So if we just did away with unions and the pressure to get workers more of the value they created, and just watch as businesses and banks failed (No FDIC reform), everything would have self-corrected? Yes, some small recessions self-correct, but this was a global crash of all markets. Do nothing? Unfortunately for that theory, the masses have agency. Without FDR 'doing something,' would communist and socialists won many elections, perhaps a majority? Especially if the self-correction is slow in coming? Maybe we get rid of elections too?
I won't judge whether FDR's policies are net-positive or net-negative, but the NIRA specifically was worse than nothing. The fact is that controlling prices by cartelization ends up reducing output, so it reduces the incomes of everybody else more than it increases the incomes of the beneficiaries. This is bad in a depression.
Here's a chart. The blue-green line is when the US went off the gold standard (imo good). The orange lines show the start and end of the NIRA.
Anyways, "what should FDR have done" is somewhat vague. Expansionary fiscal and monetary policies as used in the modern day would have made the depression into a recession, or even stopped it before it happened. However, the economic theory behind those policies was developed by studying mistakes governments made during the depression, so yeah.
I don't know much about the electoral history of that time period, but I'd be surprised if extending the Great Depression *harmed* the electoral chances of communists and socialists relative to the counterfactual where the GD ends much sooner. Many stories can be told about this, of course.
The self-correction, as I understand Nicholas's post, is just prices lowering. Nicholas, do you have a sense of how quickly prices would lower when allowed to?
Even Mises understood the danger (to debtors but eventually creditors) of a meaningful downturn in the process level. There's some hand waving in some circles about indexed debt contracts, but I don't know of any reliable studies showing that, and evidence from the Long Depression and Great Depression are powerful counterweights to such claims.
Glib allusions to 1919-1921 overlook some important underlying dynamics. And on an external monetary standard, changes in the value of money arguably have effects that are analogous to fiscal. On a fiat standard with an interest rate-targeting central bank, it's really hard--perhaps impossible--to get monetary policy to behave like fiscal imo. Which calls into question the relevance of this post to today's world, even if you accept its central assertion.
"On a fiat standard with an interest rate-targeting central bank, it's really hard--perhaps impossible--to get monetary policy to behave like fiscal imo." what do you have in mind by this?
Vastly oversimplifying/playing with mental models of a closed economy here (and too verbose, sorry), but...
When a modern central bank engages in open market operations,whether for targeting an int rate or QE, it's exchanging one financial asset for another. Influences interest rates but doesn't expand "money supply" broadly defined. Resulting credit dynamics are relevant obviously but (keeping it simple) net to zero under double entry accounting. Whereas fiscal deficits (surpluses) are a net addition to (subtraction from) the overall stock of financial assets.
If a central bank (or legislature or executive) operating under a gold standard changes nominal parity, it's essentially expanding (or contracting depending on direction of parity adjustment) money supply.(There's the old "what happens if govt tells us all to cut our paper money in half" argument but it's not worth the diversion imo.) I think there was an understanding of this at work in how seriously the "rules of the [gold standard] game" were taken by policymakers back in the day. In hindsight, that was unfortunate as policy could/should have been more flexible than it was. Maybe less-flexible exchange rates and a crawling peg to gold would have the global economy in a better place today? Who knows? Instead it was seen as more virtuous to invest boatloads of human capital in finding, mining, refining and minting precious metals and for misfortune to visit far too many people (the latter something New Deal policies did A LOT to alleviate, but the libertarian minded tend to undervalue that). When Bretton Woods collapsed the pendulum swung to the other extreme.
Upshot I guess is that in a fiat world, fiscal deficits are as important a factor as interest rate targets. Net exports can play a similar role if we move to an open economy mental model, but at the aggregate level trade has to net out to zero. Under gold, mines ran deficits of gold. Today, some combunation of govts need to run sufficient deficits of their IOUs. Central banks do have magic checkbooks, so you can envision a world where they do add to "money supply" in return for something other than financial securities (eg, as agent for Congress in an employer of last resort program), but I don't know of any that are doing anything like that rn.
Sectoral comparisons show places with the least intervention (article itself cited Ohanian) recovered fastest. I don't see how it's bad that human capital was invested in creating gold, not that the incentives have really changed since as gold kept appreciating relative to fiat.
As another commenter noted, that's a view that's been out there since the New Deal and they're not without controversy. Similar ones I've read strike me as driven by policy preferences prior rather than letting the evidence lead you to a sound assessment.
As for gold, by all means, let's allocate as much human talent and effort to digging a shiny ore out of the ground, I guess?
if FDR had done nothing the money supply would have continued to be inadequate because the price of gold in dollars was too low. it is because of FDRs intervention that this changed. the argument presented here, as i understand it, is that *this* was the something FDR should have done and did. the fact that setting crops on fire would also count as doing something does not mean it was a particularly useful thing to do.
I think that's a reasonable take. But his invoking of the 1919-21 depression as self-resolving (a la Jim Grant) makes me wonder.
Aside, someone once pointed me to US industrial production before and after FDR's gold revaluation (I don't consider it a devaluation because the purported nominal exchange ratio was entirely out of line with economic reality). Was eye opening. But also fair to question his calculations and if confiscation was necessary (whatever your opinion of his policies, FDR had some autocratic tendencies).
The caricatured Cole-Ohanion "NIRA did it" line is, as I expect you're aware, hardly uncontentious. The biggest issue is of course the timeline:
- the NRA stopped operations in mid-1935
- output recovers to pre-crash levels in 1937
- and then almost immediately plummets again, almost back to where it was in 1934.
- actual recovery takes until 1939
Ohanion bridges the gap by pointing to
- weak antitrust enforcement before 1938, which is prima facie plausible, but not a matter of "continued meddling" - just the opposite, in fact.
- The NLRA protecting collective bargaining rights, resulting in the equal pay provisions of NIRA being locked in by contract. But union density peaks in 1954 and the "great compression" continues well into the 60s.
If you want to say the fastest period of economic growth in human history should have been even faster, fine, but we're *far* out of distribution there, the empirics are anybody's guess. If you want to say Ohanion's model relies on other factors particular to the era and can't be generalized past the war, also fine. But you've got to bite at least one bullet here.
> What we need to understand is that the solution to shortfalls in aggregate demand is not massive fiscal interventions, but good monetary policy.
I don't think this follows from the argument you lay out here! You're critiquing particular kinds of government intervention—price controls and output restrictions—which I wouldn't even consider to be fiscal policy. Yes, clearly these regulatory policies are bad, but it does not follow that fiscal intervention (in the form of tax cuts, perhaps) would not be a good response to a depression.
In the depths of the Great Recession, the Fed ran out of space to cut rates. By December 2008, rates were effectively zero. I think this makes a strong case that monetary policy is not sufficient to resuscitate the economy in a recession. If you want to argue against fiscal intervention, you'll have to provide other evidence. And I think you might be hard pressed to do so, given that many of the sinister premonitions of run-away inflation given by Austrian economists during the Great Recession—during which there was over a trillion dollars of fiscal stimulus—turned out to be flat wrong.
This is such an incredibly simple-minded and stupid analysis, I hardly know where to begin.
Let us begin with the Smoot-Hawley tariff bill (1930). America was effectively a closed economy in 1930. Only 5% of GNP was due to exports. Exports nominally decreased 67% (5.2B-->1.7B) or 55% in real terms (less than 3% of GNP). A substantial chunk of that is recovered by local businesses replacing imports after reciprocal tariffs. However, GNP declined in real terms by 29%. Moreover, exports would have declined to a large extent of their own accord in accordance with general global economic decline. It would require one heck of a multiplier effect for Smoot-Hawley to be a major contributor to the Great Depression.
Like COVID-19, the 1921/2 sharp and short depression was due to a political event, namely the transition of America from a war to a civilian economy. The same thing happened in 1946, partly because of huge reductions in Federal spending. The 1921/2 event was also due to agricultural overinvestment based on sharp declines from war time food prices. For this reason, it cannot be compared to the Great Depression.
When FDR inherited the economy, GNP was already down about 29%. The 3 years following FDR's inauguration, GNP increased in real terms by about 10% annually, another 5% in 1937. It defies credulity to claim that the Great Depression was largely FDR's fault.
The first initiatives to arrest the continuing decline in GNP was to stop the deflation. For if deflation is above 7% per annum and banking is unsafe, then burying one's cash in the backyard or under the mattress (like my grandfather did even into the early 1970s, so traumatic was the event), that is one great investment.
For the record, I have never voted for a left of center party. I just believe in intellectual integrity and competence.
I strongly agree with the thesis of this essay. However, one thing that was not mentioned was how FDR banned complementary currencies.
Demurrage currencies had great success in reducing unemployment and boosting the economic activity of the towns that tried them, and yet the USFG and other federal governments still banned them anyway in order to maintain monopolies on their national currencies and legal tender. https://en.wikipedia.org/wiki/Demurrage_(currency)
I've been working on Wikipedia to help raise awareness about this. If this topic interests you, I'd love to collaborate with you on improving Wikipedia. I'd greatly appreciate it.
Forgive the newbie question: if prices are not sticky long-term, then why would anchoring USD to gold matter at all? Every non-gold price would just adjust; effectively, prices are not denoted in USD, but in "fractions of 1 gold ounce" or whatever.
It sounds like your main objection is to price controls? That's certainly not something I would argue with.
But that's not really a fiscal intervention as I understand the term.
What we did for the Covid Recession was partly fiscal policy that seems to have worked. Monetary policy is certainly important but post-2008 showed the limitations.
In other words, Flexible Average Inflation Targeting.
Yes there were lots of microeconomic shocks, but they don't causes macroeconomic if the central bank acts flexibly with enough inflation to facilitate the adjustment of relative prices to the shocks.
{Bleg: Could someone who knows the history explain if the Depression era Fed could have done more to create the needed inflation or if even with the repricing of gold, it's hand were tied?]
> Starting with Hoover, he mistook the symptoms of loose money (high wages) for the causes.
I thought the story you told was: (+) Demand for Gold -> (-) Money Supply -> Tight Money & Sticky Wages & Nominal Debt Contracts -> High Real Wages & High Real Borrowing Costs.
This essay sounds like a repackaging of Jim Grant's book. A Selgin book sounds much more worthwhile! Though admittedly George may have reached similar conclusions.
I strongly suspect (hello, bias, my old friend) there are some underappreciated dynamics in the 1919-1921 depression and recovery. Gold inflows, anyone? And while exchange rates were allegedly floating, I'm not convinced the BOE's retreat from trying to reimpose 1914 gold parity didn't have some favorable impacts outside the UK.
So if we just did away with unions and the pressure to get workers more of the value they created, and just watch as businesses and banks failed (No FDIC reform), everything would have self-corrected? Yes, some small recessions self-correct, but this was a global crash of all markets. Do nothing? Unfortunately for that theory, the masses have agency. Without FDR 'doing something,' would communist and socialists won many elections, perhaps a majority? Especially if the self-correction is slow in coming? Maybe we get rid of elections too?
I won't judge whether FDR's policies are net-positive or net-negative, but the NIRA specifically was worse than nothing. The fact is that controlling prices by cartelization ends up reducing output, so it reduces the incomes of everybody else more than it increases the incomes of the beneficiaries. This is bad in a depression.
Here's a chart. The blue-green line is when the US went off the gold standard (imo good). The orange lines show the start and end of the NIRA.
https://fred.stlouisfed.org/graph/?g=1Ivdh
Anyways, "what should FDR have done" is somewhat vague. Expansionary fiscal and monetary policies as used in the modern day would have made the depression into a recession, or even stopped it before it happened. However, the economic theory behind those policies was developed by studying mistakes governments made during the depression, so yeah.
I don't know much about the electoral history of that time period, but I'd be surprised if extending the Great Depression *harmed* the electoral chances of communists and socialists relative to the counterfactual where the GD ends much sooner. Many stories can be told about this, of course.
The self-correction, as I understand Nicholas's post, is just prices lowering. Nicholas, do you have a sense of how quickly prices would lower when allowed to?
Even Mises understood the danger (to debtors but eventually creditors) of a meaningful downturn in the process level. There's some hand waving in some circles about indexed debt contracts, but I don't know of any reliable studies showing that, and evidence from the Long Depression and Great Depression are powerful counterweights to such claims.
Glib allusions to 1919-1921 overlook some important underlying dynamics. And on an external monetary standard, changes in the value of money arguably have effects that are analogous to fiscal. On a fiat standard with an interest rate-targeting central bank, it's really hard--perhaps impossible--to get monetary policy to behave like fiscal imo. Which calls into question the relevance of this post to today's world, even if you accept its central assertion.
"On a fiat standard with an interest rate-targeting central bank, it's really hard--perhaps impossible--to get monetary policy to behave like fiscal imo." what do you have in mind by this?
Vastly oversimplifying/playing with mental models of a closed economy here (and too verbose, sorry), but...
When a modern central bank engages in open market operations,whether for targeting an int rate or QE, it's exchanging one financial asset for another. Influences interest rates but doesn't expand "money supply" broadly defined. Resulting credit dynamics are relevant obviously but (keeping it simple) net to zero under double entry accounting. Whereas fiscal deficits (surpluses) are a net addition to (subtraction from) the overall stock of financial assets.
If a central bank (or legislature or executive) operating under a gold standard changes nominal parity, it's essentially expanding (or contracting depending on direction of parity adjustment) money supply.(There's the old "what happens if govt tells us all to cut our paper money in half" argument but it's not worth the diversion imo.) I think there was an understanding of this at work in how seriously the "rules of the [gold standard] game" were taken by policymakers back in the day. In hindsight, that was unfortunate as policy could/should have been more flexible than it was. Maybe less-flexible exchange rates and a crawling peg to gold would have the global economy in a better place today? Who knows? Instead it was seen as more virtuous to invest boatloads of human capital in finding, mining, refining and minting precious metals and for misfortune to visit far too many people (the latter something New Deal policies did A LOT to alleviate, but the libertarian minded tend to undervalue that). When Bretton Woods collapsed the pendulum swung to the other extreme.
Upshot I guess is that in a fiat world, fiscal deficits are as important a factor as interest rate targets. Net exports can play a similar role if we move to an open economy mental model, but at the aggregate level trade has to net out to zero. Under gold, mines ran deficits of gold. Today, some combunation of govts need to run sufficient deficits of their IOUs. Central banks do have magic checkbooks, so you can envision a world where they do add to "money supply" in return for something other than financial securities (eg, as agent for Congress in an employer of last resort program), but I don't know of any that are doing anything like that rn.
Sectoral comparisons show places with the least intervention (article itself cited Ohanian) recovered fastest. I don't see how it's bad that human capital was invested in creating gold, not that the incentives have really changed since as gold kept appreciating relative to fiat.
As another commenter noted, that's a view that's been out there since the New Deal and they're not without controversy. Similar ones I've read strike me as driven by policy preferences prior rather than letting the evidence lead you to a sound assessment.
As for gold, by all means, let's allocate as much human talent and effort to digging a shiny ore out of the ground, I guess?
*price level, not process
if FDR had done nothing the money supply would have continued to be inadequate because the price of gold in dollars was too low. it is because of FDRs intervention that this changed. the argument presented here, as i understand it, is that *this* was the something FDR should have done and did. the fact that setting crops on fire would also count as doing something does not mean it was a particularly useful thing to do.
I think that's a reasonable take. But his invoking of the 1919-21 depression as self-resolving (a la Jim Grant) makes me wonder.
Aside, someone once pointed me to US industrial production before and after FDR's gold revaluation (I don't consider it a devaluation because the purported nominal exchange ratio was entirely out of line with economic reality). Was eye opening. But also fair to question his calculations and if confiscation was necessary (whatever your opinion of his policies, FDR had some autocratic tendencies).
The caricatured Cole-Ohanion "NIRA did it" line is, as I expect you're aware, hardly uncontentious. The biggest issue is of course the timeline:
- the NRA stopped operations in mid-1935
- output recovers to pre-crash levels in 1937
- and then almost immediately plummets again, almost back to where it was in 1934.
- actual recovery takes until 1939
Ohanion bridges the gap by pointing to
- weak antitrust enforcement before 1938, which is prima facie plausible, but not a matter of "continued meddling" - just the opposite, in fact.
- The NLRA protecting collective bargaining rights, resulting in the equal pay provisions of NIRA being locked in by contract. But union density peaks in 1954 and the "great compression" continues well into the 60s.
If you want to say the fastest period of economic growth in human history should have been even faster, fine, but we're *far* out of distribution there, the empirics are anybody's guess. If you want to say Ohanion's model relies on other factors particular to the era and can't be generalized past the war, also fine. But you've got to bite at least one bullet here.
Let's not forget Morgenthau's obsession with getting federal spending "under control" c. 1937.
> What we need to understand is that the solution to shortfalls in aggregate demand is not massive fiscal interventions, but good monetary policy.
I don't think this follows from the argument you lay out here! You're critiquing particular kinds of government intervention—price controls and output restrictions—which I wouldn't even consider to be fiscal policy. Yes, clearly these regulatory policies are bad, but it does not follow that fiscal intervention (in the form of tax cuts, perhaps) would not be a good response to a depression.
In the depths of the Great Recession, the Fed ran out of space to cut rates. By December 2008, rates were effectively zero. I think this makes a strong case that monetary policy is not sufficient to resuscitate the economy in a recession. If you want to argue against fiscal intervention, you'll have to provide other evidence. And I think you might be hard pressed to do so, given that many of the sinister premonitions of run-away inflation given by Austrian economists during the Great Recession—during which there was over a trillion dollars of fiscal stimulus—turned out to be flat wrong.
This is such an incredibly simple-minded and stupid analysis, I hardly know where to begin.
Let us begin with the Smoot-Hawley tariff bill (1930). America was effectively a closed economy in 1930. Only 5% of GNP was due to exports. Exports nominally decreased 67% (5.2B-->1.7B) or 55% in real terms (less than 3% of GNP). A substantial chunk of that is recovered by local businesses replacing imports after reciprocal tariffs. However, GNP declined in real terms by 29%. Moreover, exports would have declined to a large extent of their own accord in accordance with general global economic decline. It would require one heck of a multiplier effect for Smoot-Hawley to be a major contributor to the Great Depression.
Like COVID-19, the 1921/2 sharp and short depression was due to a political event, namely the transition of America from a war to a civilian economy. The same thing happened in 1946, partly because of huge reductions in Federal spending. The 1921/2 event was also due to agricultural overinvestment based on sharp declines from war time food prices. For this reason, it cannot be compared to the Great Depression.
When FDR inherited the economy, GNP was already down about 29%. The 3 years following FDR's inauguration, GNP increased in real terms by about 10% annually, another 5% in 1937. It defies credulity to claim that the Great Depression was largely FDR's fault.
The first initiatives to arrest the continuing decline in GNP was to stop the deflation. For if deflation is above 7% per annum and banking is unsafe, then burying one's cash in the backyard or under the mattress (like my grandfather did even into the early 1970s, so traumatic was the event), that is one great investment.
For the record, I have never voted for a left of center party. I just believe in intellectual integrity and competence.
I strongly agree with the thesis of this essay. However, one thing that was not mentioned was how FDR banned complementary currencies.
Demurrage currencies had great success in reducing unemployment and boosting the economic activity of the towns that tried them, and yet the USFG and other federal governments still banned them anyway in order to maintain monopolies on their national currencies and legal tender. https://en.wikipedia.org/wiki/Demurrage_(currency)
American economist Irving Fisher also recommended to FDR that the US should create a national stamp scrip currency, but FDR ignored his advice. https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/publications/economic-commentary/2008/ec-20080401-stamp-scrip-money-people-paid-to-use-pdf.pdf
I've been working on Wikipedia to help raise awareness about this. If this topic interests you, I'd love to collaborate with you on improving Wikipedia. I'd greatly appreciate it.
Forgive the newbie question: if prices are not sticky long-term, then why would anchoring USD to gold matter at all? Every non-gold price would just adjust; effectively, prices are not denoted in USD, but in "fractions of 1 gold ounce" or whatever.
Because gold supply is itself endogenous, and a rising real price of gold induces more mining.
And the adjustments were so timely. 😉
What about the dust bowl
It was dusty. (This is Reddit, right?)
It sounds like your main objection is to price controls? That's certainly not something I would argue with.
But that's not really a fiscal intervention as I understand the term.
What we did for the Covid Recession was partly fiscal policy that seems to have worked. Monetary policy is certainly important but post-2008 showed the limitations.
In other words, Flexible Average Inflation Targeting.
Yes there were lots of microeconomic shocks, but they don't causes macroeconomic if the central bank acts flexibly with enough inflation to facilitate the adjustment of relative prices to the shocks.
{Bleg: Could someone who knows the history explain if the Depression era Fed could have done more to create the needed inflation or if even with the repricing of gold, it's hand were tied?]
> Starting with Hoover, he mistook the symptoms of loose money (high wages) for the causes.
I thought the story you told was: (+) Demand for Gold -> (-) Money Supply -> Tight Money & Sticky Wages & Nominal Debt Contracts -> High Real Wages & High Real Borrowing Costs.
How does loose money factor in to the story?
Are you going to read/review Selgin's book on this?
This essay sounds like a repackaging of Jim Grant's book. A Selgin book sounds much more worthwhile! Though admittedly George may have reached similar conclusions.
I strongly suspect (hello, bias, my old friend) there are some underappreciated dynamics in the 1919-1921 depression and recovery. Gold inflows, anyone? And while exchange rates were allegedly floating, I'm not convinced the BOE's retreat from trying to reimpose 1914 gold parity didn't have some favorable impacts outside the UK.