Sunday, September 29, 2013

Jerry Wolfgang on the 1920-1921 Recession

EPJ's most regular troll gets one half right. Jerry Wolfgang writes:
The claim that there was massive money printing during the 1920s contradicts a claim made by Ron Paul on Charlie Rose that the recovery from the 1921 recession was strong because govt cut spending and got out of the way. Funny how Austrian economists make both arguments that 1921 recession fixed itself and 1928 meltdown was due to money printing.
Wolfgang is partially correct here. There is no reason to single out the 1920-21 recession as different from other Federal Reserve money manipulations.

According to A Monetary History of the US by Friedman and Schwartz (Table 10) money growth was at 15% between May 1919 and May 1920. This according to Austrian theory would have fueled the boom. Eyeballing Chart 1 in Friedman-Schwartz one can see that money supply growth peaked in 1921 but then bottomed in 1922. Thus, money supply would have started to slow in 1920, but would have started to climb in 1922. Indeed, money growth according to Murray Rothbard (America's Great Depression Table 1) for the period June 1921 to June 1922 was at  4.1%. but for the period June 1922 to June 1923 money growth was at 9.8%. This growth would  have thus started in 1922, when the economy was coming out of the recession. Thus, as far as I am concerned, the boom, bust and new boom were all the result of Federal Reserve money manipulations.

I have no idea how the urban myth started that the 1921 recession was different from other Federal Reserve manipulations, that said, after this period for the remainder of the 1920s, money supply growth until 1928 was pretty much between 5% and 10% (See Rothbard, Table 1), which justifies, contra to Wolfgang's statement, Austrian claims that it was money printing in the 1920s that caused the 1929 stock market crash and start to the Great Depression.

Ron Paul's claim that government stayed out of the way in the early 1920s, applies more to the propping up of wages and businesses, that didn't occur, so there was no suffocation of the overall economy as occurred in the 1930s and at present, but the Fed was, indeed, up to its dirty tricks in the early 1920s.

9 comments:

  1. RW states:

    "Ron Paul's claim that government stayed out of the way in the early 1920s, applies more to the propping up of wages and businesses, that didn't occur, so there was no suffocation of the overall economy as occurred in the 1930s and at present, but the Fed was, indeed, up to its dirty tricks in the early 1920s..."

    From the online version of my favorite Wanniski article (The WSJ article covers Say's Law and is simply brilliant):

    "To understand the crash, though, one must back up to review the boom years of the 1920s. The great Coolidge bull market got under way in earnest in 1924. The industrial average, which had taken four years to move from 90 to 106 in the first part of the 1920s, reached 134 at the end of 1924, 181 by the end of 1925 and, after a pause in 1926, 245 at the end of 1927.

    "These were not paper, "speculative" gains, for this was a period of phenomenal growth in the nations's capital stock. Between 1921 and 1929, GNP grew to $103.1 billion from $69.6 billion. And because prices were falling, real output increased even faster.

    "The boom coincided with sharp tax cuts. To pay for the First World War, income taxes had been boosted to a high of 77% on incomes over $1 million. An excess profits tax on business and a doubling of the normal corporate rate to 12% had also been imposed. In the 1920 elections, Warren Harding, pledging a return to normalcy and a reduction in taxes, won by the greatest landslide in American history up to that time. Harding's Treasury Secretary, Andrew Mellon, engineered a tax cut -- the top bracket was reduced to 56% in 1921 and then to 46% in 1922. Because this reduction in the domestic wedge was partly offset by the mild increase in tariffs the administration also pushed through, there was only mild expansion in the economy. But after Harding's death, Calvin Coolidge succeeded to the presidency, and he quickly embraced Secretary Mellon's arguments for even more drastic tax reductions.

    "As Coolidge aptly explained in a speech to the National Republican Club in February 1924: "An expanding prosperity requires that the largest possible amount of surplus income should be invested in productive enterprise under the direction of the best personal ability. This will not be done if the rewards of such action are very largely taken away by taxation."

    "As it gradually became clearer through 1924 that the Coolidge tax bill to reduce the top income-tax rate to 25% had sufficient support for passage, the stock market began its unprecedented climb. It's interesting that Great Britain, which did nothing to reduce the steep progressive income taxes introduced during World War I, experienced no boom at all during the 1920s. By contrast, Italy under Mussolini went from severe economic contraction to rapid expansion in 1923 as he cut the wartime personal tax rates back and also cut back tariffs and internal excises. And the French, under a center-right coalition formed by Poincare, ended a financial crisis in 1926 by slashing the general income-tax rates in half, to 30% from 60% at the top..."

    Wanniski is coherent here, going beyond the shores to see international government trends. Again, there is a unified Conservative Economic View to see here, if only someone would look.

    CW

    http://www.polyconomics.com/index.php?option=com_content&view=article&id=1739:the-crash-of-1929&catid=50:2001

    ReplyDelete
    Replies
    1. "These were not paper, "speculative" gains, for this was a period of phenomenal growth in the nations's capital stock. Between 1921 and 1929, GNP grew to $103.1 billion from $69.6 billion. And because prices were falling, real output increased even faster.

      Yes, economics is more complicated than Wolfgang or Wenzel maintains. Wenzel's assertion: "Thus, as far as I am concerned, the boom, bust and new boom were all the result of Federal Reserve money manipulations." is half correct.

      1) Austrians maintain money creation in the 20's lead to the Great Depression. Though Rothbard emphasizes the policy of supporting the overvalued Pound post 1925 in the money creation which occurred. 2) Yes, a strong economy was distorted by money creation, Wenzel's denial of a strong economy not withstanding. 3) Wenzel does acknowledge a difference: "Ron Paul's claim that government stayed out of the way in the early 1920s, applies more to the propping up of wages and businesses, that didn't occur, so there was no suffocation of the overall economy as occurred in the 1930s and at present". I am not sure why he finds this an insignificant event. Perhaps it is the natural tendency of libertarians to be contrary. But to muddy the economic history of the period adds little in my opinion.

      Delete
  2. Keynesian economic historians concede the Fed's relative inactivity; by the time money growth was robust, the recession was over. The inflation that led to 1929 was much later in the 1920s. Where's the contradiction?

    ReplyDelete
  3. http://www.fee.org/the_freeman/detail/the-depression-youve-never-heard-of-1920-1921

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  4. Thanks Robert. Jerry please stay on the boards. If you help me learn something, I do not care how dumb your comments. The key is to check and verify all parts of history. I admit I fell for the myth without checking the facts

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    Replies
    1. You didn't fall for anything. You were right the first time. The resolution to this great puzzle is that the Fed was tight early in the '20s and loose later in the '20s. So quit beating yourself up. The "myth" exists only in Jerry's imagination.

      Delete
  5. Uber -Keynesian Daniel Kuehn seemed to think he refuted the Austrian explanation of 1920, but his paper only verified the explanation.

    http://bobroddis.blogspot.com/2012/08/daniel-kuehn-provides-factual-basis-for.html

    As I repeat for the 4,456th time, no Keynesian ever appears to understand either economic calculation/miscalculation, the importance of unimpeded prices or how funny money expansion distorts prices and economic calculation. And they are clueless that this is the essential foundation of all Austrian analysis. It's just amazing.

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    Replies
    1. Bob, I agree 100%.

      Time preference, heterogeneous desire, Cantillion effects, savings vs interest rates...none of these things are ever brought to the fore. Mention them to a Keynesian and you're likely to get a blank stare.

      Delete

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