Question about Milton Friedman/Great Depression?

[Carson]

After reading the book, Free to Choose by Milton Friedman he became a hero of mine. He and his wife put together a book that made many of the mechanics of economics fairly easy to comprehend. It was written in plain English. We probably have Mrs. Rose D. Friedman to thank for that but Mr. Friedman was a regular guy also.

I think not only did a lot of good come out of his teachings but also some bad. He gave people a tool and I think like children, we did what children would do and tested things out in both directions. Good and bad. I'm thinking we are ahead two to one at this point.

Anyway many of the rules seem to work like a chain of teeter totters touching ends and forming a geometric shape like a square. They need to all be in balance to run steady. If you push down on one to far at the other end they rise up. It transfers through the other teeter totters like a wave. Like learning to drive, maybe we have a tenancy to over steer.

Anyway enough of the bull.

Take a look at what we had done to ourselves right before the depression on this chart. During World War One we counterfeited the money supply to finance the war. Unlike the earlier times when we did the same thing, this time it looks like we didn't started working the counterfeit out of the system like we had done before. I would think to retire the counterfeit it would have to be taxed out of the system and basically burned. I would think that could be done in many was. Many ways that could take advantage of the unsuspecting. Maybe someone had a brainy idea at the time to stiff the other guy and killed him off financially. It sure did crash when it did go down. (And then someone fired up the fake money presses and we never did fully recover.)



But Odin,

If Milton Friedman said they should have introduced more counterfeit at the time, I would have like to argue the point with him. (Right at the moment I'm wonder at exactly which point.)

Then on the other hand if he would have changed his mind and thought pulling some out the right thing, that would have been fun to argue that out with him also.

He seemed the kind of guy that could see and argue both sides. I've heard of him changing sides often. It is like practicing law. You may need to understand how to argue both sides of an argument. With economics like I said before, I don't think there is necessarily any hard and fast right or wrong answer, but it's like a chain of sea saws that need to be adjusted carefully.

Well carefully if your chancing getting strung out on the counterfeit.

[Carson]

Thread music?

But if you want money for people with minds that hate,
all I can tell you brother you have to wait.

[Steven Douglas]

But granting that, what in world induces such a "realist" to imagine or expect that "they" would (or even could) do so "in a manner that is reasonable [and] consistent" - let alone in manner that is "not subject to political or economic whims" ... ?

That's what I've never been able to figure out. Friedman was NOT a stupid man. So why was he so obtuse on this point?

I don't think he was being obtuse, to be honest. It is certainly valid to question whether reasonableness or consistency is even possible by the very government that chose to debase a currency, or inflicted economic distortions based on centrally planned monetary debasement. But I don't think that was Friedman's objective at all. I seriously doubt that he had any illusions there. I could be dead wrong, of course, but I think he was just taking a different tack in leading the ignorant and unwilling horses to water--those ignorant of money, banking and finance to begin with. He might well have thought it best to address the principles involved from current reality standpoint, regardless how distorted, and how do we "get there from here", even if in specific steps, and not one giant leap. It is much easier to apply a theory or principle to real world conditions than it is to construct an ideal from scratch, which bears little resemblance to the real world, and can therefore be relegated as such (not real world) and dismissed as so much fanciful thinking.

It appears to me that Friedman was trying to get people to understand, at the very least, the core principles that really do apply to all currencies anyway--free market and fiat--and the relationship that scarcity plays regardless, especially in a growing economy. If they can get that far in their understanding, or acceptance of the principles, even in theory, then perhaps they can finally reach the natural conclusion that the best means to that end is what the hard specie advocates had been advocating all along. The danger in that, of course, is that by accepting the "current reality" as even an hypothetical premise for a model, you appear to affirm the overall acceptability or desirability of the premise itself.

[LibertyCitrus]

For those who know more about economics than I do, I saw a video of Milton Friedman discussing the Great Depression and the Federal Reserve's role in it, and he was saying that it is not the proper job of the Federal Reserve to control interest rates, but it is the Fed's job to control the supply of money, and that when people rushed the banks and they couldn't give people their money, that the Fed should have expanded the money supply so that people would see that they could get their money, and if people saw that they could get their money, then no one would have have tried to take it and there would be no rush.

It doesn't sound quite right, and I've heard Ron Paul and other Austrian economists says that the Federal Reserve shouldn't control the money supply either. Would someone mind clarifying for me?

My guess is that you were watching Free to Choose part 3/10: Anatomy of a Crisis:
www.youtube.com/watch?v=jOO4kPSaD4Y
www.youtube.com/watch?v=SWVoPrntBso

The video has a segment on a bank that avoided a run by getting customers in and out of the door as fast as possible the first day, then delaying the customers as long as possible the second day while money got delivered. If the government had expanded the money supply, instead of contracting it, banks would have been able to get more money to their vaults to hand out to people withdrawing --- keeping the lines down, reassuring crowds that they are solvent and have money, and reducing psychological factors that incite panics and bank runs that make banks insolvent/collapse.

For Milton's position on the Fed, In 1992, the Minneapolis federal reserved asked Milton Friedman, “what’s the biggest economic challenge facing the US?” Friedman told them, “The #1 economic challenge facing the US is ‘how do we get rid of the Federal Reserve?’”

Milton's speaking series called "Milton Friedman Speaks" is great too.

[Danan]

Friedman and others basically found out (by using econometrics) that recessions always follow after a contraction of the money supply. They argued that therefore, if this could be prevented, we wouldn't experience these recessions.

Austrian economists view it quite differentely and yet very similar in some sense. Most of them would actually agree that an increase in the money supply theoretically could have "prevented" the Great Depression from occurring in that time, at least in the short run. In fact, if an increase in the money supply had no positive effect on economic growth, the whole Austrian business cycle theory would be meaningless. However, the main difference is that while Friedman and other neo-classicals, Keynesians and monetarists view the whole economy as producing a single homogeneous output Y (by using homogeneous capital K and homogeneous labour L) in order to create practical mathematical models, Austrians beliefe that this simplification is hiding one of the most crucial properties of the economy, the capital structure.

They belief that while a recession is not desirable, it's the necessary correction of malinvestments, mainly caused by artificially low interest rates. Shortly after the Fed (and FDIC, etc.) was created it started to increase the money supply, causing interest rates to drop, giving more incentives to invest in long term projects like mining, housing, etc. And while this may sound like a desirable thing, it's actually bad, because in contrast to a decline in interest rates based on more savings, there was not enough purchasing power available at the time these investments turned into consumer goods, because nobody cut back on consumption at any point before. The result was a huge amount of failing businesses, causing chain reactions. So therefore, ironically I believe Austrians actually agree with Keynes, that too low aggregate demand is what we are experiencing during crises. But they argue that other schools of thought have the causation backwards. There is not enough aggregate demand to match the artificially pumped up producing of the wrong goods in the past, and the suggestion to lower interest rates, increase the money supply and/or increase public spending during crises is trying to cure the drug addict by giving him more drugs. It may delay the pain, but it will not cure the disease.

All this is mainly caused by the fact, that Y=KL hides fundamental truths about the economy. The common motto of neo-classical economists is that, "A map in a scale of 1:1 is useless." I don't disagree, but I would add that a map in the size of a thumbnail is just as useless.

The sad thing is that properties like capital structure are immensly hard to measure objectively. And even if we could, adding them into economic models seems almost impossible, because of the complexity we would arrive at.

[Steven Douglas]

Friedman and others basically found out (by using econometrics) that recessions always follow after a contraction of the money supply. They argued that therefore, if this could be prevented, we wouldn't experience these recessions.

Austrian economists view it quite differentely and yet very similar in some sense. Most of them would actually agree that an increase in the money supply theoretically could have "prevented" the Great Depression from occurring in that time, at least in the short run. In fact, if an increase in the money supply had no positive effect on economic growth, the whole Austrian business cycle theory would be meaningless. However, the main difference is that while Friedman and other neo-classicals, Keynesians and monetarists view the whole economy as producing a single homogeneous output Y (by using homogeneous capital K and homogeneous labour L) in order to create practical mathematical models, Austrians beliefe that this simplification is hiding one of the most crucial properties of the economy, the capital structure.

They belief that while a recession is not desirable, it's the necessary correction of malinvestments, mainly caused by artificially low interest rates. Shortly after the Fed (and FDIC, etc.) was created it started to increase the money supply, causing interest rates to drop, giving more incentives to invest in long term projects like mining, housing, etc. And while this may sound like a desirable thing, it's actually bad, because in contrast to a decline in interest rates based on more savings, there was not enough purchasing power available at the time these investments turned into consumer goods, because nobody cut back on consumption at any point before. The result was a huge amount of failing businesses, causing chain reactions. So therefore, ironically I believe Austrians actually agree with Keynes, that too low aggregate demand is what we are experiencing during crises. But they argue that other schools of thought have the causation backwards. There is not enough aggregate demand to match the artificially pumped up producing of the wrong goods in the past, and the suggestion to lower interest rates, increase the money supply and/or increase public spending during crises is trying to cure the drug addict by giving him more drugs. It may delay the pain, but it will not cure the disease.

All this is mainly caused by the fact, that Y=KL hides fundamental truths about the economy. The common motto of neo-classical economists is that, "A map in a scale of 1:1 is useless." I don't disagree, but I would add that a map in the size of a thumbnail is just as useless.

The sad thing is that properties like capital structure are immensly hard to measure objectively. And even if we could, adding them into economic models seems almost impossible, because of the complexity we would arrive at.

Love the explanation.

I have often wondered how this would all play out if humans had two hundred year lifespans, such that they inherited their own messes. I like to characterize the heroine trafficking result of Keynes' proposed methadone solution (and only as it was supposed to apply in certain cases, as a last resort) as a case where you really can become an addict, enjoy the high, and transfer all the pain, withdrawals, and even death in many cases, to yours and everyone else's grandchildren--selling and promising the unborn, as so much chattel, into slavery.

[Carson]

Danan,

Nice reading post.

"The sad thing is that properties like capital structure are immensly hard to measure objectively. And even if we could, adding them into economic models seems almost impossible, because of the complexity we would arrive at."


It left me at the point that using a currency that has an intrinsic value in itself can remove the need to measure somewhat. Not that even that is perfect, as intrinsic values are always changing. They would tend to work through the changes at working pace, not blow up and down so much, but then again real assets do at times.

[Carson]

Love the explanation.

I have often wondered how this would all play out if humans had two hundred year lifespans, such that they inherited their own messes. I like to characterize the heroine trafficking result of Keynes' proposed methadone solution (and only as it was supposed to apply in certain cases, as a last resort) as a case where you really can become an addict, enjoy the high, and transfer all the pain, withdrawals, and even death in many cases, to yours and everyone else's grandchildren--selling and promising the unborn, as so much chattel, into slavery.

I think we all have bankruptcy as a option. Dieing wouldn't pass on the addiction.

I'm more concerned with me at the moment. I've had the counterfeiters leaching away at, all of my everything, since we went off of the gold standard. Actually before that, but big-time since 1971. Not that it has all been bad but I just can't help but wonder what if we would have been able to lead our own lives and each one of us had of been running full power. Making our own mistakes, then paying them in full, but learning and going forward.


We've been led around like sheep with a hog rings in our noses.

Shorn and taxed to the point we don't even have that special furry spot left!

Left with our fiats exposed!

[Danan]

It left me at the point that using a currency that has an intrinsic value in itself can remove the need to measure somewhat. Not that even that is perfect, as intrinsic values are always changing. They would tend to work through the changes at working pace, not blow up and down so much, but then again real assets do at times.

Well, not controlling the money supply would definitely make it less "important" to measure certain things. However, it is more of a scientific issue of understanding the world, than of policy. In fact our monetary policy results to a great deal from how most economists describe reality.

The only way to end the desire for state-control of the money supply permanently is to change the economic paradigm in academia by using their method and by critizing and improving the models - which is going to be extremely hard.

[Steven Douglas]

I think we all have bankruptcy as a option. Dieing wouldn't pass on the addiction.

I'm actually just as concerned about the ultimate way that bankruptcy in the aggregate can play out; the elephant in the room called war. Counterfeiting gets us more easily into wars, just as wars are a way of deciding who is going to pay for all the counterfeiting.

I'm more concerned with me at the moment. I've had the counterfeiters leaching away at, all of my everything, since we went off of the gold standard. Actually before that, but big-time since 1971. Not that it has all been bad but I just can't help but wonder what if we would have been able to lead our own lives and each one of us had of been running full power. Making our own mistakes, then paying them in full, but learning and going forward.

Me too. Big time. As a child and teen in the 70's, I watched us go through economic changes, and wanted to make sense of it all. My school teachers' simplistic answers to why prices always increased, and never decreased in the long term: Spiraling greed. To them it was that simple. Someone wanted more, and that forced everyone else into wanting more. Not one of them had the first clue about how money, banking and finance worked, let alone the role central banks played in any of that.

Not to split hairs, but we didn't "go off" the gold standard. It never went anywhere, and is still in effect. Our government finally just defaulted on obligations that were based on it back in 1971 (on other governments, most of which were in default themselves). That was in much the same way that FDR enforced a default on gold obligations to citizens. But the real default occurred long before Roosevelt's move, with countless contradictory RIGHT NOW claims on existing gold.

We've been led around like sheep with a hog rings in our noses.

Shorn and taxed to the point we don't even have that special furry spot left!

Left with our fiats exposed!

That's it, in a nutsack.