Austrian Theory of the Business Cycle

[dlreynolds]

http://research.stlouisfed.org/fred2/data/FYFSD_Max.png

See the image. The gray vertical lines represent recessionary periods. From this graph it seems to me that the business cycle existed before the creation of the federal reserve and after we left the gold standard. It appears to me that after we left the gold standard in 1971 we had fewer recessionary periods. I haven't read Rothbard's works on the business cycle, but from my understanding his thesis is that the federal reserve, in the absence of the gold standard, creates the business cycle. Doesn't this graph suggest the opposite?

[Dequeant]

....................

[tmosley]

http://research.stlouisfed.org/fred2/data/FYFSD_Max.png

See the image. The gray vertical lines represent recessionary periods. From this graph it seems to me that the business cycle existed before the creation of the federal reserve and after we left the gold standard. It appears to me that after we left the gold standard in 1971 we had fewer recessionary periods. I haven't read Rothbard's works on the business cycle, but from my understanding his thesis is that the federal reserve, in the absence of the gold standard, creates the business cycle. Doesn't this graph suggest the opposite?

It doesn't mention the severity of those recessions. In a system that is based on gold, a (nearly) fixed amount is in existence, so there would naturally be an average amount of economic activity, and the economic moment would naturally fluctuate above and below the mean. The economy grew only as the population increased, and as industrial production ramped up.

What the fed did is hide the periods of negative growth through their control of currency and debt, falsely growing the economy using paper. It's sort of like continuously winding a spring. Eventually, it won't be able to turn any more, and they won't be able to hold it, and it will release all that pent up reccessionary power at once.

Then BOOM.

[2_Thumbs_Up]

I think the biggest reason is the size of the economy. Back then the economy was a lot smaller and heavily reliant on agriculture. Agriculture has natural cycles that depend on the weather etc.

[dlreynolds]

It doesn't mention the severity of those recessions. In a system that is based on gold, a (nearly) fixed amount is in existence, so there would naturally be an average amount of economic activity, and the economic moment would naturally fluctuate above and below the mean. The economy grew only as the population increased, and as industrial production ramped up.

Sure, I considered that. I'll admit I'm not very educated on American economic conditions from 1890-1913. What I'm interested in though is the stability of the gold standard. From my understanding, gold is somewhat erratic short term and very stable long term and inflates at about 3%/year due to an increase in the supply. So as long as the population was increasing and production grew more efficient, the economy would grow steadily. Anyway, this graph surprised me.

[nate895]

http://research.stlouisfed.org/fred2/data/FYFSD_Max.png

See the image. The gray vertical lines represent recessionary periods. From this graph it seems to me that the business cycle existed before the creation of the federal reserve and after we left the gold standard. It appears to me that after we left the gold standard in 1971 we had fewer recessionary periods. I haven't read Rothbard's works on the business cycle, but from my understanding his thesis is that the federal reserve, in the absence of the gold standard, creates the business cycle. Doesn't this graph suggest the opposite?

Fractional Reserve Banking was still around.

[polomertz]

Yeah, I agree that when measured in dollars, it throws everything off. Also, just from looking at the graph, I can see a couple problems. First, it doesn't really go back that far. Second, I can't tell how severely shady or wonderously white the areas are. Third, I can see that the shaded area in 1991 should include 1990 & 1992. Last, there should really only be a little bit of white in 2004 between the shaded years of 2000 and 2009. I'm sure there are more but just because the government tells you it's a white christmas, it doesn't mean it is.

[tmosley]

Sure, I considered that. I'll admit I'm not very educated on American economic conditions from 1890-1913. What I'm interested in though is the stability of the gold standard. From my understanding, gold is somewhat erratic short term and very stable long term and inflates at about 3%/year due to an increase in the supply. So as long as the population was increasing and production grew more efficient, the economy would grow steadily. Anyway, this graph surprised me.

I believe it is more like 0.5%/year, which is largely cancelled by population growth (same amount of gold/person).

[dlreynolds]

Yeah, I agree that when measured in dollars, it throws everything off. Also, just from looking at the graph, I can see a couple problems. First, it doesn't really go back that far. Second, I can't tell how severely shady or wonderously white the areas are. Third, I can see that the shaded area in 1991 should include 1990 & 1992. Last, there should really only be a little bit of white in 2004 between the shaded years of 2000 and 2009. I'm sure there are more but just because the government tells you it's a white christmas, it doesn't mean it is.

Okay sure lets assume that things were only slightly bad in the pre-fed recessions and wonderful during the non-recession period. It is irrelevant. I'm focused on Rothbards theory of the business cycle. From my understanding, the boom/bust periods should occur less frequently on the gold standard without a federal reserve. Anyone out there educated enough in Austrian economics to address this point? As to your critique of the graph, I agree it is probably not perfect. They use the NBER definition of recession, but I'm not sure how far that goes back. I imagine the more recent data is more accurate relative to NBER standards.

[nate895]

Okay sure lets assume that things were only slightly bad in the pre-fed recessions and wonderful during the non-recession period. It is irrelevant. I'm focused on Rothbards theory of the business cycle. From my understanding, the boom/bust periods should occur less frequently on the gold standard without a federal reserve. Anyone out there educated enough in Austrian economics to address this point? As to your critique of the graph, I agree it is probably not perfect. They use the NBER definition of recession, but I'm not sure how far that goes back. I imagine the more recent data is more accurate relative to NBER standards.

The booms and busts are caused by expansions and contractions in credit markets, that happens in a fractional reserve banking system.

[Zippyjuan]

The graph shows Federal spending surpluses and deficits. It does not show what the economy in general was doing. But yes, business cycles did exist before the Fed and even before the United States.

AH- I noticed the additional information. Silly me. The shaded areas are supposed to indicate recessionary periods. Note how they were more frequent and longer prior to the 1930s.

[dlreynolds]

The booms and busts are caused by expansions and contractions in credit markets, that happens in a fractional reserve banking system.

Hence the role of the fed, according to the Keynesians anyway. I've heard Ron Paul and Peter Schiff say time and time again that the fed is responsible for the business cycle and that they are the culprit in our current economic woes. I guess I better just start reading Rothbard.

[Zippyjuan]

The booms and busts are caused by expansions and contractions in credit markets, that happens in a fractional reserve banking system.

Can you find a chart which shows when credit was expanding and contracting so we can compare it to this?
If so- did credit expand because the boom demanded more credit or did the expanding credit actually lead to the boom? Which is the cause and which the effect?
In a slowing economy, businesses do not want to borrow money to expand their output so credit issued would naturally be down. In a period of growth of demand they will be more willing to take on borrowing to expand to meet the demand. From what we are seeing today, you cannot artificially increase credit without businesses and individuals being willing to borrow.

"Herd mentality" can be a factor in booms and busts. Investors notice rising profits in one sector so they try to get in. This causes the assets to rise more which catches the notice of more investors who pour in more money. The assets rise even faster. This continues until there is not enough new money coming in to sustain the expected rate of growth which is followed eventually by an exodus of the investors from this area- most likely on to another one- whatever is the "hot commodity" of the moment. Dollars chase where they think they can get the highest return.

[nate895]

Can you find a chart which shows when credit was expanding and contracting so we can compare it to this?
If so- did credit expand because the boom demanded more credit or did the expanding credit actually lead to the boom? Which is the cause and which the effect?
In a slowing economy, businesses do not want to borrow money to expand their output so credit issued would naturally be down. In a period of growth of demand they will be more willing to take on borrowing to expand to meet the demand. From what we are seeing today, you cannot artificially increase credit without businesses and individuals being willing to borrow.

"Herd mentality" can be a factor in booms and busts. Investors notice rising profits in one sector so they try to get in. This causes the assets to rise more which catches the notice of more investors who pour in more money. The assets rise even faster. This continues until there is not enough new money coming in to sustain the expected rate of growth which is followed eventually by an exodus of the investors from this area- most likely on to another one- whatever is the "hot commodity" of the moment. Dollars chase where they think they can get the highest return.

No graphs, but they are caused by Bank runs (http://en.wikipedia.org/wiki/Bank_run).

[nate895]

Hence the role of the fed, according to the Keynesians anyway. I've heard Ron Paul and Peter Schiff say time and time again that the fed is responsible for the business cycle and that they are the culprit in our current economic woes. I guess I better just start reading Rothbard.

The other alternative is to ban FRB, because it steals from savers in favor of borrowers, and because it is a fraudulent base system to begin with.

[Zippyjuan]

While looking for my credit growth graph I found an interesting bit from the New York Times:
http://krugman.blogs.nytimes.com/2008/11/28/was-the-great-depression-a-monetary-phenomenon/?apage=7

November 28, 2008, 1:47 pm
Was the Great Depression a monetary phenomenon?

http://www.princeton.edu/~pkrugman/mbase.png
Sins of omission?
Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history?

A central theme of Keynes’s General Theory was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression.

Now, what the Fed really controlled was the monetary base — currency plus bank reserves. As the figure shows, the base actually rose during the great slump, which is why it’s hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble.

So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base:
http://www.princeton.edu/~pkrugman/benbase.png

Ben goes for broke
And guess what — it doesn’t seem to be workiing.

I think the thesis of the Monetary History has just taken a hit.

[Conza88]

Do yourself a favour..

When asking for a response to a Mises.org graph... how about you ask the Mises.org community... :rolleyes:

[Zippyjuan]

I did find one which goes back to 1960 which shows credit and the periods of recessions. Do we assume that there was economic growth between the recessions? If so, there are several periods during economic growth where credit contracted but did not lead to recession as well as periods of credit expansion during recessions so there does not appear to be a strong link between credit expansion and contraction and economic bubbles at least since the 1960s. Obvously there must be other factors at work.

Credit growth was above the long term average throughout the 1960s and still there was a recession around 1970. Late 1970s had below average credit growth but no recession until about 1980 (difficult for me to pick out specific years off the graph). There are up sloping lines before and during recessions and down sloping ones. Same for non- recession periods.

http://www.fdic.gov/bank/analytical/bank/images/bt_chart2_022002.gif
http://www.fdic.gov/bank/analytical/bank/bt_0202.html

[Knighted]

I think that the boom/bust cycle would exist even if the Fed was abolished tomorrow. There are hundreds of foreign central banks around the globe whose monetary actions influence us, either directly or indirectly. Fed or not, a global recession brought on by careless monetary policies of foreign governments would affect us just as much as the current crisis is affecting every other country around the globe that isn't walled off from the rest of the world - which is a lot. In many cases, even more than it has us so far.

[dlreynolds]

Do yourself a favour..

When asking for a response to a Mises.org graph... how about you ask the Mises.org community...

This is from government data chief. Thanks for the advice though.