Thursday, December 4, 2014

1920-21 and reasoning from a price change: two recent posts

Two recent posts on monetary policy and 1920-21 by Tom Woods and George Selgin. The thrust of it is some of us (myself included) are, as Scott Sumner would put it, reasoning from a price change. I don't have a strong view of the argument because I haven't had a chance to look at the data. I find Woods's post a little odd - he seems to switch from arguing from a price change to arguing from a quantity change. The other problem here is that even if money were still tight through the recovery, the break in the extremely tight policy still matters. A lot of people think that Bernanke has been tight throughout the recovery, but that is not the same thing as saying that the stark policy changes at the beginning of the crisis didn't prevent a much worse situation. I'm not a monetary economist and I haven't had time to digest all of this, but those are my initial reactions.

I really have to add that Selgin's glib reference to my article (RAE) and note (CJE) on 1920-21* doesn't demonstrate a good grasp of what I've claimed. My point has always been that 1920-21 doesn't disprove Keynesian arguments. I am no critic of the idea that markets can recover on their own, nor am I a critic of the idea that monetary policy can be instrumental in a recovery without fiscal policy.

Anyway - links:
George Selgin
Tom Woods

* - He says I've made "something of a specialty" of this work, which is also odd because most of my research has nothing to do with 1920-21 - it's hardly a specialty of mine.


  1. David, I didn't intend my reference to your work to be "glib" at all, or to misrepresent it. I merely intended to say that you'd written a lot on it, mainly taking exception to some "Austrian" claims concerning conclusions to be drawn from it. I have tried to revise my reference to your work so as to correct the misleading suggestion.

    1. Sorry to have written "David" instead of Daniel. A long day yesterday!

  2. My prior on all this was that the Fed tightened early on in 1920, and then quickly turned to a looser policy. So have been poking around a little; I think I've changed my mind.

    1. The historical reserve data on FRED shows bank reserves declining sharply from October 1920 to November 1921. The total decline over this 14 month period was 15%.

    2. FRED data on bank borrowing from the Fed shows a similar decline, but peaking earlier (October 1919) and declining until August 1921, falling by 85%(!).

    3. I could only find annual data on M1 and M2. M1 had been growing at double digit rates from 1915 to 1919. M1 growth between 1919 and 1920 was 9.4%; it then declined from 1920 to 1921 by 9.4% and grew by only 0.7% from 1921 to 1922. M2 grew at double-digit rates from 1916 until 1920 (growth between 1919 and 1920 was 12.5%); it then fell by 5.6% from 1920 o 1921 and grew by only 2.6% between 1921 and 1922.

    4. Private-sector interest rates generally fell, from around 8% in 1920 to around 4.5% in 1922. However, since the rate of inflation (measured as the 12-month rate of change in the CPI) fell from an (annualized) 20% or so in early 1920 to priced falling by from 10% to 12% through 1921--and still falling (at a slower and slower rate of deflation) in 1922, it appears that real interest rates were probably increasing.

    Overall, the mid-102- to 1922 period does not look to me like a period of monetary ease.

    1. In the last sentence of all that, it should read: "...the mid-1920 to 2911 period does not look to me like a period of monetary ease."

  3. Another take on the entire episode:


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