I’ve been reading Friedman’s, “Monetary History of the US” he seems to say as if there was deflation, however, it seems to clash with the Austrians opinion that it was inflation. Am I getting it right, was it inflation or deflation during the great depression?
It depends on how you define inflation and deflation. Austrians define inflation as an increase in the money supply. An increase in the money supply reduces the purchasing power of the monetary unit. Increased prices are just the effect of an increase in the money supply.Austrians argue that this is why modern day policy makers are only erroneously attempting to cure effects and not the cause of inflation. They only look at the increase in the “price level”, and not the increases in the money supply. The opposite effect is true for deflation.
So, if for the same of argument, we define deflation as a decrease in prices, then yes, there was deflation from the period of 1929 to 1933. Friedman says that the cause of this was that the Fed did nothing when the Great Depression hit and when banks started to rapidly close, and the money supply catastrophically dropped. Rothbard countered this argument by saying the Fed did try to inflate during the Great Depression, and this stretched the gold standard to the limits and aggravated the downturn. Rothbard says that while controlled factors (money supply augmentations the Fed can control) increased, uncontrolled factors caused the money supply to shrink. Most notably is currency in circulation, which is when people removed currency from the banking system, reducing the money multiplier and dangering the solvency of the bank when enough people demand their deposits.
Only in 1933 when Roosevelt took the U.S off the gold standard and floored the money supply leakage did the money supply stop dropping. I assume you are not talking about this period but the period prior where there are the most arguments between Monetarists and Austrians.
I’ve been trying to figure out which money supply is the most important when talking about debasing the currency. I’ve read that Friedman thought it was M2. I’m starting to think the “true” money supply is M0 or the actual amount of currency. It seems to me that once the new money is printed the “cat is out of the bag”, if you know what I mean. M1, M2, M3 are all just created by multiplying M0 and can’t be controlled. At least that’s my theory. [:D]
I think Freidman and Ben Bernake are in economic fantasy land when they explain the Depression as being caused by the central bank not pringing money like crazy. Printing money does not resolve situations where there are bad investments and mis-appropriations of resource. This was clearly the case in the Great Depression where the crash of 1929 was the result of an unsustainable boom in the 1920s. This process unfortunately takes time as all actors in the economy have to wait for profit and loss feedback to determine which investments are good and which are bad.
The text books are out of wack here as well. When I was in high school my text book said the crash and Depression were caused by too much margin debt. When that answer proved false, Freidman, Bernake and the like picked the reason that it was caused by an under-aggressive central bank.
It was caused by the central bank all right. In the 1920s the central bank created too much credit that caused a boom and subsequent SHARP bust in 1929. Instead of letting businesses and consumers react to the lower prices, the government and central bank tried a multitude of actions that were successful at keeping prices high and extremely successful at reducing employment and causing economic stagnation.
Unfortunately the Bush and Obama teams are pulling the same destructive stunts. The only difference is that the US economy is much larger and more flexible than in the 1920s. But give this “Buy American” crap time, eventually that will turn into protectionist policies and tariffs. When it does the tit-for-tat trade war will be horrible.
I think the economy is in much worse shape then in the 1920s. We were on a gold standard and we produced things the rest of the world wanted to buy.