I was looking for something on the history of China, back when they first had paper money, to find out whether the business cycle arose in China at that time. Somehow I found the Futurecasts Journal of August 2011. I'm providing the link, but you don't have to use it.
The Futurecast thing starts out with an attack on Keynesian policy. It is a broad, sweeping attack, rather than a pointed one, so it's not too painful to read a little of it. And I found a prize in there:
The 8% price inflation that afflicted the Depression-ravaged economy through the first six months of 1937 after four years of New Deal monetary inflation occurred despite unemployment rates in excess of 14%. Those who criticize the monetary and budget policies that caused the 1937 relapse and its 19% unemployment rate somehow never seem to mention the 8% price inflation that forced those moves.
I don't recall ever seeing a discussion of inflation during the Great Depression. Well, I've seen one now.
Art,
ReplyDeleteThere has been some conjecture on what caused the recession of 1937-38. There is a plausible argument that it was a result of a contractionary monetary policy through sterilizing gold. ...."Though understudied by economists, the decision by the Treasury Department to sterilize gold inflows from December 1936 until February 1938 turns out to have been a very large monetary shock. By preventing gold inflows from becoming part of the monetary base, this policy brought to an abrupt halt to what had been a strong monetary expansion." http://www.dartmouth.edu/~dirwin/1937.pdf
I might add that as a measure of the economy, the rate of inflation for the year 1937 was 3.6%. If you look at the inflation rates for the period of 1929-1937, I think the average is a negative rate overall.(1929 .0, 1930 -2.3, 1931 -9,0, 1932 -9.9, 1933 -5.1, 1934 3.1, 1935 2.2, 1936 1.5 and 1937 a whopping 3.6.) Is it really any wonder that attempts to get out of a deflationary cycle would lead to price inflation?
ReplyDeleteNanute.
ReplyDelete"An abrupt halt" -- Well, I should think so! But I didn't know about this 'sterilizing' policy.
In "A History of the Federal Reserve" Alan Meltzer writes:
"The Board's principal policy action in these years increased reserve requirements as a preemptive act against inflation. Between August 1936 and May 1937, the Board doubled these ratios, thereby contributing to a steep recession in 1937-38." [Chapter Six]
A powerful combination of recession-inducing policies, to be sure. But the gold sterilization seems much the more significant, I would think.
The 1934-1937 inflation rates you list sound like targets Ben Bernanke would be happy with. The Futurecast guy was talking about 8%... Oh but I have to read more carefully.
Thanks, Nanute.
Art,
ReplyDeleteWhat Meltzer left out of his analysis, is that the reserve requirement increases were not binding. Convenient. (never question the Fed:) lol)
The Futurcast claim is pure bullshit.
ReplyDeleteFrom the BLS, in 1938 there was actual deflation, to the tune of -2.1% in CPI.
I graph it here.
Isn't it interesting that every attack on Keynsianism is based on cherry-picked data, distortions, or flat-asses lies.
Cheers!
JzB
Thanks Jazz. Nice link to data, too. Your graph matches up nice with Nanute's numbers, in the 3-to-4 percent range max, at that time.
ReplyDeleteMaybe that's why I don't recall seeing such a discussion before.
Nanute...
ReplyDelete"What Meltzer left out of his analysis, is that the reserve requirement increases were not binding. Convenient. (never question the Fed:) lol)"
Never the Fed! But I have to question you, Nute. From what you said about sterilizing gold above, I agree that Meltzer left some stuff out, or maybe that I skipped over an important part of what he said.
But my question is: What do you mean, "the reserve requirement increases were not binding"?
Maybe like the Pirates' Code? More like guidelines, really???
Art,
ReplyDeleteIn
1936-‐37,
the
Federal
Reserve
doubled
the
reserve
requirements
imposed
on
member
banks.
Ever
since,
the
question
of
whether
the
doubling
of
reserve
requirements
increased
reserve
demand
and
produced
a
contraction
of
money
and
credit,
and
thereby
helped
to
cause
the
recession
of
1937-‐1938,
has
been
a
matter
of
controversy.
Using
microeconomic
data
to
gauge
the
fundamental
reserve
demands
of
Fed
member
banks,
we
find
that
despite
being
doubled,
reserve
requirements
were
not
binding
on
bank
reserve
demand
in
1936
and
1937,
and
therefore
could
not
have
produced
a
significant
contraction
in
the
money
multiplier.
To
the
extent
that
increases
in
reserve
demand
occurred
from
1935
to
1937,
they
reflected
fundamental
changes
in
the
determinants
of
reserve
demand
and
not
changes
in
reserve
requirements.http://fic.wharton.upenn.edu/fic/papers/11/11-03.pdf
Does this help?
R
ReplyDeletee
t
o
r
t
.
Yeah, thanks.
Having slept on it, yeah. They raised the reserve requirement, but they didn't raise it so that there were no excess reserves. There were still excess reserves.
ReplyDeleteThe requirement was "binding" in the sense that it was a legal requirement. But it was not "binding" in the sense that banks did not bump into the limit. Because there were still plenty of excess reserves.
Thus the hike in the reserve requirement did not have a significant effect.
Sterilizing gold inflows, on the other hand, was like putting an immediate stop to the growth of money. Certainly that would be devastating.
I got it now. Thanks, Nute. Good info.
I started reading the Futurecraps Urinal post you linked to. It is seriously one of the absolute worst things I have ever set eyes on (mind you, I don't read Pajamas Media, the WSJ editorial page nor World Nut daily.)
ReplyDeleteAfter a few paragraphs I just gave up.
What egregious rot. Now I must go hug a quid AND scrub my brain with a Brillo pad.
Cheers!
JzB