0811.29
12:35:55

From the mailbag

Jump to Comments On Nov 29, 2008, at 10:18 , ——–@—–.com wrote:
Ben –
Check out this web link and let me know your thoughts
http://www.mises.org/article.aspx?Id=447
Thank you – Dad
I am including quotations from this article. They are set off quotes, or maybe sometimes block-quotes.
“There was no reason why the 1929 recession should have taken longer, for the American economy was fundamentally sound. “
This is the primary flaw of the argument. If this were the case, he would be right. Regardless of how well-run GM (“already one of the best-run and most successful manufacturing groups in the world”) or US Steel (” the world’s biggest and most efficient steel-maker”) were, the collapse of the margin bubble of what we might call fake money negatively impacted stocks of companies with real value, as the author himself says –
“shares dropped vertically with no one buying and speculators were sold out as they failed to respond to margin calls. Then came Black Tuesday, October 19, and the first selling of sound stocks to raise desperately needed liquidity.”
The equities markets are not merely some elaborate game where people in colored jackets used to throw paper at each other until they got television screens and now merely punch buttons at each other. They are the way by which publicly-traded companies finance themselves: they would not be able to exist otherwise. This is why there are stock markets in the first place; they enhanced the old joint-stock company model by providing a place where shares in companies could be sold to raise money for that company, and for investors to profit by receiving dividends from that company when it turned a profit. The fact that investors can gain money by buying and selling stocks based on good timing is a side-effect of the way that markets generally work, and is not the primary purpose of a stock market.

I can make money buying and selling pork options on the Chicago Board of Trade, but the real purpose of that market is to get said pigs from the farms where they are raised to the slaughterhouses (traditionally in …. Chicago) where they are processed for human consumption. My entry into that market is beneficial because I can provide my extra capital which otherwise would not have been available to the farmer or the slaughterer. That capital is only useful, however, if it is real. If it is some sort of fictitious leverage it might be useful, too, if we (me, the butcher, and the farmer) all know precisely how fictitious it is and in what amount there is real cash there — however, in order for this to be the case, there has to be regulation in order to coerce me to disclose exactly how fake it is, or to just keep my fake money out of the game. It’s not advantageous otherwise for me to advertise that I have fake money, because it is worth less than real money, so I will not do it unless prompted.

If I enter this fake money into the market and it is only discovered later by others to be fake, not only does this mean that I have falsely overvalued not only my own transactions, but others transactions as well. Further, I decrease overall market confidence because no one can be sure that other people haven’t placed fake money in the market as well.

From the above, we realize that A) equities (stock) markets are crucial to the function of a market economy and that B)margin trading or other sorts of hidden plays of nonexistent capital damages equities markets. Thus:

Syllogism 1
A) equities (stock) markets are a fundamental function of a market economy
B) margin trading or other sorts of hidden plays of nonexistent capital damages equities markets
Therefore:
C) Margin trading or other sorts of hidden plays of nonexistent capital damages a fundamental function of a market Economy.

Syllogism 2
A) Margin trading or other sorts of hidden plays of nonexistent capital damages a fundamental function of a market Economy.
B) The United States’ economy is a market Economy.
Therefore:
C) Margin trading or other sorts of hidden plays of nonexistent capital damages a fundamental function of the United States’ economy

This is why “There was no reason why the 1929 recession should have taken longer, for the American economy was fundamentally sound” is wrong. A fundamental function of the United States’ economy (the equities markets) was damaged and therefore was not fundamentally sound.

The author goes on to cite the work of a man named Rothbard, of whom I have never heard. The author states, apprently according to Rothbard, that, Hoover, fresh off keeping Belgium from starving to death in the aftermath of the First World war, “followed his own advice, and made it [government] an engine of interference, first pumping more credit into an already overheated economy then, when the bubble burst, doing everything in his power to organize government rescue operations. “

This is simply unsubstantiated by fact.

Everything in that sentence is wrong. Every single thing in it. First, Hoover had no power to “pump money into an already overheated economy.” We know from recent events that this sort of action either comes from the Federal Reserve or from an act of congress authorizing the Treasury to do so. It is not an executive decision.

Not only did he not have any power to “pump money”, but no money was so pumped. Congress did not take any action of this sort until the New Deal, as this was precisely the point of electing the New Dealers to Congress. Nor did the Federal Reserve do this either. In fact, it did the opposite of what it has done ever since – it contracted the money supply, which worsened the problem. We all know who Milton Friedman is, regardless of whether or not we may like him. He is therefore reputable when it comes to recounting facts. Here is what he as to say about the actions of the Federal Reserve System in 1929-30.

“Why didn’t this system prevent The Great Depression after 1929? Because from 1929 to 1930 after the stock market crashed, the Federal Reserve system allowed the quantity of money to decline slowly thereby throttling the monetary structure.” Friedman, (this is now for-pay on the Friedman website, it used to be free so I linked the internet archive of it)

Finally, Hoover did “everything in his power to organize government rescue operations”? Certainly, the author must be talking about some other Herbert Hoover, that was not the President of the United States. President Herbert Hooverville Hoover encouraged volunteerism as a way for the public to pull itself up by its own bootstraps. President Herbert Hard Times Are Still Hoover-ing Over Us Hoover urged big banks to lend to little banks through the construction of the National Credit Corportation, which as a private consortium was not a government rescue organization nor did it have any particular track record of actually rescuing the little banks.

Okay, I should give President Herbert hoover means ‘to help’ in Finnish Hoover some credit in organizing government rescue operations, or at least in signing legislation that did so. In July 1932 he signed the Emergency Relief and Reconstruction act, which allocated money to states and municipalities to be spent on public works, and to create the Reconstruction Finance Corporation.

The RFC did little to set up relief programs until the passage of New Deal legislation which strengthened it significantly. As for the money, I cannot find the text of this act, but it is incredibly unlikely that any such funds could have been allocated, much less distributed, before the start of Fiscal Year 1933 in October ’32 which would have been three full years since the stock market crash.

For the sake of argument let us accept the author (or perhaps Rothbard’s) ludicrous premise that Hoover did, eventually, do everything in his power, three years after the fact, “to organize government rescue operations.” The author (or perhaps Rothbard) presents this as the reason that the 1929 recession was much worse than the 1920 recession.

As for the 1920 recession, the market peaked in January 1920 and bottomed in July 1921, however, the decline was not severe until after July 1920. Since the few academic journal articles I’ve been able to find on this recession do not give a specific definition other than this, and the GDP data I can find on the most part is annualized, let us then call this a 6-quarter-long recession (all of 1920 and the first two quarters of 1921, although it is unlikely based on the above description that Q1 1920 was actually a net contraction for that quarter.)

As I have stated before, there was no money pumping, and no government relief action even signed into law until July 1932. At that point US GDP had been contracting for ELEVEN CONSECUTIVE QUARTERS. It did not bottom out until Q1 1934. Herbert “when in doubt, eat potatoes” Hoover, the Congress and the Federal Reserve did none of the things that either the author or Rothbard is attributing to them as the cause of the Great Depression, and yet the facts are still there. There were eleven consecutive quarters of economic contraction until the first signing of an aid package.

Zees article, eet ees, how you say, eh bownch uv crap.

P.S. Ben Bernanke is a bronze god.

P.S. Ben Bernanke is a bronze god.

5 Comments

  • You’ve seriously never heard of Murray Rothbard?!

  • Should I have? Prima facie he sounds like somebody I needn’t waste time on.

  • Well as you say, “We all know who Milton Friedman is, regardless of whether or not we may like him.” The same goes for Rothbard in my mind; indeed when I hear “Friedman” the first name to come to my mind in connection is “Rothbard.”

  • Nazz wonders if Friedman ever considered an "Escape Velocity" analogue for money fluidity? har har har
    GMT-0500 14:52:34 0812.1 (Mon)

    I have never heard of Murray Rothbard, either. I enjoyed Ben’s weblog update. I read all of it. Very good. I had (err, have) forgotten much of this segment of U.S. history. Ben’s weblog update reminds me of the dangers of revisionism in this modern era of easy-access information. It seems so much easier today than it was 100 years ago to b.s. a scholar. It seems like back in the day only the most credible of academicians would publish these sorts of books. Today, it seems that anybody who’s a big fan of C-SPAN and the History channel can sit himself down, type up a manuscript, rush it off to Bantam Books, and would you look at that: he’s the proud author of Border’s newest center-of-the-store dust collector, snugly placed in between the newest addition to Oprah’s book club and the quasi-autobiography of one of America’s most famous political figures.

    I have been working on similarly well-written, revised, and logically ordered “blog essays” as Ben has been doing recently but so far the few I have felt compelled to pen have not been ones which suit our circle of friends. This is my way of saying (1) sorry for no blog still but it’s on its way and (2) your writing inspires me, Ben.

    I suppose the one thing which detracted from the professionalism of this essay would be the Herbert Hoover nicknames; but then again, this is first and foremost a weblog update for friends’ and family’s entertainment. That I mistake the true purpose of IAATB the Blog is, ironically, not unlike how I and millions of other Americans mistake the stock market’s true purpose. Thank you for reminding us, Ben, that the stock market is not primarily a game of buying and selling, even if that is the idea which dominates the public consciousness today. Your reminder was so simple, and yet so embarrassingly elusive to my mind.

  • I’m guessing a birthday post is on the way but just in case, Happy Birthday!