If the Fed was increasing the money supply throughout the 1920s, why was the inflation rate during the 1920s slightly below zero?
And on another topic, does anyone know the cause of the Panics of 1873, 1893, and 1907, the supposed justification for the Federal Reserve Act? Does it have to do with fractional reserve banking?
What’s your source?
It’s possible that the boom was so large that the economy was growing faster than the monetary supply.
Wikipedia is your friend. Most of those panics were caused by a mixture of fractional reserve banking and monetary supply shocks (e.g. a huge contraction in 1873, IIRC).
Source is my macroecon textbook which cites Milton Friedman and Anna J Schwartz’ Monetary Trends in the United States and the United Kingdom: Their Relation to Income, Prices, and Interest Rates 1867-1975 (Chicago: University of Chicago Press, 1982)
I asked about the bank panics here as opposed to checking wikipedia because I wanted to get an Austrian School perspective.
Are you sure you aren’t confusing 20s deflation with 30s deflation? Friedman/Schwartz argued that part of the reason the Great Depression was so severe was due to monetary contraction in the early 30s (particularly 1933).
On the issue of the inflation rate, the increased money supply was offset by a general increase in goods. So while the fed printing of money should have raised prices, the greater production of goods, generated by high real saving, helped keep prices rather constant.
That depends on what people think inflation is. If you see it as the cost of consumer prices or CPI then, yes there was little inflation during those years. But, If you think that inflation is just how much new money is being printed, then there was a lot of money creating asset inflation inthe stock market.
About those Panics I have no idea but at least the one of 1907 had something to do with the creation of the FED.
I have my copy of Rothbard’s “America’s Great Depression” loaned out, but there is a table maybe 1/3 in that illustrates that the amount of coin in circulation actually didn’t increase that much - we were still on a gold standard. The components of the money supply that increased so dramatically were bank credit (due to relaxed lending standards and the beginning of cartelization under the Fed, if memory serves) and insurance investment. These two components (again, if memory serves) were what drove the boom in the stock market and thus led to the bust.
The actions of Hoover and FDR is what kept us there…
On page 167 of Rothbard’s “History of Money and Banking in the United States” he says “The financial panics throughout the late nineteenth century were a result of the arbitrary credit-creation power of the banking system. While not as harmful as today’s inflation mechanism…” On the next page, he writes that the State took several actions that weakened the general faith in the US gold standard in 1892 and 1893, among them return to gold without contraction of the inflated paper money supply after the Civil War (or the War of Northern Agression). The State also was indicating that they wanted to return to bimetalism with silver - the bill was unsuccessful, but it still rattled the confidence in the US repaying obligations in gold bar or coin. It is also worth mentioning that the panic was over by the end of 1893 as the gold stock was increased and the Treasury could once again pay it’s obligations in gold coin.
Yes I’m sure. Deflation in the 30s was even lower.
Thx for the info guys.
If I recall correctly, the teens and the twenties in the U.S. were periods of immigration into the country. The population, both natively and by arrivals, was growing rapidly. Thus, the money supply, even though it was increasing quickly, was likely not causing significant inflation because it was being widely disbursed throughout a growing population.
Of course, this brings up the flip-side argument of the anti-gold people, which is that such a scenario would have lead instead to a period of rapid deflation under the old Gold Standard.
After a manner then, both systems appear to have, or would have, produced the same result, albeit the Gold Standard would not have allowed for the massive growth in government and centralization of power away from the middle to the upper classes. (Yes, I know there was supposedly little deflation in the 30’s, but wasn’t that the result of of further manipulations, rather than market forces? Clearly the market was delating, values were declining. Right? If the government hadn’t pulled so many workers and supplies out of the private marketplace there likely would have been significant deflation. (That deflationary-offset cost being deferred to future generations.)
And of course, deflation mostly hurts the producer (typically those who can most afford it), and typically only temporarily, by affecting a loss on goods already in the channel, whereas, inflation typically affects non-producers, workers, retirees, the disabled, and so forth (typically those who can least afford it), and it most often effects them permanently. So that brings up the question, why do we not more often frame the Gold-Standard argument as a class-warfare argument? Wouldn’t that sell better in the current quasi-socialist culture?
Can anyone else comment on how this might or might not be correct way of looking at this? I appreciate the input.
Oh, and on the last point, aren’t all panics caused by fractional reserve banking, or it’s various cousins, modern hedge funds, sub-prime packaging, and so forth? Who is to blame the people for panicking when they realize that the magician is merely pulling accounting slight-of-hand rather than real magic?
In America’s Great Depression Rothbard states that throughout the 1920s the money supply increased 62% while the amount of gold only increased 15%. That statistic alone should demonstrate how much inflation there was, and if you compare that with the general price levels in that decade it is remarkable that they remained somewhat “stable” due to our productive capacity still increasing a significant amount. The interesting aspect of the 1930s “deflation” is that this deflation was due to market forces and did not appear to be the Fed’s desire. The factors determing reserves that the Fed controlled continued to increase in the 1930s, but those beyond their control kept decreasing. Thus the Fed was still trying to inflate but forces beyond their control overpowered them. The conclusion I draw from this at least is that deflation should have been even greater than it was in the 1930s if the market were allowed to fully correct itself.
In liberty,
Chris