Timberlake v Salerno battle, a few questions

Economics Economics Questions
1

Hello, I generally read alot of posts on this website in addition to all of the Austrian books I read. Recently, since I have to do a paper/debate on the Great Depression, the vortexes of the internet brought me to Joseph Salerno’s “Money and Gold in the 1920s…”, which was an Austrian reply to the Monetarist Timberlake. In a book about Monetary history, and in a series on articles criticizing Rothbard, Timberlake was attempting to prove that the Federal Reserve was deflationary during the 1920s and that Rothbard mismeasured the money supply and the Fed’s intentions from 1920-1933.

Before I go on any longer, here are the links (I’m not including Timberlake’s first three articles)

http://www.thefreemanonline.org/featured/money-and-gold-in-the-1920s-and-1930s-an-austrian-view/

http://www.thefreemanonline.org/featured/austrian-inflation-austrian-money-and-federal-reserve-policy/

http://www.thefreemanonline.org/featured/inflation-and-money-a-reply-to-timberlake/

http://www.thefreemanonline.org/featured/final-comment-on-salernos-monetary-program/

Salerno offered good rebuttals to Timberlake, but then Timberlake replied again with a couple of comments, to which Salerno replies but only directs his attacks to the Inflation and Money Supply portions of Timberlake’s reply to Salerno, briskly leaving some other things out. Timberlake then replies with a “Final Comment”, which seems to be a slight rehash of why Timberlake is right, Salerno wrong, and a couple of jabs at the ABCT. Apparently Salerno decided to leave it at that, and that is all that I know of the “discussion” between them.

Basically, to make the more important discussion in these papers apparent, Timberlake uses his statistics of “Net Fed”, a statistic that he says decreased during the 1920s to prove that the Fed was deflationary, and goes with the general Monetarist view that the Fed starved the country in the contraction. Salerno says that Timberlake includes things in the Net Fed that he shouldn’t have, and this leads him to the wrong conclusion. Timberlake uses his own data (I presume, he wrote his book), while Salerno, a favorite Austrian of mine, mainly uses Rothbard’s America’s Great Depression in an attempt to rebuttal Timberlake.

The rebuttals and counter rebuttals don’t cover everything that the other says, and this confused me a bit. Not to mention Salerno never replied to Timberlake’s “Final Comment”, which worried me a bit (unless he felt like there was no need to).

What do you guys think of these articles? Who do you think “won”(be objective). Comments on how to further tackle these and prove that Timberlake’s assertions are wrong?I know that there are some astute and learned people in my school, and I wouldn’t be suprised if they got their hands on Timberlake/Monetarist claims. Something seems blatantly wrong here, both men, free market capitalists, are disagreeing on the money supply/“inflation” in spades.

2

Price inflation/deflation does not matter. The key question is whether or not the supply of credit expanded beyond the supply of savings, thereby creating an unsustainable boom in the 1920s. Since fractional reserve banking existed in the 1920s, we can undoubtedly say it did.

3

It seems to me the problem with that argument is it is a little bit weak to argue for general discussion, as one can say “Oh, well fidicuary media expanded, so therefore regardless of everything else…”. The question I’m trying to see is if the Fed was deflationary or inflationary, which seems to be the crux of the Salerno/Timberlake and general Austrian/Monetarist conflict. If the fed wasn’t trying to inflate during the 1920s, which is what Timberlake suggests, then the ABCT might be in a little bit of trouble. It just seems that both camps (in this debate) are fighting againist “contrived” statistics, with Salerno using Rothbard’s and Timberlake his own, and somewhere one of these men must be wrong (obviously). Timberlake says the Fed never tried to inflate seriously in the 1920s and Great Contraction, and either he or the Austrians have missed something.

4

It seems to me the problem with that argument is it is a little bit weak to argue for general discussion, as one can say “Oh, well fidicuary media expanded, so therefore regardless of everything else…”. The question I’m trying to see is if the Fed was deflationary or inflationary, which seems to be the crux of the Salerno/Timberlake and general Austrian/Monetarist conflict. If the fed wasn’t trying to inflate during the 1920s, which is what Timberlake suggests, then the ABCT might be in a little bit of trouble. It just seems that both camps (in this debate) are fighting againist “contrived” statistics, with Salerno using Rothbard’s and Timberlake his own, and somewhere one of these men must be wrong (obviously). Timberlake says the Fed never tried to inflate seriously in the 1920s and Great Contraction, and either he or the Austrians have missed something.

5

The only evidence you need to validate is ABCT is whether or not the supply of credit is greater than the supply of savings. Since fractional reserve banking existed in the 1920s, we can say with a doubt that the supply of credit was greater than the supply of savings, validating ABCT as an explanation for the Great Depression. Now whether or not the Fed was trying to be inflationary or deflationary may be questioned, but AFAIK all scholars of the subject agree that the Fed DID expand credit. Whether they expanded a lot or a little does not matter, because any expansion of credit is validation of ABCT.

Here is a little data, if you need any:

6

Thanks, those graphs are helpful. AFAIK (or I thought), like you said, the Fed expanded credit, but Timberlake goes on to say that they didn’t, or they at least tried not to. Thats the problem I worry about. Salerno says that Timberlake “mismeasured the supply”, but in the replies and counter replies it seems to have gotten a little fuzzy.

I watched Salerno’s link of this website, and while helpful, it seemed like a rehash of his first article.

7

From the Concise Encyclopedia of Economics:

Since 1914 a sustained decline of the money supply has occurred during only three business cycle contractions, each of which was severe as judged by the decline in output and rise in unemployment: 1920–1921, 1929–1933, and 1937–1938. The severity of the economic decline in each of these cyclical downturns, it is widely accepted, was a consequence of the reduction in the quantity of money, particularly so for the downturn that began in 1929, when the quantity of money fell by an unprecedented one-third.