paragraph 7 continueth
“If chapter 4 is the heart of the bad book, Table 7 on p. 109 is the heart of chapter 4. It was from the data in that table, that Rothbard argued (108): “…the inflation [in money] was clearly precipitated deliberately by the Federal Reserve. The plea that the 1920s was simply a ‘gold inflation’ that the Federal Reserve did not counter actively is finally exploded.” His reasoning was that “controlled reserves increased by $1.79 billion for the entire period and that exceeded the monetary gold stock’s increase of $1 billion.” The problematic aspect with the ‘controlled reserves’ in Table 7 is that Rothbard’s never provided a definition for controlled reserves. While he did provide some computations pertinent to controlled reserves on p. 113, when those computations are applied consistently throughout Table 7, the figures do not add to the amounts he termed there, controlled reserves.”
Oh dear. Another page is missing from Mr Rutner’s copy of the book. Not only does Rothbard explain explicitly what controlled reserves mean, he enumerates them in a list.
From page 103 [emphasis mine]:
"What then caused the increase in total reserves? The answer to
this question must be the chief object of our quest for factors
responsible for the inflationary boom. We may list the well-known
“factors of increase and decrease” of total reserves, but with special
attention to whether or not they can be controlled or must be uncon-
trolled by the Federal Reserve or Treasury authorities. The uncon-
trolled forces emanate from the public at large, the controlled stem
from the government. "
Then he enumerates them:
"There are ten factors of increase and decrease of bank reserves.
1. Monetary Gold Stock. This is, actually, the only uncontrolled
factor of increase…
2. Federal Reserve Assets Purchased. This is the preeminent con-
trolled factor of increase and is wholly under the control of the Fed-
eral Reserve authorities…"
and so on, through all ten.
Then, as if that wasn’t enough for the meanest intelligence, to make good and sure everyone is on the same page, he then has a summary:
"Summing up, the following are the factors of change of mem-
ber bank reserves:15
Factors of Increase
Monetary Gold Stock…uncontrolled
Federal Reserve Assets Purchased…controlled
Bills Bought
U.S. Government Securities
New Bills Discounted…controlled
Other Federal Reserve Credit…controlled
Treasury Currency Outstanding…controlled
Factors of Decrease
Outside Money in Circulation…uncontrolled
Treasury Cash Holdings…controlled
Treasury Deposits at the Federal Reserve…controlled
Unexpended Capital Funds of the Federal Reserve…controlled
Non-member Bank Deposits at the Federal
Reserve…uncontrolled
Bills Repaid…uncontrolled"
OK guys. Is it still fair to say “The problematic aspect with the ‘controlled reserves’ in Table 7 is that Rothbard’s never provided a definition for controlled reserves”? I mean really. Is there one thing here in Rutner’s long review that has at least SOME validity? There is not much time left to find one. We have done 7 and a half out of 10 paragraphs.
Maybe this one will be better than the others: “While he did provide some computations pertinent to controlled reserves on p. 113, when those computations are applied consistently throughout Table 7, the figures do not add to the amounts he termed there, controlled reserves.”
Dam, I hate math. As Rothbard explains on Page 108 and 111, to get total control reserves in a column, just add items 2 through 9 in each column. [Item one is merely the sum of items 2 3 4 and 5, items 10 11 and 12 are uncontrolled].
UH oh. Looks like Mr Rutner is right. The table is a real mish mash. Column 1 is in error, column 2 is OK. column 3 is ok, 4 is in error, as is 5. 6 is ok, 7 is OK, 8 is in error, 9 is OK. 10 is OK, 11 is OK, 12 is OK. Total OK columns: Eight. Total Erroneous columns: 4.
Uh oh. In column 1 Total Controlled should be -883, given the other numbers [not 462, a huge huge error] , and uncontrolled should be a whopping 1042 [not -303, another huge error] . Note that1043-883 is 159, so that the bottom line of 157 is fine, given that there are rounding errors, as Rothbard notes. But that doesn’t help us with Rothbard’s thesis. The positive numbers are supposed to come from controlled reserves [proving the Fed is inflating], and the uncontrolled numbers are supposed to be negative in this column, showing the gold supply was not inflating the money supply, since banks were offsetting that by paying off debt, as Rothbard writes on page 113. Hmm.
Hey. Here there is indeed a valid criticism! 4 deeply flawed columns. I mean simple arithmetic. I guess it must be typos.
[EDIT: The guys on the forum have come through and taken care of this one here. Special thanks to Black Numero.]
Somewhat sobered, let’s get to the next point. He quotes Rothbard as saying on page 108: “…the inflation [in money] was clearly precipitated deliberately by the Federal Reserve. The plea that the 1920s was simply a ‘gold inflation’ that the Federal Reserve did not counter actively is finally exploded.” His reasoning was that “controlled reserves increased by $1.79 billion for the entire period and that exceeded the monetary gold stock’s increase of $1 billion.” But since this conclusion is based on the error filled Table 7, Rothbard has no evidence. Hmmm. Sounds pretty valid. So yes, score one, and a serious one, attacking the very heart of the book, for Mr Rutner. I need help here.
To go on: Indeed, once we get the REAL numbers, continues Mr Rutner, we’ll see that just the opposite is true. Just have a look at page 282 of Friedman’s book, he says, and You’ll see just how wrong Rothbard is.
To quote him in full “Another way of looking at what Rothbard was describing can be found Chart 25 on p. 282 of Friedman and Schwartz’s Monetary History. The chart demonstrates the opposite of Rothbard’s claim. It makes it quite clear that what the Fed was attempting to do was to use Federal Reserve credit to offset changes in monetary gold stocks that were occurring at the time. Based on the modest growth of reserve money, we would have to say they were somewhat successful.”
OK, let’s have a look. Hmm. That Chart and the accompanying explanation is very partial. It only has two elements, gold and fed credit [Items 10 and I suppose 1 in Rothbard’s table 7]. [One interesting side note is that for the interval covered by the flawed column 1, Friedman admits that the Fed was trying, and succeeding, in inflating as much as they could!]
At any rate, Since Friedman’s Chart only takes into account a small amount of the variables Rothbard discusses, it clearly cannot serve as a refutation. That’s like saying a chart describing the trend of events happening worldwide is refuted by a chart describing only two countries.
OK, next post will tackle paragraph 8. But it looks like we need serious help with that Table 7 in Rothbard’s book. Any experts out there listening who have something to contribute? [EDIT: as I said above, the answer is here, in Black Numero’s post].