We have spent a lot of time over the past two years looking into various aspects of the “Interwar Period,” 1914-1944, which includes the Great Depression.
October 10, 2016: The Interwar Period (contains many links)
October 6, 2016: Team Gold Needs To Get Over the Great Depression
October 16, 2016: Nonmonetary Perspectives on the Great Depression
October 23, 2016: Nonmonetary Perspectives on the Great Depression 2: Steindl, Schwartz and Eichengreen
October 30, 2016: Nonmonetary Perspectives on the Great Depression 3: Nonmonetary Causes
November 6, 2016: Robert Mundell’s Interpretation of the Interwar Period
November 13, 2016: Robert Mundell’s Interpretation of the Interwar Period 2: the “Mundell-Johnson Hypothesis”
July 10, 2016: The Tyranny of Prices, Interest and Money
November 27, 2016: The Tyranny of Prices, Interest and Money 2: The Old Historicism
February 19, 2017: “Prices” And Value
February 23, 2017: James Grant Explains How A Crash in 1921 “Cured Itself” — With The Help of Good Policy
May 14, 2017: More on the Depression of 1921
May 21, 2017: The Fed’s 1932 Bond-Buying Experiment
May 29, 2017: The Fed’s 1932 Bond-Buying Experiment 2: Automatic Adjustments Via Gold Conversion
June 18, 2017: The “Gold Sterilization” of 1937
June 26, 2017: The “Gold Sterilization” of 1937 2: Fumbling and Bumbling
July 9, 2017: The “Gold Sterilization” of 1937 3: The View From 2011
That sure is a lot of water under the bridge, even after I thought I had wrapped things up in the item from October 10, 2016. This material also made up a prominent part of my new book, Gold: the Final Standard.
Today, we will begin our look at The Midas Paradox (2015), by Scott Sumner. Sumner is a Fellow at the Independent Institute and also the Mercatus Center, where he is the “Ralph G. Hawtrey Chair of Monetary Policy at the Mercatus Center at George Mason University, where he is the director of the Program on Monetary Policy.” Mercatus is a university-attached think tank with a strong conservative leaning, that embraces the Austrian tradition (Ludwig von Mises and Friedrich Hayek, among others) with some enthusiasm. The regular economics department of George Mason has similar leanings, and provides a home for the gold-friendly professor Larry White. This is rather uncommon among academic economic departments.
Sumner, however, is not an “Austrian,” but rather a nominal-GDP-targeting fan, which is basically third-generation Monetarism. The Austrians always embraced the Classical principle of Stable Money, money that maintains a stable value — in practice, a stable value relationship with gold, which in turn is used as a proxy for stable monetary value in general. Monetarists, however, typically aim for “domestic macroeconomic stability,” which they believe can be attained with some sort of smooth expansion of some measure of “money.” The early 1960s version of this was a stable growth rate in the base money supply, as described by Milton Friedman although the basic idea goes at least as far back as the late 19th century. Adam Smith, in the Wealth of Nations (1776), said that many of his day were making similar arguments, and cited Montesquieu (1689-1755) as one prior example, so the idea is very old indeed. Today, it has re-emerged in the form of Bitcoin.
This did not work out very well, so second-generation Monetarism focused on broader credit measures, particularly M2, which consists mostly of bank deposits. This also did not work — the idea was largely abandoned after Paul Volcker’s “Monetarist Experiment” in 1979-1982 — and so, from the mid-1980s, third-generation Monetarists decided that if “domestic macroeconomic stability” was the goal, then they should just target nominal GDP, and apply whatever monetary expansion or contraction (of base money) is necessary to hit that target.
The goals of Monetarism are really indistinguishable from Keynesian funny-money schemes, which in turn are indistinguishable from the funny-money schemes of the 18th century Mercantilists, in particular James Denham Stuart, who I’ve quoted in all three of my books.
[The statesman] ought at all times to maintain a just proportion between the produce of industry, and the quantity of circulating equivalent, in the hands of his subjects, for the purchase of it; that, by a steady and judicious administration, he may have it in his power at all times, either to check prodigality and hurtful luxury, or to extend industry and domestic consumption, according as the circumstances of his people shall require the one or the other corrective … For this purpose, he must examine the situation of his country, relatively to three objects, viz. the propensity of the rich to consume; the disposition of the poor to be industrious; and the proportion of circulating money, with respect to the one and the other. If the quantity of money in circulation is below the proportion of the two first, industry will never be able to exert itself; because the equivalent in the hands of the consumers, is then below the proportion of their desires to consume, and of those of the industrious to produce.
James Denham Steuart, An Inquiry Into the Principles of Political Economy (1767)
I talked about the similarities between Monetarism and Keynesianism here:
Here’s another item on the topic:
But Murray Rothbard had this all figured out a long time ago. Here is a piece from 1971:
Thus, Milton Friedman is, purely and simply, a statist-inflationist, albeit a more moderate inflationist than most of the Keynesians. But that is small consolation indeed, and hardly qualifies Friedman as a free-market economist in this vital area.
But Friedman himself said in 1965 that Keynesians and Monetarists were essentially indistinguishable.
Sir: You quote me [Dec. 31] as saying: “We are all Keynesians now.” The quotation is correct, but taken out of context. As best I can recall it, the context was: “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.” The second half is at least as important as the first.
The University of Chicago
Monetarists, in general, are very heavily warped by the “Prices, Interest, Money” box that all economists fell into beginning in the 1870s, and which, for the most part, they are still stuck in.
Obviously, their Nominal GDP Targeting scheme is basically a one-variable model for economic prosperity. Any decline of nominal GDP below some trendline is considered a failure of monetary policy, pretty much by definition. It doesn’t matter what might have caused the decline. Perhaps it was the nationalization of the U.S. electric power industry (a stated goal of the Roosevelt administration), and businessmen’s natural worries that they could be the next target. Doesn’t matter — if nominal GDP declines as a result, it is a failure of the central bank. I have the impression that it wouldn’t matter to the NGDP people even if they agreed that the downturn was caused by nationalization of industry. This makes sense: once you demand that a central bank follow an NGDP policy, you can’t exactly hand out caveats like “unless we agree that the downturn was caused by nationalization of industry.” Actually, I think the NGDP people would want to maintain an NGDP target even if they agreed that there was a downturn caused by nationalization of industry. A downturn is a downturn; the central bank must react. This opinion is reinforced by the fact that monetary policy and legislative/executive policy operate largely independently of each other. The central bank says: “Yes, those government people are stupid. We agree. We wish they wouldn’t do such things. But, there is nothing we can do about that. We can, however, help to lessen the effects, and help to soften the blow upon the people, by maintaining a stable NGDP with our easy-money mechanism. We have that responsibility toward the people. If we did not act, then we would be responsible for all the outcomes that one might naturally expect in the wake of such stupidity, if it were not counteracted with expansionary monetary policy. We would, arguably, be the ’cause’ of these effects that follow from the nationalization of industry, in the absence of a monetary response.”
When you put it like that, it seems rather noble, doesn’t it? This too is straight out of 18th century Mercantilism.
A statesman when he intends to suddenly augment the taxes of his people, without interrupting their industry, which then becomes still more necessary than ever, should augment the circulating equivalent in proportion to the additional demand for it.
James Denham Steuart, An Inquiry Into the Principles of Political Economy (1767)
The same principle applies to history: once you go blaming money for any decline in NGDP, from first principles, you can’t then go blame other things and say “except in this circumstance.” Higher-than-trend nominal GDP is considered an inflationary threat, if not the definition of inflation itself. The fact that high-growth economies sometimes have nominal GDP growth rates in excess of 15%, and sometimes even in the neighborhood of 30%, even with stable currency values (especially following a previous decline in currency value, so that some of the rise in NGDP is a reaction to prior devaluation) is one of those messy realities that have no place in their neat and simple equations, which in turn reflect their neat, simple, and totally fallacious mental models.
This is a little background to the book itself, which, as we will see, has many of these characteristics, these intellectual trends, that we have seen throughout discussion of economics in general, and the Great Depression in particular, since the 1930s, or even the 1870s.