of the free market economy in that phase of its business cycle.
This is also covered in particular detail in Murray N. Rothbard’s “America’s Great Depression”, which happens to be a great book by the way. I felt like shooting Woods an e-mail questioning him on this, but I figured he has much more to do then compose a rejoinder for me.
It looks like a very good book and right on point, but I don’t see it online or at my local library. I’ll probably have to put it off for awhile.
I started reading Rothbard’s “America’s Great Depression” which you had recommended in an earlier link. Hopefully he will go into it a bit in that book.
Thanks for this recommendation as well, though. Hopefully I’ll be able to find the time and pick up a copy soon.
If I’m reading it correctly the monetary base was going up into 1921 which would seem to go against the notion that the Fed was deliberately “raising interest rates”.
Sounds like he’s over-simplifying, even if technically correct on facts presented. Anyway, LF primarily refers to how the government didn’t embark on a mad “New Deal” spending spree, the Raw Deal being what most people credit for the supposed recovery… which didn’t really occur until 1946 or so since the economy was most definitely crummy in terms of prosperity during the war.
Also, I can’t remember the details of why, but I do vaguely recall reading something by Rothbard (Case against the Fed?) making a claim that the Fed can pump money into the economy with ease, but has a much harder time doing the reverse. If I’m recalling that correctly, claiming that the Fed “cured” (in such a short time) the very problem it created is somewhat sketchy.
It seems an interesting (i.e. “different”, not strong) type of counter point, but I’ve serious doubts that it’s a good one. Think about it some more first or better yet keep a discussion going with this guy to get more information on his viewpoint to evaluate. If you’re still not sure, maybe someone should shoot Woods an email regarding this. If it’s succinct and well written, I think you will get a response, but honestly I think we can figure it out here if we think about it some.
Not enough time today to comment further, I’m no more an expert than anyone else here anyway.
This kid doesn’t know what he’s talking about. America went back on the gold standard in 1919-1920 leading to a massive monetary contraction down to the metallic base. This was, in essence, a massive liquidation of malinvestments and lead to a speedy and robust recovery. The significance of this is that even in the face of enormous deflation, the economy is able to rebound without government intervention and/or expansionary monetary policy (in fact, expansionary monetary policy didn’t exist until 1922). This is empirical evidence against new deal type policies and government intervention.
Yeah, I’d like to dialogue with him a bit more. I’ve disagreed with him at times in other threads, but he seems like he knows what he’s talking about, or at least has the attitude of someone who does. It would be interesting to have him come on here and discuss things in a little more depth with others, though I tend to doubt he’d want to try his hand at that. He’d probably figure he wouldn’t “convert” anyone and would be among people with views hostile to his own.
I posted the link to the chart of the base money supply(?) at the time but he hasn’t responded yet. Unfortunately the format there is not conducive to ongoing dialogue. It’s almost like an online newspaper format. Someone posts a story and people respond. By the next day most people have moved on to the new stories of the day, yesterday’s stories aren’t on the main pages and only a few, if any, return to check responses.
But, if he had a valid point or even a common misconception it would be good for me to know about it in more detail so I would know what I was talking about the next time that topic came up.
Well that’s the way I saw things after I saw Mr. Woods’ talk on YouTube, and was taken a little by surprise at the rejoinder by this poster. But it does seem to me as if the money supply had taken a dip in early 1919 and then ramped back up later in the year through early 1922 perhaps, at least if I’m reading that chart from the Fed correctly.
Yes, the Fed deliberately raised it’s discount rate but that this was in response to the economic circumstances, the same economic circumstances that led to the recession.
For comparison, and I’m honestly not sure if this will be helpful or even an accurate guess, but what did the Fed do before/during/after the 1929 depression? I’m not familiar enough to remember what they did (I know I’ve read it somewhere!) I’d guess they did basically the same thing the 2nd time… but-- no worky! One difference between the two = Raw Deal.
Of course no matter what the Fed did after they screwed up the economy, that difference still remains, and it’s a big one.
Well, Wikipedia says: “Rates were sharply reduced in the latter half of 1921. The New York Federal Reserve reduced rates in successive half-point moves over the July- November period from the 7% high to 4.5% on November 3 1921. The depression ended.”
I’m just reading Robert Murphy’s “Politically Incorrect Guide to the Great Depression” which states that:
And also my above quote form Wikipedia says, that just in July of 1921, the FED began lowering interest rates. But at that time, the economy has already recovered - the Depression lasted from January 1920 to July 1921!
While currently reading Rothbard’s A History of Money and Banking In the United States, I came across something that I think is on topic with the current discussion.
Unfortunately, that takes away, at least somewhat, from the strength of the Austrian argument that it was a necessary adjustment to malinvestments/overconsumption from the prior period. Monetarists and Keynesians would discount the Austrian interpretation by pointing to the factor they consider to be most important… The Fed made a mistake in raising interest rates too quickly &/or too high according to their theories and the results might be considered to be consistent with them.
But for the purposes of my discussion with the gentleman on the other board, the more critical question was really how and why it all ended. Even if the Fed did cause the 1920 depression would be somewhat irrelevant in and of itself with respect to that question.
Well, it actually lies perfectly in line with Austrian theory. Austrian theory states (according to Jesús Huerta de Soto) that the malinvestments will show themselves when the growth of the money supply either stops completely, or stops growing at an accelerating pace (exponential function). So, if the Federal Reserve raises its discount rate and the money supply stops growing as quickly as it was before, then the malinvestments will show.
But, that’s the problem with proving theories with empirical evidence; you can’t.
I’m not quite positive, whether that is the monetary base for the country as a whole or for the St. Louis region. I got it from the St. Louis Federal Reserve page, but they have much data for the nation as a whole.
The only link I could find that went back to 1918 was labeled St. Louis Source Base, but I saw no description of what data was included. Perhaps its the national records as kept at the St. Louis Fed, or maybe just the data for the St. Louis Fed region, I’m not sure. But I imagine the graphs for both would be pretty similar anyway.
The graphs can be custom designed to include various time frames or even custom time frames, which is what I saved in the 1st two links in this post.
Don’t know if that helps, but it is all I could find.
Thanks for the info, Tobbog. It is certainly interesting, and the info and interpretations seem to be in conflict with one another as you note.
From the 1st post quoting the Wikipedia article:
“Rates were sharply reduced in the latter half of 1921. The New York Federal Reserve reduced rates in successive half-point moves over the July- November period from the 7% high to 4.5% on November 3 1921. The depression ended.”
from your 2nd post quoting Robert Murphy’s “Politically Incorrect Guide to the Great Depression”
Despite the fairly severe depression-recall that unemployment averaged 11.7 percent in 1921-the Fed held steady to its record-high rate for almost a full year, not cutting until May 1921, after the depression was basically over.
It would be nice to have quick and easy access to some of the source documents, or at least reliable data that would be accepted as accurate by both sides of the argument. It would be nice, for instance, to be able to see a graph of the money supply overlaid by graphs of the unemployment rate, Fed discount rate, GDP, government spending & the federal deficit.
