Clark Johnson on Keynes

This week Lars Christensen is hosting 4 posts on Keynes by Clark Johnson.  Clark wrote an excellent book on the role of gold in the Great Depression, which has influenced recent work by Doug Irwin—particularly the hypothesis that French gold hoarding played a big role in the severe 1929-33 deflation.  Clark is also a very shrewd reader of Keynes.  Here is the concluding paragraph (but read the whole thing):

So here we are.  We saw an historically sharp recovery for four months during 1933, driven almost entirely by a decision to break the straightjacket imposed on monetary policy by the international gold standard.  Keynes had previously been an able critic of the gold standard, for example in the Tract on Monetary Reform (1923) and then in several chapters in the Treatise. The 1933 recovery was then stalled by micro-policies [the NIRA] of which he was explicitly critical.  Yet Keynes seemed to dismiss this entire episode in his call a few months later for fiscal stimulus!

I should add that I’ve known Clark for many years.  He gradually convinced me that I know nothing about foreign policy, which is why I never blog on that topic.   (He was too polite to say this in so many words, it’s just that I noticed that subsequent events always showed that he was right and I was wrong.)  I would describe his overall views as being politically moderate, and although his post is somewhat critical, Clark actually has enormous respect for Keynes, especially his Treatise on Money.

I look forward to the next 4 posts.


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21 Responses to “Clark Johnson on Keynes”

  1. Gravatar of RobertD RobertD
    25. June 2012 at 07:03

    Sumner on foreign policy… That would be interesting…

  2. Gravatar of dwb dwb
    25. June 2012 at 07:44

    i find this discussion series very interesting, particularly the period when the US went off the gold standard. the discussion of monetary ineffectiveness is confused, and i see the same confusion when PK simultaneously lambasts the Fed for not doing enough but saying the Fed did a great job during 2008-2009.

  3. Gravatar of Mike Sax Mike Sax
    25. June 2012 at 07:59

    dwb as I understand it Krugman is bascially saying the Fed helped us avoid a Depression but not enough to avoid the Great Recession.

    Basciallly the Fed did avoid deflation as Japan failed to do but still not enough to engneder a full recovery.

  4. Gravatar of Bill Ellis Bill Ellis
    25. June 2012 at 08:14

    Krugman Bashes the FED again…It has become his most prominent theme.

    Yet let’s not ridicule the Europeans, since many of our own policy makers are acting just as irresponsibly.(…)
    Let’s talk instead about the Federal Reserve. (…) the Fed released its latest set of economic projections, showing that it expects to fail on both parts of its mandate, with inflation below target and unemployment far above target for years to come.

    This is a terrible prospect, and the Fed knows it. Ben Bernanke, the Fed’s chairman, has warned in particular about the damage being done to America by the unprecedented level of long-term unemployment.

    So what does the Fed propose doing about the situation? Almost nothing. True, last week the Fed announced some actions that would supposedly boost the economy. But I think it’s fair to say that everyone at all familiar with the situation regards these actions as pathetically inadequate — the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.

    Why won’t the Fed act? …

    That is the big question, is it not ?… Why won’t the Fed act ?

    Krugman guesses that the Fed is intimidated by congressional Repubs. That seems hard for me to believe. In theory the Fed is insulated from this kind of pressure.

    I used to think the Fed did not act because it was married to discredited Ideas…But I no longer believe they don’t get it. I am at a loss.

    http://www.nytimes.com/2012/06/25/opinion/krugman-the-great-abdication.html?_r=1&hp

  5. Gravatar of Major_Freedom Major_Freedom
    25. June 2012 at 08:58

    I too could “recover” if I could print money to prolong the liquidation of bad investments I have made, to pay my bills, and to acquire assets and resources from others.

    Of course, the costs of my actions have to fall on somebody, but those people don’t count of course! As long as it looks like I am recovering, that’s all that matters, because my agenda is to show how money printing is better than the gold standard.

    ——

    If a country’s economy can “recover” from economic problems they might be having, by “breaking the straightjacket” imposed by that country mistakenly using a money the supply of which is under the control of non-country bureaucrats, such as gold miners, then by that logic, we can also argue that within a country, say the US, if one state “broke the straightjacket” imposed by that state mistakenly using a money the supply of which is under the control of non-state bureaucrats, such as Federal Reserve Chairmen, then that should also enable the state to “recover” from the “lack of demand” problems it might be having.

    Similarly, within a state, say California, if a county “broke the straightjacket” imposed by that county mistakenly using a money the supply of which is under the control of non-county bureaucrats, such as California state monetary policy chiefs, then that should also enable the county to “recover” from the “lack of demand” problems it might be having.

    And so on.

    The logic can be used within counties, all the way down to cities, neighborhoods, finally stopping at individuals.

    If Clark is right, if Friedman is right, if Sumner is right, if the majority of economists are right, about “lack of demand” being a main, or the main, source of economic ills, then the solution to individuals suffering from a “lack of demand” for his/her output, is for that individual to be able to print money for him or herself. Of course being the market monetarist I am, I recommend that each individual print only as much paper notes as would result, in combination with their demand for money, with them spending 5% more each year.

    If an individual spends more than 5% in one year, then…um…there should be a…um…democratic process that uh…replaces that individual with another individual who promises to…spend only 5% more each year.

    —–

    At some point the myth surrounding money is going to end. All lies do. Market monetarists only seem credible today in 2012 because the majority of people are ignorant when it comes to the nature of money. Most people who are concerned with only their daily affairs, will attribute their economic problems to a lack of money income, i.e. “lack of demand” for their goods and services. On the basis of this, the fallacy of composition is committed, and the belief “If a whole country can have increased spending, then everyone in the whole country can recover!” arises.

    Ergo the myth of the benevolent nature of central bank monopoly money printing is born.

    It’s the same old ancient superstition that was once manifested in a desire to turn stone into bread, dressed up for 20th/21st century socialist culture.

    —–

    The problem of money is not that there is not enough of it. The problem of money is one of economic calculation. Any quantity of money is just as good as any other for serving the purpose of money, as long as the real side of the economy has been well structured in the physical sense.

    More money printing only seems to be economically beneficial by fostering the illusion of “recovery” for those who can externalize the costs of prolonging a bad real structure onto others. There are always victims to violence backed money printing, the same way there would be victims if I used force to coerce people into paying me taxes in the paper money I print and spend, even if they trade without using my paper money.

    —–

    Contrary to the Friedmanite “deflation caused the Great Depression” myth espoused by Clark et al, the relatively large increase in reserves that took place throughout the 1930s played a HUGE role in PREVENTING real economic recovery in the US.

    Why? Because it goes back to the problem of economic calculation. When there is lots of money flowing from the money creators, this has an effect on separately acting and producing individuals’ ability to coordinate their economic behavior. Yes, incomes are growing, people are making more money, demands are rising, employment is rising, everything seems fine.

    But because individual actors are essentially acting in the dark vis a vis other individual actors when it comes to engaging in projects, what happens is that instead of each individual producing real puzzle pieces that tend to fit together with the rest of the real puzzle pieces that others are responsible for, to make a completed puzzle that no one individual knows what it looks like, there is instead a deviation away from the puzzle fitting tendency.

    The economy isn’t a place where people are divorced from each other, where each take raw materials and producing goods from them. No, the population is interconnected into a division of labor, where one group (more accurately one individual) are only responsible for their own piece of the overall puzzle. One group is responsible for the raw material stage, another group is responsible for refining, another for manufacturing, another for assembly, another for wholesale, and another for retail.

    Imagine cars being made from raw material to finished product in a single factory, where there is no central planner, no CEO, no overall leaders, but rather there is just a collection of independently producing workers each responsible for one part of “a car”, who have no other source of information concerning what the other workers are doing, other than a price system of profit and loss for each worker within the factory.

    Can you imagine how production in this factory will be distorted if I printed and spent money on those worker’s respective outputs, according to MY desires, rather than according to the same profit and loss system that the workers in the factory were depending on? That introducing subjective whims that are not subject to profit and loss, could distort a profit and loss system?

    Yes, for a time I might be able to goose a little more output out of the workers, as each worker sees an increase in income even if what each worker is doing is not physically in line with what the other workers are doing. But at some point, reality is going to assert itself. Economic scarcity is going to rear its head.

    Suppose it does so by the windshield installer realizing that he needs more glass than what he can afford given his existing income. In other words, the price of glass is getting too high relative to his income. This situation is going to look exactly like a “lack of demand” for that worker’s output is the problem. That there is “insufficient money”. Suppose this problem continues, because I as money printer am “sleeping at the wheel.” As his problems get worse, so too do the problems for those workers who depend on him get worse. They too find that they are experiencing a “lack of demand”. Economic scarcity is more and more asserting itself and making it appear as if the problem is a lack of enough money circulating in the factory.

    If only I could print more money to keep this distorted factory going, right?

    The above is what happened throughout the 1920s. The war-time inflation and the inflation thereafter created an economic “boom” that was in fact a distortion of production precisely due to the aggregate money (not just base money) inflation.

    Notice the almost universal absence of analysis of the 1920s from the inflationist crowd. Most BEGIN with the 1929 crash, and then they try to explain the Depression as a “lack of money”, when it was an overabundance of money throughout the 1920s that is the actual culprit. If aggregate money inflation accelerated into the 1930s, then yes, the Great Depression would not have taken place during the 1930s, but at some point physical reality would have asserted itself in the form of so much needed inflation to postpone correction that the US would have experienced another Weimar.

    This is why we see an almost universal correlation between “money tightening” and “recession.” It’s because we have not yet gotten to the currency collapse stage, as the central bank has always chosen to save the currency and allow corrections to occur, than to try and use inflation to stave off correction forever, which leads to currency collapse.

  6. Gravatar of Bill Ellis Bill Ellis
    25. June 2012 at 09:17

    Clark Johnson has to be a monetarist…his post provides evidence for the effectiveness of monetary policy to boost the economy while showing that price and production controls will have adverse effects.

    Great.
    But then it goes where Monetarist are always compelled to go…to a Knee Jerk attack on the effectiveness of Fiscal stim.
    There was Nothing in this post that showed That Fiscal stim does not work, yet some how it concluded with mockery of Keynes’ call for Fiscal Stim.

    Yet Keynes seemed to dismiss this entire episode in his call a few months later for fiscal stimulus!

    Advocates of monetary solutions and fiscal solutions do not have to be at odds. Why they are is more of a matter of political tribalism than economics.

  7. Gravatar of Justin Justin
    25. June 2012 at 09:18

    Maybe this isn’t an appropriate comment to leave (and if so feel free to delete), but I feel like someone has to say it:

    Major Freedom- Let’s suppose you are right about everything related to economics. You still come off like a crackpot writing lengthy essays in the comment section of every blog post here. The fact that you go to these lengths make you seem obsessed and ideological. As a result, supposing you are right, you are simply pushing people away from Austrian economics because they don’t want to associate with people like you.

    I was once more Austrian oriented than I am now. I like to think I moved away from some of my positions because I was logically persuaded, but part of the reason was probably because I felt like other people holding my positions were mostly a bunch of ideologues and crackpots. If you want change people’s minds about this, you should really look into finding a different way.

  8. Gravatar of dwb dwb
    25. June 2012 at 09:21

    dwb as I understand it Krugman is bascially saying the Fed helped us avoid a Depression but not enough to avoid the Great Recession.

    at some point he said monetary policy was ineffective but worth trying. now he says the fed did not do enough. Back in 2010 he was worried about the Fed turning hawkish. seems like a heck of lot of cognitive dissonance to me. the simplest explanation is that the fed was always hawkish. that might explain why the fed held rates at 2% in sept 2008 after lehman fell, and then capitulated and lowered them to zero q408.

  9. Gravatar of Major_Freedom Major_Freedom
    25. June 2012 at 09:22

    Justin:

    Maybe this isn’t an appropriate comment to leave (and if so feel free to delete), but I feel like someone has to say it:

    Alright, finally some cojones.

    Major Freedom- Let’s suppose you are right about everything related to economics. You still come off like a crackpot writing lengthy essays in the comment section of every blog post here. The fact that you go to these lengths make you seem obsessed and ideological. As a result, supposing you are right, you are simply pushing people away from Austrian economics because they don’t want to associate with people like you.

    GOOD. I don’t want people to agree with me based on popularity, group think, appearances, reputation, or ANYTHING other than facts and truth.

    If you don’t want to accept what I say because doing so will lead you to agreeing with someone you don’t like, then I welcome you to take a long walk off a short peer, and stay as far away from economic science as possible, and go try out for American Idol, along with the rest of those who crave acceptance.

    I was once more Austrian oriented than I am now. I like to think I moved away from some of my positions because I was logically persuaded, but part of the reason was probably because I felt like other people holding my positions were mostly a bunch of ideologues and crackpots. If you want change people’s minds about this, you should really look into finding a different way.

    Not a chance. If I thought like you did, then I’d be as ignorant as you, because I would be guided NOT by reason or logic, but by appearances.

  10. Gravatar of Justin Justin
    25. June 2012 at 09:38

    I think you’re missing the point. For one, if only crackpots agree with your position, it creates a presumption against the position. If most smart people disagree with you, it makes perfect rational sense to factor that in to the probability of whether your position is correct. We’d all like to think we’re smart and completely honest, but we all have biases, and no completely valid reason to suppose our opinions are more correct than someone else’s. That’s not to say minority opinions cannot be correct (Sumner’s opinion is minority too), but given the opportunity costs of time, you’d better have a great argument if you want people to bother to read your minority opinion.

    Second, I never said I disagree with you because I dislike you. The truth is, I explored other views because I questioned the intellectual honesty of the people espousing my views (I think your response adds validity to my suspicion by the way). Some of the new views I looked into seemed illogical and I did not adopt them. Others did seem logical, and I adopted those. The fact that I’m annoyed by Austrians didn’t change my opinion in and of itself, but it certainly made me consider other viewpoints more than I otherwise would have. Contrary to what you say, this does imply any of the accusations you have thrown at me.

    My point actually was, that people who do succumb to reason might (reasonably) assume you are a crackpot and not worth their time to read.

  11. Gravatar of Bill Ellis Bill Ellis
    25. June 2012 at 09:45

    Justin,

    No one gets more attention on these threads than M.F… Even Sumner feeds him. A lot of posters like sparing with him. He seems to be able get under folks skin.
    I don’t get it. But to each his own.

  12. Gravatar of Mike Sax Mike Sax
    25. June 2012 at 10:09

    Justin I’m no Austrian but from what I’m seeing there are Austrains and there are Austrians. The Hayekians you can at least have a reasoned debate with but the Rothbardians are a horse of a different color

  13. Gravatar of John Becker John Becker
    25. June 2012 at 10:15

    Mike Sax,

    I think it is too early to say that we’ve avoided a Japanese type scenario. People have been saying interest rates on treasuries would spike any day now but they keep going lower. If they go down another 50 basis points or so over the next year or two, I think it’s safe to say we’re in pretty much the same position Japan get itself into. Their yields on a ten year are 0.8% Also, they had a fairly mild deflation; nothing like the U.S. had in 1920 or the early 1930s.

    The first ten years of Japan’s Lost Decade looked remarkably like ours from an inflationary perspective.

    http://www.tradingeconomics.com/japan/inflation-cpi

    It was only after nearly ten years after their bubble burst that they had any kind of sustained deflation.

    Professor Sumner,

    I’m a little curious how Keynes would’ve view the German Reichsbank’s interest rate policies during the Weimar Hyperinflation. Would he have seen their 93% rate target in 1923 as very high, or was he smart enough to see that it was ridiculously low in real terms?

  14. Gravatar of Major_Freedom Major_Freedom
    25. June 2012 at 11:55

    Mike Sax:

    Justin I’m no Austrian but from what I’m seeing there are Austrains and there are Austrians. The Hayekians you can at least have a reasoned debate with but the Rothbardians are a horse of a different color

    That’s probably because Rothbardians consider violence to be unreasonable, whereas Hayekians are open to violence, and hence they seem more approachable to you, someone who advocates for violence (as long as they outnumber the minority).

  15. Gravatar of Major_Freedom Major_Freedom
    25. June 2012 at 12:03

    Justin:

    I think you’re missing the point.

    You mean I didn’t react the way you wanted me to react. I didn’t accept the guilt trip you’re peddling. Is that “the point” I missed?

    For one, if only crackpots agree with your position, it creates a presumption against the position. If most smart people disagree with you, it makes perfect rational sense to factor that in to the probability of whether your position is correct.

    That’s called fallacy of ad populum, sucker.

    We’d all like to think we’re smart and completely honest, but we all have biases, and no completely valid reason to suppose our opinions are more correct than someone else’s. That’s not to say minority opinions cannot be correct (Sumner’s opinion is minority too)

    Sumner’s position is a minority WITHIN an existing majority.

    but given the opportunity costs of time, you’d better have a great argument if you want people to bother to read your minority opinion.

    I’d rather appeal to those willing to put the same effort in.

    Second, I never said I disagree with you because I dislike you. The truth is, I explored other views because I questioned the intellectual honesty of the people espousing my views (I think your response adds validity to my suspicion by the way).

    What dishonesty are you talking about? What did I say that would convey dishonesty on my part? And what does dishonesty even have to do with the validity of an argument? Dishonest arguments can be true, and honest arguments can be false.

    Some of the new views I looked into seemed illogical and I did not adopt them. Others did seem logical, and I adopted those. The fact that I’m annoyed by Austrians didn’t change my opinion in and of itself, but it certainly made me consider other viewpoints more than I otherwise would have. Contrary to what you say, this does imply any of the accusations you have thrown at me.

    What accusations?

    I only defended my approach against your vitriolic attack against it!

    My point actually was, that people who do succumb to reason might (reasonably) assume you are a crackpot and not worth their time to read.

    “Succumb” to reason? Was that a Freudian slip or something?

    Those are aware of rationalist epistemology would certainly not find my views crackpot. My views are grounded on rationalist epistemology!

    If they don’t think I’m worth their time, then that’s their loss, not mine.

  16. Gravatar of Morgan Warstler Morgan Warstler
    25. June 2012 at 12:46

    We all know Austrianism / MF is right, the world just isn’t ready for it yet.

    It sucks.

    I mean I LOVE the idea that people get destroyed for their bad decisions, watching people twist and turn in despair does nothing for me, it is never pretty, BUT

    I REALLY LOVE the rest of the workers and investors etc. witnessing the gut wrenching ache of someone who over-extended, and for want of a SINGLE MISSED payment, loses everything.

    We NEED this fear. We NEED most people to be careful, and spend their lives measuring twice since they are only allowed to cut once.

    —–

    Risk cannot be removed from the game, there should be no “safe”investments.

    Equity, preferably the kind that requires you keep sweating it out, is the best kind of investment.

    I love the idea of Natural Money where interest on loans is not legal, and everyone must be 110% aware of where all their equity is and how it it performing.

    So yes, of course Austrianism will be thought of favorably because we all know it is right.

    It it DeKrugman that gives way to TBTF, not Austrians.

    That’s why folks here give it breathing room.

  17. Gravatar of Major_Freedom Major_Freedom
    25. June 2012 at 13:19

    Morgan:

    We all know Austrianism / MF is right, the world just isn’t ready for it yet.

    It sucks.

    It won’t happen on its own you know. It requires positive action, of ideas spreading by conscious effort. These ideas can’t spread if you’re spending each day talking about NGDP targeting.

    You seem to adhere to a sort of historicism, where the process of history is inevitable, where each stage gives way to a subsequent one, totally apart from conscious human effort, as if 7 billion people can’t take control of their own lives purposefully and change their minds, as if they have to go through some allegedly necessary historical development.

    Mises crushed that worldview as self-contradictory.

    I love the idea of Natural Money where interest on loans is not legal, and everyone must be 110% aware of where all their equity is and how it it performing.

    You love what has historically led to murder, black market workarounds, police state tactics, and economic convolutions?

    Would you be willing to point a gun at me to prevent me from accepting an interest bearing loan from someone else?

    Maybe that’s why you have a small soft spot in your heart for central banks.

    Theoretically, banning interest is absurd because interest is a consequence of people naturally valuing goods more highly in the present than in the future, all else equal.

    What would be the gain to someone who gave up present consumption for a period of time by loaning their money at zero interest to someone else?

    —–

    Other than that, I pretty much agree with what you said.

  18. Gravatar of Greg Ransom Greg Ransom
    25. June 2012 at 16:59

    Hayek’s well considered view was that Keynes’s _Treatise_ was much better than his _General Theory_, even given what a mess Hayek demonstrated the _ Treatise_ to be.

  19. Gravatar of ssumner ssumner
    25. June 2012 at 17:50

    RobertD, No it wouldn’t.

    dwb, There are all sorts of similarities between Krugman and Keynes.

    Bill, I’m at a loss too. And Clark is not really a monetarist—more a Mundellian.

    John Becker, He wrote the “Tract” right after the hyperinfaltion, and it was quite monetarist—I’ll bet Friedman loved it. He understood that Keynesian economics doesn’t work during hyperinflation.

    Greg, I agree with Hayek, and the Tract was still better.

  20. Gravatar of Philo Philo
    26. June 2012 at 07:28

    Johnson writes (in his Milken paper) that the dollar should not have been allowed to appreciate so much from July to October, 2008–from $1.60/euro to $1.25/euro; he agrees with Mundell that it should have been held in the low $1.40s/euro. He adds: “This result could almost certainly have been achieved through aggressive, coordinated interventions in the government-debt and foreign-exchange markets.”

    I would not quarrel with the main point, but I am surprised at the weakness of ‘almost certainly’: what does he think might have prevented this achievement? And I wonder at the term ‘coordinated’: I think he means the Fed would have had to coordinate its actions *with other central banks around the world*, but why does he suppose this would have been necessary? Is it not clear that the Fed could have kept the dollar from appreciating beyond $1.40/euro all by itself, regardless of the actions of other central banks (provided we limit our consideration to actions that were politically feasible for them)?

  21. Gravatar of ssumner ssumner
    27. June 2012 at 09:23

    Philo, And I’d add that the euro was also too strong, as was the yen.

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