I’ve read the portion on Tulipmania in Doug French’s “Early Speculative Bubbles”, and I’m pretty dissatisfied with his explanation as to how government intervention caused it. In short (from my memory), he admits that fractional reserve banking couldn’t have been the culprit, but the fact that the Bank of Amsterdam was offering free coinage (charging no fee to convert bullion into coins) allowed the silver coins to be acquired at less than what they could have been at the natural market rate, and this made possible the irrational bidding up of the tulip bulbs. I’m a big advocate of the Austrian business cycle theory, but I don’t find this particular explanation all that convincing. It’s hard for me to imagine how the minor freebie of a waved coinage fee could generate such a bubble… perhaps it was a factor, but was it the only? Are there any other essays from eminent Austrians on this topic?
Increase in specie is actually a fairly recurrent Austrian argument for early speculative bubbles. For example, if you read Rothbard’s history of economic thought you see the effects of an increase in specie in the Spanish Empire during the first and second centuries of its imperialism in South America. General price levels increased tremendesly during that period of time. Furthermore, I believe that Rothbard blamed the recession of 1837 largely on an increase in specie due to government tinkering with the gold standard. I am currently studying the 1937 recession (writing an article) and I found that most of the inflationary damage committed between ~1934 and 1937 (1934 marks the year that the price of gold was increased by the government) was because of an increase in specie, not because of fractional-reserve banking or the Federal Reserve System.
Removing a large portion of the cost associated with creating money would have led to a massive increase in the money supply in the Netherlands, as bullion from other nations would begin to flood Dutch banks.
I don’t remember if he specified what the cost reduction was, but I definitely don’t doubt that that could have been a factor. It’s just that there could be a lot of reasons for sending all of your money toward the Dutch banks, including possibly the general feeling that Dutch banks were dependable and didn’t partake in fractional reserve banking, and as a result everyone was very confident in them.
Free coinage is a satisfactory explanation for large increases in the money supply creating bubbles. If you believe other factors are at play, you should look at the historic record and prove so.
I’ll go ahead and say I think that regime uncertainty and things like tarrif increases and closing borders can trigger or at least worsen a recession as well. In these situations total investment can plummet and industries can find their current business plans unsustainable.
Lower market interest rate does not cause cycles. Lower fiat interest rate causes cycles.
On another note, I wonder what happen if central banks did the opposite and raised rates somehow.
Maintaining an artificially high interest rate only causes economic stagnancy, but I don’t think cycles would occur. Am I wrong on this?
You ought to be wrong if the ABCT is correct. I’m too tired to think it through right now, but the result should, I would think, be something like the chronological reverse of a typical cycle.
Rothbard’s on my side for this one… from note 113, Chapter 12 of Man, Economy, and State:
He is talking about upside down. I meant sideways- a bust followed by a boom. What you said except assuming they let up and then it turns into a boom.