AGD

[Smiling_Dave]

Welcome, paragraph 8.

Straight to the jugular: "**Another problematic aspect raised by Table 7 is its narrow focus on reserves held at the Federal Reserve by banks that are members of the Federal Reserve system. He did not account for the vault cash of the members or the reserves of the non-members. By focusing just on those reserves, he gave a skewed accounting of the increase in bank reserves."

Mr Rutner continues: *"*By Rothbard’s accounting, reserves increased by 47.5 percent from June 1921 through June 1929. (See his Table 6, 102.) When all bank reserves are taken into account, though, the increase comes to 27.5%; and when all reserve money is taken into account, the increase is just 8.4 percent. (See, respectively, Table A-2, 738f., and Table B-3, 802f., of the Monetary History.) Again Rothbard’s focus on a specific component, rather than on the total, presents results that can be viewed as misleading."

Here are the relevant lines from Table A-2, all numbers in billions of dollars:

June 1921: Vault cash: .905 Bank Deposits at Federal Reserve Banks: 1.597 Bank reserves [meaning Item 1 plus Item 2]: 2.502

June 1929: Vault cash: .865 Bank Deposits at Federal Reserve Banks: 2.326 Bank reserves [meaning Item 1 plus Item 2]: 3.191

OK. let’s analyze what’s going on here. First, there seems to be a difference of opinion about vault cash between the two respected authors. Rothbard put it at a constant half a billion [footnote on page 102], Friedman roughly doubles that. I don’t know how to account for this. Maybe Rothbard is counting member banks, and Friedman is counting all banks. But notice they agree it was roughly constant. Also, we will show that it doesn’t matter.

Another thing to notice is that Rothbard puts 1929 Bank Deposits at 2.6 billion, and Friedman at 2.326 billion, a difference of 280 million dollars. I don’t know how to account for this either. Notice that they agree on the number for 1921, Rothbard putting it at 1.6 and Friedman at 1.597.

OK, lets take1.6, multiply it by 147.5%, and you get 2.6. This is what Rothbard calls a 47.5% increase.

Rutner says, no, multiply 2.502, multiply it by 127.5%, and get 3.1901, which he calls a 27.5% increase. [Note that he underestimated a bit, because we have to get to 3.191, not the lower 3.1901]. So that Bank reserves didn’t go up as much as Rothbard claims.

Really a zinger, no? After all, money in the vault can also be used as a basis for fractional reserve banking.

But I think there’s a huge fallacy here. Rothbard is saying that member banks of the Fed [which is the same as the Fed itself] did ALL THAT WAS IN THEIR POWER to inflate.But banks have no way of increasing the amount of money [=gold, remember? This is the 20’s] in their vaults. That’s up to the public. In other words, it is an UNCONTOLLED reserve, over which they have no power. So of course when we discuss “By what percent did the feds increase whatever they could?”, money in their vaults doesn’t count.

Here’s El Rothbard, on page 103:"1. Monetary Gold Stock. This is, actually, the only uncontrolled
factor of increase—an increase in this factor increases total reserves
to the same extent. When someone deposits gold in a commercial
bank (as he could freely do in the 1920s), the bank deposits it at the
Federal Reserve Bank and adds to its reserves there by that
amount. While some gold inflows and outflows were domestic, the
vast bulk were foreign transactions. A decrease in monetary gold
stock causes an equivalent decrease in bank reserves. Its behavior
is uncontrolled—decided by the public—although in the long run,
Federal policies influence its movement. "

Well, word for word, the same goes for money that non member banks put into member banks. It is UNCONTROLLED. The fed guys increased the amount of reserve money THAT THEY COULD. They could not make non member banks deposit more or less than the non member banks wanted. So when we try and figure out what percent did the fed increase the amount of reserves THAT IT COULD, obviously deposits of non memebr banks arent in the picture.

Here’s Rothbard on the subject, page 106:

"9. Non-member Bank Deposits at the Federal Reserve. This factor
acts very similarly to Treasury deposits at the Federal Reserve. An
increase in non-member bank deposits lowers member bank
reserves, for they represent shifts from member banks to these
other accounts. A decline will increase member bank reserves.
These deposits are mainly made by non-member banks, and by
foreign governments and banks. They are a factor of decrease, but
uncontrolled by the government. "

But we have shown in earlier posts that Mr Rutner had all those pages missing from his copy of the book, else he would not have made some earlier foolish comments.

Mr Rutner proceeds to give an alternate explanation of what happened: “A slightly different explanation of what happened is that individuals had a greater preference for bank money than currency in the 1920s, and so they converted their currency into bank money. Comparably, the banks had a greater preference for reserves at the Federal Reserve then they did for vault cash, so they, in effect, transferred any new funds received from the public into reserves at the Federal Reserve. The increase, than, in reserves held at the Federal Reserve was not so much an increase engendered by the Federal Reserve, but simply the workings of banks and depositors preferring one form of money to another.”

The amount of money outside banks remained more or less the same all through the 20’s [page 92, first column]. This did not happen, we are told, because they wanted as much gold as they could get, but on the contrary, suddenly people preferred bank money [=checks?] more than currency. So what they did was, as soon as they had more gold than they had before, they ran to the bank with it. Please get rid of these ugly gold coins for me. “What about the three and a half billion you are keeping for yourself? Why not give me some of those?” “No, that I want.” “Why?” “I don’t know. Animal spirits, I suppose.”

The bank also hated gold, hated it. As soon as they got some, they ran with it to the federal reserve. Please take this. I dont want it in my vault, ugh. “Why not give me some of the 500 million [or a billion according to Friedman] that you already have in your vault?” “No, that I want.”

Here I think someone who knows more than me will come up with a better refutation. All I’m saying is that it sounds very fishy.

The rest of paragraph 8 is faint praise for Rothbard on Hoover. The only quibble is he should have piled up more statistics. Nu.

[Smiling_Dave]

Welcome to paragraph 9, which we will tackle together with paragraph 10. So this will be it. Final post.

The topic is the Smoot Hawley Tariff. Rutner loves it. And that fool Rothbard just confuses correlation with causation, appeals to authorities that he has rejected in other places, forgets that other tarrifs did no damage to the United States, and just makes silly assertions while actually proving nothing.

OK, a pause while I read up. Here are Mr Rutner’s reservations:

1. Rothbard takes the fact that the market broke after the tariff was signed into law as proof that the Smoot Hawley tariff contributed mightily to the Great Depression. But this is a big mistake. “The market’s having sunk is by itself not evidence. The old saw of, correlation is not causation is at work here.”

My rebuttal. Mr Rutner is setting up a straw man. Rothbard does not say what Rutner attributes to him. Here is the full quote on page 242: *"*The stock market broke sharply on the day that Hoover agreed to sign the Smoot–Hawley Bill. " That’s it. Mr Rothbard was writing a history in Part 3, of which this chapter is a part. The theory he dealt with in the other parts. No where does he mention that Smoot Hawley caused the market. Of course it might possibly have been a cause for the market to break sharply in 1930 [not 1929] when it was passed. But Rothbard does NOT claim it.

2. “The fact that many economists opposed the tariff is also not evidence.” Same straw man. Rothbard does not say it is, although it’s certainly curious, to say the least.

3. “Indeed, Rothbard did not accept stable prices as being a beneficial goal of monetary policy despite many economists having recommended it as policy.”

Firstly, in point 2 we showed how this is irrelevant. Second, there is a difference between many and all. " Hoover was urged to veto the
Smoot–Hawley Tariff by almost all the nation’s economists, in a remarkable display of consensus, by the leading bankers, and by
many other leaders. " [page 241].

4. “Moreover, there was an earlier tariff, the Fordney-McCumber Tariff, which went into effect in 1922, and was just as onerous as Smoot-Hawley. Yet, it seems not to have caused any lasting real effects.”

Really? Here is Rothbard on that tariff, page 139**:**

" a mild
recession ensued, continuing until the middle of 1924. Bond yields
rose slightly, and foreign lending slumped considerably, falling
below a rate of one hundred million dollars per quarter during
1923. Particularly depressed were American agricultural exports to
Europe. Certainly part of this slump was caused by the Fordney–
McCumber Tariff of September 1922, which turned sharply away
from the fairly low Democratic tariff and toward a steeply protec-
tionist policy.3 Increased protection against European manufac-
tured goods delivered a blow to European industry, and also served
to keep European demand for American exports below what it
would have been without governmental interference.
To supply foreign countries with the dollars needed to purchase
American exports, the United States government decided, not sen-
sibly to lower tariffs, but instead to promote cheap money at home,
thus stimulating foreign borrowing and checking the gold inflow
from abroad. Consequently, the resumption of American inflation
on a grand scale in 1924 set off a foreign lending boom, which
reached a peak in mid-1928. It also established American trade,
not on a solid foundation of reciprocal and productive exchange,
but on a feverish promotion of loans later revealed to be unsound.4
Foreign countries were hampered in trying to sell their goods to
the United States, but were encouraged to borrow dollars. But
afterward, they could not sell goods to repay; they could only try
to borrow more at an accelerated pace to repay the loans. Thus, in
an indirect but nonetheless clear manner, American protectionist
policy must shoulder some of the responsibility for our inflationist
policy of the 1920s.

Who benefitted, and who was injured, by the policy of protec-
tion cum inflation as against the rational alternative of free trade
and hard money? Certainly, the bulk of the American population
was injured, both as consumers of imports and as victims of infla-
tion and poor foreign credit and later depression. Benefitted were
the industries protected by the tariff, the export industries uneco-
nomically subsidized by foreign loans, and the investment bankers
who floated the foreign bonds at handsome commissions."

5. And finally, the last of Mr Rutner’s sallies, begins by quoting Rothbard: "it was at a precarious time of depression that the Hoover administration chose to hobble international trade, injure the American consumer, and cripple the American farmers’ export markets by raising tariffs higher than their already high levels."

Mr Rutner is not pleased*.*

"This is economics by assertion. It proves nothing."

To which I say: Huh? If there is a tariff, THE WHOLE POINT OF IT is to hobble international trade. This is to obvious to even talk about. Why are Americans forced to pay more for foreign products than local products, if not to stop them from buying the foreign stuff?

But it goes further. Them furriners are not going to take it lying down. They are going to set up tariffs of their own, sure as night follows day.

As for injuring the American consumer being a mere assertion, I don’t get it. If I have to pay double for sugar or whatever because of a tariff, is it mere “assertion” to say I have been injured? The mind boggles.

Last one, crippling the farmers’ export markets. Rothbard says on page 241, "Whereas we have seen that a policy of high tariffs cum foreign
loans was bound to hurt the farmers’ export markets when the
loans tapered off, Hoover’s answer was to raise tariffs still further,
on agricultural and on manufactured products. A generation later,
Hoover was still to maintain that a high tariff helps the farmer by
building up his domestic market and lessening his “dependence”
on export markets, which means, in fact, that it hurts him griev-
ously by destroying his export markets."

When he says “we have seen”, he is referring to his discussion of the harmless [according to Rutner] Fordney McCumber Tariff, which I quoted a little bit earlier.

OK, that’s it folks. What a long strange trip it’s been. Once again, anyone who can help out with Table 7’s botched arithmetic, please do. [EDIT: Black Numero came up with the answer here.]

Also with the alternate explanation of the increase in reserves, that everyone started hating gold for ten straight years, the common man and the banks.