Here is Germany Prime Minister Brüning in 1931.
Here is Greek Prime Minister Papandreou in 2011.
Brüning fled Germany in 1934 after the Nazi takeover in 1933.
All posts in category The Great Depression
Brüning (1931) and Papandreou (2011)
Posted by Lars Christensen on October 24, 2011
https://marketmonetarist.com/2011/10/24/bruning-1931-and-papandreou-2001/
80 years on – here we go again…
The year is 1931. US president Hoover on June 20 announces the so-called Hoover Moratorium. Hoover’s proposition was to put a one-year moratorium on payments of World War I and other war debt, postponing the initial payments, as well as interest. This obvious is especially a relief to Germany and Austria. The proposal outrages a lot of people and especially the France government is highly upset by the proposal.
July 23, 1931. After finally gaining French support, President Hoover announced that all of the important creditor governments had accepted the intergovernmental debt moratorium. While the U.S. government rejected the notion that inter-Allied war debts and reparations were connected, the European governments adopted the stand that Allied debts and reparations would stand or fall together. The delay in action on the debt moratorium contributed to the closing of all German banks by mid-July. (From youtube)
Here are the historical pictures from the Paris conference in 1931.
80 years on – now we are again talking about European debts. This time things a different now it is now Germany who are in need of a debt moratorium, but Greece. And guess who is upset this time around??
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Posted by Lars Christensen on October 24, 2011
https://marketmonetarist.com/2011/10/24/80-years-on-here-we-go-again/
“Our Monetary ills Laid to Puritanism”
Douglas Irwin has been so nice to send me an article from the New York Times from November 1 1931. It is a rather interesting article about the Swedish monetary guru Gustav Cassel’s view of monetary policy and especially how he saw puritanism among monetary policy makers as the great ill. I had not read the article when I wrote my comment on Calvinist economics, but I guess my thinking is rather Casselian.
The New York Times article is based on an article from the Swedish conservative Daily Svenska Dagbladet (the newspaper still exists).
Professor Cassel claims that overly tight US monetary policy in the early 1930s is due to two “main ills”: “deflation mania” and “liquidation fever”.
NYT quote Cassel: “The deeper psychological explanation of this whole movement..can without doubt be found in American Puritanism. This force assembled all its significant resources in what was considered a great moral attack on the diabolism of speculation. Each warning against deflation has stranded on fear on the part of Puritanism that a more liberal monetary policy might infuse new vigor in the spirit speculation.”
It isn’t it scary how much this reminds you about how today’s policy makers are scared of bubbles and inflation? I wonder what Gustav Cassel would tell the ECB to do today?
Maybe here would just say: “That the deflation has meant the ruin of one business after another and forced many banks to suspend payments is a matter that little concerns the stern Puritan”…”on the contrary, it is highly approves proper punishment of speculation and thorough cleaning out of questionable business projects. It totals disregards the fact that deflation in itself by degrees adversely affects the finances of any enterprise and forces even sound business to ruin”.
Wouldn’t it be a blessing if Cassel was around today to advise central bankers? And that they actually would listen…but of course if you are a puritan or what I termed a believer on Calvinist economics then you don’t have to listen because all you want it just doom and pain to punish all the evil speculators.
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Posted by Lars Christensen on October 21, 2011
https://marketmonetarist.com/2011/10/21/our-monetary-ills-laid-to-puritanism/
Calvinist economics – the sin of our times
A couple a days ago I had a discussion with a colleague of mine about the situation in Greece. My view is that it is pretty clear to everybody in the market that Greece is insolvent and therefore sooner or later we would have to see Greece default in some way or another and that it therefore is insane to continue to demand even more austerity measures from the Greek government, while at the same time asking the already insolvent Greek government to take on even more debt. My colleague on the other hand insisted that the Greeks “should pay back what they owe” and said “we can’t let countries default on their debt then everybody will do it”. It was a moral and not an economic argument he was making.
I am certainly not a Keynesian and I do not think that fiscal tightening necessarily is a bad thing for Greece, but I do, however, object strongly to what I would call Calvinist economic thinking, which increasingly is taking hold of our profession.
At the core of Calvinist economics is that Greece and other countries have committed a sin and therefore now have to repent and pay for these sins. It is obvious that the Greek government failed to tighten fiscal policy in time and even lied about the numbers, but its highly problematic that economic thinking should be based on some kind of quasi-religious morals. If a country is insolvent then that means that it will never be able to pay back its debt. It is therefore in the interest for both the country and its creditors that a deal on debt restructuring is reached. That’s textbook economics. There is no “right” or “wrong” about it – it is simple math. If you can’t be pay back your debts then you can’t pay. It’s pretty simple.
In another area very Calvinist economic thinking is widespread is in the conduct of monetary policy. Around the world central bankers resist easing monetary policy despite clear disinflationary or even deflationary tendencies and the main reason for this is not economic analysis of the economic situation, but rather the view that a loosening of monetary policy would be immoral. The Calvinists are screaming out “We will have another bubble if you ease monetary policy! Don’t let the speculators of the hook!”
The problem is that the Calvinists are confusing an easing of monetary policy or the default of insolvent nations with moral hazard.
If a central bank for example has a inflation target of 2% and inflation is running at below 1% and the central bank then decides to loosen monetary policy – then that might well be positive for “speculators” – such as property owners, banks or equity investors. The Calvinists see this as evil. As immoral, but the fact is that that is exactly what a central bank that is undershooting its inflation target should. Monetary policy is not about making judgements of what is “fair” or not, but rather about securing a nominal anchor in which investors, labour, companies and consumers can conduct there business in the market place.
The Calvinists are saying “It will be Japan”, “the global economy will not grow for a decade” and blah, blah…it nearly seems as if they want this to happen. We have sinned and now we need to repent. The interesting thing is that these Calvinists where not Calvinists back in 2005-6 and when some of us warned about excesses in the global economy they where all cheerleaders of the boom. They are like born-again Christian ex-alcoholics.
And finally just to get it completely clear. I am not in favour of bailing out anybody, or against fiscal austerity and I despise inflation. But my economics is back on economic reasoning and not on quasi-religious dogma.
PS anybody that studies history will note that Calvinist economics dominated economic thinking in countries which held on to the gold standard for too long. This is what Peter Temin has called the “Gold Standard mentality”. The in countries like France and Austria the gold standard mentality were widespread in the 1930s. We today know the consequences of that – Austria had major banking crisis in 1931, the country defaulted in 1938 and the same it ceased to existed as an independent nation. Good luck with your Calvinist economics. It spells ruins for nations around the world.
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UPDATE: Douglas Irwin has kindly reminded me that my post remind him of Gustav Cassel. Cassel used the term “puritans” about what I call Calvinist economics. Maybe Market Monetarists are New Casselians?
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Posted by Lars Christensen on October 20, 2011
https://marketmonetarist.com/2011/10/20/calvinist-economics-the-sin-of-our-times/
Gold, France and book recommendations
Can you recommend a book that you haven’t read yet? I am not sure, but I will do it anyway. I believe we can learn a lot from the Great Depression and I am especially preoccupied with the international monetary consequences and causes of the Great Depression.
An issue that especially have come to my attention is the hoarding of gold by central bank prior and during the Great Depression and here especially France’s hoarding of gold is interesting and have already blogged about Douglas Irwin’s excellent paper “Did France Cause the Great Depression?”
However, both Scott Sumner and Douglas Irwin have recommend to me that I should read H. Clark Johnson’s book “Gold, France and the Great Depression”. I don’t want to disappoint Scott and Doug – after all they are both big heroes of mine so I better start reading, but I haven’t been able to find the time yet – especially since taking up blogging. Between the day-job and an active family life reading is something I do at very odd hours. That said, I know I will have to read this book. The parts of it I have already read is very interesting and well-written so it is only time that have kept me from reading the book.
Anyway, what I really what to ask my readers is the following: What books have had the biggest influence on your thinking about monetary theory and monetary history? I would love to be able to make a top ten list of monetary must-read books for the readers of this blog. So please give me your input. I will keep asking this question until I got at least 10 books. If you don’t want to put your name out here in the comment section drop me a mail instead: lacsen@gmail.com
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Posted by Lars Christensen on October 17, 2011
https://marketmonetarist.com/2011/10/17/gold-france-and-book-recommendations/
Gustav Cassel on recessions
Swedish economist Gustav Cassel (1866-1945) had many views today is shared by Market Monetarism. I today was reminded by a Cassel quote that pretty much spells out the Market Monetarist view of the causes of recessions:
“(Recessions) are essentially a result of a supply of money that is too small, and to that extent are monetary phenomena…Complaints about excessive habits of saving are in such circumstances calculated to confuse the mind of the public and to distract attention from the shortcomings of monetary policy.”
- Gustav Cassel, Theory of Social Economy, 1918.
Cassel’s quote is an explanation for the Great Depression as well as for the Great Recession.
This is not the only area in which Market Monetarist can be inspired by and learn from Gustav Cassel. An obvious example is Gustav Cassel’s views on the Great Depression.
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Posted by Lars Christensen on October 15, 2011
https://marketmonetarist.com/2011/10/15/gustav-cassel-on-recessions/
Gideon Gono, a time machine and the liquidity trap
Here is a quote from a random article from the financial media in 2008:
“Central banks around the world are rapidly depleting their ammunition as interest rates head to unparalleled lows”
It is quite common that it is claimed that central banks around the world are out of ammunition because interest rates are close to zero and that there therefore are no more options for monetary stimulus. Market Monetarist obviously disagrees strongly with that assessment, but we are up against a long running tradition.
Lets jump into a time machine and fastback to 1935. This is US congressman T. Alan Goldsborough supporting Federal Reserve chairman Marriner Eccles in Congressional hearings on the Banking Act of 1935:
Governor Eccles: Under present circumstances, there is very little, if any, that can be done.
Congressman Goldsborough: You mean you cannot push on a string.
Governor Eccles: That is a very good way to put it, one cannot push on a string. We are in the depths of a depression and… beyond creating an easy money situation through reduction of discount rates, there is very little, if anything, that the reserve organization can do to bring about recovery
There is now doubt that even in 1935 the situation was quite desperate, but not as desperate as it was before the US went off gold in 1933.
So further back to 1932.
In 1932 the US economy is deep in depression, unemployment is massively high and deflation has never been stronger.
The situation is desperate for president Hoover. No matter what ideas he comes up with nothing works and he stands no chance of winning the upcoming presidential elections.
The chairman of the Federal Reserve Eugene Meyer is telling Hoover that he should use fiscal policy to boost the economy, but that monetary policy loosening is no option.
But then it all becomes very sci-fi – Meyer is beamed up by Scotty (Sumner) and replaced by Zimbabwean central bank governor Gideon Gono.
We need a little be more sci-fi: Everybody in 1932 knows the reputation of Gideon Gono as a money printing psycho central banker.
So what happened when Gono is beamed back to 1932? Well, everybody knows that he doesn’t care about any strings on money policy – he just print money like a mad man and everybody knows that he created hyperinflation in his previous job. So what would you expect? They would of course expect inflation! And they would expect the US to give up the gold standard very fast – after all Gideon Gono is not exactly Bob Murphy. And he probably would so with in minutes of arriving back in 1932.
What happens now? Everybody realise that the value of cash will not continue to increase so there will be no reason to hoard cash. Rather suddenly the dollars are burning holes in people pockets. And the same goes for banks and corporations: We don’t want dollar anymore. This is the hot potato effect in monetary theory. Money demand collapse relative to the money supply. That is monetary loosening!
So monetary policy works with long and variable LEADS – in fact with time warping leads.
Fast forward to 2011. The global economy is on the verge of a new depression – the talk of a debt-deflation continues nearly four years into the Great Recession. An economics professor Scotty starts blogging about monetary policy. His big hero is Gideon Gono – the Fed chairman who in 1933 pulled out the US from the Great Depression and with it the rest of the world. Nobody would remember Hitler and we would still be talking about the “Great War” rather than World War 1.
And no Gideon Gono was never a good central bank and he would probably have stolen the US gold reserve once he landed back in 1932. This is not an endorsement of inflationist policies or insane central bankers, but an illustration of the importance of what expectations mean for monetary policy effectiveness.
PS after Gideon Gono became Fed chairman Hoover won the presidential campaign and became the longest serving US president ever and became a much loved president in the Republican party. They call him: “The president who understood monetary policy”. And the Republican party is forever grateful to Hoover for never having introduced Social Security. And most important Paul Krugman would look pretty stupid when he went on and on about the liquidity trap.
PPS luckily Gideon Gono was not beamed back to 1979.
PPPS If you want to read a truly insane book on monetary policy have a look at Gideon Gono’s “masterpiece”: Zimbabwe’s Casino Economy: Extraordinary Measures for Extraordinary Challenges.
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Posted by Lars Christensen on October 11, 2011
https://marketmonetarist.com/2011/10/11/gideon-gono-a-time-machine-and-the-liquidity-trap/
Believe it or not, but Greenspan makes a lot of sense
I have often been critical about Alan Greenspan’s economic thinking, but listen to this Interview on CNBC. It is pretty good. Greenspan talks about the international financial linkages – particularly between the US and the euro zone. He makes a lot of sense (other than some odd cultural references, which the rather uneducated reporters just go along with…)
I think that US based Market Monetarists should pay attention here. The global financial markets are highly inter-linked. One can not ignore European issues if one want to understand US monetary policy issues as you can not understand the Great Depression without understand French goal hoarding and the collapse of the Austrian bank Creditanstalt.
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Posted by Lars Christensen on October 10, 2011
https://marketmonetarist.com/2011/10/10/believe-it-or-not-but-greenspan-makes-a-lot-of-sense/
Friedman on the Great Depression – the Youtube version
Obviously anybody interested in monetary theory and monetary history should read Milton Friedman’s and Anna Schwartz’s great book “A Monetary History of the United States, 1867-1960”, but you could also have a look at the youtube version of the story.
See also my post on Scott Sumner’s account of the Great Recession on Youtube.
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Posted by Lars Christensen on October 7, 2011
https://marketmonetarist.com/2011/10/07/friedman-on-the-great-depression-the-youtube-version/