More Fake History of the Great Depression

I refer readers to this post by Robert P. Murphy:

Robert P. Murphy, “Does Anyone Deny That There Were Unprecedented Credit Stimulus Policies During Hoover Administration?,” 27 September.

Here is Murphy’s question to Keynesians:

“In my book on the Great Depression [Murphy 2009 – LK], I quote Lionel Robbins saying (I think in 1934) that central banks around the world had tried unprecedented measures to stimulate a recovery through cheap credit, and that this was a complete reversal of traditional central bank doctrine. ….

But I’m asking, do you [sc. Keynesians – LK] agree with Robbins, Hayek, and the random Joes writing letters to the NYT, who at the time were claiming that the central banks of the world were fighting the downturn differently from how things were handled in previous crises?

Note well, I’m speaking here in absolute terms, not in a Sumnerian view whereby the Fed–by definition–has been ‘tight’ the last few years because NGDP is below trend. Rather, I’m asking (for example) if it’s true that central banks in the early 1930s were actively trying to ease credit (by lowering interest rates, setting up special asset purchases or loan programs, etc.) when they had never done things like this in earlier crises?”

First the issue of Lionel Robbins.

Here is what Lionel Robbins said:

“Now in the pre-war [viz. pre-WWI – LK] business depression a very clear policy had been developed to deal with this situation. The maxim adopted by central banks for dealing with financial crises was to discount freely on good security, but to keep the rate of discount high.

Similarly in dealing with the wider dislocations of commodity prices and production no attempt was made to bring about artificially easy conditions. The results of this were simple. Firms whose position was fundamentally sound obtained what was necessary. Having confidence in the future, they were prepared to foot the bill. But the firms whose position was fundamentally unsound realised that the game was up and went into liquidation. After a short period of distress the stage was once more set for business recovery.

In the present depression we have changed all that. We eschew the sharp purge. We prefer the lingering disease. Everywhere, in the money market, in the commodity markets and in the broad field of company finance and public indebtedness, the efforts of Central Banks and Governments have been directed to propping up bad business positions.

We can see this most vividly in the sphere of Central Banking policy. The moment the boom broke in 1929, the Central Banks of the world, acting obviously in concert, set to work to create a condition of easy money, quite out of relation to the general conditions of the money market. This policy was backed up by vigorous purchases of securities in the open market in the United States of America. From October 1929 to December 1930 no less than $410 millions was pumped into the market in this way. The result was as might have been expected. The process of liquidation was arrested. New loans were floated.” (Robbins 1935: 72–73).

Robbins asserts that the pre-WWI central bank policy had been to keep discount rates high and only “discount freely on good security.”

He then asserts that in the 1929–1933 contraction “we have changed all that.” Yet Robbins is wrong, certainly with respect to the United States.

For the Federal Reserve banks had regularly lowered rates and engaged in substantial bond buying programs to fight the 1920s recessions before 1929. The Fed cut rates in 1921, 1924 and 1926–1927 to fight recessions, and cut rates and bought bonds in 1924 and 1926–1927.

Here is a list of 1920s recessions:

1920s Recessions
Recession | Duration Months
January 1920–July 1921 | 18
May 1923–July 1924 | 14
October 1926–November 1927 | 13.

http://www.nber.org/cycles.html

Let us look at the policy responses of the Fed to the 1920s recessions:

(1) 1920–1921 Recession

Here are the Fed cuts to the discount rate during the recession of 1920-1921:

Discount Rate of the Federal Reserve Bank of New York
Date | Rate
1920
May | 6%
June | 7%
Dec. | 7%
1921
Jan. | 7%
Apr. | 7%
May. | 6.5%
Jun. | 6%
Jul. | 5.5%
Sep. | 5%
Nov. | 4.5%

1922
Jan. | 4.5%
Jun. | 4%.
http://fraser.stlouisfed.org/download-page/page.pdf?pid=38&id=1477

Although the rate was raised to 7% in June 1920, the rate was cut from 7% in 1921 to 5.5% by July, and a further cut to 5% in September as the recovery had begun, and then to 4.5% in November.

(2) 1923–1924 Recession

Let us start with bond purchases:

Bond Purchases
Date | Fed government security holdings
1923
Apr. | $229
July | $97
Oct. | $91

1924
Jan. | $118
Apr. | $274
Jul. | $467
Oct. | $585

1925
Jan. | $464.
(Wheelock 1992: 22).

By early 1924, the Federal reserve banks began a bond buying program. Federal Reserve holdings increased from $91 million in October 1923 to $585 million by October 1924. That was increase of $494 million over about a year. In other words, a six-fold increase in the course of a year.

By April 1924, the Fed bought $156 million in bonds in the period from January, and by July 1924 had bought about another $193 in bonds to fight the recession.

Next, the discount rate:

Discount Rate of the Federal Reserve Bank of New York
Date | Rate
1923
Apr. | 4.5%
Jul. | 4.5%
Oct. | 4.5%
1924
Jan. | 4.5%
Apr. | 4.5%
Jul. | 3.5%
Oct. | 3.0%
1925
Jan. | 3.0%.
(Wheelock 1992: 22).

In 1924, the rate was brought down from 4.5% to 3% – a reasonable cut.

So here we have quite clear evidence that the Fed fought the 1923–1924 recession with both discount rate cuts and a bond buying program. The bond buying program, in particular, was large and comparable to that done by the Fed between late 1929 and 1930.

(3) 1926–1927 Recession

First, the bond purchases:

Bond Purchases
Date | Fed government security holdings
1926
Oct. | $306
1927
Jan. | $310
Apr. | $341
Jul. | $381
Oct. | $506
1928
Jan. | $512.
(Wheelock 1992: 22).

From October 1926 to October 1927, the Fed increased its government security holdings by $200 million.

Next, the discount rate:

Discount Rate of the Federal Reserve Bank of New York
Date | Rate
1926
Oct. | 4.0%
1927
Jan. | 4.0%
Apr. | 4.0%
Jul. | 4.0%
Oct. | 3.5%
1928
Jan. | 3.5%.
(Wheelock 1992: 22).

Here the discount rate cut was not very large, but bond buying program was hardly insignificant.

Again, both rate cuts and asset purchasing were the norm.

When we come to 1929–1933, we can see that monetary policy actions were not “qualitatively different” (the expression Murphy uses here in this comment) from previous policy – they differed merely in quantity, not quality: lower rate cuts and some more bond purchases than previously.

Let us look at the bond buying program:

Bond Purchases
Date | Fed government security holdings
1929
Jul. | $147
Oct. | $154
1930
Jan. | $485
Apr. | $530
Jul. | $583
Oct. | $602
1931
Jan. | $647
Apr. | $600
Jul. | $674
Oct. | $733.
(Wheelock 1992: 22).

Far from being unprecedented, the similar program from 1923–1924 provides a good precedent.

From July 1929 to late 1931, Fed holdings of treasuries increased about fivefold, and this was in a period of over two years.

Yet in the year from 1923-1924, Federal Reserve holdings increased from $91 million in October 1923 to $585 million by October 1924. That was a six-fold increase over about a year, much more radical than the 1929-1931 program and in a shorter time too!

Next the discount rate:

Discount Rate of the Federal Reserve Bank of New York
Date | Rate
1929
Jul. | 5.0%
Oct. | 6.0%
1930
Jan. | 4.5%
Apr. | 3.5%
Jul. | 2.5%
Oct. | 2.5%
1931
Jan. | 2.0%
Apr. | 2.0%
Jul. | 1.5%
Oct. | 3.5%. (Wheelock 1992: 22).

Here the discount rate was quite high in late 1929, but the cuts were certainly sharper than in previous recessions.

The rate came down to 1.5% by July 1931. This was a low rate, but we are dealing with quantity, not a qualitative difference, for the use of discount rate cuts had perfectly good precedents in 1924 and 1927.

We might also note that in 1931 the New York Fed raised the discount rate to 3.5% by October from 1.5%: right in the midst of the worst depression ever seen. Now, if anything, that was a “qualitatively different” policy measure from previous 1920s policy!

Conclusion
Murphy is dead wrong in thinking that the Fed policy in 1929–1933 “was a complete reversal of traditional central bank doctrine” – it was nothing but a development of already existing policy actions.

It is also utterly absurd to say that “central banks in the early 1930s were actively trying to ease credit (by lowering interest rates, setting up special asset purchases or loan programs, etc.) when they had never done things like this in earlier crises” – in the case of the Federal Reserve banks, they had done precisely these policy interventions from 1923–1924 and 1926–1927.

If it is any consolation to Murphy, I have now bought a copy of his book The Politically Incorrect Guide to the Great Depression and the New Deal...

BIBLIOGRAPHY

Murphy, Robert. 2009. The Politically Incorrect Guide to the Great Depression and the New Deal. Regnery Publishing, Inc. Washington, DC.

Robbins, Lionel Charles Robbins. 1935. The Great Depression. Macmillan, London.

Wheelock, David C. 1992. “Monetary Policy in the Great Depression: What the Fed Did, and Why,” Federal Reserve Bank of St. Louis Review 2: 3–27.
http://research.stlouisfed.org/publications/review/92/03/Depression_Mar_Apr1992.pdf