Happy Easter--Enjoy the Coming Economic Collapse

The Econdata site has posted the above graph of the Consumer Price Index, CPI, since 1800.  I'm not sure how they calculated it for the 19th century because the Bureau of Labor Statistics didn't start its series until the first or second decade of the twentieth century.  There were various attempts to measure inflation in the 19th century so approximations can be made.   I can't vouch for their numbers but let's assume they're correct.

Notice that most of the inflationary peaks are around wars.  There's a peak following the War of 1812, a peak right at the end of the Civil War, a peak around 1920, following World War I, and then an upswing that starts around 1940 and doesn't abate. Around 1970 (the gold standard was abolished in 1971) the inflation rate surges. It surged at a faster rate in the 1970s than during 1980 to 2010, which is probably why many Americans believed that inflation had ended in the 1980s, which it had not.  It just began increasing at a decreasing rate instead of an increasing rate.

Compare the deflation that occurred after the post-Civil War peak with the deflation that occurred during the Great Depression of the 1930s.  During the Gilded Age, from 1865 to 1910,  the deflation was proportionately greater than in the period from 1930 to 1940 (notice that the twenties, which are usually considered a boom period, also saw some deflation).  The Gilded Age was the period of greatest rates of innovation, expansion and immigration.  Fundamental inventions like the telephone, the railroad (actually pre-Civil War but largely developed post-Civil War), the automobile, radio, A/C electricity, movies, all were created in that period.  As well, there was across the board innovation in processes and methods to a far greater degree than today, despite the lip service paid to total quality management and reengineering.  Moreover, on a proportional basis there was heavy immigration, a few years reaching as high as 500,000 on a base of less than 90 million.

Yet the rapid progress occurred during the largest deflation in American history.  The deflation during the 1930s was much milder, yet the employment effects far more severe.  Yet, academic economists base their arguments on the grievous harm that deflation causes.

Here is the reason.  In the Gilded Age businessmen and Wall Street complained endlessly. The deflation created political instability because real estate investors and farmers who were anticipating real estate profits suffered losses.  But the skimpy profits led to intensification of competition.  Reducing labor costs was hardly sufficient to compete. This led to innovation.

Wall Street, the real estate investors, farmers and businesses complained about the deflation, but the average American was better off.  There was an election that emphasized this issue in 1896, and the pro-gold (but pro-tariff) McKinley defeated the pro-silver Bryan.   Despite this victory, within seventeen years in 1913, the year of JP Morgan's death, Woodrow Wilson established the Fed, which was modeled after a recommendation that Morgan's associates had previously devised.

The depression of the 1930s was accompanied by a rapid expansion of the state and by continued missteps in monetary policy (especially in the late 1930s by Mariner Eccles, the Fed chairman, who caused a second stock market collapse).  The crash of 1929 was a second leg to the correction of the 1920 inflation that the Fed had caused.  The unemployment was intensified by federal policy.  For instance, Herbert Hoover, the last Progressive president, "jaw boned" corporations into not cutting wages.  This forced a much higher layoff rate than would have otherwise occurred (see Murray Rothbard and Ronald Radosh's New History of Leviathan for information about Hoover's role and Hoover's long standing commitment to price fixing and cartelization).  Following Hoover's loss to FDR, the nation embarked on a long term socialization policy that integrated Hoover's Progressive ideas (public works and cartelization via FDR's failed National Industrial Recovery Act) as well as additional ideas that the New Deal Democrats added--regulation of wages via the Fair Labor Standards Act; Social Security; the National Labor Relations Act; and price fixing for agriculture, the Agricultural Adjustment Act, which paid farmers not to grow.  As well, the Smoot-Hawley tariff, enacted in 1930, raised tariffs to the highest levels at any time in US history save in 1828.

The period of inflation from 1940 to today has been the worst in American history for the average worker.  The claim that deflation during the 1930s caused the massive unemployment is contradicted by the fact that a larger deflation in the late nineteenth century was not accompanied by such severe unemployment. 

In other words, the Democrats used the failure of their policies to justify intensification of their policies.  They are doing it again with health care.

Happy Easter!

James Dale Davidson's "The Plague of the Black Debt"

I am cleaning out my New York City apartment in anticipation of a final move to West Shokan, NY. The biggest problem is all my books. I had to discard a number of old books, including many of no-longer-used labor relations books from my doctoral program. I came across a tiny soft cover volume published in 1993 by James Dale Davison, founder of the National Taxpayers' Union. I don't remember where I got it. Here are some excerpts:

"The Fed has been pursuing a loose money policy for three years, and the money supply is still falling like a rock. The Fed has moved heaven and earth to get the money supply up, and it's not working...the markets are confused because interest rates are going down, and that is always good for the stock market. At least that's what people think."

Davidson points out that monetary expansion does not work if banks are failing or contracting. He notes that in the Great Depression the Fed reduced interest rates but the money supply still contracted because of bank failures. The process did not occur in the early '90s as Davidson feared, but is what many fear is happening now.

Here are some of Davidson's predictions from 1993:

>I see Social Security benefits being cut to the bone. They'll probably only go to the most needy.

>I see at least 40 million unemployed to make-work public assistance jobs

>Sick elderly will be cared for at home. Almost no one will be able to afford nursing home care.

>I see millions of homeowners upside down--with the mortgage bigger than the market value of the home. A lot of them will hand the key to the lender and walk away. There will be a lot of empty houses with "For Sale" signs.

>Banking industry problems will return, much worse than anything we've seen. And much too big next time for the government to bail out. Either your savings will be wiped out or you'll be paid in worthless paper dollars.

>I expect to see 'extended families of 10 to 15 crammed into three-bedroom houses. Millions of retired folks will be forced to live with their children. Young people in their twenties and thirties--including young marrieds with their children--will move in with their parents. In many cases, not a person in the house will have a full time job.

>The suburbs will become slums

Davison argues that knowledge workers will become affluent.

>Small communities two hours away from major cities are the fastest-appreciating real estate in the country. These communities are already benefiting from the "Fifth Migration" in American history. The Third Migration was from the farms fo the cities, and the fourth (1950-70) was from the cities to suburbs. Now, people like us are bailing out and moving to small, clean, safe towns. Technology makes it possible for us to work anywhere...Even if you're not ready to move yet, a rental property in these areas is the best investment in the United States."

Quite a coincidence. Hello West Shokan.

Andrew Jackson Turns in His Grave

Howard S. Katz has posted two blogs on the growth of monetary reserves and Federal Reserve bank credit. Most economists now agree that the unemployment of the Great Depression was caused by a contraction of monetary reserves followed by popular insistence on maintenance of pre-existing wages. The "recovery" that stimulative monetary policy began to create in 1936 was stopped by further contraction of the money supply, resulting in new stock market lows and unemployment in the late 1930s. These problems were caused initially by monetary expansion in the 1920s by Benjamin Strong's Fed. The stock market bubble that led to the 1929 stock market crash was a monetary phenomenon. Likewise, the housing bubble of the past six years and the tech bubble of seven and eight years ago were all due to Federal Reserve manipulation. It seems that politicians can't keep their fingers out of the cookie jar. What irritates me is that the pissant media, from Fox to MSNBC, blames these problems on the "free market". If government control and manipulation of interest rates to stimulate bubbles is "free", then they are right. But unfortunately, our pissant media friends are ignorant of the meaning of the word "freedom" in America and American history.

Katz produces these charts:

I. Federal Reserve Bank Credit growth 130% since August(which apparently leads monetary base growth):



II. Monetary base growth: 20% since August:



Andrew Jackson turns in his grave at the sight of self-indulgent America, once the home of dynamic industrial growth, now the home of Wall Street beggars looting the public treasury while an ignorant public looks on.

David Ames Wells on the Depression of 1873, George W. Bush and Today's Fed Policy

David Ames Wells, whom Abraham Lincoln first appointed to public office, was commissioner of revenue in the late 1860s and was a consultant to the nascent railroad industry. He became an advocate of free trade, a Mugwump supporter of President Grover Cleveland and an advocate of hard money.

In 1889 he copyrighted Recent Economic Changes. In the introduction he notes:

"The existence of a most curious and in many respects unprecedented disturbance and depression of trade, commerce and industry, which, first manifesting itself in a marked degree in 1873, has prevailed with fluctuations of intensity up to the present time (1889), is an economic and social phenomenon that has been everywhere recognized. Its most noteworthy peculiarity has been its universality...the maximum of economic disturbance has been experienced in those countries in which the employment of machinery, the efficiency of labor, the cost and standard of living and the extent of popular education are the greatest...It is also universally admitted that the years immediately precedent to 1873--i.e., from 1869 to 1872--constituted a period of most extraordinary and almost universal inflation of prices, credits and business; which in turn has been attributed to a variety or sequence of influences, such as excessive speculation; excessive and injudicious construction of railroads...the opening of the Suez Canal...the Franco-German War; and the payment of the war indemnity which Germany extracted from France...Under date of March 1873, the London Economist in its review of the commercial history of the preceding year, says:

"'Of all events of the year 1872, the profound economic changes generated by the rise of prices and wages in this country, in Central and Western Europe, and in the United States, have been the most full of moment.'"

And the London Engineer under date of February 1873 thus further comments on the situation:

'...In 1872 scarcely a single step in advance was made in the science or practice of mechanical engineering. No one had time to invent, or improve, or try new things...'" (emphasis in the original).