All posts tagged Great Depression

Patri Friedman on Market Monetarism

Here is Patri Friedman on his blog “Patri’s Peripatetic Peregrinations”:

“I sent a friend an intro to market monetarism (a modern, blogosphere-inspired adjustment to the traditional monetarism my grandfather helped create). He was surprised I believed that printing money could be good, rather than agreeing with the Austrians.”

I am happy to see that Patri has read my paper on Market Monetarism.

There is of course nothing wrong in thinking that “printing money could be good” (under certain circumstances). In fact this is completely in line with what Patri’s grandfather Milton Friedman argued in terms of the Great Depression and the Japanese crisis.

Patri in his post also discusses how a “helicopter drop” could happen in a world of digital cash. Interestingly enough this discussion is similar to a recent internal Market Monetarist debate between Nick Rowe, Bill Woolsey and Scott Sumner about whether money is a medium of exchange or a medium of account. See for example here, here and here. Kurt Schuler also has contributed to the discussion. Finally Miles Kimball similarly has a very interesting post on the case for electronic money.

Patri’s discussion of digital cash to some extent also relates to my own discussion of monetary reform in Africa and the development of mobile based money (See for example here, here, here and here).

Anyway, I am happy to Patri seems to be showing some sympathy for Market Monetarism.

HT Lasse Birk Olesen

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6 Comments
by Lars Christensen on November 11, 2012  •  Permalink
Posted in Bill Woolsey, Kurt Schuler, Lars E. O. Svensson, Miles Kimball, Nick Rowe, Patri Friedman, Project African Monetary Reform, Project African Monetary Reform (PAMR), Scott Sumner, The Great Depression
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Posted by Lars Christensen on November 11, 2012

http://marketmonetarist.com/2012/11/11/patri-friedman-on-market-monetarism/

David Laidler: “Two Crises, Two Ideas and One Question”

The main founding fathers of monetarism to me always was Milton Friedman, Anna Schwartz, Karl Brunner, Allan Meltzer and David Laidler. The three first have all now passed away and Allan Meltzer to some extent seems to have abandoned monetarism. However, David Laidler is still going strong and maintains his monetarist views. David has just published a new and very interesting paper – “Two Crises, Two Ideas and One Question” – in which he compares the Great Depression and the Great Recession through the lens of history of economic thought.

David’s paper is interesting in a number of respects and any student of economic history and history of economic thought will find it useful to read the paper. I particularly find David’s discussion of the views of Allan Meltzer and other (former!?) monetarists interesting. David makes it clear that he think that they have given up on monetarism or as he express it in footnote 18:

“In this group, with which I would usually expect to find myself in agreement (about the Great Recession), I include, among others, Thomas Humphrey, Allan Meltzer, the late Anna Schwartz, and John Taylor, though the latter does not have quite the same track record as a monetarist as do the others.”

Said in another way David basically thinks that these economists have given up on monetarism. However, according to David monetarism is not dead as another other group of economists today continues to carry the monetarist torch – footnote 18 continues:

“Note that I self-consciously exclude such commentators as Timothy Congdon (2011), Robert Hetzel (2012) and that group of bloggers known as the “market monetarists”, which includes Lars Christensen, Scott Sumner, Nicholas Rowe …. – See Christensen (2011) for a survey of their work – from this list. These have all consistently advocated measures designed to increase money growth in recent years, and have sounded many themes similar to those explored here in theory work.”

I personally think it is a tremendous boost to the intellectual standing of Market Monetarism that no other than David Laidler in this way recognize the work of the Market Monetarists. Furthermore and again from a personal perspective when David recognizes Market Monetarist thinking in this way and further goes on to advocate monetary easing as a respond to the present crisis I must say that it confirms that we (the Market Monetarists) are right in our analysis of the crisis and helps my convince myself that I have not gone completely crazy. But read David’s paper – there is much more to it than praise of Market Monetarism.

PS This year it is exactly 30 years ago David’s book “Monetarist Perspectives” was published. I still would recommend the book to anybody interested in monetary theory. It had a profound impact on me when I first read it in the early 1990s, but I must say that when I reread it a couple of months ago I found myself in even more agreement with it than was the case 20 years ago.

Update: David Glasner also comments on Laidler’s paper.

6 Comments
by Lars Christensen on September 9, 2012  •  Permalink
Posted in Allan Meltzer, Anna Schwartz, David Laidler, Karl Brunner, Milton Friedman, MM Research agenda, Reading recommendations, The Great Depression, The Great Recession
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Posted by Lars Christensen on September 9, 2012

http://marketmonetarist.com/2012/09/09/david-laidler-two-crises-two-ideas-and-one-question/

Who did most for the US stock market? FDR or Bernanke?

My post on US stock markets and monetary disorder led to some friendly but challenging comments from Diego Espinosa. Diego rightly notes that Market Monetarists including myself praises US president Roosevelt for taking the US off the gold standard and that similar decisive actions is needed today, but at the same time is critical of Ben Bernanke’s performance of Federal Reserve governor despite the fact that US share prices have performed fairly well over the last four years.

Diego’s point is basically that the Federal Reserve under the leadership of chairman Bernanke has indeed acted decisively and that that is visible if one look at the stock market performance. Diego is certainly right in the sense that the US stock market sometime ago broken through the pre-crisis peak levels and the stock market performance in 2009 by any measure was impressive. It might be worth noticing that the US stock market in general has done much better than the European markets.

However, it is a matter of fact that the stock market response to FDR’s decision to take the US off the gold standard was much more powerful than the Fed’s actions of 2008/9. I take a closer look at that below.

Monetary policy can have a powerful effect on share prices

To illustrate my point I have looked at the Dow Jones Industrial Average (DJIA) for the period from early 2008 and until today and compared that with the period from 1933 to 1937. Other stock market indices could also have been used, but I believe that it is not too important which of the major US market indices is used to the comparison.

The graph below compares the two episodes. “Month zero” is February 1933 and March 2009. These are the months where DJIA reaches the bottom during the crisis. Neither of the months are coincident as they coincide with monetary easing being implemented. In April 1933 FDR basically initiated the process that would take the US off the gold standard (in June 1933) and in March 2009 Bernanke expanded TAF and opened dollar swap lines with a number of central banks around the world.

As the graph below shows FDR’s actions had much more of a “shock-and-awe” impact on the US stock markets than Bernanke’s actions. In only four months from DJIW jumped by nearly 70% after FDR initiated the process of taking the US off the gold standard. This by the way is a powerful illustration of Scott Sumner’s point the monetary policy works with long and variable leads – you see the impact of the expected policy change even before it has actually been implemented. The announcement effects are very powerful. The 1933 episode illustrates that very clearly.

Over the first 12 months from DJIA reaches bottom in 1933 the index increases by more than 90%. That is nearly double of the increase of DJIA in 2009 as is clear from the graph.

Obviously this is an extremely crude comparison and no Market Monetarist would argue that monetary policy changes could account for everything that happened in the US stock market in 1993 or 2009. However, impact of monetary policy on stock market performance is very clear in both years.

NIRA was a disaster

A very strong illustration of the fact that monetary policy is not everything that is important for the US stock market is what happened from June 1933 to May 1935. In that nearly two year period the US stock market was basically flat. Looking that the graph it looks like the stock market rally paused to two years and then took off again in the second half of 1935.

The explanation for this “pause” is the draconian labour market policies implemented by the Roosevelt administration. In June 1933 the so-called National Industrial and Recovery Act was implemented by the Roosevelt administration (NIRA). NIRA massively strengthened the power of US labour unions and was effectively thought to lead to a cartelisation of the US labour market. Effectively NIRA was a massively negative supply shock to the US economy.

So while the decision to go off the gold standard had been a major positive demand shock that on it’s own had a massively positive impact on the US economy NIRA had the exact opposite impact. Any judgement of FDR’s economic policies obviously has to take both factors into account.

That is exactly what the US stock market did. The gold exit led to a sharp stock market rally, but that rally was soon killed by NIRA.

In May 1935 the US Supreme Court ruled that NIRA was unconstitutional. That ruling had a major positive impact positive impact as it “erased” the negative supply shock. As the graph shows very clearly the stock market took off once again after the ruling.

FDR was better for stocks than Bernanke, but…

Overall we have to conclude that FDR’s decision to take the US off the gold standard had an significantly more positive impact on the US stock markets than Ben Bernanke’s actions in 2008/9. However, contrary to the Great Depression the US has avoided the same kind of policy blunders on the supply side over the past four years. While the Obama administration certainly has not impressed with supply side reforms the damage done by his administration on the supply side has been much, much smaller than the disaster called NIRA.

Hence, the conclusion is clear – monetary easing is positive for the stock market, but any gains can be undermined by regulatory mistakes like NIRA. That is a lesson for today’s policy makers. Central banks should ensure stable growth in nominal GDP, while governments should implement supply side reforms to increase real GDP over the longer run. That would not undoubtedly be the best cocktail for the economy but also for stock markets.

Finally it should be noted that both FDR and Bernanke failed to provide a clear rule based framework for the conduct of monetary policy. That made the recovery much weaker in 1930s than it could have been and probably was a major cause why the US fell back into recession in 1937. Similarly the lack of a rule based framework has likely had a major negative impact on the effectiveness of monetary policy over the past four years.

PS this post an my two previous posts (see here and here) to a large degree is influenced by the kind of analysis Scott Sumner presents in his book on the Great Depression. Scott’s book is still unpublished. I look forward to the day it will be available to an wider audience.

5 Comments
by Lars Christensen on May 28, 2012  •  Permalink
Posted in Ben Bernanke, Federal Reserve, Scott Sumner, Transmission mechanism
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Posted by Lars Christensen on May 28, 2012

http://marketmonetarist.com/2012/05/28/who-did-most-for-the-us-stock-market-fdr-or-bernanke/

“The Bacon Standard” (the PIG PEG) would have saved Denmark from the Great Depression

Even though I am a Danish economist I am certainly no expert on the Danish economy and I have certainly not spend much time blogging about the Danish economy and I have no plans to change that in the future. However, for some reason I today came to think about what would have been the impact on the Danish economy if the Danish krone had been pegged to the price of bacon rather than to gold at the onset of the Great Depression in 1929. Lets call it the Bacon Standard – or a the PIG PEG (thanks to Mikael Bonde Nielsen for that suggestion).

Today less than 10% of Danish export revenues comes from bacon export – back during in the 1920s it was much more sizable and agricultural products dominated export revenues and Denmark’s main trading partner was Great Britain. Since bacon prices and other agricultural product were highly correlated (and still are) the bacon price probably would have been a very good proxy for Danish export prices. Hence, a the PIG PEG would basically have been similar to Jeff Frankel’s Peg the Export Price (PEP) proposal (see my earlier posts on this idea here and here).

When the global crisis hit in 1929 it put significant downward pressure on global agricultural prices and in two years most agricultural prices had been halved. As a consequence of the massive drop in agricultural prices – including bacon prices – the crisis put a serious negative pressures on the Danish krone peg against gold. Denmark had relatively successfully reintroduced the gold standard in 1927, but when the crisis hit things changed dramatically.

Initially the Danish central bank (Danmarks Nationalbank) defended the gold standard and as a result the Danish economy was hit by a sharp monetary contraction. As I argued in my post on Russian monetary policy a negative shock to export prices is not a supply shock, but rather a negative demand shock under a fixed exchange rate regime – like the gold standard. Said in another way the Danish AD curve shifted sharply to the left.

The shock had serious consequences. Hence, Danish economic activity collapsed as most places in the world, unemployment spiked dramatically and strong deflationary pressures hit the economy.

Things got even worse when the British government in 1931 decided to give up the gold standard and eventually the Danish government decided to follow the lead from the British government and also give up the gold standard. However, unlike Sweden the Danish authorities felt very uncomfortable to go it’s own ways (like today…) and it was announced that the krone would be re-pegged against sterling. That strongly limited the expansionary impact of the decision to give up the gold standard. Therefore, it is certainly no coincidence that Swedish economy performed much better than the Danish economy during the 1930s.

The Danish economy, however, started to recovery in 1933. Two events spurred the recovery. First, FDR’s decision to give the gold standard helped the US economy to begin pulling out of the recovery and that helped global commodity prices which certainly helped Danish agricultural exports. Second, the so-called  Kanslergade Agreement – a political agreement named after the home address of then Prime Minister Thorvald Stauning in the street Kanslergade in Copenhagen – lead to a devaluation of the Danish krone. Both events effectively were monetary easing.

What would the Bacon standard have done for the Danish economy?

While monetary easing eventually started to pull Denmark out of the Great Depression it didn’t happen before four year into the crisis and the recovery never became as impressive as the development in Sweden. Had Denmark instead had a Bacon Standard then things would likely have played out in a significantly more positive way. Hence, had the Danish krone been pegged to the price of bacon then it would have been “automatically” devalued already in 1929 and the gradual devaluation would have continued until 1933 after, which rising commodity prices (and bacon prices) gradually would have lead to a tightening of monetary conditions.

In my view had Denmark had the PIG PEG in 1929 the crisis would been much more short-lived and the economy would fast have recovered from the crisis. Unfortunately that was not the case and four years was wasted defending an insanely tight monetary policy.

Monetary disequilibrium leads to interventionism   

The Danish authorities’ decision to maintain the gold standard and then to re-peg to sterling had significant economic and social consequences. As a consequence the public support for interventionist policies grew dramatically and effectively lay the foundation for what came to be known as the danish “Welfare State”. Hence, the Kanslergade Agreement not only lead to a devaluation of the krone, but also to a significant expansion of the role of government in the Danish economy. In that sense the Kanslergade Agreement has parallels to FDR’s policies during the Great Depression – monetary easing, but also more interventionist policies.

Hence, the Danish experience is an example of Milton Friedman’s argument that monetary disequilibrium caused by a fixed exchange rate policy is likely to increase interventionist tendencies.

Bon appetite - or as we say in Danish velbekomme…

15 Comments
by Lars Christensen on April 20, 2012  •  Permalink
Posted in Exchange rate policy, Gold Standard, Jeffrey Frankel, Monetary institutions, Monetary policy rules, Peg the Export Price (PEP), The Great Depression
Tagged , , , , , ,

Posted by Lars Christensen on April 20, 2012

http://marketmonetarist.com/2012/04/20/the-bacon-standard-the-pig-peg-would-have-saved-denmark-from-the-great-depression/

Remember the mistakes of 1937? A lesson for today’s policy makers

Since the ECB introduced it’s 3-year LTRO on December 8 the signs that we are emerging from the crisis have grown stronger. This has been visible with stock prices rebounding strongly, long US bond yields have started to inch up and commodity prices have increased. This is all signs of easier monetary conditions globally.

We are now a couple of months into the market recovery and especially the recovery in commodity prices should soon be visible in US and European headline inflation and will likely soon begin to enter into the communication of central bankers around the world. This has reminded me of the “recession in the depression” in 1937. After FDR gave up the gold standard in 1933 the global economy started to recover and by 1937 US industrial production had basically returned to the 1929-level. The easing of global monetary conditions and the following recovery had spurred global commodity prices and by 1937 policy makers in the US started to worry about inflationary pressures.

However, in the second half of 1936 US economic activity and the US stock market went into a free fall and inflationary concerns soon disappeared.

There are a number of competing theories about what triggered the 1937 recession. I will especially like to highlight three monetary explanations:

1) Milton Friedman and Anna Schwartz in their famous Monetary History highlighted the fact that the Federal Reserve’s decision to increase reserve requirements starting in July 1936 was what caused the recession of 1937.

2) Douglas Irwin has – in an excellent working paper from last year – claimed that it was not the Fed, but rather the US Treasury that caused the the recession as the Treasury moved aggressively to sterilize gold inflows into the US and thereby caused the US money supply to drop.

3) While 1) and 2) regard direct monetary actions the third explanation regards the change in the communication of US policy makers. Hence, Gauti B. Eggertsson and Benjamin Pugsley in an extremely interesting paper from 2006 argue that it was the communication about monetary and exchange rate policy that caused the recession of 1937. As Scott Sumner argues monetary policy works with long and variables leads. Eggertson and Pugsley argue exactly the same.

In my view all three explanations clearly are valid. However, I would probably question Friedman’s and Schwartz’s explanation on it’s own as being enough to explain the recession of 1937. I have three reasons to be slightly skeptical about the Friedman-Schwartz explanation. First, if indeed the tightening of reserve requirements caused the recession then it is somewhat odd that the market reaction to the announcement of the tightening of reserve requirements was so slow to impact the stock markets and the commodity prices. In fact the announcement of the increase in reserve requirements in July 1936 did not have any visible impact on stock prices when they were introduced. Second, it is also notable that there seems to have been little reference to the increased reserve requirement in the US financial media when the collapse started in the second half of 1937 – a year after the initial increase in reserve requirements. Third, Calomiris, Mason and Wheelock in paper from 2011 have demonstrated that banks already where holding large excess reserves and the increase in reserve requirements really was not very binding for many banks. That said, even if the increase in reserve requirement might not have been all that binding it nonetheless sent a clear signal about the Fed’s inflation worries and therefore probably was not irrelevant. More on that below.

Doug Irwin’s explanation that it was actually the US Treasury that caused the trouble through gold sterilization rather than the Fed through higher reserve requirements in my view has a lot of merit and I strongly recommend to everybody to read Doug’s paper on Gold Sterilization and the Recession 1937-38 in which he presents quite strong evidence that the gold sterilization caused the US money supply to drop sharply in 1937. That being said, that explanation does not fit perfectly well with the price action in the stock market and commodity prices either.

Hence, I believe we need to take into account the combined actions of the of the US Treasury (including comments from President Roosevelt) and the Federal Reserve caused a marked shift in expectations in a strongly deflationary direction. In their 2006 paper Eggertsson and Pugsley “The Mistake of 1937: A General Equilibrium Analysis” make this point forcefully (even though I have some reservations about their discussion of the monetary transmission mechanism). In my view it is very clear that both the Roosevelt administration and the Fed were quite worried about the inflationary risks and as a consequence increasing signaled that more monetary tightening would be forthcoming.

In that sense the 1937 recession is a depressing reminder of the strength of the of the Chuck Norris effect – here in the reserve form. The fact that investors, consumers etc were led to believe that monetary conditions would be tightened caused an increase in money demand and led to an passive tightening of monetary conditions in the second half of 1937 – and things obviously were not made better by the Fed and US Treasury actually then also actively tightened monetary conditions.

The risk of repeating the mistakes of 1937 – we did that in 2011! Will we do it again in 2012 or 2013?

So why is all this important? Because we risk repeating the mistakes of 1937. In 1937 US policy makers reacted to rising commodity prices and inflation fears by tightening monetary policy and even more important created uncertainty about the outlook for monetary policy. At the time the Federal Reserve failed to clearly state what nominal policy rule it wanted to implemented and as a result caused a spike in money demand.

So where are we today? Well, we might be on the way out of the crisis after the Federal Reserve and particularly the ECB finally came to acknowledged that a easing of monetary conditions was needed. However, we are already hearing voices arguing that rising commodity prices are posing an inflationary risk so monetary policy needs to be tighten and as neither the Fed nor the ECB has a very clearly defined nominal target we are doomed to see continued uncertainty about when and if the ECB and the Fed will tighten monetary policy. In fact this is exactly what happened in 2011. As the Fed’s QE2 pushed up commodity prices and the ECB moved to prematurely tighten monetary policy. To make matters worse extremely unclear signals about monetary policy from European central bankers caused market participants fear that the ECB was scaling back monetary easing.

Therefore we can only hope that this time around policy makers will have learned the lesson from 1937 and not prematurely tighten monetary policy and even more important we can only hope that central banks will become much more clear regarding their nominal targets. Any market monetarist will of course tell you that central bankers should not fear overdoing their monetary easing if they clearly define their nominal targets (preferably a NGDP level target) – that would ensure that monetary policy is not tightened prematurely and a well-timed exist from monetary easing is ensured.

PS I have an (very unclear!) idea that the so-called Tripartite Agreement from September 1936 b the US, Great Britain and France  to stabilize their nations’ currencies both at home and in the international FX markets might have played a role in causing a change in expectations as it basically told market participants that the days of “currency war” and competitive devaluations had come to an end. Might this have been seen as a signal to market participants that central banks would not compete to increase the money supply? This is just a hypothesis and I have done absolutely no work on it, but maybe some young scholar would like to pick you this idea?

9 Comments
by Lars Christensen on March 22, 2012  •  Permalink
Posted in Monetary policy, Economic and monetary history, The Great Depression, Milton Friedman, Exchange rate policy, Gold Standard, Federal Reserve, Chuck Norris Effect, Douglas Irwin, Commodity prices, ECB
Tagged , , , , , ,

Posted by Lars Christensen on March 22, 2012

http://marketmonetarist.com/2012/03/22/remember-the-mistakes-of-1937-a-lesson-for-todays-policy-makers/

“Fed greatly destabilized the U.S. economy”

As the European crisis just gets worse and worse I am reminded by what a clever man once said – he is that clever man Ben Bernanke in 2004:

“Some important lessons emerge from the story. One lesson is that ideas are critical. The gold standard orthodoxy, the adherence of some Federal Reserve policymakers to the liquidationist thesis, and the incorrect view that low nominal interest rates necessarily signaled monetary ease, all led policymakers astray, with disastrous consequences. We should not underestimate the need for careful research and analysis in guiding policy. Another lesson is that central banks and other governmental agencies have an important responsibility to maintain financial stability. The banking crises of the 1930s, both in the United States and abroad, were a significant source of output declines, both through their effects on money supplies and on credit supplies. Finally, perhaps the most important lesson of all is that price stability should be a key objective of monetary policy. By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy and, through the workings of the gold standard, the economies of many other nations as well.”

I wonder what he is thinking of his colleagues in the ECB and about his own responsibilities today.

2 Comments
by Lars Christensen on November 16, 2011  •  Permalink
Posted in Banking crisis, Deflation, Economic and monetary history, Federal Reserve, Gold Standard, Monetary policy, The Great Depression
Tagged ,

Posted by Lars Christensen on November 16, 2011

http://marketmonetarist.com/2011/11/16/fed-greatly-destabilized-the-u-s-economy/

Please listen to Nicholas Craft!

Professor Nicholas Craft as written a report for the British think tank Centre Forum on “Delivering growth while reducing deficits: lessons from the 1930s”. The report is an excellent overview of the British experience during the 1930s, where monetary easing through exchange rate depreciation combined with fiscal tightening delivered results that certainly should be of interest to today’s policy makers.

If you are the lazy type then you can just read the conclusion:

“The 1930s offers important lessons for today’s policymakers. At that time, the UK was attempting fiscal consolidation with interest rates at the lower bound but devised a policy package that took the economy out of a double-dip recession and into a strong recovery. The way this was achieved was through monetary rather than fiscal stimulus.

The key to recovery both in the UK and the United States in the 1930s was the adoption of credible policies to raise the price level and in so doing to reduce real interest rates. This provided monetary stimulus even though, as today, nominal interest rates could not be cut further. In the UK, the ‘cheap money’ policy put in place in 1932 provided an important offset to the deflationary impact of fiscal consolidation that had pushed the economy into a double-dip recession in that year.

If economic recovery falters in 2012, it may be necessary to go beyond further quantitative easing as practised hitherto. It is important to recognize that at that point there would be an alternative to fiscal stimulus which might be preferable given the weak state of public finances. The key requirement would be to reduce real interest rates by raising inflationary expectations.

At that point, inflation targeting as currently practised in the UK would no longer be appropriate. A possible reform would be to adopt a price level target which commits the MPC to increase the price level by a significant amount, say 15 per cent, over four years. In the 1930s, the Treasury succeeded in developing a clear and credible policy to raise prices. It maybe necessary to adopt a similar strategy in the near future.

It would be attractive if this kind of monetary stimulus worked, as in the 1930s, through encouraging housebuilding. This suggests that an important complementary policy reform would be to liberalize the planning restrictions which make it most unlikely that we will ever see the private sector again build 293000 houses in a year as happened in 1934/5.”

If I have any reservations against Craft’s views then it is the focus on real interest rates in the monetary transmission mechanism. I think that is a far to narrow description of the transmission mechanism in which I think interest rates plays a rather minor role. See my previous comment on the transmission mechanism.

That minor issue aside Craft provides some very insightful comments on the 1930s and the present crisis and  I hope some European policy makers would read Craft’s report…

—

I got this reference from David Glasner who also has written a comment on Craft’s report.

5 Comments
by Lars Christensen on November 16, 2011  •  Permalink
Posted in David Glasner, Economic and monetary history, euro crisis, Exchange rate policy, Liquidity trap, Monetary policy, Price Level Targeting, The Great Depression, The Great Recession, Transmission mechanism
Tagged , , , ,

Posted by Lars Christensen on November 16, 2011

http://marketmonetarist.com/2011/11/16/please-listen-to-nicholas-craft/

The Tragic year: 1931

Benjamin Anderson termed 1931 the “the tragic year” – these are some of the events in that tragic year: 

  1. One of Europe’s largest banks with large exposure to Central and Eastern Europe gets into serious trouble (It is of course Austria’s largest bank Österiechishe Kredit Anstalt – and it of course collapsed)
  2. Europe’s Sovereign debt crisis is threatening financial stability and currency collapse (It’s the Germans that are to blame – they can’t pay their war debts)
  3. Major international banks push for a big country to save the sinners (The US banks ask US president Hoover to help ease the pain on Germany)
  4. Debt restructuring (The Hoover moratorium gives Germany a bit of relief – the US banks are happy to begin with)
  5. Monetary policy keeps deflationary pressures on (The French central bank keeps hoarding gold)
  6. An insane commitment to a failed monetary system (the gold standard mentality keeps the commitment to the gold standard despite the fact that it is killing Europe)
  7. Some countries have had enough and give up the monetary standard (The UK leaves the gold standard – the Scandinavian countries follows suit – and recover fast from the Great Depression)
  8. Technocracy is popular and it suggested that indebted nations should be run by technocrats (The so-called Technocracy Movement became increasingly popular in German)

And here we are 80 years on…do you see any similarities? I wonder what 2012 will bring – in 1932 10 countries (or so…) defaulted…

7 Comments
by Lars Christensen on November 15, 2011  •  Permalink
Posted in Banking crisis, Central and Eastern Europe, Economic and monetary history, euro crisis, Gold Standard, Greece, MM Research agenda, Monetary institutions, The euro, The Great Depression
Tagged , ,

Posted by Lars Christensen on November 15, 2011

http://marketmonetarist.com/2011/11/15/the-tragic-year-1931/

Germany 1931, Argentina 2001 – Greece 2011?

The events that we are seeing in Greece these days are undoubtedly events that economic historians will study for many years to come. But the similarities to historical crises are striking. I have already in previous posts reminded my readers of the stark similarities with the European – especially the German – debt crisis in 1931. However, one can undoubtedly also learn a lot from studying the Argentine crisis of 2001-2002 and the eventual Argentine default in 2002.

What this crises have in common is the combination of rigid monetary regimes (the gold standard, a currency board and the euro), serious fiscal austerity measures that ultimately leads to the downfall of the government and an international society that is desperately trying to solve the problem, but ultimately see domestic political events makes a rescue impossible – whether it was the Hoover administration and BIS in 1931, the IMF in 2001 or the EU (Germany/France) in 2011. The historical similarities are truly scary.

I have no clue how things will play out in Greece, but Germany 1931 and Argentina 2001 does not give much hope for optimism, but we can at least prepare ourselves for how things might play out by studying history.

I can recommend having a look at this timeline for how the Argentine crisis played out. You can start on page 3 – the Autumn of 2001. This is more or less where we are in Greece today.

3 Comments
by Lars Christensen on November 2, 2011  •  Permalink
Posted in Banking crisis, Economic and monetary history, euro crisis, Exchange rate policy, Gold Standard, MM Research agenda, Monetary institutions, The euro, The Great Depression
Tagged , , , , , ,

Posted by Lars Christensen on November 2, 2011

http://marketmonetarist.com/2011/11/02/germany-1931-argentina-2001-greece-2011/

80 years ago – history keeps repeating itself

Scott Sumner has a excellent post on events 80 years ago and the comparison with the situation today.

I share Scott’s view of the dismal situation 80 years ago and today.

See my posts on the issue from last week here and here.

Leave a Comment
by Lars Christensen on November 2, 2011  •  Permalink
Posted in Banking crisis, Economic and monetary history, euro crisis, Gold Standard, MM Research agenda, Reading recommendations, Scott Sumner, The Great Depression, The Great Recession
Tagged , , ,

Posted by Lars Christensen on November 2, 2011

http://marketmonetarist.com/2011/11/02/80-years-ago-history-keeps-repeating-itself/

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