Thursday, April 23, 2009
Did Abandoning the Gold Standard Get Us Out of the Depression?
Greg Mankiw has come out of his shell lately on his blog. Whenever I visited in the past, I would quickly move on because he would offer links with at most a sentence of commentary. Unfortunately, now he is devoting his writing skills to pushing the benefits of massive inflation.
Last week Mankiw wrote an op ed for the NYT saying the Fed should promise large inflation in the future, in order to push the "real" (inflation-adjusted) interest rate into negative territory. Apparently many readers were upset--imagine that!--and Mankiw has been defending his flank ever since. In his most recent defense he writes:
As I argue in my new book, The Politically Incorrect Guide to the Great Depression and the New Deal, this hostility to the gold standard is misplaced. Before we delve into the economic theory, just consider the brute historical facts: In prior US depressions (or "panics"), when the US dollar was tied to gold, the country began to recover typically within about two years. In contrast, it wasn't until the governments of the world all abandoned gold, that the entire world was mired in the worst downturn in history, and for a decade to boot!
Let me dispatch with an obvious response. Mankiw could say, "Well sure, the gold standard tied the hands of central bankers, but it had an irrational aura of inviolability, and so it's not surprising that it took the worst downturn ever to finally get the Fed to drop the barbarous relic. The US economy turned around on a dime the moment FDR severed the tie to gold."
But no, that doesn't quite work either. If it were really true that it was the gold standard holding the US in Depression, then surely, say, five years after FDR severed the link, the economy should have been humming, right? But the official unemployment statistics (and note these BLS figures don't count people receiving WPA checks as having a real job) record that in 1938--five years into the New Deal--the unemployment rate averaged 19%. So when people tout how great things were for the US economy once we ditched gold, keep that in mind. Yes, 19% is lower than 25% (the rate in 1933), but to repeat, in all prior US history, a depression would have been long gone five years after the trough.
But now let's use economic theory to make sense of these undeniable historical facts. I argue in the book that the one thing that set the Great Depression apart from its earlier peers was that Herbert Hoover subscribed to an underconsumptionist theory of the business cycle. After the stock market crash in 1929, Hoover called all the big business leaders to Washington and told them not to cut wage rates, because (he thought) to do so would simply reduce incomes and hence would exacerbate the downturn in spending on business.
So what happened is that workers' paychecks fell much more slowly than prices in general, during the 1929-1933 period. In fact, workers' "real" wages (i.e. actual dollar amount adjusted for falling prices) rose more quickly during this period than they had during the Roaring Twenties! So it's no wonder that unemployment rates skyrocketed, because the relative price of labor kept rising even amidst horrible business losses.
In this context, running the printing press could provide at least short term relief, and I believe that is the explanation for Brad DeLong's favorite chart. If the government (in concert with unions) is enforcing very severe nominal wage rigidity, then the normal price deflation during a depression will be catastrophic. By freeing central banks of their obligations to redeem currency for gold, they were given the ability to run the printing press and push prices back up, easing the massive surplus in the labor market.
But it would be very queer to describe the high unemployment of the early 1930s as the fault of the gold standard. No, the blame rests squarely on government policies (and support for unions) that kept wage rates above their free market levels. In the 1920-1921 depression, for example, prices in the US fell much more quickly than they did during any single year of the 1930s, but unemployment spiked at 11.7% and then was down to 2.4% by 1923.
The reason? Wages fell even more quickly than prices; they dropped 20% in a single year. At the time Herbert Hoover (Harding's Commerce Secretary) was horrified, but it was a much better outcome than what his "compassionate" policies would unleash on workers a decade later.
Last week Mankiw wrote an op ed for the NYT saying the Fed should promise large inflation in the future, in order to push the "real" (inflation-adjusted) interest rate into negative territory. Apparently many readers were upset--imagine that!--and Mankiw has been defending his flank ever since. In his most recent defense he writes:
As to the Fed announcing a commitment to a moderate amount of inflation, let me point out that according to many macroeconomic historians, the abandonment of the gold standard was the most useful thing that the federal government did to get the country out of the Great Depression. A commitment to producing a moderate amount of inflation would be the modern equivalent of that act.
As I argue in my new book, The Politically Incorrect Guide to the Great Depression and the New Deal, this hostility to the gold standard is misplaced. Before we delve into the economic theory, just consider the brute historical facts: In prior US depressions (or "panics"), when the US dollar was tied to gold, the country began to recover typically within about two years. In contrast, it wasn't until the governments of the world all abandoned gold, that the entire world was mired in the worst downturn in history, and for a decade to boot!
Let me dispatch with an obvious response. Mankiw could say, "Well sure, the gold standard tied the hands of central bankers, but it had an irrational aura of inviolability, and so it's not surprising that it took the worst downturn ever to finally get the Fed to drop the barbarous relic. The US economy turned around on a dime the moment FDR severed the tie to gold."
But no, that doesn't quite work either. If it were really true that it was the gold standard holding the US in Depression, then surely, say, five years after FDR severed the link, the economy should have been humming, right? But the official unemployment statistics (and note these BLS figures don't count people receiving WPA checks as having a real job) record that in 1938--five years into the New Deal--the unemployment rate averaged 19%. So when people tout how great things were for the US economy once we ditched gold, keep that in mind. Yes, 19% is lower than 25% (the rate in 1933), but to repeat, in all prior US history, a depression would have been long gone five years after the trough.
But now let's use economic theory to make sense of these undeniable historical facts. I argue in the book that the one thing that set the Great Depression apart from its earlier peers was that Herbert Hoover subscribed to an underconsumptionist theory of the business cycle. After the stock market crash in 1929, Hoover called all the big business leaders to Washington and told them not to cut wage rates, because (he thought) to do so would simply reduce incomes and hence would exacerbate the downturn in spending on business.
So what happened is that workers' paychecks fell much more slowly than prices in general, during the 1929-1933 period. In fact, workers' "real" wages (i.e. actual dollar amount adjusted for falling prices) rose more quickly during this period than they had during the Roaring Twenties! So it's no wonder that unemployment rates skyrocketed, because the relative price of labor kept rising even amidst horrible business losses.
In this context, running the printing press could provide at least short term relief, and I believe that is the explanation for Brad DeLong's favorite chart. If the government (in concert with unions) is enforcing very severe nominal wage rigidity, then the normal price deflation during a depression will be catastrophic. By freeing central banks of their obligations to redeem currency for gold, they were given the ability to run the printing press and push prices back up, easing the massive surplus in the labor market.
But it would be very queer to describe the high unemployment of the early 1930s as the fault of the gold standard. No, the blame rests squarely on government policies (and support for unions) that kept wage rates above their free market levels. In the 1920-1921 depression, for example, prices in the US fell much more quickly than they did during any single year of the 1930s, but unemployment spiked at 11.7% and then was down to 2.4% by 1923.
The reason? Wages fell even more quickly than prices; they dropped 20% in a single year. At the time Herbert Hoover (Harding's Commerce Secretary) was horrified, but it was a much better outcome than what his "compassionate" policies would unleash on workers a decade later.
Comments:
The Blackadder Says:
What about the so-called "Long Depression"? Didn't that last longer than two years?
What about the so-called "Long Depression"? Didn't that last longer than two years?
# posted by 
: April 23, 2009 at 10:00 AM
: April 23, 2009 at 10:00 AM
My problem with the "Abandoning gold standard ended the Depression" argument is that "abandoning the gold standard" is just a roundabout way of saying "looting anyone who had a lot of stuff saved up".
People believed at the time that their money was worth a specific amount of gold. "Abandoning the gold standard", then, is equivalent to massively expropriating lots of peoeple.
So the claim about the wisdom of abandoning the gold standard reduces to the more trivial claim of "Hey, if people feel poor, looting the (relatively) rich and giving their stuff to everyone can fix that right up! Uh, for a while, anyway."
Which isn't so impressive when you think about it.
People believed at the time that their money was worth a specific amount of gold. "Abandoning the gold standard", then, is equivalent to massively expropriating lots of peoeple.
So the claim about the wisdom of abandoning the gold standard reduces to the more trivial claim of "Hey, if people feel poor, looting the (relatively) rich and giving their stuff to everyone can fix that right up! Uh, for a while, anyway."
Which isn't so impressive when you think about it.
@Anonymous
Please be more specific on the "Long Depression." Citations and data (other than Wikipedia) would be appreciated.
Please be more specific on the "Long Depression." Citations and data (other than Wikipedia) would be appreciated.
Blackadder,
That's why I said "typically." And it's still true that five years after the trough, unemployment rates were normal for all previous depressions.
How anyone can say FDR got us out of the Depression--when unemployment broke 20% in the month of April 1939--is beyond me.
(And yes, DeLong et al. can say the problem was that Roosevelt backed off inflation and deficits in 1937, but that still doesn't explain why they needed Full Power Money Medicine 4 years after they started applying it.)
That's why I said "typically." And it's still true that five years after the trough, unemployment rates were normal for all previous depressions.
How anyone can say FDR got us out of the Depression--when unemployment broke 20% in the month of April 1939--is beyond me.
(And yes, DeLong et al. can say the problem was that Roosevelt backed off inflation and deficits in 1937, but that still doesn't explain why they needed Full Power Money Medicine 4 years after they started applying it.)
Silas,
I get what you're saying, but I think that concedes too much. I don't think it's right to say, "Sure you can fix an economy by robbing all the rich people."
On the contrary, I think that's partly why the slump lasted so long; no rich people wanted to expose themselves by investing, so they hunkered down and waited for Roosevelt to die (literally).
I get what you're saying, but I think that concedes too much. I don't think it's right to say, "Sure you can fix an economy by robbing all the rich people."
On the contrary, I think that's partly why the slump lasted so long; no rich people wanted to expose themselves by investing, so they hunkered down and waited for Roosevelt to die (literally).
Bob: I didn't concede that you can improve the economy by robbing rich people. What I said was: you can create a temporary illusion of (widespread) wealth by robbing rich people.
The Blackadder Says:
Well, okay, but it's a pretty big exception, isn't it? Even post-Fed and post all kinds of government intervention, most recessions don't end up lasting as along as the Great Depression.
In terms of FDR getting us out of the Depression, if you read Scott Sumner's stuff (and I agree with you that it is excellent) he argues that going off gold was working like gangbusters in the first few months of FDR's term, but was stunted by his high wage policy (the nonannualized growth rate in industrial production, for example, was 57.4% for the first four months of FDR's term, only to fall 18.8% in the next four months). According to Sumner, if FDR had just taken us off gold and not done the rest of that nonsense, the recovery would have been complete by 1935.
Well, okay, but it's a pretty big exception, isn't it? Even post-Fed and post all kinds of government intervention, most recessions don't end up lasting as along as the Great Depression.
In terms of FDR getting us out of the Depression, if you read Scott Sumner's stuff (and I agree with you that it is excellent) he argues that going off gold was working like gangbusters in the first few months of FDR's term, but was stunted by his high wage policy (the nonannualized growth rate in industrial production, for example, was 57.4% for the first four months of FDR's term, only to fall 18.8% in the next four months). According to Sumner, if FDR had just taken us off gold and not done the rest of that nonsense, the recovery would have been complete by 1935.
# posted by : April 23, 2009 at 1:22 PM
: April 23, 2009 at 1:22 PM
I wish Austrians would address the following question about gold as money:
How is the theorem of any amount of money is enough compatible with gold as money?
It is not, of course, since the supply of gold is variable. It does not matter whether it is more or less variable than paper money - the variability is the issue.
The same would be true for any other commodity money.
Further problems are: if one country were to move to gold as money, would the ensuing inflation be a problem or not? And, yes, the result would be inflation - logically, and empirically (Sweden).
How does inflating the gold supply differ - from an accounting and business planning point of view - from inflating the amount of fiat money?
If gold were money, and a 100 million ounce deposit of pure gold were found somewhere, what would be the economic impact on everybody else?
Resorting to the claim that this is not 'likely', has 'never happened', or is 'pure speculation' is taking refuge not in praxeology, but empiricism.
Also, how is the historic argument in favor of gold as money compatible with praxeology, which rejects this argument in principle, and rightly so.
Fundamentally, my argument is this: while gold can be money, it is no more ideal as money as copper, water, or silicon would be. It's use as money is a historic accident, not an economic necessity.
How is the theorem of any amount of money is enough compatible with gold as money?
It is not, of course, since the supply of gold is variable. It does not matter whether it is more or less variable than paper money - the variability is the issue.
The same would be true for any other commodity money.
Further problems are: if one country were to move to gold as money, would the ensuing inflation be a problem or not? And, yes, the result would be inflation - logically, and empirically (Sweden).
How does inflating the gold supply differ - from an accounting and business planning point of view - from inflating the amount of fiat money?
If gold were money, and a 100 million ounce deposit of pure gold were found somewhere, what would be the economic impact on everybody else?
Resorting to the claim that this is not 'likely', has 'never happened', or is 'pure speculation' is taking refuge not in praxeology, but empiricism.
Also, how is the historic argument in favor of gold as money compatible with praxeology, which rejects this argument in principle, and rightly so.
Fundamentally, my argument is this: while gold can be money, it is no more ideal as money as copper, water, or silicon would be. It's use as money is a historic accident, not an economic necessity.
How is the theorem of any amount of money is enough compatible with gold as money?
I don't see the problem here. When Rothbard says any amount of money can get the job done, he doesn't mean that the quantity of money can bounce around by 80% from year to year, and the market will smoothly adjust.
No, Rothbard means that if you have a certain stockpile of gold (let's say), it's not a constraint on real output or anything if that stockpile grows slowly. So you don't need to have an "elastic currency" in which banks print up paper notes because there "isn't enough gold to go around."
And the reasons gold has historically been such a popular medium of exchange are not praxeological, but empirical (?): It is very durable, easily divisible, good value by weight, etc.
I don't see the problem here. When Rothbard says any amount of money can get the job done, he doesn't mean that the quantity of money can bounce around by 80% from year to year, and the market will smoothly adjust.
No, Rothbard means that if you have a certain stockpile of gold (let's say), it's not a constraint on real output or anything if that stockpile grows slowly. So you don't need to have an "elastic currency" in which banks print up paper notes because there "isn't enough gold to go around."
And the reasons gold has historically been such a popular medium of exchange are not praxeological, but empirical (?): It is very durable, easily divisible, good value by weight, etc.
Now I am confused:
if "you have a certain stockpile of gold (let's say), it's not a constraint on real output or anything if that stockpile grows slowly."
So you are saying that the supply of money has to grow or else it will be a constraint on real output? How does that square with "any amount of money is enough" and "an increase in the money supply does offer no social benefit".
Your argument strikes me as strangely parallel to the argument for 'steady inflation'.
"So you don't need to have an "elastic currency" in which banks print up paper notes because there "isn't enough gold to go around.""
BUT - there is no praxeological NEED for ANY increase in the money supply, since any amount of money is sufficient, provided the units are easily divisible.
I am not debating WHY gold has been used as money historically. I am arguing that it is not in fact ideal money. An ideal money would have a stable, unchanging quantity.
April 23, 2009 5:39 PM
if "you have a certain stockpile of gold (let's say), it's not a constraint on real output or anything if that stockpile grows slowly."
So you are saying that the supply of money has to grow or else it will be a constraint on real output? How does that square with "any amount of money is enough" and "an increase in the money supply does offer no social benefit".
Your argument strikes me as strangely parallel to the argument for 'steady inflation'.
"So you don't need to have an "elastic currency" in which banks print up paper notes because there "isn't enough gold to go around.""
BUT - there is no praxeological NEED for ANY increase in the money supply, since any amount of money is sufficient, provided the units are easily divisible.
I am not debating WHY gold has been used as money historically. I am arguing that it is not in fact ideal money. An ideal money would have a stable, unchanging quantity.
April 23, 2009 5:39 PM
Bob said:
if "you have a certain stockpile of gold (let's say), it's not a constraint on real output or anything if that stockpile grows slowly."
White Crowe said: So you are saying that the supply of money has to grow or else it will be a constraint on real output?No, the word "not" in my sentence changes the meaning of the sentence. :)
(I am contrasting a slowly growing money supply with a quickly growing supply. The gold stock does in fact grow, but inflationists say, "It grows too slowly! It will constrain real output growth!" And I'm saying that Rothbard argues, "No it won't, because any amount of money can get the job done."
if "you have a certain stockpile of gold (let's say), it's not a constraint on real output or anything if that stockpile grows slowly."
White Crowe said: So you are saying that the supply of money has to grow or else it will be a constraint on real output?No, the word "not" in my sentence changes the meaning of the sentence. :)
(I am contrasting a slowly growing money supply with a quickly growing supply. The gold stock does in fact grow, but inflationists say, "It grows too slowly! It will constrain real output growth!" And I'm saying that Rothbard argues, "No it won't, because any amount of money can get the job done."
OK....... BUT - there is in fact no need for it to grow, is there? Just like any amount of money is enough, any growth of the supply is too much, I would think.
I am talking about the monetary ideal here, not whether one monetary system is better than the other, but what would be necessary to have an ideal system.
Just to pre-empt the question "what else would you suggest?", because that's what I am currently working on (I think I have it solved in principle, but the details are still being worked on)
I am talking about the monetary ideal here, not whether one monetary system is better than the other, but what would be necessary to have an ideal system.
Just to pre-empt the question "what else would you suggest?", because that's what I am currently working on (I think I have it solved in principle, but the details are still being worked on)
Regarding the so-called Long Depression, read this:
http://tinyurl.com/dhfjnu
First economists and now historians are coming to realize the alleged depression of the 1870s has been absurdly exaggerated.
http://tinyurl.com/dhfjnu
First economists and now historians are coming to realize the alleged depression of the 1870s has been absurdly exaggerated.
I think this is what Boettke called the rothbardian diversion. Basically he was wrong, as Block and Barnett showed not too long ago in the QJAE.
# posted by : April 24, 2009 at 7:02 PM
: April 24, 2009 at 7:02 PM
Scineram,
page 12:
"Every supply of money is always utilized to its maximum extent, and hence no social utility can be conferred by increasing the supply of money"
This is fully compatible with the simpler theorem that "any quantity of money is sufficient."
If gold is money, any increase in the supply of gold is also an increase in the supply of money.
The argument about whether or not the gov or anybody else should prohibit the digging of gold is besides the point. The point is that an increase in gold is an increase in money, which is in effect inflationary.
It does not matter whether it is a lot of inflation or not, it is inflation by the Austrian definition. It does not matter who inflates. It is still inflation.
The basic fact remains: if gold were used as money, there would still be inflation.
There is no mechanism in the market to stop the increase of gold for monetary uses when gold is used as money.
If we were to move to gold as money, and somebody would find a supply of gold as large as the total currently existing stock of gold, we would be faced with up to 100% inflation, with all the negative impacts.
(Reference to the unlikeliness of this to happen is invalid, as it would be a purely empirical/positivist argument).
Also, if any single country would switch to gold as money, and if it had plenty of desireable goods to trade, it would immediatly face inflation, as gold would flow into the country (vide Sweden).
So, switching to gold as money in one country could very likely cause significant inflation.
Saying that only government created inflation is bad is disingenous, since that is equivalent to saying that something is only bad because the government does it. That's not economics but moralism. If inflation is bad in principle, all inflation is bad, regardless of origin.
So, unless there is a mechanism to prevent inflation (and also deflation) in a system that uses gold as money, gold is at best better money, but not ideal money.
(and when I use the words inflation and deflation, i do NOT refer to CPI, but to changes in the stock of money).
page 12:
"Every supply of money is always utilized to its maximum extent, and hence no social utility can be conferred by increasing the supply of money"
This is fully compatible with the simpler theorem that "any quantity of money is sufficient."
If gold is money, any increase in the supply of gold is also an increase in the supply of money.
The argument about whether or not the gov or anybody else should prohibit the digging of gold is besides the point. The point is that an increase in gold is an increase in money, which is in effect inflationary.
It does not matter whether it is a lot of inflation or not, it is inflation by the Austrian definition. It does not matter who inflates. It is still inflation.
The basic fact remains: if gold were used as money, there would still be inflation.
There is no mechanism in the market to stop the increase of gold for monetary uses when gold is used as money.
If we were to move to gold as money, and somebody would find a supply of gold as large as the total currently existing stock of gold, we would be faced with up to 100% inflation, with all the negative impacts.
(Reference to the unlikeliness of this to happen is invalid, as it would be a purely empirical/positivist argument).
Also, if any single country would switch to gold as money, and if it had plenty of desireable goods to trade, it would immediatly face inflation, as gold would flow into the country (vide Sweden).
So, switching to gold as money in one country could very likely cause significant inflation.
Saying that only government created inflation is bad is disingenous, since that is equivalent to saying that something is only bad because the government does it. That's not economics but moralism. If inflation is bad in principle, all inflation is bad, regardless of origin.
So, unless there is a mechanism to prevent inflation (and also deflation) in a system that uses gold as money, gold is at best better money, but not ideal money.
(and when I use the words inflation and deflation, i do NOT refer to CPI, but to changes in the stock of money).
Yes, there would be money supply inflation under a gold standard. It has happened before (15th or 16th century Spain, California gold rush, etc.) But compare that to government money.
Yes, this inflation would be bad, in a sense (wealth transfer from the rest of us to whomever found the huge, easily recovered gold deposit.)
Criticizing gold on this basis is a case of the perfect being the enemy of the good. The dollar, considered a relatively stable currency, has lost 95+% of its value since 1900. That means a supply increase of at least 20x. Gold supply has maybe quadrupled in that time.
Cheap transmutation would of course make gold fairly useless as money... but at the same time it would make us all richer, for other reasons.
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Yes, this inflation would be bad, in a sense (wealth transfer from the rest of us to whomever found the huge, easily recovered gold deposit.)
Criticizing gold on this basis is a case of the perfect being the enemy of the good. The dollar, considered a relatively stable currency, has lost 95+% of its value since 1900. That means a supply increase of at least 20x. Gold supply has maybe quadrupled in that time.
Cheap transmutation would of course make gold fairly useless as money... but at the same time it would make us all richer, for other reasons.
# posted by : May 1, 2009 at 12:14 AM
: May 1, 2009 at 12:14 AM Subscribe to Post Comments [Atom]
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