Dec

30

This working paper published by the Dallas Fed Bank is helping in articulating the questionable assumptions underlying the Fed's ultra-easy monetary policies, and the potentially harmful consequences of that policy.

Stefan Jovanovich writes: 

Peter Temin has a wonderful paragraph in the introduction to his book Did Monetary Forces Cause the Great Depression:

"it is not surprising that the policies we now recommend for similar conditions were not tried. For if they had been tried and found wanting - if the Depression had occurred despite the imposition of expansionary monetary or fiscal policies - we would not longer count them as effective. Given the existence of the Depression, only policies that were not tried could escape with untarnished reputations".

Temin's book only addresses the U.S. — the one country where the Depression was truly "Great". As Hugh Hendry recently reminded people at his Buttonwood interview, the "depression" in the early 1930s in Europe saw real output fall by less than 5% from the 1920s peak; in the U.S. the decline was a THIRD! FWVLIW my assessment of what happened in the U.S. agrees neither with Rothbard nor Keynes nor Friedman. Art Cooper and I have been discussing this question recently. Art will, I hope, forgive me for making him guilty by association in presenting the Stefan theory:

In the decades that straddle the First World War, the U.S. became - for the first time in its history - a country with customers who were overseas. If you look at the histories of the giant enterprises - Standard Oil, Ford, Firestone and the other rubber companies, General Electric, DuPont to name only the ones that immediately come to mind - all of them developed large overseas operations and exported products abroad. American and Canadian farmers enjoyed a shorter but more dramatic boom because of the war. I have to quarrel a bit with your facts about the 1920s. They were not a "boom" for the U.S. any more than the period from 1945-1955 were; they were relatively good times only because the rest of the world was flat broke. Rothbard is right about the government's extending credit but he has the wrong recipients; domestic credit in the U.S. remained strict (it is the reason the farmers found it impossible to roll over the loans they had taken out during the boom of the war years) and the beginnings of consumer credit (people buying radios and cars on credit) came not from the banks but from new "finance" companies. The easy money was the stuff being sent overseas under the Dawes Plan, etc. It began back in 1914 when the U.S. Treasury unilaterally abandoned the gold standard for the British and French Treasuries and central banks; those countries were allowed to run chronic trade deficits without ever having to settle their accounts in gold. The Depression (as opposed to the stock market crash) came from the final collapse of the European borrowers who were the defeated nations (German, Austria-Hungary). U.S. policies were not helpful; and Roosevelt prolonged the Depression by taking the U.S. off the gold standard at the very time the Europeans were restoring it (the Japanese followed the American example - which meant that military socialism became their solution just as the revival of the Wilson economy became ours). But the ultimate cause was the bill for WW I finally coming due. You cannot have your major overseas customer go broke and somehow expect that everything will be OK by paying them to continue to buy your stuff. If you then decide that you can avoid the foreign exchange pressures from your now recapitalized, lower cost customers who are now competitors (by destroying the mechanism for trade itself i.e. the gold standard) and then confiscate the nation's bank reserves, you are going to have a collapse in your employment and production that will last for a decade or more.
 


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  1. Arthur Cooper on January 3, 2013 1:51 pm

    Martin Feldstein weighs in on this subject in his Op-Ed piece, “The Fed’s Dangerous Direction,” on p A13 of the Jan 3 WSJ.

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