Jonathan has another post up on the 1920-21 depression, siding with Steve Horwitz over Robert Murphy.
Steve's post on this is good, but I think he overlooks one important thing that comes out in my paper - which needless to say Murphy misses too. All the most recent research suggests that the 1920-21 depression was driven by an aggregate supply shock. Horwitz contrasts it on the dimensions of (1.) wage rigidity (he attributes to Hoover... I have my doubts on the Ohanian story), and (2.) monetary policy. But he just inexplicably assumes that the switch from rigid to flexible wages is the difference between a 1920-21 outcome and a 1929 outcome. And I suppose Jonathan assumes this too since he says he more or less agrees with Steve.
Wage flexibility and monetary policy have different impacts depending on the level of the interest rate, the behavior of wages internationally, expectations, and whether a downturn is demand or supply driven. Keynesian theory says that even if you made wages flexible in 1929 you would not have gotten a 1920-21 downturn - you still would have gotten a depression.
To test that even in the most basic way we'd need a supply driven downturn with wage rigidity, a supply driven downturn with wage flexibility, a demand driven downturn with wage rigidity, and a demand driven downturn with wage flexibility. We don't have that, which is why I say in my article that Murphy, Woods, and Powell can't hope to test Keynesian theory with the 1920-21 downturn.
As for whether free banking would have done the trick, this is tough. First, would free banking have lead to the bubble in the first place? Well, free banks aren't in thrall to the Wilson War Department so that would suggest "no". Then again, free banks are liable to bubble psychology in a way that the Fed isn't which would suggest "yes". Either way, if I recall it was the Fed that lead in popping the bubble, not private banks. I'm not a free banking theorist - those are just some thoughts.
Just to clarify, I don't really agree with Steven Horwitz. I say that even Rothbardians should agree that a continuation in the increase in the supply of money at an accelerating pace will cause a "recovery".
ReplyDeleteI'm not very learned regarding banking theory, and so I rather withhold judgment until I read a bit more, but it seems to me that even if the White-Selgin banking model is correct (the one which Horwitz uses in his analysis), an increase in the supply of money by part of the Federal Reserve would have not made the depression any better.
Selgin distinguishes between an increase in money to meet demand for money (or demand to hold money) and demand for loanable funds. It seems to me that by increasing the supply of money through open market operations or lowering the discount rate the Federal Reserve would have increased the supply of loanable funds.
The last time I commented on one of Horwitz' posts he responded by suggesting that his idea is about maintaining MV. I'm not sure that this is a very good explanation, given that many Austrians (Mises included) reject the mechanical quantity theory of money, given that it doesn't recognize relative increases in prices (i.e. capital-goods versus consumer-goods). And so, maintaining MV through a central bank just doesn't seem like a sound idea, at least within the Austrian framework.
Also, I think there's more to the Great Depression than wage rigidity (wages did eventually fall, until the advent of Roosevelt's NRA). I think it had to do with low discount rates (at least until late-1931... I need to graph the Fed's discount rates between 1927 and 1940), monetary pumping, and high general price rigidity (although I suppose this was more of a factor after Hoover's administration).
By the way, in that first post I said we shouldn't look only at Fed policy in deciphering why there was a fall in the money supply. I said that according to my research on 1937 Federal Reserve policy didn't play a large role. In 1937 the Fed increased reserve ratios, not the discount rate, and I somehow was confused (or didn't think it through). So, I take that comment back! ;)
ReplyDeleteVery Good.
ReplyDelete