Tuesday, September 11, 2012

"a more insignificant thing"

Recently I remarked

I am still astounded by the density of recessions up to the 1930s.

Jazzbumpa pointed out that

We were on the gold standard.

Now I find James Hamilton at Econbrowser supporting Jazz's view:

The NBER's business cycle dates also characterize this era as experiencing economic recessions more frequently and of longer duration than observed since the U.S. abandoned the gold standard in 1933...

Hamilton quotes Tyler Cowen,

Dare anyone critical of the gold standard bring themselves to utter these (roughly true) words?: "For the Western world, the gold standard era, defined say as 1815-1913, was arguably the greatest period of human advance ever, at least in matters of economics, culture, and technology."

and Hamilton responds:

There was indeed spectacular real economic growth in the nineteenth and early twentieth centuries. But it is unnatural to me to suggest that the monetary standard was the key cause of this. Instead I would point to real developments. For example, U.S. production of crude petroleum quadrupled between 1868 and 1878 and doubled every decade after that up through 1915...

As for myself, I am always on about excessive debt and monetary imbalance and such, and how these hinder growth. I do not mean to suggest that printing money will make the economy grow. "Real developments" are most important. But when money goes bad, it can hinder real developments. It can hinder growth.

Unfortunately, when growth is hindered by money, people have a hard time seeing it. People tend to think we need to fix the real developments -- that we must focus on the supply side, for example -- and only end up doing things that make bad money worse. Let me re-quote the John Stuart Mill that Friedman quoted in Free to Choose:

There cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money ... and ... it only exerts a distinct and independent influence of its own when it gets out of order.

There may be reasons we cannot "double U.S. oil production every decade for the next 40 years". But there is no reason money should stand in the way of our efforts.


Greg said...

"There may be reasons we cannot "double U.S. oil production every decade for the next 40 years". But there is no reason money should stand in the way of our efforts."


Jazzbumpa said...

Also, regarding the Great Depression of the 30's, countries recovered in exactly the order and at exactly the time when they abandoned the gold standard.

Great Britain abandoned gold in 1931, and recovered quickly. For Brits, the current depression is deeper and longer than the one of the 30's.

See the 3rd Parker excerpt here.



Joshua Wojnilower said...

I can't find the original source at the moment, but including the recent crisis, I believe the depth of recessions has actually been greater (on average) since the Fed was established. This is not to suggest that a gold standard is ideal, but having a central bank entails its own defects that may or may not be more significant.

As you constantly and rightly note, the primary issue is excessive debt (seemingly public under a gold standard and private under central bank). I'm still working through the literature, but there is something to be said for a third option...free banking.

The Arthurian said...

Woj -- Deeper, but shorter and less frequent? "Deeper" being measured by distance from peak to trough, I suppose. Is there a technically "correct" way to measure this?

More important: "seemingly public under a gold standard"
Tell me more!

The Arthurian said...

Actually, "deeper" and "less frequent" may be two sides of the same coin, or rather, of the same fiat dollar. Preventing small wildfires creates an environment where fewer, but massive ones arise.

Greg said...

I think what Woj means is that under a gold standard govt debt was issued as a way to promise gold .....later. It was kicking the promise down the road. One couldnt exchange their present dollars for gold but if they tied them up in bonds for a while they would get the gold later when they redeemed the bonds, so theoretically the country would acquire more gold (via trade or stealing or mining I guess)to keep their promises. So in reality a country could default on their debt if they promised more gold than they could possibly acquire.

Jazzbumpa said...

The other thing to note about recessions on the gold standard is the accuracy level of the data.

Frex, you can trace GDP data for the U.S. back to about 1800, but you'd better put a wide tolerance band around anything pre-1929.

The record keeping was full of holes, and estimates tend to favor the PoV of the estimator.

This is why the mists of antiquity are so misty.

Caution is advised.


Joshua Wojnilower said...

Let me attempt to clarify...

By deeper I did mean measuring peak to trough. There is data for this, but as JzB points out, one has to be skeptical of its accuracy.

As for the comment on excessive debt, Greg has the right idea. Govt spending was constrained by the requirement to convert dollars into gold and opened the possibility of govt insolvency. A gold standard generally prevents counter-cyclical fiscal policy.

Under the current fiat-money regime, the govt can always print dollars so excessive debt could result in inflation but not default. However, the private sector remains budget constrained and has taken on far more debt, compared to income, since the Fed was established.

The Arthurian said...

"estimates tend to favor the PoV of the estimator."

Yeah, there's none of that these days! :)

Greg, I get ya. Sounds like going off gold solved one part of the problem.

The Arthurian said...

Apart from my email troubles, apparently, for some reason your comment ended up as blog spam.

Okay, I get it now. "Govt spending was constrained by the requirement to convert dollars into gold..."

I still assert that excessive private debt (rising and falling in a Kondratieff-like pattern) has much do to with hard times. Certainly, the gold standard would have complicated the picture. (The two are not mutually exclusive.)

Point taken. Thanks.