Cause of the Great Depression

Chris M. Sciabarra sciabrrc at is2.NYU.EDU
Thu Sep 21 07:33:52 MDT 1995


On Thu, 21 Sep 1995 P8475423 at vmsuser.acsu.unsw.edu.au wrote:

> Unfortunately, Critical Review isn't available in Sydney(!), so I
> won't be able to chase up the Smiley paper; though I will eventually
> take a look at Rothbard.

Well mate--- I'll just have to send it to you, and I'll try to get my
hands on the Kydland paper.

> But I would also suggest that Austrians take a look at the Kydland
> paper I cited. There is a discernible difference between PK and
> Austrianism here, with the former believing that the money supply
> is endogenous, the latter apparently believing that it is possible
> to design a regime in which it is exogenous (the gold standard
> appears to play a role here?). Also, the interpretation Chris
> summarised had the (exogenous) actions of the Reserve fueling
> the process of boom in the '20s that led to the '29 Crash. The
> PK interpretation, as in the Minsky excerpt I attached, would be
> that the increase in cash etc. that occurred was an endogenous
> product of the euphoric expectations that developed during the
> 20s.

	This is all very difficult in a sense-- the actual evolution of
money standards was certainly NOT exogenous.  It was an endogenous
process.  The early history of banking shows that people, graduating from
a barter to a non-barter system of trade, began exchanging notes that were
directly redeemable in specie which was stored in a warehouse.  Early
free banking was such that any warehouse which sought to issue more notes
than they had specie available was in danger of diluting their value, and
in competitive conditions, they were less likely to inflate.  But
warehouses tried to inflate TOGETHER eventually, like every other
economic attempt at monopoly.  As their own relationship with the state
became closer, monetary matters were slowly taken over by the state which
was the only agency with the power to cartelize the industry effectively.
This is no different than what has happened in every other industry.
Kolko, Weinstein, and others have shown that the rivalrous competition in
the early days of capitalism with wide-open market entry led to a
gradually falling level of relative prices, and that industries wanting
to boost their own wealth sought to control prices through cartel
arrangements that ultimately failed due to internal cheating.  It was
only by appealing to FEDERAL (not STATE) regulation that such industries
achieved what they believed was a "rationalization" of their own sector.
The alphabet soup of regulatory agencies was prompted by, promoted by,
sanctioned by, and ultimately designed by, the captains of industry.

	So, I would say that the market in money IS endogenous to the
overall market process; the central bank is merely one sector of the
market that must be analyzed dialectically -- that is, it is BOTH
economic AND political.  It is no more "exogenous" than any other
monopoly on the market.  By the way, some Austrians -- Hayek for example
-- do criticize other Austrians for acting as IF the monetary authority
is exogenous.  But then again, Hayek, as I've suggested in MARX, HAYEK,
AND UTOPIA, is far more dialectically sensible and aware of internal
relations.
					- Chris
==================================================
Dr. Chris M. Sciabarra
Visiting Scholar, NYU Department of Politics
INTERNET:  sciabrrc at is2.nyu.edu
==================================================


> The PK approach seems to be supported by the Kydland paper:
> money supply follows the boom, it doesn't lead it; credit
> leads, but it's credit created endogenously, not M1 which is
> (supposedly) under the control of the Reserve.
>
> Cheers,
> Steve K
>
>
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>


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