.
> > Econopolitics > >
How a radical interpretation of the Great Depression became orthodoxy:
Understanding of economic crises came to be dominated by lessons drawn from past crises, and in particular the Great Depression in the 1930s — particularly its interpretation by economists, Milton Friedman and Anna Schwartz, in their 1963 book, A Monetary History of the United States.
In A Monetary History of the United States, Friedman and Schwartz claimed that the Federal Reserve System was responsible for turning an ordinary economic downturn into the Great Depression. When a massive financial crisis led to a sharp decline in the stock of money in the US economy, the Fed failed to take action to mitigate the problem.
A Monetary History of the United States, 1867–1960 is a book written in 1963 by Nobel Prize–winning economist Milton Friedman and Anna J. Schwartz. It uses historical time series and economic analysis to argue the then-novel proposition that changes in the money supply profoundly influenced the U.S. economy, especially the behavior of economic fluctuations. The implication they draw is that changes in the money supply had unintended adverse effects, and that sound monetary policy is necessary for economic stability. Economic historians see it as one of the most influential economics books of the century. Asking why the Great Depression occurred in the US was a difficult question. The chapter dealing with the causes of the Great Depression was published as a stand-alone book titled The Great Contraction, 1929–1933.
Deflation ..
22-9-23 How The Japanese Economic Miracle Led to Lost Decades - Boyle > .
Inflation ..
Monetarism ..
The onset of the Great Depression coincided with “a golden age” of theoretical and empirical research on business cycles and crises. Although they did not agree on the causes of cycles, economists tended to look for explanations of the recurrent fluctuations in economic activity in the internal dynamics of the economic system. This emphasis is readily apparent in the work of Wesley Clair Mitchell, an American economist in the early 20th century who was the foremost global authority on business cycles.
..
To Mitchell, it was the “precarious dependence” of material wellbeing on an economy organised for profit-seeking that generated business cycles: “Where money economy dominates," Mitchell concluded, "natural resources are not developed, mechanical equipment is not provided, industrial skill is not exercised, unless conditions are such as to promise a money profit to those who direct production.” He looked to the dynamics of enterprises’ profit-making to explain the recurrent phases of business activity and how they “grow out of and grow into each other” in a process of cumulative change.
The depth and persistence of the Depression, especially in the country that seemed to embody capitalism in its most sophisticated form, reinforced the importance of understanding fluctuations in economic activity. A novel perspective proposed by John Maynard Keynes attracted particular attention: Keynes looked to the internal dynamics of the economic system for the roots of cycles, echoing other economists’ scepticism about its capacity for self-adjustment, but identified a significant new role for government in ensuring economic stability.
The depth and persistence of the Depression, especially in the country that seemed to embody capitalism in its most sophisticated form, reinforced the importance of understanding fluctuations in economic activity. A novel perspective proposed by John Maynard Keynes attracted particular attention: Keynes looked to the internal dynamics of the economic system for the roots of cycles, echoing other economists’ scepticism about its capacity for self-adjustment, but identified a significant new role for government in ensuring economic stability.
In A Monetary History of the United States, Friedman and Schwartz claimed that the Federal Reserve System was responsible for turning an ordinary economic downturn into the Great Depression. When a massive financial crisis led to a sharp decline in the stock of money in the US economy, the Fed failed to take action to mitigate the problem.
[The Fed's failure affected more than the USA. By fueling economic resentments in Germany, the Great Depression directly contribute to the rise of Hitler's Nazi party and thus to WW2.]
Friedman and Schwartz identified four main policy mistakes made by the Federal Reserve that led to a sharp and undesirable decline in the money supply:
Friedman and Schwartz refused to be swayed by methodological fashion, opting instead for history to discriminate among different explanations of “statistical covariation” by going “beyond the numbers alone” to “discern the antecedent circumstances whence arose the particular movements that become so anonymous when we feed the statistics into the computer”.
Based on historical research, they strove to reconstruct the temporal sequence of events that they claimed led to a “catastrophic contraction” during the Great Depression. They also used historical reasoning to go further, to transcend a story that would otherwise locate the collapse of the US economy in the failures of its private financial system. The Federal Reserve System had “ample powers”, they suggested, “to cut short the tragic process of monetary deflation and banking collapse” but did not use these powers “effectively”. Through the use of counterfactual history, therefore, they created the impression of a crisis that did not have to occur.
The significance of the interpretation of the Great Depression that Friedman and Schwartz laid out can be appreciated only by understanding the continuity and rupture it marked in economists’ analyses of business cycles. Their book was based on a combination of theory and history that bears an uncanny resemblance to Mitchell’s distinctive methodological approach to the study of cumulative change. But just as Mitchell had used historical annals and statistics to challenge the economic orthodoxy of his day, Friedman and Schwartz employed their historical research to confront not only what Mitchell and Keynes believed but what many economists believed about the inherent instability of a capitalist economic system.
In a Monetary History, Friedman and Schwartz conceived of the norm in capitalism as stability, as characterised by a harmonious covariance of money and income, interrupted only by aberrant cycles. It was during these unusual historical moments, they claimed, that money mattered a great deal. Insofar as the Great Depression was concerned, they posited that it was the drop in money that caused income to fall. While they acknowledged the monetary collapse originated in the waves of banking crises that ravaged the US financial system in the early 1930s, they blamed the US monetary authority for failing to inject enough liquidity into the system to counter the collapse. In doing so, they held government [fiscal policy] responsible for what seemed to most people to be a crisis of capitalism.
By the end of the 20th century, Friedman's and Schwartz's interpretation of the Great Depression had become sufficiently dominant in economics and economic history to qualify as the orthodoxy. Monetarist economists used the work of Friedman and Schwartz to justify their positions for using monetary policy as the critical economic stabilizer. This view became more popular as Keynesian stabilizers failed to ameliorate the stagflation of the 1970s and political winds shifted away from government intervention in the market into the 1980s and 1990s. During this period, the Federal Reserve was recognized as a critical player in setting interest rates to counter excessive inflation and also to prevent deflation that could lead to real economic distress.
- In the spring of 1928, the Federal Reserve began to tighten its monetary policy (resulting in rising interest rates) and continued that same policy until the stock market crash of October 1929. This tight monetary policy caused the economy to enter a recession in mid-1929 and triggered the stock market crash a few months later.
- In the fall of 1931, it raised interest rates to defend the dollar in response to speculative attacks, ignoring the difficulties this caused to domestic commercial banks.
- After lowering interest rates early in 1932 with positive results, it raised interest rates again in late 1932, causing a further collapse in the U.S. economy.
- The Federal Reserve was also to be blamed for a pattern of ongoing neglect of problems in the U.S. banking sector throughout the early 1930s. It failed to create a stable domestic banking environment by supporting the domestic banks and acting as lender of last resort to domestic banks during banking panics.
To defend their bold claims, Friedman and Schwartz embraced a methodological approach inspired by Mitchell but increasingly castigated as old-fashioned against the growing influence of econometric analysis in economics. Econometricians agreed with Mitchell on the importance of integrating economic theory and evidence but they cast economic activity in terms of stable mathematical relationships that belied the importance of cumulative change that Mitchell emphasised.
Friedman and Schwartz refused to be swayed by methodological fashion, opting instead for history to discriminate among different explanations of “statistical covariation” by going “beyond the numbers alone” to “discern the antecedent circumstances whence arose the particular movements that become so anonymous when we feed the statistics into the computer”.
Based on historical research, they strove to reconstruct the temporal sequence of events that they claimed led to a “catastrophic contraction” during the Great Depression. They also used historical reasoning to go further, to transcend a story that would otherwise locate the collapse of the US economy in the failures of its private financial system. The Federal Reserve System had “ample powers”, they suggested, “to cut short the tragic process of monetary deflation and banking collapse” but did not use these powers “effectively”. Through the use of counterfactual history, therefore, they created the impression of a crisis that did not have to occur.
In a Monetary History, Friedman and Schwartz conceived of the norm in capitalism as stability, as characterised by a harmonious covariance of money and income, interrupted only by aberrant cycles. It was during these unusual historical moments, they claimed, that money mattered a great deal. Insofar as the Great Depression was concerned, they posited that it was the drop in money that caused income to fall. While they acknowledged the monetary collapse originated in the waves of banking crises that ravaged the US financial system in the early 1930s, they blamed the US monetary authority for failing to inject enough liquidity into the system to counter the collapse. In doing so, they held government [fiscal policy] responsible for what seemed to most people to be a crisis of capitalism.
By the end of the 20th century, Friedman's and Schwartz's interpretation of the Great Depression had become sufficiently dominant in economics and economic history to qualify as the orthodoxy. Monetarist economists used the work of Friedman and Schwartz to justify their positions for using monetary policy as the critical economic stabilizer. This view became more popular as Keynesian stabilizers failed to ameliorate the stagflation of the 1970s and political winds shifted away from government intervention in the market into the 1980s and 1990s. During this period, the Federal Reserve was recognized as a critical player in setting interest rates to counter excessive inflation and also to prevent deflation that could lead to real economic distress.
When the global financial crisis struck in 2008, the Federal Reserve System proposed aggressive policies of monetary expansion to avoid its supposed mistakes during the Great Depression.
That flood of liquidity into capitalism’s financial system is remarkable in historical perspective, surpassing all previous records for monetary interventions, outside of wartime, since the beginning of the 20th century.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.