FUTURECASTS JOURNAL

Keynesian Attack on Monetary Policy Discipline

Page Contents

Keynesian analysis

Gold standard

New Keynesian analysis

Mathematical models

Gold reserve ratio impacts

Wage shocks

Correlation analysis

Monetary policy targets

Expectations

Great Depression causes

Great Depression analysis

New Deal policies

1937-1938 relapse

Great Depression end

Monetary policy effectiveness

(with a review of "The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression,"
 
by Scott Sumner)

January, 2017
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Shallow Analysis

Analytical methods:

 

 

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  "The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression," by Scott Sumner, is yet another Keynesian effort to disparage gold standard and other rules-based monetary policy disciplines as alternatives for the never-ending failures of Keynesian fiat money efforts at discretionary fiscal and monetary policy.
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Sumner may be placed in the monetarist class of Keynesians.

 

Sumner cherry picks the facts that can be interpreted as supporting his assertions about the Great Depression and generally relies on opaque aggregates that hide more than they reveal.

 

The Depression and credit crunch  problems could all have been overcome simply by expanding a fiat money supply to inject additional effective demand into the economy or by suitable manipulation of gold reserves.

 

It would clearly be "confused psychology" to reject this Keynesian view.

  Sumner emphasizes monetary manipulation policy rather than budget deficit fiscal policy and he may thus be placed in the monetarist class of Keynesians. He commendably presents his concepts in plain readily accessible prose, but demonstrates and reinforces  his analysis  with Keynesian  mathematical models. Unsurprisingly, a substantial claque of modern economists has readily climbed on board to praise the book.
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  Sumner's analysis is narrowly focused in the fashion typical of Keynesian macroeconomic analyses. He cherry picks the facts that can be interpreted as supporting his assertions about the Great Depression and generally relies on opaque aggregates that hide more than they reveal. Ignored are many of the ordinary facts of the interwar economy. The shallowness of the analytical effort is thus stunning.
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  Disregarded or denigrated are numerous fundamental economic weaknesses of government policy outside the monetary sphere that had become increasingly notorious in the early months and years of the Great Depression. They could all have been overcome simply by expanding a fiat money supply to inject additional effective demand into the economy or by suitable manipulation of gold reserves.
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  What a wonderful world Keynesians live in. No need to disturb politicians with the need to reverse their disastrous policies. Just throw money at the economy and engage in price fixing in the interest rate markets and all will be well. No need to worry about government debt. It can all be monetized. Central banks with fiat money systems "never run out of ammunition."
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  No need to disturb politicians like Barney Frank and Chris Dodd who created and preserved many of the policy incentives responsible for much of the housing and mortgage securities bubbles that blew up in 2007. See, Morgenson & Rosner, "Reckless Endangerment." Suitable monetary manipulation is all so easy, it would clearly be, as Keynes asserted, "confused psychology" to reject it.
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Inherent long term weaknesses can all be disregarded if we just limit analysis to the short term immediate responses to monetary inflation policy.

  Not so fast! It's obviously not all that easy.
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  It turns out that there have been repeated failures during this last century in the implementation of increasingly unrestrained monetary policy by dozens of different central banks, in large and small nations, under hundreds of different central bankers, much of which Sumner acknowledges.
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  Indeed, monetary expansion policy has been attempted thousands of times by hundreds of nations over the millennia without a single sustainable success. Typically, it begins with an economic boom and moves through a period of increasingly onerous unintended consequences to end in insolvency or some form of stagflation that may be justified as "the new normal."
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  However, that can all be disregarded if we just limit analysis to the short term immediate responses to monetary inflation policy, which is also in the general fashion of Keynesian analysis. It is also the fashion of pyramid scheme salesmen. The politicians who appoint Keynesians to prestigious positions in government are only concerned with the next election cycle, so they care not.
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He focuses on policies affecting the gold, money, and labor markets.

  The role of government monetary and labor policy misadventures in the onset and duration of the Great Depression are the focus of Sumner's book. Government policy outside this narrow focus disappears from the story or is mentioned just in passing. He focuses on policies affecting the gold, money, and labor markets.
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  The importance of these policies is obvious, but the narrowness of focus inevitably overstates the case. He concedes that gold market analysis can not be done mechanically. Expectations created by policy matter.

  "[It] is essential to look at how a specific gold market disturbance affects policy expectations, and no mechanical model can do justice to the variety of complex factors that go into the formation of those expectations." (Indeed!)

The hobbled gold standard:

 

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  An explanation of the dysfunctional gold standard system in effect after most of the advanced nations rejected the disciplines of the rules that made the system work before The Great War - WW-I - occupies the bulk of this book. The constraints - the disciplinary mechanisms - imposed on monetary policy by the gold standard, are discussed by Sumner.
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The rules-based gold standard never prevented the business cycle. Indeed, it relied heavily on the business cycle. However, it minimized contractions by imposing disciplines that political leaders hated but badly needed, kept contracting periods short, maximized resiliency and facilitated economic growth.

  The gold standard after WW-I was hobbled by political policies and could thus no longer be expected to function properly, Sumner acknowledges. There was no longer "a stable international gold standard."

  "For the remainder of the 1930s, a hobbled gold standard did far more damage than would have been possible from either a pure gold standard or a pure fiat money regime."

  Under the rules-based gold standard, some national economies were always expanding while others contracted. An increase in exports from contracting nations to expanding nations could powerfully assist recovery for contracting nations. See, Friedman & Schwartz, Monetary History of U.S.(I), at segment on "The Adjustment Process of the Gold Standard."
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  The rules-based gold standard never prevented the business cycle. Indeed, it relied heavily on the business cycle. However, it minimized contractions by imposing disciplines that political leaders hated but badly needed, kept contracting periods short, maximized resiliency and facilitated economic growth.
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When most of the advanced nations refused to play by gold standard rules after WW-I, the system unsurprisingly broke down. There was an immediate increase in the competition for gold and hard currency reserves, ultimately resulting in an escalating trade war.

  The 1921-1922 depression is frequently referred to by Sumner as a benchmark for his analysis. Unfortunately, the 1921-1922 depression involved the liquidation of much of the massive economic and financial distortion of the Great War and is thus hardly a suitable benchmark for Great Depression or any other peacetime economic contraction period. See, Grant, Forgotten Depression of 1921-1922.
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  When most of the advanced nations refused to play by gold standard rules after WW-I, the system unsurprisingly broke down. There was an immediate increase in the competition for gold and hard currency reserves, ultimately resulting in an escalating trade war. Suddenly, business cycle fluctuations became increasingly coordinated among the major nations, making contractions more dangerous and recovery much more difficult.
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Gold and hard currency "hoarding" become an inevitable result of the rejection of monetary discipline.

  This business cycle coordination phenomenon continues into current Keynesian times driven by the widespread use of discretionary monetary and fiscal policies. The Great Depression of the 1930s, the Keynesian Great Inflation of the 1970s, and the booms and busts of the first decades of the 21st century could not have happened under the rules-based gold standard or similar rules-based monetary systems.
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  Gold and hard currency "hoarding" become an inevitable result of the rejection of monetary discipline. Among the results is the approximately 90% decline in the dollar with respect to gold since 1970, the hoarding of huge reserves of hard currencies and, most ominously, a highly coordinated world-wide business cycle among the advanced economies..

Sumner's New Keynesian Analysis

Keynesians - Old and New:

Nominal spending growth can and should be determined by monetary policy.

  The "new" Keynesians, like the old Keynesians, inevitably fail to "obsolete" the business cycle. Their models feature "monetarist elements, an assumption that nominal spending growth can and should be determined by monetary policy rather than fiscal policy, and a greater sensitivity to the distinction between real and nominal interest rates."
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New Keynesians include a belief in the potency of monetary policy and the self-correcting mechanism of long-run wage and price flexibility.

 

Sumner bluntly rejects the Marxian views of many Keynesians about the inherent instability of capitalist markets.

  They add rational expectations, maintain focus on the interest rate transmission mechanism and interest rates as both an instrument and indicator of policy, and include a belief in the potency of monetary policy and the self-correcting mechanism of long-run wage and price flexibility.
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  Sumner spends considerable effort in setting forth the shortcomings of traditional Keynesian theory, mathematical models, and analyses, even when supplemented by rational expectations and conventional monetarism. He bluntly rejects their Marxian views about the inherent instability of capitalist markets.

  "[The] capitalist system is fairly stable when not disturbed by monetary shocks or other gross policy errors. If the [standard] IS-LM model fails to explain the onset of the Depression, the solution is not to look for mysterious forces such as 'animal spirits' or 'consumer sentiment' -- rather, the solution is to rethink one's model and look at other policy indicators."

  But fuzzy thinking is so much easier to manipulate for propaganda purposes.

Mathematical models: 

 A gold market - gold ratio - model can provide a superior fit to past events and a superior target for monetary policy. according to Sumner.
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Sumner offers only sketchy consideration of the inevitable unintended consequences of market manipulation.

 

The broad aggregates used by Sumner and other Keynesian economists are inherently variables that are derived from more basic factors. They are averages of innumerable increases and decreases. They simplify analysis at the cost of losing most of its explanatory power.

  He discusses various targets for fiat money monetary policy in the absence of gold, but offers only sketchy consideration of the inevitable unintended consequences of market manipulation.

  The "new" Keynesians have indeed made some improvements around the edges that shed some light on their previous failures, but Keynesian concepts remain rotten to their Marxian core. See, Blatt, "Understanding the Economic Basics and Modern Capitalism: Market Mechanisms and Administered Alternatives," at Keynes, "The General Theory," Introduction, 2) "The Influence of Karl Marx." See, Keynes, The General Theory (I), at segment on "The influence of Marx."
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  Sumner refers to both "Philips curve" traditional models and "New Keynesian" modern models in his mathematical analytical efforts, but mathematical analysis remains inapt for  macroeconomic analysis.  Despite the improvements, Sumner's book actually reveals the shallowness inherent in the use of macroeconomic mathematical models.
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  Among many other things, see, Scott, Capitalism, Origins and Evolution, at segment on  "The narrow scope of modern economics," macroeconomic mathematical models are all based on economic aggregates, like industrial production and aggregate demand and aggregate supply and aggregate wage levels and gross domestic product and the admittedly inaccurate aggregate price indexes, etc. The use of some basic interest rate as a money market indicator and policy target generally overlooks shifts in credit worthiness, interest rate spreads and in the profit inducement to borrow.
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  Aggregates are inherently variables that are derived from more basic factors. They are averages of innumerable increases and decreases. They simplify analysis at the cost of losing most of their explanatory power.

Simner criticizes reliance on annual and quarterly data that obscures vital monthly, weekly and daily events, which is precisely the problem with broad brush economic analyses based primarily on broad aggregates.

  Such aggregates thus obviously lack validity. They obscure reality and hide more than they reveal, providing a useful tool for the propaganda of advocacy scholars. Marx, too, ultimately misused averages as independent variables rather than dependent variables to overcome theoretical difficulties. See, Karl Marx, Capital (Das Kapital), vol 3 (I), at segment on "The influence of labor use values on profit."
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Mathematical economists no longer even pretend the competence to provide accurate economic forecasts. Their "projections" routinely miss vital economic turning points and prove unreliable as indicators even of ordinary levels of economic performance. See, Hendry and Ericsson, "Understanding Economic Forecasts."

  When it suits his purposes, Sumner can be critical of analytical methods that paint with a broad brush and obscure vital details. He criticizes reliance on annual and quarterly data that obscures vital monthly, weekly and daily events, which is precisely the problem with economic analyses based primarily on broad opaque aggregates.
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The "gold standard" view:

  The role played by the gold standard in the Great Depression is the focus of Sumner's analysis. It is his "gold standard view."
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Interest rates and commodity prices were determined by international markets, so none of the advanced nations could have had a truly independent monetary policy.

 

Changes in the ratio of gold reserves to currency "directly affect aggregate demand and the world price level" and provide an effective target for monetary policy.

  Since the gold standard impacted monetary systems worldwide, it is inapt to focus on monetary developments in any particular nation, Sumner reasonably points out. Interest rates and commodity prices were determined by international markets, so none of the advanced nations could have had a truly independent monetary policy.

  Under the rules of the gold standard as in effect prior to World War I, all nations were constrained by gold standard disciplines. No nation, not even Great Britain, had a "truly independent monetary policy." It was the rejection of those disciplines that left monetary policy adrift, subject to the ultimately far more onerous and unavoidable disciplines of the money markets.

  Sumner focuses on gold reserve ratios. Changes in the ratio of gold reserves to currency "directly affect aggregate demand and the world price level" and provide an effective target for monetary policy. He views changes in gold reserve ratios as fundamental causes rather than as just a part of the financial transmission mechanism.

  "[Without] the large increase in central bank gold ratios during 1929-1930, it is difficult to see any plausible mechanism by which aggregate demand would have plummeted during the 1930s." (emphasis Sumner)

  This is a confession of deplorable ignorance of the basic economic events of the interwar period. But, of course, by beginning his analysis with the changes in gold reserve ratios, Sumner effectively hides many of the "plausible mechanisms" that were responsible for those changes. See comments in #Wage shocks, below.

Sumner also discovers that gold market factors were intimately related with economic events throughout the Great Depression.

 

Sumner thus can argue incredibly that "there were no significant policy failures in the period preceding the Wall Street crash of 1929." (emphasis Sumner) There "was no dramatic break in the growth rate of U.S. monetary aggregates in the year following the crash."

  Gold market shocks were often the most powerful policy factor during the Great Depression, Sumner asserts. Analyzing gold ratio developments, he concludes that "world monetary policy tightened sharply between October 1929 and October 1930." He also discovers that gold market factors were intimately related with economic events throughout the Great Depression. (What a surprise!)

  Are changes in gold reserve ratios fundamental causes of economic events or just part of the financial transmission mechanism by which fundamental factors impact economic events? Keynesians don't really care!

  Changes in gold reserve ratios are points in the infinite cause-and-effect chain that can be influenced by monetary manipulation, and any failure to indulge in appropriate monetary manipulation is thus magically transformed into a fundamental cause. Sumner thus can argue incredibly that "there were no significant policy failures in the period preceding the Wall Street crash of 1929." (emphasis Sumner) There "was no dramatic break in the growth rate of U.S. monetary aggregates in the year following the crash."

  When political policies undermine the economy, Keynesian views shield the politicians from responsibility for the resulting economic disruptions. That's why politicians  love and appoint Keynesian economists to prestigious posts in government. The unfortunate result may be an accumulation of disruptive policies. For example, many of the policies responsible for the housing and mortgage securities crash of 2007-2009 are still in existence. See, Morgenson & Rosner, "Reckless Endangerment." See, Understanding the Credit Crunch; Tavakoli, "Dear Mr. Buffett;" Cooper, "Origin of Financial Crises."

Wage shocks and industrial production:

  "Wage shocks" are the one significant fundamental factor that Sumner adds to his analysis. He identifies five wage shocks flowing from New Deal policies that set back promising recoveries.
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  "Seventeen high-frequency changes in the growth rate of U.S. industrial production" that can be explained in substantial part by gold standard factors or wage shocks, are identified by Sumner

  If "wage shocks" played some significant role in Great Depression events, could it be that there were other fundamental factors - "real" economy factors - that also had significant impacts? Sumner does perforce recognize a few, such as the German financial crisis, the Hoover debt moratorium, and the devaluation of the pound in 1931, and the approach of WW-II later in the decade. However, for the most part, Sumner confesses his inability to identify other such events - perhaps because he doesn't really want to. They distract from his thesis.
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  Industrial production is certainly an important segment of the economy, but it does not by itself provide an adequate proxy for  events in the whole economy.

  1. Agriculture was a huge sector of the economy during the 1920s and 1930s.

  2. Events in export and import markets were vital for such segments as agricultural cash crops, industrial commodities, steel, the automotive industry, and transportation.

  3. A wide variety of service sectors played major roles, as did private sector investment levels and private consumption levels.

  4. Total unemployment statistics are also obviously vital indicators of events.

  The focus on the industrial production aggregate facilitates the absurd denial of the differences in economic impact of government sector activity and private sector activity in the typical Keynesian fashion.

Correlation analysis:

 

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  Public and private gold "hoarding" - an increase in demand for gold - pushes up the price for gold in accordance with basic supply and demand theory, Sumner points out. As the basic monetary metal, a rise in the gold price imposes deflationary pressures on other commodities and economic factors.
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He thus falls back on correlation analysis.

  Impacts of gold market fluctuations are highly complex and difficult to analyze, Sumner acknowledges, He thus falls back on correlation analysis.
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Gold market events correlated not just with one or two broader economic and market events but with dozens of them. Sumner thus justifies an economic analysis based overwhelmingly on correlations.

  Correlation is not causation, Sumner concedes. However, he emphasizes that gold market events correlated not just with one or two broader economic and market events but with dozens of them. He thus justifies an economic analysis based overwhelmingly on correlations.

  However, Sumner is indeed cherry picking among evident correlations. For some prominent examples:

  • That domestic and international crop reports and the impacts on the major cash crop markets of weather repeatedly correlate with broader market and economic events, especially in the summers of 1929 through 1937, is not something he deigns to discuss. See, Blatt, "Understanding the Great Depression and Failures of Modern Economic Policy: The Story of the Heedless Giant," (2016)

  • The close correlation between stock market events and steel production reports and railroad car loading reports is for the most part ignored. See, Great Depression Series of articles beginning with Great Depression: The Crash of '29, It is not until October, 1937, that Sumner deigns to take notice that a sharp stock market drop occurred at the same time as news of sharp declines in steel production, but he completely overlooks the connection.

   "[On] days of some of the sharpest price breaks, there was little news other than reports of sharp declines in steel output." (Really!)

  Would it be too much to expect of Sumner that he check how often during the interwar period that market moves correlated with expectations shocks in steel production reports?

  • There were also, of course, many temporary factors. For example, in September and October, 1929, reports that brokers loans were rising rapidly even as the stock market began to decline became a serious factor in the markets.

  Sumner mentions the market responses to reports of turbulence in Germany and Great Britain in 1931, but fails to explain the role of the reparations, war debts and trade war constraints in the problems of those two nations.
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  While many of the market responses attributed by Sumner to events in the gold market lasted for just days or even just hours, the economic and market responses to crop news about the nation's great cash crops - cotton, corn, wheat and the other grains - were frequently dramatic and lasted for weeks and even months. Brokers loan reports frequently dominated market moves during the critical two months from the middle of September, 1929.
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  Economic and market responses were generally closely in line with the significance of the crop reports. It is not until the sharp market declines of November, 1937, that Sumner deigns to take note without further evaluation of the decline in wheat prices "underway for eight straight days,"
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  Warning! When evaluating market correlations you must keep in mind that insider trading was widespread during those days, so the markets frequently began to move prior to reports of significant business or financial results. This was especially true of railroad car loadings, which took more than a week to compile.

  Sumner focuses on stock market correlation with gold market and gold reserve fluctuations - a very slippery form of analysis. He has a touching faith in efficient market theory that supports those parts of his analysis based on immediate stock market fluctuations.

  Since gold as money and reserves was a basic part of the complex financial mechanism, it is perfectly normal to expect such financial factors to respond visibly to almost all major economic and financial developments. Sumner does refer briefly to a variety of political and economic factors but finds few other than wage shocks and monetary and banking panics of major import.

  Skipping over that which he doesn't want to see, Sumner does marshal evidence from contemporary business news accounts that can be interpreted as supporting his thesis.

  "[Daily] indices of commodity prices often responded strongly to monetary shocks and can provide a timely indicator of deflationary shocks hitting the interwar economy."

  The contemporary financial news covered many powerful "real" economy influences on commodity price movements that Sumner does not deign to include in his analysis.

"We don't know of any 'real' factors that were even close to being powerful enough to produce a depression after 1929."

 

"The mixture of gold market and labor market shocks can explain the high frequency changes in industrial production, and indeed can explain the Great Depression itself."

  Sumner does refer to "root causes." However, his "root causes" are confined to gold and money market factors and labor market factors. Indeed, "we don't know of any 'real' factors that were even close to being powerful enough to produce a depression after 1929."

  "Establishing causality in macroeconomic history is something like peeling an onion, or opening a Russian doll. As each layer is removed, there always seems to be another layer inside. - - - [The] observed pattern of interwar wage and price cyclicality suggests that aggregate demand and autonomous wage shocks can explain much of the Great Depression. - - - On the supply side, there were five autonomous wage shocks during the New Deal, each of which led to higher nominal wage rates. On the demand side. a series of gold market shocks produced a highly unstable price level, which then impacted real wage rates. The mixture of gold market and labor market shocks can explain the high frequency changes in industrial production, and indeed can explain the Great Depression itself."

  Sumner is quite correct that the Great Depression was not the result of just one or two causes. It was a noxious combination of government policies that ultimately brought down markets world-wide, all of which was prominently featured in the contemporary financial press and mulishly maintained even as the world fell apart. See comments in #Great Depression causes" below.

  Sumner incredibly assumes that the financial distortions of WW-I had all been substantially resolved by 1929.

  Sumner thus ignores the post-World War I context, the disruptive provisions of the Treaty of Versailles and the financial burdens of massive reparations and dollar-denominated war debts that were impossible to service if dollars could not be earned by sales to the tariff-constrained markets of the U.S.
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. These are just some of the devils in the details that are submerged in Sumner's broad opaque aggregates, but they dominated contemporary business news reports that Keynesians and monetarists make heroic efforts to ignore.

Targeting nominal GDP:

  That aggregate demand was "allowed to fall" was the proximate cause of the economic contractions of both 1929 and 2008, according to Sumner.
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Sumner agrees with Ben Bernanke that a central bank with a fiat currency "is never out of ammunition." The bank need only throw enough newly created money into the economy to make up for the insufficient demand and prevent the contraction. "Our policymakers allowed it to happen," Sumner insists with respect to the mid-2008 contraction. 

  The fall of aggregate demand is the root cause of its own fall and need only be prevented from falling by central bank monetary expansion to avoid all the painful symptoms.

  "In retrospect, we now understand that falling GDP was the root cause of the financial distress of the 1930s."

  He agrees with Ben Bernanke that a central bank with a fiat currency "is never out of ammunition." The bank need only throw enough newly created money into the economy to make up for the insufficient demand and prevent the contraction. "Our policymakers allowed it to happen," Sumner insists with respect to the mid-2008 contraction. 

  "With a more expansionary monetary policy that kept expected nominal GDP growth up around its 5 percent long-term average, banks would have done much better, and the recession would not have spread beyond construction to sectors such as manufacturing and services."

  However, Sumner acknowledges the limits of government efforts to administer markets when discussing the unintended consequences that swamped New Deal gold and silver buying programs. Markets are always full of surprises for those foolish enough to think they can administer them.

  Fundamental causes are thus reduced to mere symptoms of the refusal to counter a decline in aggregate demand with newly created money in the Keynesian fashion.

  "If there is a root cause to the Great Depression, it lies somewhere in the painful birth of the modern world, the difficulty that societies had in letting go of their emotional attachment to the 'barbarous relic,' and moving to a more mature, and interventionist, monetary policy."

  If it's all that easy, those policymakers must have been afflicted with "confused psychology." After all, it all works out just fine - according to the "cutting edge 'new Keynesian' mathematical models" that have never been validated. Indeed, Keynesians admit that their models cannot be validated because Keynesians admit they do not have the competence to provide economic forecasts. See, Hendry and Erricson, "Understanding Economic Forecasts," Like the clerics of some religion, they insist that the truth of their assertions be taken on faith,
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  Keynesians thus provide only "projections." They are handicapped because they cannot forecast the failure of their own policies - which have always ultimately failed. But, of course, Sumner's supplementation of new Keynesian monetarism is sure to fix all that.

For fiat monetary systems, monetary policy should target the objective so the objective will always be achieved.

 

Sumner reasonably complains that the "quantitative easing" of 2008 was sterilized by a vast increase in requirements for reserves.

 

The demand to hold gold and currency is called "hoarding" by Sumner in the Marxian fashion.

  Bernanke and other Keynesians assure us that they have now devised "numerous 'foolproof' strategies" for implementing expansionary policy even after basic interest rates hit zero. For fiat monetary systems, Sumner asserts that monetary policy should target the objective so the objective will always be achieved. If the goal is 2% inflation, expand the money supply until 2% inflation is reached and then adjust to keep it there. The same applies to the targeting of GDP growth. He recognizes that such targeted aggregates can be influenced but can not necessarily be controlled, but makes no effort to consider unintended consequences.

  What could possibly go wrong! Doesn't it all work so beautifully in the mathematical models?
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  The unintended consequences of the current policy mix of interest rate suppression and its necessary accompaniment of credit restrictions and complex proliferating regulations are numerous and continuously compounding. The actuarially based financial plans of pension and insurance funds are increasingly distressed. An increasingly leveraged economy is the inevitable result of artificially low interest rates. Tens of thousands of pages of costly new regulations are imposed in the effort to make the economy safe for expanding deficits, but as interest rates rise, bubbles will pop.
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  Such policies inevitably involve government determination of winners and losers. Savers, bond mutual funds and other fixed income investors, small businesses and the middle class broadly, are among those that have been clobbered. Many of the losers become single-issue voters - many of whom voted for Trump.
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  As difficult as the domestic considerations are, complexity and difficulty increases exponentially with international considerations. The dollar is, after all, the world's predominant reserve currency, a status of enormous benefit to the U.S. Inevitably, turbulence abroad will wash ashore in the U.S.

  Sumner reasonably complains that the "quantitative easing" of 2008 was sterilized by a vast increase in requirements for reserves, most of which were kept in the Fed where they could not affect prices or provide much stimulus.
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  The effectiveness of monetary policy, Sumner asserts,  is more accurately shown by the gold reserve ratio and gold market prices during the interwar years than by interest rates. The demand to hold gold and currency is called "hoarding" by Sumner in the Marxian fashion, and he concludes that the rate of such demand strongly influences aggregate demand. 
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Commodity and financial markets are assumed to be relatively efficient and thus reliable indicators of the implications of various "shocks" and other major factors.

  Sumner uses a variety of mathematical models for particular purposes. He combines monetarist and "New Keynesian" features. Rational expectations are emphasized. Current aggregate demand (GDP) is viewed as dominated by expected future aggregate demand.
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  He concentrates on demand factors in typical Keynesian fashion, restricting consideration of supply factors for Great Depression analysis to little more than changes in wage rates. By concentrating on short-term phenomena, aggregate wage and price movements can be simplified as "sticky," and unintended consequences can be ignored in the Keynesian fashion. Commodity and financial markets are assumed to be relatively efficient and thus reliable indicators of the implications of various "shocks" and other major factors. Of course, only short term implications are discussed.
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  Recent work on the impacts of sticky wage levels on the Great Depression are viewed critically by Sumner. As price levels declined much faster than wages during the early years of the Depression, real wages increased substantially for those fortunate enough to maintain full time jobs, but labor productivity declined substantially. Since Sumner's work concentrates on gold market disturbances that generated wage and price shocks, he reasonably concludes that conflicting theories on the impacts of wage and price inflexibility do not affect his work.
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New Deal labor legislation played a major role in extending and deepening the Great Depression.

  The combination of gold market shocks and wage shocks determines Great Depression real wage rates which, by itself, correlates strongly with Great Depression industrial production, Sumner points out. New Deal labor legislation played a major role in extending and deepening the Great Depression.

    Somehow, the "projections" derived from those "New Keynesian models" have not had a very good run during this last two decades. They totally missed the dot-com bust and the subsequent Credit Crunch recession. They substantially missed the slow pace and partial nature of the recent recovery and the increasingly massive distortions that are always the unintended consequence of market price fixing efforts. Credit bubbles, especially in the bond markets, expanded ominously and real estate bubbles are again in evidence. The impacts abroad are often even more disturbing. The old Keynesian mathematical models suffered similar results in the 1970s.
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  The Keynesian policymakers have rushed to claim victory since the 2007-2009 depression. Like ancient priests who took credit for the recovery of the midwinter sun, they ignore the ordinary resilience of the economic system and rush to take credit for recovery from economic contractions. However, a substantial portion of the electorate has apparently not been impressed.
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  Mathematical  models are supposed to reflect reality, but the reflections in macroeconomic models are like those from Alice's looking glass. Once you take a few steps into them, you bump into the Cheshire cat and the Mad Hatter. No matter what those who presume to administer markets see in their mathematical models, the markets ultimately will always win - viciously.

Gold market shocks:

  Sumner's "New Keynesian" analysis of the Great Depression sharply departs from existing Keynesian and monetarist explanations.
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Changes in reserve ratios always unambiguously affect price trends. They either reflect policy easing or tightening as reserve ratios fall or rise.

 

The gold reserve ratio is unambiguously within the policy choices of central banks - either individually or worldwide.

  Changes in the gold reserve ratio lack the ambiguity of interest rate or monetary base changes. Changes in reserve ratios always unambiguously affect price trends. They either reflect policy easing or tightening as reserve ratios fall or rise. Keynesian emphasis on changes in national interest rates or monetarist reliance on changes in the national monetary figures always involve a balance between cause and effect.
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  Sumner provides a model for analyzing shifts and impacts of gold reserve ratio fluctuations in the interwar period. He discusses limitations on such models.

  "It would be nearly impossible to estimate stable parameter values in a general equilibrium time series model of the international gold standard, because so many of the secondary effects  -- private gold hoarding, currency hoarding, sterilization  of gold flows, etc. -- are extremely sensitive to a wide variety of macroeconomic conditions."

  However, the gold reserve ratio is unambiguously within the policy choices of central banks - either individually or worldwide.

  "But at least with the gold reserve ratio we have a truly exogenous indicator of monetary policy and thus a starting point for the analysis of policy actions of individual central banks under the international gold standard."

 Expectations:

 

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  The Great Depression was international, Sumner correctly emphasizes. "It makes no sense" to explain world price level changes in terms of a national currency - even one as important as the dollar or the pound.  However, complexities intrude in any event.
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"It makes no sense" to explain world price level changes in terms of a national currency - even one as important as the dollar or the pound.

  Sumner thus includes financial market expectations about gold reserve ratio policy and international coordination in his analysis. What did the markets expect, and what happened when their expectations went unfulfilled, he asks.

  "[The] most important influence on aggregate demand is change in the expected future path of monetary policy." (emphasis Sumner)

  When gold pegs are abandoned temporarily, expectations arise as to the level at which they will be restored.

  This question remains relevant for the many soft currency nations that today have currency pegs to the dollar or other hard currencies.

Only monetary policy that appears credible will have desired impacts on aggregate demand.

  Monetary policy credibility is vital. Only monetary policy that appears credible will have desired impacts on aggregate demand.
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 Current interest rates or money supply aggregates are not nearly as important as "changes in the expected path of policy over time."
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Market responses would restore market dominance.

  Gold standard constraints meant that all monetary policy deviations were expected to be temporary. Market responses would restore market dominance. This explains much of the futility of the massive temporary monetary policy effort in the spring of 1932 and why permanent  spring 1933 dollar devaluation was so effective.

  "Thus FDR succeeded with a reflationary policy without adjusting either of the two most well-known tools of monetary policy: short-term nominal rates and the monetary base. There is no better example of how the gold market approach to macro can yield insights not seen when using traditional monetary policy indicators."

   This assumes the validity of Sumner's counterfactual that the revival was sustainable in the absence of the regulatory burdens and wage shock of the NIRA. Keynesians are always adept at finding excuses for failure. They've had so much practice.

Great Depression causes:

  The U.S. gold reserve ratio "increased sharply after October 1929, and that contractionary policy seems to have triggered the Great Contraction," according to Sumner.

  Or was it the Great Contraction, that arguably began in mid-August, 1929, that caused the increase in the gold reserve ratio? Indeed, the Great Contraction in much of Europe clearly began in the first half of 1929 if not earlier, following the sharp decline in the availability in Europe of Wall Street credit in the last half of 1928. That massive financial shock must certainly have had some impact on gold reserve ratios. See, comments in #The NIRA, below.
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  Indeed, gold market shocks had many impacts, but they themselves often flowed from numerous more fundamental factors hidden when the analysis begins with the gold market shocks. Wage legislation, on the other hand, has a clear starting point and associated causal economic chain.
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  However, why bother to worry about that if simple intervention with fiat monetary expansion can interrupt the causal chain at any point? Kindly don't complicate matters with unintended consequences and the noxious initiating factors that may escape liquidation and thus continue in existence if left unattended.

  Other primary monetary influences on the Great Contraction recognized by Sumner include periods of currency hoarding from fears of bank closures, FDR's dollar devaluation increase in the price of gold, and low interest rates that reduced the cost of holding currency.
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  Sumner reasonably compares the industrial boom and bust of the late 1920s to the information technology and telecommunications boom and bust of the late 1990s, but then provides a remarkably inaccurate conjecture.

  "Although over-investment may have occurred in the 1920s as well, it is not at all obvious that booming industries such as automobile manufacturing would have been overextended had the U.S. economy continued to grow at a healthy rate during the early 1930s."

  In fact, it was the sudden decline in automotive exports rather than domestic sales that undermined the industry and its whole supply chain during 1929. That's the kind of mistake you make when you rely on aggregates like "aggregate demand" for your analysis instead of real factors like the cumulative impacts of nearly a decade of trade war constraints on international markets.
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  Massive sums were in fact poured into agricultural price supports in 1930 and 1931, but they only made matters much  worse by encouraging massive increases in agricultural surpluses that overwhelmed storage facilities. Perhaps the government should have bought and warehoused the millions of rapidly depreciating surplus trucks and autos? Perhaps General Motors should have been paid to not produce? That would have gone over quite well with the electorate.
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  Typically, Sumner ignores the unintended consequences of government market interventions. All problems can be countered by throwing money at them. It just wasn't enough, the Keynesians assert. It never is!

Sumner incredibly asserts that uncertainty arises about the causes of the Great Depression because there were no obvious culprits.

  Monetarist, Austrian, and old Keynesian views of the Great Depression are evaluated by Sumner and found wanting. Both market bubble and market irrationality theories fail objective evaluation.
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  Sumner incredibly asserts that uncertainty arises about the causes of the Great Depression because there were no obvious culprits.

  Sumner thus continues to demonstrate a deplorable ignorance of the interwar economy. He fails to acknowledge the numerous articles in the contemporary financial news that persistently provided clear explanations of economic conditions that incumbent policymakers persistently chose to ignore.
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  The papers accurately reported the beginnings of the Great Depression that became evident early in 1929 in Europe except for France and Scandinavia, the fears in the grain markets due to the huge worldwide surplus carryover from the record trade-war protected crops of 1928, and the closing of the European grain import markets as a result of huge trade-war protected European crops.
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  Sumner appears oblivious to the importance to investors of declining steel production and railroad car loadings in October, 1929, the spectacular year-long surge in brokers loans that revealed the speculative nature of the markets that year, and the sharp decline in commodity prices from the middle of August, 1929, as triggers for the October and November stock market crashes. He apparently has no knowledge of these and other common investment indicators.
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  In those days, the nation's economy was built with steel and ran on railroads, and the agricultural sector was still a major component. The professionals in the investment trusts saw enough from such indicators so that they were fleeing U.S. stock markets by that September. However, prominent economist Irving Fisher, a Keynesian before Keynes, remained publicly in denial of the implications of these common indicators through the entire period of the Crash, just like Sumner now.
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  By 1928, the trade war had made it impossible for Germany to meet its reparations obligations, for the Allied nations to earn the dollars needed to service their WW-I dollar-denominated debts, and for small nations created by the Treaty of Versailles to achieve economic viability. Behind tariff protection, European agriculture had expanded sufficiently by 1930 to satisfy all of its grain needs, thus closing the vital European import markets for North American grain for the rest of the decade and swamping the world with huge surplus agricultural carryovers. Among much else, about 75% of the value of the major North American cash crops was ultimately destroyed by the loss of export markets. See, Blatt, "Understanding the Great Depression and Failures of Modern Economic Policy: The Story of the Heedless Giant" (2016), at Part I, "Government Economic Policy." See, Great Depression Series of articles beginning with Great Depression: The Crash of '29,
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  As Sumner acknowledges, the interwar economy was "much more commodity intensive" than today. He does not deign to acknowledge that the interwar economy was much more agriculturally intensive than today.
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  Exports accounted for 20% of the automotive market, the loss of which had wide ramifications. Automotive exports suddenly shifted from boom to bust in the first half of 1929. This bust occurred just as production peaked in April, 1929, resulting in a massive inventory increase that heavily weighed on  the markets until brought down to normal levels in February, 1930, by domestic sales that continued at good levels. Wall Street reduced its lending to Europe by 50% in the last half of 1928, so Europe, among many other things, cut its purchases from Detroit in the beginning of 1929, just one of the vital economic developments submerged in Sumner's aggregates.
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  Add the collapse of rural real estate and rural banks throughout the nation, and the widespread big hit from the Keynesian multiplier running in reverse, and only the intentionally blind could fail to find sufficient 'real' factors to explain the early years of the Depression.
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  No change in the gold reserve ratio or even a flood of fiat currency would have reopened the trade war constricted export markets. The U.S. electorate firmly insisted on payment of the war debts. They are hardly likely to have accepted a policy by which U.S. gold and currency would be granted to debtors for debtor payments to the U.S.
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   The trade war and WW-I aftereffects explain much of the Great Depression, and they do that not by mere correlations but by direct chains of causation prominently highlighted repeatedly in the contemporary financial press. It requires an intentional denial of reality to dismiss it.

  Sumner provides equations with which to trace the changes in world aggregate real gold demand and the stock of monetary gold, refined to show changes in the gold reserve ratio and changes in the real demand for currency.

  "[An] increase in gold demand is deflationary, whether caused by the hoarding of currency or a higher gold reserve ratio."

  After a decade of price stability, prices began to drop dramatically from October, 1929.

  "The] proximate cause of the massive deflation was a large increase in real gold demand."

France was the source of about 50% of the gold demand increase, and the U.S. was the source of about 20%. At first, the public still preferred cash. The culprits, according to Sumner, were the central banks, which increased their gold reserve ratios.

  France was the source of about 50% of the demand increase, and the U.S. was the source of about 20%. At first, the public still preferred cash. The culprits, according to Sumner, were the central banks, which increased their gold reserve ratios.

  This could not have happened if the central banks were still submitting to the disciplines of the gold standard rules.

  By 1932, the French gold reserve ratio was twice as high as in 1914, prior to WW-I. (The devaluation of the pound in September, 1931, rendered all reserves suspect except for gold.)

  For the U.S., Sumner shows a close correlation between the rise in the gold reserve ratio and the decline in industrial production. He provides a graph that purports to show this correlation. While it shows industrial production declining steadily from the summer of 1929 through 1930,  the increase in the gold reserve ratio is very erratic, with some short periods of sharp decline that had no apparent correlation with industrial production. However, this is neither surprising nor by itself a refutation of Sumner's thesis.

Cherry picking the Crash of '29:

  U.S., France and Great Britain were all hoarding gold at the same time by 1929.
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  France and Great Britain were trying to get back on the gold standard, and the U.S. was actively sterilizing gold inflows to prevent them from causing price inflation.

   Trade flow adjustments were supposed to reduce dependence on gold flow adjustments, but trade flow adjustments were suppressed by trade war constraints. This is a basic factor that Sumner fails to discuss. In the absence of appropriate adjustments in trade flows, gold flows could do little more than delay monetary crises.

  Demand for gold increased at a 2.53% annual rate from December, 1926 to October, 1929, and then soared by 9.52% during the next twelve months.
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  The sharp stock market decline in May, 1929, is attributed by Sumner to speculation about a Federal Reserve interest rate increase.

  He completely ignores the plunging wheat prices that declined past the traditional $1 per bushel bear market signal under the influence of the vast surplus carryover from the record 1928 crop.

  The subsequent spectacular summer bull market is incredibly attributed by Sumner to the easing of credit demand and Fed interest rate inaction.

   However, even short term money market rates remained well into double digits throughout the summer bull market, making this assertion by Sumner more than just incredible.
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  Completely ignored are the soaring agricultural commodity prices driven by reports of sharply reduced grain crops in North America, Argentina and Australia. The gold reserve ratio has no impact on the weather, but weather events with major impact on the harvest have significant impacts on gold, money, financial markets, and the economy.

  This does not mean that Fed rate increases were inconsequential. However, Sumner dubiously attributes a sharp decline in the markets on August 9, 1929, to a Fed increase in its discount rate from 5% to 6%.

  The increase was effective only in New York, while the acceptance rate was actually lowered to 5%. The rapidity with which the markets resumed their rally demonstrates the actual insignificance of that policy move. After all, rates in the short term money markets were well above 10% and had been there for months without laying a glove on the stock market bull. Any individual one percent or smaller rate change by the Fed cannot serve as an explanation for a major market and economic event like the spectacular bull markets of the summer of 1929.

Sumner's explanation concentrates on central bank monetary manipulations, completely ignoring the dramatic increases in the brokers loan figures and the declines in steel production and, ultimately, in railroad car-loadings, too. 

  In the weeks prior to the Crash, the stock markets whipsawed with increasing volatility. Sumner's explanation concentrates on central bank monetary manipulations, completely ignoring the dramatic increases in the brokers loan figures and the declines in steel production and, ultimately, in railroad car loadings, too, that visibly impacted October market fluctuations. The sharp short rebound at the end of October, just after the Crash, is ridiculously attributed by Sumner to the Fed discount  rate cut.

  However, steel production and railroad car-loadings continued to decline, and so did the stock market, which reached its 1929 bottom in the middle of November. Such temporary rebounds as that at the end of October are attributable to many factors, including the natural market response to the Crash itself. The Fed rate cut had no visible impact on any of this.

Political factors: 

 

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  However, a gold flow from the U.S. to London would have been the natural result of an end to U.S. sterilization of its gold inflows and a disciplined submission to gold standard rules. Thus, much more defensible is Sumner's assertion that gold flows to London might have prevented the monetary crisis building in London.
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Much more defensible is Sumner's assertion that gold flows to London might have prevented the monetary crisis building in London.

 

Sumner accurately presents the passage of the Smoot-Hawley Tariff Act in June, 1930, as a major cause of the sharp acceleration in stock market and economic decline at that time.

 

Early "confidence game" propaganda pronouncements and measures are correctly credited by Sumner with some short term influence on the markets.

  There was considerable international and domestic political turmoil during September and October, 1929. Sumner speculates on a number of political factors that might have had some impact on the markets and even provides some substantial discussion of the possible impacts of the Smoot-Hawley tariff legislation. He accurately presents the passage of the Smoot-Hawley Tariff Act in June, 1930, as a major cause of the sharp acceleration in stock market and economic decline at that time.

  This makes his neglect of the impacts of the existing tariffs and trade war all the more incredible. Significantly, this is one point where he does not find some monetary shock as a primary factor.
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  Without explanation, at the end of the book, Sumner casually dismisses the impact of the 1930 Smoot-Hawley Tariff. Unfortunately, he evaluates it as an individual factor rather than as an important feature in an ongoing trade war cumulating in intensity and impact since its initiation by the U.S. with the 1922 Fordney-McCumber Tariff.

  Early "confidence game" propaganda pronouncements and measures are correctly credited by Sumner with some influence on the markets.

  However, these influences were always clearly temporary in nature and quickly displaced by the continuous flow of bad economic news. By the middle of 1930, "confidence game" assurances from political, business, financial and academic authorities had become objects of ridicule.

  Sumner clearly falls from grace when he credits political events in Europe for the substantial boom and bust in the stock and corn and grain markets that summer, 1930. He erroneously asserts that the severe corn drought that summer - a "supply shock" - just "moved stock and commodity markets in opposite directions."

  The NYSE gained about $3 1/3 billion in July, clearly accompanying the increase in corn prices. Corn rose about 30, reaching above $1 per bushel by early August and dragging up the grains with it.
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  Significantly, this market surge was largely confined to corn and the grains, all of which broke sharply with reports of widespread rains in the second week or August, Yet again, the stock markets tended to accompany the agricultural markets lower, but managed to hold on to a small $ billion gain for August, to a new total of $67 billion, supported by the usual hopes for recovery during the fall business season.
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  In those days, before air conditioning and under the dominant influence of winter in the Northeastern region, the economy was generally seasonal. Sumner manages to ignore this obvious fact throughout most of his analysis, It is not until his analysis of the summer, 1937, that he deigns to mention the impact of expectations concerning the fall business season.

Bank panics had international impacts because the increase in demand for gold and currency in one nation would impact world gold markets.

  When discussing the gold and currency "hoarding" that accompanied the banking panics of the last two months of 1930, Sumner moves to much firmer ground. He points out that such bank panics had international impacts because the increase in demand for gold and currency in one nation would impact world gold markets.

  However, the Fed had enough gold to easily absorb such shocks through 1930, and acted effectively to confine the panics.

Primary Causes

1929-1930:

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  Sumner denigrates agricultural market influences on the Crash of '29 and on the market turmoil of the following year.
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  The commodity price decline in October 1929  is viewed by Sumner as a symptom of the stock market decline rather than as one of the causes of the stock market decline. He concludes that "demand shocks" had a greater impact than "supply shocks" like the summer 1930 corn drought.

  However, commodity prices were in sustained decline from the middle of August, 1929, whereas the stock market decline didn't really get started until the middle of September, and conditions in the grain  markets from the record 1928 crop had been a continuous concern throughout that spring and summer. He is clearly cherry-picking the comments in the contemporary press that support his view. It is not until the end of 1930 that Sumner recognizes the extent to which commodity price declines influenced the stock market.

  The view of such Keynesians as Irving Fisher, Ralph Hawtry, and Keynes, himself, that overproduction was one of the primary causes of the Crash of '29, is criticized by Sumner. He describes as "awkward theories" the Keynesian view that falling production was caused by overproduction. (These Keynesian views are clearly taken from the Marx propaganda myth.)

  "More sophisticated observers held that declines in both markets could be attributed to monetary factors."

It could all have been prevented or greatly mitigated by redistributing gold reserves or moving to fiat currencies that could have been greatly expanded so that there would have been unlimited sums to throw at the problems, or through appropriate currency devaluation.

  Ultimately, Sumner views as a fundamental "cause" of the Great Depression the lack of any Keynesian-type monetary manipulation responses. It could all have been prevented or greatly mitigated by redistributing gold reserves or moving to fiat currencies that could have been greatly expanded so that there would have been unlimited sums to throw at the problems, or through appropriate currency devaluation.

  Monetary factors, of course, always play a roll, but the combination of war debts, reparations, and trade war restraints were clearly predominant. Perhaps the biggest Keynesian fallacy is the assumption that government monetary manipulation  could ever be conducted without massive unintended consequences and destructive political distortions.

1931:

  Economic realities that don't support Sumner's thesis are again omitted in his analysis of the events of 1931.
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  "Industrial production rose 3.2 percent between January and April [1931] and there were numerous signs that the depression might be ending," he points out, without acknowledging the seasonality of the economy in those days.

  The surge was driven by hopes of a normal spring business revival. Much of the economy did not participate in this surge. The "signs that the Depression might be ending" were primarily illusory observations of the usual "confidence game" propagandists - political, business and financial leaders and economists - whose optimistic pronouncements were a feature of the first two years of the Depression.
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  The production surge was centered in such sectors as autos, steel, textiles and drug companies and amusement companies. These were sectors that traditionally did well leading into the spring business season.
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  After rising modestly from low levels, the N.Y. Times seasonally adjusted weekly business index was again reaching new lows by the beginning of March. Foreign trade continued to plunge at staggering multiple double digit rates. Revealingly, railroad car loadings also continued to decline. The electric power output index was at record lows.  The increase in unemployment slowed but did not stop. There was thus no real sign the Depression might be ending.
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  It all fell apart towards the end of March with the announcement of the ending of Farm Board price supports. The Farm Board had exhausted its huge $500 million fund. Slippage extended to autos and steel as the spring business revival failed to materialize. There were thus sharp losses in stock and commodity markets beginning in the last week of March as revival hopes collapsed
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  It is more than just a stretch to pretend that there were signs of an end to the Depression in this scene.

Underlying everything was gold hoarding by central banks as they increased their gold reserve ratios. Private demand for gold soared as well during the bank panic.

 

 Sumner attributes the economic fluctuations of 1930-1932 largely to gold market fluctuations, emphasizing central bank gold hoarding and gold reserve ratios. He correctly attributes much of the international monetary and deflationary problems to French and U.S. gold hoarding policies.

  Sumner relies heavily on his gold market approach for explaining "changes in aggregate demand" for the first few years of the Great Depression..
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  The initial year of the Great Depression experienced a 9.6% increase in the world gold reserve ratio "that sharply lowered output and prices after October, 1929." This was accompanied at the end of 1930 by increases in real currency demand as a result of the banking crisis. Real currency demand soared by 30% between October, 1930, and the end of 1932.
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  Just by itself, Sumner, points out, this increase in real currency demand would have had a severe deflationary impact. However, Sumner is well aware of the complex cause-and-effect relationship between real currency demand and the general economic deflation at various points in this period.
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  Underlying everything was gold hoarding by central banks as they increased their gold reserve ratios. Private demand for gold soared as well during the bank panic in the second half of 1931.
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  Sumner attributes the economic fluctuations of 1930-1932 largely to gold market fluctuations, emphasizing central bank gold hoarding and gold reserve ratios. He correctly attributes much of the international monetary and deflationary problems to French and U.S. gold hoarding policies.

  Trade war economic restraints and gold sterilization imposed rigidity on both trade flows and gold flows, and rendered the international monetary system as fragile as glass.

The immediate impacts of the June, 1931, announcement of the Hoover Moratorium plan for international obligations provides ample proof of the  international nature of the Great Depression experience and the importance of these WW-I factors.

 

However, that was all swamped by the British devaluation of the pound that September.

  War debt and reparations are finally - unavoidably - brought into the picture by Sumner when discussing events after May, 1931. He makes a good case for the impacts of German reparations and political problems on the U.S. economy.
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  The immediate impacts of the June announcement of the Hoover Moratorium plan for international obligations provides ample proof of the  international nature of the Great Depression experience and the importance of these WW-I factors.

  Stock and commodity markets surged higher around the world with the Moratorium announcement, demonstrating the widespread recognition of the reparations and war debts problems as among the fundamental causes of the Great Depression.

  Moratorium negotiations impacted market fluctuations throughout the summer and into the first half of September, according to Sumner. However, that was all swamped by the British devaluation of the pound that September.

  Also clearly more important than the German financial and political problems was the almost total failure of the expected fall business season upturn and the heavy flow of dividend casualties at that time. Germany had been a major economic and financial problem throughout the 1920s without laying a glove on the U.S. economy.

The restoration of confidence supported a significant stock market recovery in early November. Nevertheless, numerous Keynesians castigate the Fed's interest rate increases.

  British and German monetary crises had a dramatic impact on gold hoarding, which in turn had powerful impacts on financial systems. Sumner speculates on the various financial impacts.
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  Policy shifts and rumors had major impacts on the markets during October. Currency  hoarding surged in the U.S., the Fed discount rate was increased twice, stemming the gold  outflow and restoring sufficient confidence to reverse the currency hoarding.
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  Sumner accurately views the discount rate increases as one of the two alternatives - both painful - available at that time. The restoration of confidence supported a significant stock market recovery in early November. Nevertheless, numerous Keynesians castigate the Fed's interest rate increases.
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Sumner argues unconvincingly that the British stock market surge after the devaluation undermines the view that attributes economic decline to high tariffs.

  Tariffs were increased in Britain and around the world after the devaluation of the pound as competition for gold became fierce. Yet, British markets recovered swiftly after the devaluation. Sumner argues unconvincingly that the British stock market surge after the devaluation undermines the view that attributes economic decline to high tariffs.

  However, the events of September and October 1931 and the immediate British policy responses were much too complex to provide insight into any individual factor. The effective austerity program  that ultimately stabilized the pound at its new lower value and restored confidence in the diminished pound was far more influential than the tariffs at this time. Even in an increasingly autarkic world, Great Britain continued to have the trade advantages of its vast empire.

  The concurrence of U.S. stock market fluctuations with events and rumors involving Germany during the last quarter of 1931 continue to be emphasized by Sumner. He says that German problems became more important for U.S. markets than those of Great Britain.

  The effectiveness of Great Britain's austerity policies quickly restored confidence in British finances. That Germany and its financial and political problems remained an important factor for U.S. markets is not in doubt, but it was only one of a tsunami wave of trouble impacting the markets at that time.

  1. Steel production and railroad car loadings were in sharp decline.

  2. The Farm Board remained swamped with surplus agricultural carryover.

  3. The N.Y. Times business index was in uninterrupted decline through new record lows for four straight months.

  4. Exports and imports continued their inexorable decline at multiple double digit rates.

  5. Dividend casualties and poor earnings reports drove a sharp renewal of declines in a discouraged, moribund stock market.

  6. Credit markets were in an accelerating state of collapse.

  7. Although commodity price levels were fairly firm in the last quarter, after their sharp declines earlier, they nevertheless ended the year at their lowest level since 1911.

  8. The AF of L estimated that 7.5 of 48.4 million workers were unemployed.

  Such factors as these had a far greater impact in November and December, 1931, than Germany's continuing problems.

  Britain quickly ceased to be one of the problems.. The devaluation of the pound caused an immediate 10% surge in price inflation despite high levels of unemployment, but the inflation was not further accommodated by monetary inflation. The combination of devaluation and austerity led to a substantial increase in British exports despite rising tariff barriers and the acceleration of economic contraction abroad. The British balance of payments turned positive and Britain began rapidly repaying the massive loans extended to it by the U.S. and France during the devaluation crisis.

  The devaluation had lasting consequences as central banks sought to increase gold reserves and private gold and currency hoarding increased. The main transmission factor for all these problems, according to Sumner, was the rising gold reserve ratio.

  Changes in gold reserve ratios had no observable impact on weather and reports about Farm Board subsidized crops or the inexorable rapid decline in exports and imports. Steel production and railroad car loadings had more immediate impacts on the markets, and the periodic crop reports had massive impacts at various times.

1932:

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  The many factors involved in the stock market and economic turmoil of the first half of 1932, are analyzed impressively by Sumner.
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  Unfortunately, he totally omits the main factor: the total failure of the 1932, spring business revival to materialize.

  Steel production and railroad car loadings renewed their decline as early as the first half of February, automotive production was declining when it should have been increasing, first quarter earnings were a disaster, and exports and imports continued their inexorable plunge even as the financial factors covered by Sumner caused a significant stock market upsurge.
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  Among other things, the new Reconstruction Finance Corporation and a Glass-Steagall Act proved quickly effective, bringing the banking panic to a halt by March, 1932. However, the real economic factors omitted by Sumner quickly overwhelmed the financial factors covered by Sumner.
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  In the absence of any economic revival the stock market decline quickly resumed. After a modest $2.1 billion rise in February, the NYSE lost about $3 billion in March, reaching a new low of about $24 billion. But the worst was yet to come.

Spring 1932 quantitative easing:

 

"The problem was - - - the fact that the gold bloc central banks sterilized their gold inflows by sharply increasing their gold ratios. They weren't playing by the rules of the game."

 

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  Sumner explains the wide array of factors involved in the failure of the Federal Reserve Bank's spring, 1932, $1 billion expansionary open market purchase program. He accurately pinpoints the primary problem.

  "The problem was not so much the U.S. gold outflow -- a fall in the U.S. gold ratio is the expected consequence of an expansionary policy -- but rather the fact that the gold bloc central banks sterilized their gold inflows by sharply increasing their gold ratios. They weren't playing by the rules of the game."

  Indeed, gold sterilization was a significant aspect of the trade war and was clearly one of the several fundamental causes of the Crash of '29. It continued to be one of the factors blocking recovery throughout the Great Depression decade.

He analyzes the relationship between stock market fluctuations and fluctuations in the world monetary gold stock, but omits  the myriad major economic shocks from his analysis at this point.

 

The complexity of economic and financial developments is recognized briefly by Sumner, but he nevertheless quickly narrows his analytical focus to just a few factors and often to just one factor.

  Sumner extensively reviews the contrasting views on the failure of the spring 1932 $1 billion monetary stimulus program. This was a huge sum in those days. He also reviews conflicting interest rate theories, concluding that they do not change his gold market view in any case.
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  Sumner recognizes the residual question: Did gold hoarding lead to economic and stock market contraction or vice-versus?
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  He analyzes the relationship between stock market fluctuations and fluctuations in the world monetary gold stock, but omits the myriad major economic shocks from his analysis at this point. Gold market fluctuations as a transmission element rather than as a fundamental cause of economic events is acknowledged by Sumner with respect to public fears of devaluation.
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  The complexity of economic and financial developments is recognized briefly by Sumner, but he nevertheless quickly narrows his analytical focus to just a few factors and often to just one factor. His analytical efforts are undermined at this point by a total failure to account for the dramatic events in the agricultural markets that summer.

  No one factor could have caused and maintained the Great Depression at any point during the Depression decade.

Summer 1932 boom:

 

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  The stock market hit bottom on July 8, 1932, but the subsequent rally remained modest until July 19. The stock markets thereafter exploded upwards spectacularly, more than doubling from their low base in less than two months, perhaps the greatest bull surge in market history.
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  Cause and effect are reversed by Sumner. He attributes the market rallies to strength in the dollar and a resumption of gold inflows as confidence in U.S. finances were restored with the end of the Fed's $1 billion monetary policy experiment. He relies on the sharp gains in aggregate industrial production that summer that declined only marginally through the rest of the year to support his contention that the rally could have marked an end to the Depression.

The stock markets thereafter exploded upwards spectacularly, more than doubling from their low base in less than two months.

 

Sumner relies on the gains in aggregate industrial production that lasted in large part through the rest of the year to support his contention that the rally could have marked an end to the Depression.

 

 

  The agricultural nature of the summer upsurge is completely omitted by Sumner. The narrow nature of the summer rally is apparently lost in his economic aggregates. He thus finds it "difficult to account for the subsequent boom in stock prices." Inherently limited by the shallowness of his analytical effort, he thus unsurprisingly expresses uncertainty as to why the recovery aborted.
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  There are many who have argued that the summer of 1932 was the actual turning point in the Great Depression. However, such arguments would seem ludicrous to experienced investors and businessmen of that time. Their eyes remained focused on such predominant market and economic indicators as steel production and railroad car loadings that failed to reflect any business revival.
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  All of the most important economic indicators remained flat at low levels throughout the summer despite the great surge in agriculture, textiles, and the stock market.

  1. With the exception of a recovery from the July 4 holiday week dip, steel production remained flat through the entire summer.

  2. Electric power experienced a few sharp spikes but remained within a flat range.

  3. Automotive activity declined sharply throughout the summer.

  4. The N.Y. Times weekly business index held steady occasionally but usually continued to hit one new Depression low after another.

  5. Exports and imports continued their inexorable decline at multiple double digit rates.

  6. Railroad car loadings remained flat until September when they began to rise in response to the usual fall business season upturn. But the fall business season upsurge turned out to be short and grossly disappointing and railroad car loadings quickly resumed their decline,

  With the exception of agriculture and textiles, there is absolutely no proof of an economic bottom in the summer of 1932. The summer, 1932 surge was clearly an agricultural market phenomenon that lasted only so long as supported by crop reports. The economic surge spread to textiles, but little else.
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  The Farm Board had stepped aside in defeat.
The surge in commodity and stock market prices began precisely with reports of the resulting drastic reductions in U.S. grain and cotton crops that were no longer influenced by price supports. The upsurge came to an end that October as European reports indicated another bumper European wheat crop sufficient to meet all European needs. The agricultural bust took the stock market down with it in October, dragging it down $3.3 billion that month.

  The summer boom did include the textile industry. A greatly reduced U.S. cotton crop was joined by cotton crop failures in India and Egypt, to push cotton prices sharply higher from their low Depression base. Cotton, silk, rayon and wool - in raw material, in process, and in finished goods forms - all drew hurried buying orders on an impressive scale, pushing prices sharply higher. War between Japan and China brought a surge in exports of cotton goods.
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  The autumn business revival appeared imminent. News of the reopening of many industrial plants and the expansion of production in others was highlighted in the financial press. Rising stock and commodity prices helped to greatly reduce the rate of bank failures.
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  In October, 1932, it was reported that, in spite of the smaller U.S. crop, the world wheat crop was still expected to be huge - the biggest since the record 1928 crop. Europe's wheat crop was the biggest in history - about one billion bushels - so Europe would again not be needing any North American grains.
&
  The bottom promptly dropped out of the North American and world grain markets, hitting the lowest levels on record. Records in Liverpool, England, went back to 1594. Farmers bore the brunt of the decline as the cost of shipping soon amounted to between two and four times the value of the crops in their hands.
&
  Textiles were one industry group that held up well in the year-end debacle. Wage rates in the textile industry were highly flexible. Textile production was supported by the substantially reduced wage rates and price levels for pertinent commodities that remained relatively low. The summer commodity price upsurge fell back substantially thereafter. Textiles was one of the most important factors that limited the decline in the industrial production aggregate during the last quarter of 1932.
&
  The increase in the industrial production aggregate lasted no longer than supported by the surge in agricultural markets. For the vast majority of industrial sectors, economic results in the fourth quarter of 1932 were a total disaster, and the aggregate itself was thus actually slipping throughout that quarter.
&
  However, all of this is mere detail, lost in the opaque industrial production aggregate that Sumner is fixated with. If Sumner and other Keynesians cannot see the reasons for the quick end to the summer, 1932, rally, it can only be because they don't want to see it. They remain determinedly committed to their shallow analytical methods.

1932 election:

  Without doubt, the political campaigns and election results of 1932 influenced the financial markets and even to some extent the economy, but Sumner overstates the case.
&

Although of overwhelming importance, the ongoing collapse of agricultural markets is given ust brief notice.

 

Sumner at last concedes the importance of the "war debt issue" that FDR refused to help address during the long interregnum period.

  He focuses narrowly on political news reports and correlates them with daily market fluctuations. Although of overwhelming importance, the ongoing collapse of agricultural markets is given just brief notice.

  "On November 27, the New York Times noted falling commodity prices. 'About 90% of the Recovery Made Up to Sept. 6 Has Now Been Wiped Out.'"

  Those falling agricultural prices and their cause had been reported daily for well over a month by that time. The reports were often dramatic. How could Sumner have missed them?

  However, Sumner at last concedes the importance of the "war debt issue" that FDR refused to help address during the long interregnum period.

  "The war debt issue was clearly the dominant financial story from mid November to the end of 1932 and is the most plausible explanation for the 17.2 percent decline in the Dow between November 12 and the end of the month."

  Sumner is still ridiculously seeking to blame the Great Depression and individual periods thereof on individual economic and political causes. War  debts had been a prominent issue in the financial news throughout the previous decade.

Analyzing the New Deal

The 1933 New Deal program:

Sumner is very enthusiastic about FDR's post-inauguration devaluation and inflation policies.

  FDR's monetary views and policies both before and after his inauguration are viewed as a mixed bag by Sumner
&
  FDR's refusal to cooperate with Hoover
prior to his inauguration during which the nation's financial system fell apart is sharply criticized by Sumner. However, Sumner is very enthusiastic with respect to FDR's post-inauguration devaluation and inflation policies.
&

  FDR had four policy alternatives, according to Sumner. He mentions orthodox policies of balanced budgets and maintenance of the hobbled gold standard, Keynesian public works and budget deficits, price inflation by dollar devaluation, and the cartelization of the entire economic system to restrict production.

  Sumner, like FDR at this time, revealingly ignores the policy alternative of ending the trade war and restoring international markets as an effective economic remedy.

FDR achieved his goal of rapid recovery of both price levels and industrial production.

  Both the markets and the economy began to surge on April 19, 1933, when FDR began his abandonment of what was left of the gold standard. A great bull market and resurgence of industrial production followed.
& 
  The dramatic economic and market response
to FDR's actions immediately after his inauguration are viewed by Sumner as proof of their effectiveness. FDR achieved his goal of rapid recovery of both price levels and industrial production.

  "It is certainly easier to generate high rates of growth in a severely depressed economy, but even so, the 57 percent increase in industrial production between March and July is astounding. Roughly half of the ground lost during the previous four years was made up in a period of just four months. And even if we assume that output was artificially depressed in March by the bank closures, we are still left with a July output peak that was nearly 50 percent above the level of late 1932."

  Unfortunately, as important as industrial production is, it is not the whole economy. Unemployment remained above 21.7% throughout 1933, hardly a picture of robust economic revival.
&
  The huge agricultural sector responded visibly to weather and crop reports more than FDR nostrums. Agricultural prices rose with early reports of reduced North American crops. However, agricultural prices were decimated by news in August of the record European wheat crop and record worldwide wheat carryover of 960 million bushels - 650 million above the 1919-1928 average. Crop production abroad was still being stimulated by trade war policies that shielded national crop markets from international competition.
&
  The industrial resurgence was evidently due primarily to the reopening of the banks - a factor Sumner concedes but minimizes - and inventory and consumer buying in anticipation of price inflation - an inherently temporary factor that Sumner recognizes only indirectly. He concedes that unemployment rates remained "nearly 25 percent" and that a "gap" had opened up between production and consumption, which is just what would be expected from inventory purchases ahead of price inflation.
&
   The concentration on industrial production is too narrow to represent the entire economy and indeed is an obvious result of cherry picking and shallow analysis.  See comments in #Wage shocks, above. Crop reports sent the agricultural sector into a tailspin again in August, 1933, yet again correlating strongly with broader market and economic declines.

The NIRA:

 

&

  FDR's National Industrial Recovery Act (NIRA) - which broadly substituted administered alternatives for market mechanisms - unsurprisingly was an economic disaster. Sumner is harshly critical, blaming the NIRA for the July, 1933, aborting of the dollar devaluation surge in industrial production.
&

From July 1933 to July 1935, during the NIRA period, industrial production actually declined.

 

Sumner acknowledges that anticipation of the higher costs and prices of the NIRA policy did provide a temporary boost to inventory accumulation that would have come on top of the temporary inventory accumulation driven by dollar devaluation. He concedes that the higher prices would naturally depress demand.

  But for the NIRA, Sumner asserts, the Great Depression could have been substantially ended in 1934 or 1935. Sumner's analysis is still based on broad aggregates like aggregate industrial production, but here he adds a fundamental factor: the NIRA shock to wage rates. From July 1933 to July 1935, during the NIRA period, industrial production actually declined.

  Sumner's conclusions fly in the face of moribund private investment rates and stubborn unemployment rates that reflected no such revival prospects during the spring  of 1933. The decline in industrial production from July 1933 is exactly what would be expected from a temporary surge of inventory buying followed by sharply rising prices..

  Sumner portrays a New Deal administration that, like the Sorcerer's Apprentice, was increasingly in danger of being drowned by the unintended consequences of its inflationary and industrial policy programs.
&
  He emphasizes the consumption "gap" and administered wage shocks. He concedes that, even at its July 18, 1933 peak, the stock market remained 71% below its September, 1929 peak. He acknowledges that anticipation of the higher costs and prices of the NIRA policy did provide a temporary boost to inventory accumulation that would have come on top of the temporary inventory accumulation driven by dollar devaluation. His observation that the higher prices flowing from both NIRA and dollar devaluation policy would naturally depress consumption clearly undermines his assertions about the likely sustainability of price inflation as a stimulatory policy.
&

Sumner asserts that a second supply side depression began on top of the old one with implementation of the NIRA in the second half of 1933.

  The massive increase of 22.3% in average wage rates in a two month period under the NIRA is highlighted by Sumner. He spends considerable ink asserting that a second supply side depression began on top of the old one with implementation of the NIRA in the second half of 1933. This extensive analytical effort supports his dubious counterfactual argument about the long-term stimulatory impact of FDR's monetary and price inflation policies in the absence of NIRA interference.

  "In 'Previous Interpretations of the NIRA and the Failed Recovery,' I show why economic historians have greatly underestimated both the expansionary impact of dollar depreciation, and the contractionary impact of the NIRA."

Sumner points to the rapid gain in output that occurred with NIRA repeal in mid-1935.

  Additional wage shocks from New Deal policies afflicted the economy under the NIRA in 1934, under Wagner Act union drives in 1936 and 1937, and from minimum wage increases in late 1938 and again in late 1939. He points to the rapid gain in output that occurred with NIRA repeal in mid-1935.

  As a result of the end of inventory accumulation, a major portion of the 1933 surge in industrial production was lost by that November. While the broad NIRA experiment with administered alternatives to market mechanisms had the negative economic impacts that inevitably flow from such policies, it was far from the only negative market and economic explanation for why the stock market and economic surge peaked in July.
&
  Sumner mentions the decline in commodity prices, but again fails to provide any details. At this point, it is blatant incompetence to analyze the negative impacts of the NIRA without recognizing the dramatic events in the agricultural markets.

FDR buys gold:

 

&

  FDR's gold buying program leading up to the formal devaluation of the dollar at the beginning of 1934 is extensively analyzed by Sumner. Unlike so much of his other analytical efforts, Sumner here recognizes the complex influences on the markets that cloud evaluation of the impacts of any single influence of less than dramatic strength.
&

The stock and commodity markets reacted erratically, as might be expected, but nevertheless were heading broadly lower during the last half of 1933 along with the economy. The program was swamped by predictable if unintended consequences.

  The dollar devaluation effort in the fourth quarter of 1933 was broadly disappointing for those advocating monetary inflation as a remedy. It had much less impact on market prices and economic activity than the initial dollar devaluation effort in the second quarter of the year.
&
  The stock and commodity markets reacted erratically, as might be expected, but nevertheless were heading broadly lower during the last half of 1933 along with the economy. The program was swamped by predictable if unintended consequences.

  "Fisher's weekly price index measured in gold terms declined by 11.8 percent between October 21 and November 24, 1933."

  The controversy over the program became fierce, with several opponents resigning from high administration posts. Monetary volatility was spreading outwards from gold and the dollar to undermine financial stability around the world.

  "[The] private hoarding induced by the gold-buying program may have had a greater impact than the RFC purchases, which totaled only $131 million at market prices during the entire gold-buying program. Gold hoarding put deflationary pressure on European economies in late 1933, and this tended to lessen the (inflationary) impact of the dollar depreciation on U.S. prices. It was like ascending a ladder resting on a sinking platform."

As for price inflation - the immediate object of the exercise - the 60% devaluation of the dollar resulted in only single digit rates of price inflation.

  When the gold-buying program was brought to an end on January 1, 1934, with a new fixed level for the gold price, there was an immediate relief surge in stock and bond markets. As for price inflation - the immediate object of the exercise - the 60% devaluation of the dollar resulted in only single digit rates of price inflation.
&
  Agricultural commodity prices actually declined that November during the height of the gold buying program. (Sumner still doesn't deign to mention the obvious impacts of crop reports.) However, without the dollar devaluation effort, the price decline could well have been far steeper.
&

Sumner asserts that it could have been a useful part of a more determined reflationist monetary policy, but by itself it was too short term and simply not enough to get the job done. 

  Sumner reviews disagreements among Keynesians concerning the gold-buying policy. He disputes critics of the program, asserting reasonably that it actually had substantial short-term impact. He views the program as "marginally effective at raising commodity prices." He asserts that it could have been a useful part of a more determined reflationist monetary policy, but by itself it was too short term and simply not enough to get the job done. 

  This is the typical Keynesian excuse for the repeated failures of Keynesian-type policies: It simply was not enough. It never is!

End of the NIRA and the gold standard:

  Volatility in industrial production was a prominent characteristic of the New Deal period, but unemployment levels remained stubbornly high despite a large increase in government employment.
&

  Another NIRA wage increase, although this time only 4.4%, is implicated by Sumner in the termination of the spring, 1934, business and industrial production upsurge.

  Sumner again misses the seasonal nature of the interwar economy. It was normal for industrial production to surge early in the year in anticipation of the spring business season, but it would sharply decline if the business revival failed to materialize, as frequently occurred in the 1930s.

  Sumner finally deigns to consider the impact of agricultural factors when he refers to the "dust bowl" crop failures as his reason for removing agricultural commodities from his inflation evaluation. Thus, wage increases and other labor factors are viewed again as the primary factors in the 1934 year-end economic decline.
&

  New Deal gold and silver policy impacts are extensively analyzed by Sumner. He speculates on their role in the economic ups and downs of the mid-1930s. That they had economic impact is clear, but that leaves questions of degree.
&
  The final collapse of the international gold standard in 1936 and the Supreme Court rejection of the N IRA and the Agricultural Adjustment Act created considerable volatility in stock and commodity markets in 1935 and 1936. However, these dramatic events proved to be short term.

  None of these factors addressed the remaining fundamental political policy causes of the Great Depression, the most important of which was the continued destruction of international markets and national financial systems by trade war policies.
&
    Business conditions remained within narrow ranges for about two years and unemployment remained above 14% even at its 1937 best. There was little improvement in private sector investment and private sector employment and the stock market remained depressed until after the end of the NIRA. In 1936, railroad car loadings were still barely more than of their 1929 level.

"Under the NIRA, there was strong pressure on firms to report prices in line with industry codes, which often exceeded the actual market prices."

  A nearly uninterrupted 22 month bull stock market is attributed by Sumner to the Supreme Court repeal of the NIRA. Industrial production soared by almost 44% during that time. The increase in economic activity served to minimize the extent of the resulting wage cuts.
&
  The Court brought an end to the Agricultural Adjustment Act in January, 1936, as well. The Court has ever since been harshly criticized by the political left for these clearly beneficial decisions.

  "The impact of the repeal of the N IRA went far beyond the changes in wage and price trends. By reducing the cartelization of the economy, the repeal boosted economic efficiency. Not only were wholesale prices slightly higher after repeal of the N IRA, but they were also much more likely to represent market-clearing prices. Under the NIRA, there was strong pressure on firms to report prices in line with industry codes, which often exceeded the actual market prices."

  Serious war scares began late in 1934 and increased in severity in the succeeding years. Sumner evaluates their impacts.
&

  Sumner sums up:

  "[The 2 year period] from February 1934 to September 1936 represents the eye of the hurricane. The purchasing power of gold was fairly stable, and - because the dollar was pegged to gold - a stable gold market meant a relatively stable price level. As gold flowed back from the gold bloc to the United States, the world gold reserve ratio declined. Thus, the deflationary impact of private gold hoarding - as well as currency hoarding - was roughly offset by the inflationary impact of gold flows. Most of the events described in this chapter and the next - the devaluation scares, revaluation scares, wage shocks, and war scares - were short-lived - - -. Not surprisingly, the stock market became much more stable in the period after the dollar's link to gold was reestablished in early 1934, and this stability continued until the fall of 1937, when the dollar again came under attack."

1937-1938 relapse:

  The Wagner Act was passed in 1935 resulting in a rapid increase in labor unionization.
&

There was also a Federal Reserve Bank increase in required reserve levels by 50% in response to inflation rates that were surging despite unemployment rates still well above 14%.

  The impacts of wage increases and unionization gains are emphasized by Sumner as among the driving forces behind the sharp economic and market relapses of 1937-1938.  There was also a Federal Reserve Bank increase in required reserve levels by 50% in response to inflation rates that were surging despite unemployment rates still well above 14%. A new 2% payroll tax is also viewed by Sumner as a factor. The  result, according to Sumner, was a sharp relapse in the stock market and the economy during the second half of 1937.

  "Even though the 'international gold standard' was now reduced to the United States and Belgium, the international gold market was playing an increasingly important role in the world economy. Although nominally operating under a floating rate regime, the important sterling bloc maintained a relatively stable exchange rate with the dollar, and thus with gold. Thus, the inflation of 1936-1937 was a worldwide phenomenon." (emphasis Sumner)

The artificially high price offered for silver and gold were bringing in a deluge of monetary metal. The U.S. government was the only buyer at those prices.

  The Federal Reserve increased reserve requirements sharply in March and May, 1937, in response to rising rates of inflation and a problem controlling a huge buildup of excess bank reserves.  Reserves in excess of requirements were viewed as an inflation threat when they exceeded Fed capacity to limit their deployment.
&
   Inflation was running ahead of wage gains, adding to a worrisome increase in labor unrest. The artificially high price offered for silver and gold were bringing in a deluge of monetary metal. The U.S. government was the only buyer at those prices.
&

Gold hoarding as well as pay role tax and wage increases, are especially implicated by Sumner in the sharp contraction

  Gold flows played a significant role in the 1937-1938 relapse, Sumner explains. Gold hoarding as a result of worries about dollar and French franc devaluation, as well as pay role tax and wage increases, are especially implicated by Sumner in the sharp contraction.

  "[There] was insufficient nominal spending to support production at current wage and pay role tax levels."

FDR's confrontational speeches repeatedly undermined business and market sentiment.

  FDR's anti-business rhetoric had increased after substantial gains for left-wing Democrats in the 1936 election. His confrontational speeches repeatedly undermined business and market sentiment, and may have played a substantial role in the reluctance of businesses to make new investments. Sumner reviews a wide variety of other adverse policy proposals that may have played a role.
&

The Fed in 2007-2009 again increased reserve requirements and sterilized the vast monetary expansion. The Fed thus "allowed the [contraction] to happen."

  Keynesian and monetarist explanations for the 1937-1938 depression relapse are criticized by Sumner as lacking in consideration of gold reserve ratios and wage shocks.

  "The severe recession of 1937-1938 was due to a dramatic turnaround in the world gold market and the wage shock, neither of which were the Fed's fault."

  Such American factors explain why this economic contraction was so much worse in the U.S. than in Europe, according to Sumner. Other factors that add to the complexities of the analytical exercise are laudably acknowledged by Sumner and serve to emphasize  the inadequacy of the narrow focus of Keynesian and monetarist analysis,
&
  Sumner asserts that the Fed under Ben Bernanke
failed in 2007-2008 to follow the lessons of 1937-1938. The Fed again increased reserve requirements and sterilized the vast monetary expansion. The Fed thus "allowed the [contraction] to happen."
&

  War fears in Europe:

  German aggression in Europe was a dominant factor by February, 1938. Even as FDR shifted from combating inflation to monetary stimulus, gold and currency flows remained dominated by war fears in Europe.
&

  Uncertainty clouds economic analysis of the period just before and during the onset of war in Europe. "This is one period where both monetarist and gold market models performed poorly," Sumner acknowledges. Price inflation didn't accelerate significantly until the middle of 1940 when the war intensified. (The first large U.S. war budget was not passed until August, 1940, almost a year after the onset of the war.)

  "In any case, the money multiplier began to rise in late 1940 and the growth in the broader aggregates accelerated despite a slowdown in the growth of the gold stock, and the monetary base.'

  Unmentioned by Sumner is the sharp revival of U.S. export markets. The U.S. economy benefited by the substitution of the military war for the trade war.

  "It wasn't until 1941 that the economy finally recovered from the Great Depression, with industrial production expanding by nearly 40% between May 1940 and December 1941."

The Great Depression clearly "was over even before the United States entered the war." However, this recovery was sharply inflationary. The wholesale price index rose 21% between August 1940 and December 1941.

  Wage shocks still made themselves felt during this period. The minimum wage increases under the 1938 Wage-Hours bill, occurred in the last quarter of both 1938 and 1939. and correlated with temporary reversals of surging industrial production. 
&
  The Great Depression clearly "was over even before the United States entered the war." However, this recovery was sharply inflationary. The wholesale price index rose 21% between August 1940 and December 1941.

  Consumer prices were also rising at double digit rates during that period. Clearly, this was more inflation than would be politically tolerated in the absence of the war. Although unemployment was in rapid decline, this surge in inflation occurred while unemployment was still above 9%.

Sumner sums up:

  "Modern economist have often focused on the seemingly high growth rates of the recovery period. These would be high rates of growth during normal time periods, but were less than what would have been expected to occur in an economy recovering from a deep depression. During those periods free of wage shocks and deflationary policies, industrial production invariably grew at a blistering pace, testimony to the economy's  powerful self-correcting mechanism. And when aided by effective steps at monetary expansion -- as in March through July 1933 -- the growth rates were truly extraordinary." (emphasis Sumner)

Evolution of Keynesian views:

 

&

  Sumner identifies the basic Keynesian error as an assumption of the ineffectiveness of "unaided" monetary policy as a mechanism for economic stabilization.  "In an economy where the monetary authority is willing and able to target nominal GDP growth," Sumner emphasizes, monetary policy becomes effective practically by definition.
&

"In an economy where the monetary authority is willing and able to target nominal GDP growth," Sumner emphasizes, monetary policy becomes effective practically by definition.

  The apparent ineffectiveness of the 1933 devaluation of the dollar was not because of any inherent limitation of monetary policy as Keynes and Keynesians were led to believe, but because it was so quickly countered by the wage shock and other costs imposed by the NIRA. Similarly, the failure of the spring 1932 $1 billion stimulus program was just "an example of the constraints of the interwar gold standard" that are absent from "unanchored" fiat money systems.

  "[For] some reason [Keynes] never contemplated an intermediate case -- that is, he never foresaw the possibility of an unanchored fiat money regime that targeted inflation at a low but positive level."

  Views that monetary policy is ineffective are inconsistent with fears that radical monetary policy like quantitative easing might lead to hyperinflation, Sumner points out. Fears that the economy lacked a self-correcting mechanism and that monetary policy was inadequate to overcome this weakness were generated by Keynesian analyses of Great Depression experience that Sumner considers faulty.
&

  Inflation expectations became recognized as one of the factors undermining Keynesian policies in the 1970s. Paul Volcker's austerity policy of harsh monetary restraint and high interest rates slew 1970s inflation expectations and actually constitutes a triumph of monetarist policy, according to Sumner. With inflation under control, he asserts, the financial environment is again suitable for renewed Keynesian efforts at economic management, this time hopefully in accordance with "New Keynesian" theory.

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