Private Issues post-post

In Defense of Theory

I'm just a tad disappointed in my "Private Issues" series. I wanted to look at some numbers and claim there was evidence supporting my view. But it's like there are no numbers to look at.

The FRED GDP observations go back to 1947, mostly; some to 1929. Nothing in the 1800s. Nor does ALFRED go back in time before 1929. FRASER doesn't list GDP at all, that I could see.

The Bicentennial Edition of Historical Statistics lists GNP back to 1869, but even that is after the Free Banking era. The older HS lists national wealth back to 1774, but GNP only to 1929 and National Income back to 1799 but only for every tenth year.

NBER business cycles start with 1854, the last decade of the Free Banking era.

I ended up using Measuringworth's numbers again. I compared "real" GDP of the Free Banking era (1836-1863) to the post-WWII Golden Age (1947-1973, but I used 1946-1973 for the comparison).

For each period I figured the CFPY (Change From Previous Year) of Real GDP. I took the absolute values of those numbers, to make them all positive. And I compared the minimum and maximum changes for the two periods.

Why? Because it seemed a reasonable approach, that's all.

The smallest year-to-year change during the Free Banking era was 44% larger than the smallest comparable change during the Golden Age. The biggest year-to-year change during the Free Banking era was 42% larger than the biggest change of the Golden Age.

I want to conclude that downturns were more severe in the Free Banking era. But the comparison shows only that our economy was more generally active back then. I need another comparison. I would have to look at the downturns specifically.

The numbers show four negatives during the Golden Age -- four years of decline in RGDP during the period. Oddly, the numbers show no negatives during the Free Banking era: No recessions at all. Not in the Measuringworth numbers, anyway.

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Wikipedia provides a table listing seven U.S. recessions between 1836 and 1863. There were many. And judging by the declines in business activity, they were severe.

Economictheories.org provides Business Cycles History, which refers to

Professor Wesley C. Mitchell, whose work on business cycles is the best known and the most substantial of all the modern works in this field...

And Professor Mitchell himself provides a chart showing "Approximate Duration of Business Cycles" -- Chart 23 from Business Cycles, The Problem and its Setting by Wesley C. Mitchell, one of the "National Bureau of Economic Research Publications in Reprint." (Image at right.)

Wesley Mitchell's chart shows eight cycles within the 1836-1863 period, one more even than Wikipedia. Table 32 in Mitchell's book identifies four of those eight as involving panic. Inflation was well-controlled in the Free Banking era. Panics were not.

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The Library of Economics and Liberty offers Business Cycles by Christina D. Romer, wherein one may read:

The prewar versions of these series were constructed using methods and data sources that tended to exaggerate cyclical swings. As a result, these conventional indicators yield misleading estimates of the degree to which business cycles have moderated over time.

In other words, according to Romer, the business cycles of the 19th century were not as severe as we have been led to believe.

On the other hand, in Changes in Business Cycles: Evidence and Explanations (PDF, 1999) Romer writes:

The bottom line of this analysis is that economic fluctuations have changed somewhat over time...

...the advent of effective aggregate demand management after World War II explains why cycles have become less frequent and less likely to mushroom. At the same time, however, there have been a series of episodes in the postwar era when monetary policy has sought to create a moderately sized recession to reduce inflation. It is this rise of the policy-induced recession that explains why the economy has remained volatile in the postwar era.

Romer's point is that business cycles are less frequent and less severe after World War II, as compared with before World War I. (But not as much less as people thought.)

So Romer confirms a bit of my Private Issues hypothesis -- at least, she confirms the environment I need for my hypothesis to be valid: the environment where recessions are more frequent and more severe in the 19th century than in the 20th.

But Romer does more than this. She points out that much of the 20th century volatility arises from inflation-fighting by the Federal Reserve. Yes. In the Free Banking era there was no Federal Reserve. And there was no inflation. But there were panics and frequent, severe recessions.

In the 20th century, we had to create recessions on purpose, in order to do the thing that was done automatically (and more severely, and more often) in the 19th.

And to the extent that Fed-induced recessions were less frequent and less severe than Free Banking recessions, the difference has been made up by the greater inflation of the post-war era. Romer confirms my hypothesis.

Romer calls this "effective aggregate demand management." What was it I said?

They pat themselves on the back and attribute the difference to the wisdom of their policies. I say the difference arises from the fact that we are no longer on gold.

But remember: The problem is not whether we are on gold or not. The problem is the imbalance between base money and private-issue money. This problem resolves itself differently when we are on gold and when we are off. But neither getting on gold nor getting off gold is a solution to the problem of monetary imbalance.