Brad DeLong needs to reread the Monetary History

Bob Murphy directed me to a Brad DeLong post bashing Milton Friedman:

In A Monetary History of the United States, published in 1963, Friedman and Anna Jacobson Schwartz famously argued that the Great Depression was due solely and completely to the failure of the US Federal Reserve to expand the country’s monetary base and thereby keep the economy on a path of stable growth. Had there been no decline in the money stock, their argument goes, there would have been no Great Depression.

I can’t understand how a brilliant economic historian like DeLong could make such a totally erroneous statement.  Milton Friedman and Anna Schwartz clearly documented the fact that the Fed increased the monetary base sharply during the Great Depression. They discussed the Fed’s QE policy of 1932.  So the preceding statement is flat out wrong.

And indeed the entire post is confused.  DeLong argues that the Great Recession was partly caused by the influence of Friedman’s ideas.  Actually, one could argue that the Great Recession happened because we did not pay enough attention to Milton Friedman.  Indeed this Friedman insight from 1998 was totally ignored in late 2008 by all but a tiny band of market monetarists:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

.   .   .

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

In early 2009 I wrote a piece sharply criticizing DeLong for claiming that monetary policy was ineffective at the zero bound and that we therefore needed fiscal stimulus. He finally got the message, and a few years later he was bashing the Fed for letting NGDP growth plunge.  Now he’s back to claiming there was nothing the Fed could do at the zero bound.

When I was in grad school in the 1970s, anyone claiming a fiat money central bank would be unable to debase its currency would have been laughed at.  As recently as the early 2000s mainstream economists like Mishkin, Bernanke, Svensson, etc., were still scoffing at that idea.  It’s a sad comment on modern macro that this bizarre theory has suddenly become mainstream without a single shred of evidence in support.  Even worse, most macroeconomists don’t even seem to know what evidence in support of monetary policy ineffectiveness would look like.

PS.  Bob Murphy also has a post on the same topic.  David Glasner criticizes the DeLong post for other reasons.

PPS.  I strongly believe that if the FOMC had been composed of 12 Brad DeLongs, the Great Recession would have been considerably milder.  Which means Brad is wrong.  🙂



52 Responses to “Brad DeLong needs to reread the Monetary History”

  1. Gravatar of Rajat Rajat
    1. April 2015 at 15:38

    There’s your mistake right there. Modern NK theory appears to have nothing to do with something so crude as ‘evidence’. At least that’s what I get from reading Tony Yates’s posts.

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    1. April 2015 at 15:42

    Another Pot, Kettle, Black Award goes to;

    ‘Hubbard is a competent economist, when he wants to be.’

    A friend tells me that Hubbard’s textbook is now outselling Paul and Robin’s.

  3. Gravatar of Ashton Ashton
    1. April 2015 at 16:34

    Hi Scott, off topic but do you think you could take a few minutes to read over this Reddit post about the recession and the financial crisis and say whether it’s essentially correct:

  4. Gravatar of A A
    1. April 2015 at 16:40

    I remember Delong’s previous posts about Hicks, and the possibility of QE perpetuating a liquidity trap. Yet his solution was puzzling. On one hand, he thought that cash and interest bearing safe assets were equivalent at the ZLB; but then he called on the Treasury to finance spending by issuing bonds. As he wrote in 2011 []:

    “The government spends and borrows, creating more of the safe, cashlike assets that private investors want. As these bonds hit the market, people who otherwise would have socked their money away in cash — diminishing monetary velocity and slowing spending — buy bonds instead. A large, timely government deficit thus short-circuits the adjustment mechanism, avoiding the collapse in monetary velocity. ”

    Isn’t that sort of weird? He focuses on the buying of deficit financing bonds, not the deficit spending. If the issue is a too small supply of real safe assets, and safe assets are indistinguishable from cash at the ZLB, then why wouldn’t you have the same effect by increasing real cash balances?

  5. Gravatar of benjamin cole benjamin cole
    1. April 2015 at 16:44

    Excellent blogging. DeLong and Krugman are smart guys, and if told fiscal policy is off the table, somewhat become Market Monetarists.
    Krugman had a recent post suggesting a higher IT which was pretty good.

  6. Gravatar of ssumner ssumner
    1. April 2015 at 17:21

    Patrick, It’s almost uncanny how many of his insults aimed at others remind us of his own faults.

    Ashton, Very good post. My only quibble would be that (in my view) the Fed’s excessively tight money came in 2008, not 2006 and 2007. But that’s a judgment call.

    A, I suppose he’d say it depends on what you buy with the cash.

    Thanks Ben.

  7. Gravatar of Derivs Derivs
    1. April 2015 at 17:50

    Being one that sees emotion in markets, IMO I really don’t think monetary policy can do much in times of great breaks in confidence (unless that policy itself is what is needed to restore confidence). The system simply seizes and everyone seems to panic and freeze. I think the same parallel is occurring in Brazil right now. IMO the Central Bank can try anything they wish, but this is a crisis of confidence. No one wants to hire, no one wants to extend credit, no one wants to build, no one wants to spend, no one wants to take on debt, and definitely no one wants to invest since they don’t trust the corrupted system. Lack of confidence will overwhelm monetary policy, just as it did in the U.S. in ’07-’08. Deer say hello to headlights.

  8. Gravatar of TravisV TravisV
    1. April 2015 at 17:50


    “Jeb Bush picks righty-tighties for economic advisor team, FEC frowns”

  9. Gravatar of marcus nunes marcus nunes
    1. April 2015 at 19:08

    Given the circumstances, falling house prices followed shortly by troubles in mortgage companies, monetary policy began to tighten almost as soon as Bernanke takes over at the Fed. Evidently, the screws were fully tightened in 2008.

  10. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    1. April 2015 at 20:04

    Brazilian central bankers have zero credibility since a long time, they screwed up so many times before, even running a (hidden) inflation target that was 1.5% above the formal target. Since we have long and variable LEADS, they would have to throw tombni out. Levy on the contrary has extra credibility, he was the guy responsible for the fiscal adjustment of finance minister Palocci in 2003-2005, before he was thrown out by a corruption scandal. The problem with Levy is that he can be fired at any time by madam president, and to be frank, PT will try very hard to achieve that. He is implementing PSDB agenda, and some part of the elctorate felt betrayed (correctly). Political situation is a mess. But with all this, GDP surprised on the upside in the 4th quarter. Brazilians never disapoint on spending!

  11. Gravatar of Ray Lopez Ray Lopez
    1. April 2015 at 20:43

    DeLong’s orthodox history is right, Sumner’s revisionist history is wrong, see the below paper from Bardo’s personal website or Google it. Read the paper, space constraints forbid me from being too lengthy here. Already our host has rebuked me for making long posts, I hope for the readers of this blog that censorship is not next.

    Bardo reviewing Meltzer’s vol. 1 on the Fed Reserve: “the interpretation of the Great Depression by Friedman and Schwartz and other scholars such as Bernanke and Eichengreen is wanting;”

    Bardo says Meltzer says that the monetary rule of the Burgess-Riefler (-Strong) doctrine, a ‘real bills’ pro-cyclical monetary rule that to me sounds suspiciously like NGDPLT–was the real culprit behind the Great Depression (Meltzer is a diehard monetarist I might add). “following the severe recession of 1920-21, the Fed shifted to a more activist stance based more on the use of open market operations rather than discount policy and a new policy framework which Meltzer calls the Burgess – Riefler doctrine.” “Throughout the book Meltzer effectively demonstrates that by following this doctrine, the system seriously misjudged policy. Thus it viewed low member bank indebtedness and low nominal interest rates from 1930-33 as evidence of monetary ease, thereby creating the Great Depression, the recession of 1937-38 and other less spectacular failures”. Note there’s no money loosening as Sumner states, but the opposite, just as DeLong and conventional wisdom have it.

    (Also, off-topic, Meltzer discusses how Eichengreen (1992) and Temen (1989) are wrong about the supposed failings of the Gold Standard and its purported cause of the Great Depression, just as I said late last year here).


  12. Gravatar of Major.Freedom Major.Freedom
    1. April 2015 at 20:54

    In A Monetary History of the United States, published in 1963, Friedman and Anna Jacobson Schwartz famously argued that the Great Depression was due solely and completely to the failure of the US Federal Reserve to expand the country’s monetary base and thereby keep the economy on a path of stable growth. Had there been no decline in the money stock, their argument goes, there would have been no Great Depression.

    “I can’t understand how a brilliant economic historian like DeLong could make such a totally erroneous statement. Milton Friedman and Anna Schwartz clearly documented the fact that the Fed increased the monetary base sharply during the Great Depression. They discussed the Fed’s QE policy of 1932. So the preceding statement is flat out wrong.”

    It isn’t totally erroneous. It is just worded badly. What DeLong is saying there is that Friedman and Schwartz’s theory of the Great Depression was that the Fed failed to expand the money base sufficiently so as to prevent the drop in the money supply that was a cause for why aggregate spending fell as much as it did.

    DeLong did not mean to say that Friedman and Schwartz believed the Fed did not expand the monetary base at all. By “monetary base” DeLong means the total money supply, of which the base is the primary driver and limiter, as aggregate spending cannot keep increasing indefinitely, or at least for as long as it has, without an increase in that part of the money supply the Fed directly determines by way of OMOs.

    DeLong is not a brilliant economic historian by the way. Hus false theory has clouded a proper understanding of economic history. He is a Keynesian. Keynesianism is incapable of accurately assessing history because it is full of internal inconsistencies. Take for example the contradiction between Keynes’ Marginal Efficiency of Capital (MEC) doctrine, and his Multiplier Doctrine. The first says an increase in net investment will reduce profitability, while the second says that an increase in net investment will increase profitability.

    It is annoying that we live in a world where economists feel the need to flatter each other no matter how empty of evidence and sound economic logic the arguments get.

    DeLong’s economic function in the world is a statist propaganda mouthpiece that encourages political power for its own sake. Economics, or at least his attempt at it, is an afterthought, a weapon to be used to promote his politics.

  13. Gravatar of ssumner ssumner
    2. April 2015 at 04:00

    David Glasner emailed me that his comment had been blocked. (BTW, Marcus Nunes also has comments blocked on occasion–so if you have a comment blocked, don’t assume the worst.) David provided his comment in the email, so I list it below:


    I tried posting once before, but was unsuccessful. First of all, thanks for linking to my post. Second, I think that you may not be reading Delong with sufficient charity. You are right of course that Friedman and Schwartz did observe that the monetary base rose during the Great Contraction, so Delong was technically wrong in the passage that you quote. But Friedman and Schwartz did not believe that the increase in the monetary base absolved the Fed from responsibility and blame for the contraction of M1. So the charitable way to read Delong would be to read it as follows “the failure of the US Federal Reserve to expand the country’s monetary base [enough to prevent M1 from falling] and thereby keep the economy on a path of stable growth.”

    I agree with you that one can make a good case that Friedman would have argued for an expansionary monetary policy in the post 2008 period. However, Delong referred not only to Friedman but to his “monetarist disciples” and, as we all know, number of Friedman’s actual and many of self-proclaimed disciples have been very vocal in opposing even the minimally expansionary policy of the Fed since 2008. Just wondering, but do you think Friedman would have favored raising the inflation target above 2 percent or moving to price level targeting instead of inflation targeting with a catch up for the deflation after the financial crisis? (And feel free to translate from inflation and price level to NGDP.)

    Finally, if you read the last paragraph of my post carefully, you will see that I was also (at least indirectly) critical of Delong for suggesting that the Fed could not have generated a price level path any higher than the one we have been on since 2008.

  14. Gravatar of james in london james in london
    2. April 2015 at 04:15

    OT but more good news for liberals, market forces pushing wages higher for the lowest paid.

  15. Gravatar of ssumner ssumner
    2. April 2015 at 04:25

    Derivs, You said:

    “Being one that sees emotion in markets, IMO I really don’t think monetary policy can do much in times of great breaks in confidence (unless that policy itself is what is needed to restore confidence). The system simply seizes and everyone seems to panic and freeze.”

    It can certainly do a lot if the monetary policy itself was causing the great break in confidence, which was clearly the case in 2008.

    Marcus, I agree, but given the Fed’s dual mandate one could argue the tightening of 2006-07 was appropriate. Remember that the Fed was not targeting NGDP along a 5% growth path, level targeting. And even if they were, we don’t know the exact starting point for that growth path.

    Ray, Thanks for bringing the funny version of Ray back!!

    What’s more hilarious:

    1. That Ray thinks he understands “Bardo”
    2. That Ray thinks he understands “Temen”
    3. That Ray thinks a regime that treats low rates as easy money is “market monetarist.”
    4. That Ray thinks the Fed did not sharply increase the monetary base during the 1930s.
    5. That Ray thinks I argued there was “money loosening.”

    I cannot recall the last time I saw so much hilarious idiocy in one short comment.

    David, I thought of what you called the “charitable” interpretation, but then realized it was actually the least charitable. My interpretation is kinder to DeLong. Let’s say DeLong knew that the Fed increased the base roughly 4 fold between December 1929 and December 1941, when WWII broke out. Then the rest of his post would make no sense at all. He implicitly suggests that the Fed recently tried to do what Friedman wanted it to do in the 1930s, but failed to do in the 1930s. DeLong seems to think this shows Friedman’s policy would not have worked in the 1930s either.

    And that’s just wrong. The recent policy was to sharply increase the base, just like in the 1930s.

    Now I have problems with Friedman’s interpretation of the Depression, and also oppose his M2 targeting scheme. But DeLong doesn’t lay a glove on him. Unless you know that the Fed did aggressive QE in the 1930s, you don’t understand Friedman’s actual critique, which was that they let M2 decline sharply. More recently, Friedman shifted to advocating an inflation target. By that criterion, money was too tight in 2008-09

    I have a paper coming out soon in an Oxford University Press publication that argued Milton Friedman would have been sympathetic to market monetarism. During the last years of his life he said many things that sound quite MM. He also moved away from money supply targeting. I am certain he would have seen the IOR program as a mistake similar to the reserve requirement increase of 1937 (which increased global gold demand). He favored targeting TIPS spreads, which is similar to NGDP futures. One can never be sure, but I think he would have been horrified by Anna Schwartz’s Austrian interpretation of 2008.

  16. Gravatar of Derivs Derivs
    2. April 2015 at 05:21

    “It can certainly do a lot if the monetary policy itself was causing the great break in confidence, which was clearly the case in 2008.”

    Yes, that is what I said “(unless that policy itself is what is needed to restore confidence)”

    Although I think a big part of the crisis was initiated by balance sheet fears which is why credit seized up. Not being a fan of so many QE’s I have never deviated from saying that the first one, getting all that Mortgage backed paper off MTM and into stronger hands was the right thing to do.

    As for Brazil I don’t see it at all as a monetary fix, it is a corruption problem, a crisis of confidence that would be better helped by RICO laws than anything a CB can do (IMO). Investment money moves to where it is treated kindly, not to where it will be stolen.

    Jose, I think the turning point was mid-March when the realization of theft with impunity (the old way of doing business) might no longer be acceptable. I’m not sure what you are looking at but I see just today, Car manufacturing down 17%, Telephone companies cutting 3,700 jobs, OAS asking for bankruptcy protection, 1,000 given aviso previo at the Olympic site, Meat sales dropping, Housing prices breaking, Azul cutting routes and employees, those overpriced Easter eggs on sale even, beer sales dropping…

    And GDP may have come in flat (in $R), but my odd proclivity to convert everything to a consistent numerator (USD) – one shared by wiki in ranking countries globally, looks like a pretty big break.

    Long and short of what I am saying is don’t ignore watching the confidence indexes. Until those flatten or turn, you usually have trouble on your hands.

    But it is gorgeous out, life is short, I want to get in front of some of the weekend traffic, so to all… a Happy Easter and a Happy and Healthy Pesach.

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. April 2015 at 06:31

    ‘…so if you have a comment blocked [at DeLong’s blog], don’t assume the worst.’

    No, go ahead and assume. I sometimes amuse myself by posting a complimentary remark there when I read something by him that I agree with. THOSE comments always go up. Always.

    When he is good, he is very, very good, but when he is ‘Brad’….

  18. Gravatar of David de los Ángeles Buendía David de los Ángeles Buendía
    2. April 2015 at 07:00


    You link to the original quote from Dr. Friedman about interest rates and tight money is broken. Could you provide the a citation?

  19. Gravatar of Felipe Felipe
    2. April 2015 at 07:19


    Although I think a big part of the crisis was initiated by balance sheet fears which is why credit seized up

    But balance sheet fears are directly influenced by the central bank. If economy-wide income unexpectedly goes down 9% below trend, a lot of loans are going to go from the profitable category into default.

  20. Gravatar of TravisV TravisV
    2. April 2015 at 08:39

    David de los Ángeles Buendía,

    The Hoover Institution recently changed that link where that Friedman quote came from (originally the WSJ). Here is the new one:

  21. Gravatar of Lord_Kelvin Lord_Kelvin
    2. April 2015 at 10:03

    As part of my efforts to be a better-informed econ undergrad, I recently read the Monetary History and was surprised by how much more sophisticated the narrative was than I expected.

    Friedman and Schwartz were quite clear that the decline in M2 was due mainly to changes in the deposit and reserve ratios. They blamed the Fed for having assured banks that it would be a sound lender of last resort, then doing nearly nothing in the face of the Great Depression; they claim earlier suspension and the Aldrich-Vreeland act would have worked better. So I agree that Delong reads them incorrectly: they blamed the Fed for replacing a superior system; while you may disagree with this assessment, it’s certainly reasonable.

  22. Gravatar of Ray Lopez Ray Lopez
    2. April 2015 at 10:07

    Sumner’s quotes in quotes:

    “Ray, Thanks for bringing the funny version of Ray back!!” – I have not changed, maybe your manic pendulum is shifting?

    “What’s more hilarious:”

    “1. That Ray thinks he understands “Bardo”” (it’s ‘Bordo’ Scott)
    “2. That Ray thinks he understands “Temen”” (I read his book on AT&T’s breakup)

    “3. That Ray thinks a regime that treats low rates as easy money is “market monetarist.”” – no, I just think NGDPLT is a new form of the Real Bills doctrine, except the Fed is pushing paper out not merely accepting paper in. Call me crazy.

    “4. That Ray thinks the Fed did not sharply increase the monetary base during the 1930s.” – OK I stand corrected, having read:

    “5. That Ray thinks I argued there was “money loosening.”” – no, I second Glasner’s second point: ‘Second, I think that you may not be reading Delong with sufficient charity.’

    “I cannot recall the last time I saw so much hilarious idiocy in one short comment.” – well don’t block me and I’ll come up with more, promise!

    “I have a paper coming out soon in an Oxford University Press publication that argued Milton Friedman would have been sympathetic to market monetarism.” – I dunno, but Friedman was not sympathetic of the IS-LM diagram, see “IS-LM AND MONETARISM” by Michael D. Bordo, Anna J. Schwartz, Working Paper 9713, May 2003

  23. Gravatar of flow5 flow5
    2. April 2015 at 10:48

    We were not reduced to practically a barter economy because the banks were insolvent; but because perfectly sound banks could not meet the liquidity tests imposed upon them by a panic-stricken public.

    The loss of faith in the private commercial banks had become so pervasive by the end of 1932, banks were being forced to liquidate by the thousands.

    People everywhere were attempting to convert their demand and time deposits into currency. Thousands of towns and cities throughout the country were attempting to finance their daily commerce without a single operating bank. And by March, 1933, just before Roosevelt’s “banking holiday” there were even entire states without a single operating bank.

  24. Gravatar of flow5 flow5
    2. April 2015 at 10:52

    In the commercial loan theory of banking (pre-1914 banking theory) lending (CB credit) was confined to short-term, self-liquidating agricultural, industrial, or commercial paper originating out of the financing of “goods-in-process”.

    Reserve bank credit (discounts & advances) then consisted of (1) re-discounting previously discounted paper by the borrowing banks (endorsing its customer’s paper), & by (2) direct advances through the purchase of the banks’ own promises to pay (secured by the banks’ own collateral).

    The traditional commercial loan was essentially a processing or merchandising loan. It had a maturity of less than one year (usually less than ninety days), and it purportedly was self-liquidating, that is the sale of the merchandise financed by the loan provided the borrower with the funds with which to repay the loan. The bills which this type of lending gave rise to were termed “real bills,” and it was the contention of those who sponsored the “real-bills doctrine” that this type of loan was not inflationary [sic] since the banks were financing real things, value being added to product as a result of the lending process.

    In fact, however, if the theory is applied under the assumption that labor and facilities are fully employed, the injection of new bank credit for financing inventories or any other phase of merchandising or processing is obviously inflationary. It is also inflationary, but less so, if the new bank credit is injected at a time of underemployment.

    The effect then is to bring about both a rise in prices and some re-employment of factors. Once prices start increasing, it will be necessary for businessmen to secure larger commercial loans, just to carry on the same volume of business, and other so-called commercial loans will be obtained in order to hold larger inventories and engage in more forward buying. All such activity promotes higher prices with no necessary concomitant expansion in the production of “real” things.

    Rediscounting was discontinued because of its mechanical difficulties (the many pieces and aggregate volume of eligible paper discounted, and the maturity of the paper varying with the term of the loan, all of which might not necessarily correspond to the amount an MCB is seeking to borrow).

    There was never an extensive “bill market” in the U.S. (as in Europe). The MCBs lacked an adequate volume of commercial paper, from which to meet their reserve (discounting), needs. And the objectives of the Central bank can’t be met by limiting “eligible paper” to an insignificant proportion of a bank’s assets. Furthermore the enforcement of stringent collateral requirements during recessionary periods is likely to exacerbate its availability, especially when it’s needed most, during economic downswings.

    It wasn’t until the Glass-Stegall Act of 1932 that government securities were given the same discounting privileges as short-term self-liquidating commercial paper (but the Presidents ran on “balanced budget deficit” platforms). The Banking Act of 1935 further liberalized discounting privileges to be “secured to the satisfaction of the Federal Reserve Bank” (giving the RB virtually complete freedom to determine collateral types).

  25. Gravatar of flow5 flow5
    2. April 2015 at 10:53

    In retrospect, the answers to the depression seem simple. We needed a central bank that could and would pump IBDDs into the commercial banks in a volume sufficient to satisfy the public’s demand for currency, specifically paper money (currency is an asset the Fed does not, should not, and cannot control). In the control of the monetary aggregates, the monetary authorities are completely dependent on their power to control the volume of bank credit. They have no power over the volume of the Treasury’s General Fund Account or the currency holdings of the public.

    It was not until 1933 that we began to unshackle our paper money from the numerous and unnecessary restrictions pertaining to its issuance. With the numerous types of paper money in circulation at the time, this would seem to have been a non-problem. Here is the list: gold certificates, silver certificates, national bank notes, United States notes, Treasury notes of 1890, Federal Reserve Bank notes, and Federal Reserve notes. With that array of paper money there should have been plenty to meet the liquidity demands placed on the banks by the public. But the volume of each type that could be issued was so circumscribed by restrictions that even the aggregate group could not begin to meet the panic demands of the public.

    Today we have only the Federal Reserve Note, and there is only one restriction placed upon its issuance. No Federal Reserve Note can be put into circulation unless there is a prior transaction involving the relinquishing by the public of an equal volume of bank deposits, and an equal diminution of the holdings of IBDDs on deposit with the Federal Reserve Banks; In other words, the issuance of our paper money contains no inflationary bias. Its issuance does not increase the volume of money. It merely substitutes one form of money for another form

  26. Gravatar of flow5 flow5
    2. April 2015 at 10:55

    Estimates by the Department of Commerce put the net debt figure as of the end of 1939 at $183.2 billion compared with a figure of $190.9 billion as of the end of 1929. I.e., for the period encompassing the Great Depression there was no over all debt expansion.

    Total Net Debt,,, Private,,,, Public
    1916 ,,,,, 82.1 ,,,,, 76.5 ,,,,, 5.6
    1917 ,,,,, 94.4 ,,,,, 82.4 ,,,,, 12.0
    1918 ,,,,, 117.4 ,,,,, 91.5 ,,,,, 25.9
    1919 ,,,,, 128.0 ,,,,, 97.2 ,,,,, 30.8
    1920 ,,,,, 135.4 ,,,,, 105.8 ,,,,, 29.6
    1921 ,,,,, 135.8 ,,,,, 106.2 ,,,,, 29.6
    1922 ,,,,, 140.0 ,,,,, 109.5 ,,,,, 30.5
    1923 ,,,,, 146.3 ,,,,, 116.3 ,,,,, 30.0
    1924 ,,,,, 153.0 ,,,,, 123.0 ,,,,, 30.0
    1925 ,,,,, 162.6 ,,,,, 132.3 ,,,,, 30.3
    1926 ,,,,, 168.8 ,,,,, 138.9 ,,,,, 29.9
    1927 ,,,,, 177.3 ,,,,, 147.6 ,,,,, 29.7
    1928 ,,,,, 185.9 ,,,,, 156.1 ,,,,, 29.8
    1929 ,,,,, 190.9 ,,,,, 161.2 ,,,,, 29.7
    1930 ,,,,, 191.0 ,,,,, 160.4 ,,,,, 30.6
    1931 ,,,,, 181.9 ,,,,, 147.9 ,,,,, 34.0
    1932 ,,,,, 174.6 ,,,,, 136.7 ,,,,, 37.9
    1933 ,,,,, 168.5 ,,,,, 127.5 ,,,,, 41.0
    1934 ,,,,, 171.4 ,,,,, 125.1 ,,,,, 46.3
    1935 ,,,,, 174.7 ,,,,, 124.2 ,,,,, 50.5
    1936 ,,,,, 180.3 ,,,,, 126.4 ,,,,, 53.9
    1937 ,,,,, 182.0 ,,,,, 126.7 ,,,,, 55.3
    1938 ,,,,, 179.6 ,,,,, 123.1 ,,,,, 56.5
    1939 ,,,,, 183.2 ,,,,, 124.3 ,,,,, 58.9
    1940 ,,,,, 189.9 ,,,,, 128.6 ,,,,, 61.3
    1941 ,,,,, 211.6 ,,,,, 139.0 ,,,,, 72.6
    1942 ,,,,, 259.0 ,,,,, 141.5 ,,,,, 117.5
    1943 ,,,,, 313.6 ,,,,, 144.3 ,,,,, 169.3
    1944 ,,,,, 370.8 ,,,,, 144.8 ,,,,, 226.0
    1945 ,,,,, 406.4 ,,,,, 140.0 ,,,,, 266.4
    1946 ,,,,, 397.5 ,,,,, 154.2 ,,,,, 243.3
    1947 ,,,,, 418.0 ,,,,, 180.3 ,,,,, 237.7
    1948 ,,,,, 434.3 ,,,,, 201.6 ,,,,, 232.7
    1949 ,,,,, 447.9 ,,,,, 211.2 ,,,,, 236.7
    1950 ,,,,, 488.2 ,,,,, 248.8 ,,,,, 239.4
    1951 ,,,,, 521.2 ,,,,, 279.2 ,,,,, 242.0
    1952 ,,,,, 552.7 ,,,,, 302.7 ,,,,, 250.0
    1953 ,,,,, 584.7 ,,,,, 328.0 ,,,,, 256.7
    1954 ,,,,, 605.5 ,,,,, 341.9 ,,,,, 263.6

    Sources: Office of Business Economics, United States Department of Commerce, “Survey of Current Business,” Sept, 1953, p. 14; May, 1955, p. 9.

    1916 ,,,,, 1.2 ,,,,, 20.6
    1917 ,,,,, 7.3 ,,,,, 25
    1918 ,,,,, 20.9 ,,,,, 29.7
    1919 ,,,,, 25.6 ,,,,, 24.9
    1920 ,,,,, 23.7 ,,,,, 39.5
    1921 ,,,,, 23.1 ,,,,, 35.7
    1922 ,,,,, 22.8 ,,,,, 35.2
    1923 ,,,,, 21.8 ,,,,, 38.5
    1924 ,,,,, 21 ,,,,, 41
    1925 ,,,,, 20.3 ,,,,, 44.4
    1926 ,,,,, 19.2 ,,,,, 45.2
    1927 ,,,,, 18.2 ,,,,, 48.4
    1928 ,,,,, 17.5 ,,,,, 51.1
    1929 ,,,,, 16.5 ,,,,, 51
    1930 ,,,,, 16.5 ,,,,, 48.1
    1931 ,,,,, 18.5 ,,,,, 41.5
    1932 ,,,,, 21.3 ,,,,, 37.2
    1933 ,,,,, 24.3 ,,,,, 33.5
    1934 ,,,,, 30.4 ,,,,, 36.2
    1935 ,,,,, 34.4 ,,,,, 38.5
    1936 ,,,,, 37.7 ,,,,, 42
    1937 ,,,,, 39.2 ,,,,, 40.9
    1938 ,,,,, 40.5 ,,,,, 41.2
    1939 ,,,,, 42.6 ,,,,, 43.2
    1940 ,,,,, 44.8 ,,,,, 46.1
    1941 ,,,,, 56.3 ,,,,, 53
    1942 ,,,,, 101.7 ,,,,, 73.6
    1943 ,,,,, 154.4 ,,,,, 96.7
    1944 ,,,,, 211.9 ,,,,, 125.2
    1945 ,,,,, 252.7 ,,,,, 149.1
    1946 ,,,,, 229.7 ,,,,, 138.1
    1947 ,,,,, 223.3 ,,,,, 139.5
    1948 ,,,,, 216.5 ,,,,, 138.4
    1949 ,,,,, 218.6 ,,,,, 139.7
    1950 ,,,,, 218.7 ,,,,, 148.9
    1951 ,,,,, 218.7 ,,,,, 155.4
    1952 ,,,,, 224.2 ,,,,, 166.5
    1953 ,,,,, 228.1 ,,,,, 171.6
    1954 ,,,,, 230.2 ,,,,, 182
    Last Edit: May 5, 2012 at 12:41pm by flow5 – Back to Top

    Post by flow5 on May 5, 2012 at 12:42pm
    Change in……………….Change in
    Total Debt………………Bank Debt

    1916 ,,,,, ,,,,,
    1917 ,,,,, 12.3 ,,,,, 4.4
    1918 ,,,,, 23 ,,,,, 4.7
    1919 ,,,,, 10.6 ,,,,, 5.2
    1920 ,,,,, 7.4 ,,,,, 4.6
    1921 ,,,,, 0.4 ,,,,, -3.8
    1922 ,,,,, 4.2 ,,,,, -0.5
    1923 ,,,,, 6.3 ,,,,, 3.3
    1924 ,,,,, 6.7 ,,,,, 2.5
    1925 ,,,,, 9.6 ,,,,, 3.4
    1926 ,,,,, 6.2 ,,,,, 0.8
    1927 ,,,,, 8.5 ,,,,, 3.2
    1928 ,,,,, 8.6 ,,,,, 2.7
    1929 ,,,,, 5 ,,,,, -0.1
    1930 ,,,,, 0.1 ,,,,, -2.9
    1931 ,,,,, -9.1 ,,,,, -6.6
    1932 ,,,,, -7.3 ,,,,, -4.3
    1933 ,,,,, -6.1 ,,,,, -3.7
    1934 ,,,,, 2.9 ,,,,, 2.7
    1935 ,,,,, 3.3 ,,,,, 2.3
    1936 ,,,,, 5.6 ,,,,, 3.5
    1937 ,,,,, 1.7 ,,,,, -1.1
    1938 ,,,,, -2.4 ,,,,, 0.3
    1939 ,,,,, 3.6 ,,,,, 2
    1940 ,,,,, 6.7 ,,,,, 2.9
    1941 ,,,,, 21.7 ,,,,, 6.9
    1942 ,,,,, 47.4 ,,,,, 20.6
    1943 ,,,,, 54.6 ,,,,, 23.1
    1944 ,,,,, 57.2 ,,,,, 28.5
    1945 ,,,,, 35.6 ,,,,, 23.9
    1946 ,,,,, -8.9 ,,,,, -11
    1947 ,,,,, 10.5 ,,,,, 1.4
    1948 ,,,,, 16.3 ,,,,, -1.1
    1949 ,,,,, 13.6 ,,,,, 1.3
    1950 ,,,,, 40.3 ,,,,, 9.2
    1951 ,,,,, 33 ,,,,, 7.5
    1952 ,,,,, 31.5 ,,,,, 10.1
    1953 ,,,,, 32 ,,,,, 5.1
    1954 ,,,,, 20.8 ,,,,, 10.4

  27. Gravatar of flow5 flow5
    2. April 2015 at 11:22

    Between 1942 and Oct 2008 the commercial banks minimized their non-earning assets, remaining fully “lent up”. They held no excessive amount of excess legal lending capacity to finance business (or consumers). They utilized their excess reserves to acquire a piece of the national debt (zero-risk weighted assets absent any capital requirement), or other short-term creditor-ship obligations that were eligible for bank investment (thereby counter-cyclically expanding the money stock and obviating the need for extra gov’t intervention); whenever there was a paucity of credit worthy borrowers; pending a more profitable disposition of their legal lending capacity.

    After the intro to the payment of interest on reserves, they obtained higher returns by accepting a riskless, floating, remuneration rate. Remunerating reserves emasculated the Fed’s “open market power”. Indeed, the CBs were paid not to invest. In the absence of the Fed’s error, “pushing on a string” would have been relegated to the volume of Treasury issuance and auction timing (however, Lew chose to issue a preponderance of longer-dated debt, Lew should have been fired).

  28. Gravatar of Ben J Ben J
    2. April 2015 at 13:41

    Ray, using economics words doesn’t mean you understand economics. NGDP targeting is not like the real bills doctrine at all. That is a stupid, stupid thing to say. It’s not even a matter of opinion.

  29. Gravatar of TravisV TravisV
    2. April 2015 at 14:29

    How about Ray not realizing that Prof. Sumner, like Friedman, also disagrees with IS-LM?

  30. Gravatar of ssumner ssumner
    2. April 2015 at 17:12

    David, Check TravisV’s comment.

    Travis. Thanks.

    Lord Kelvin, Very good comment.

    Ben and Travis, Yes, he sees MM everywhere, IS-LM, Real Bills, and all the other theories that are almost total opposites of MM.

    In desperation he says “I’m with Glasner,” not even seeing my rebuttal.

  31. Gravatar of ThomasH ThomasH
    2. April 2015 at 20:00

    “When I was in grad school in the 1970s, anyone claiming a fiat money central bank would be unable to debase its currency would have been laughed at.”

    When we were in grad school, no one would have opposed QE at the ZLB by claiming that it would cause hyperinflation. We did not understand the political constraints on central banks that would prevent them from achieving there supposed targets.

  32. Gravatar of Jeff Jeff
    2. April 2015 at 22:03

    I read Peter Temin’s book on the gold standard and the Great Depression about 20 years ago. As I recall, he argued that the real problem with the gold standard was that it was asymmetric. When a central bank ran low on gold it had to stop printing money, but a central bank that was flush with gold could just sit on it and not print money. He argued that that was what happened in the 1930’s. First the French, and then the U.S. central banks experienced large gold inflows that would have allowed them to create money, but they didn’t do so. Meanwhile, other central banks ran low on gold as their reserves flowed to the U.S., so they had to cut back their money supplies. The gold standard was the mechanism by which bad policies in just a few countries were able to push the entire world into depression.

    After reading Temin’s book I was forever immunized against goldbug fever. Major Freedom probably ought to read it.

  33. Gravatar of Ray Lopez Ray Lopez
    2. April 2015 at 22:40

    @TravisV – “How about Ray not realizing that Prof. Sumner, like Friedman, also disagrees with IS-LM?” – thanks, indeed I did not know this. I wish I could learn more about why Sumner thinks IS-LM, which is useful as a teaching model, is wrong.

    @ssumner – you really need to get better forum software, like Simple Machines. I did not see your rebuttal since it’s hard to read this blog; not just the content but the delivery.

    As for ‘Yes, he sees MM everywhere, IS-LM, Real Bills, and all the other theories that are almost total opposites of MM.’ – you need to carefully outline why NGDPLT is so radical from the other monetary frameworks. Do a thought experiment: at some point there is overlap between NGDPLT and the other monetary framework rules, including John Taylor’s rule. So, given there is overlap, why would your proposal make the economy perform *much* better than the other rules? Do you think monetarism produces radial, sudden, ‘step-wise’ jumps in the economy if the right rule is picked? I doubt it, only quantum physics (e.g., lasers) work that way. To make the point more clear: suppose Taylor’s rule, often followed by the Fed, says to increase money supply by 3%. Now suppose the economy responds to its fullest capacity. Your target NGDP rule would also, by definition, call for 3% (ex post), just like the Taylor rule. So essentially your framework is subsumed by the Taylor rule when the economy works well following the Taylor rule. Your objection might be that your rule works better than Taylor’s during times of stress, like 2008-2010. But–this is key–we are no longer in those times. Do you claim that following NGDPLT now will somehow magically lift the economy to greater output? When in fact NGDP is at record highs? If so, this is akin to Marxism saying “adopt Communism and we’ll have a worker’s paradise”–completely untestable and speculative (but seductive logic followed by brainwashed proletarians worldwide, like your apt pupils on this blog). That’s faith-based economics, not economic science.

    Sumner, j’accuse you of being a Marxist in mindset.

  34. Gravatar of Ray Lopez Ray Lopez
    2. April 2015 at 22:55

    @flow5 – cut and paste? You can do better than that. As for inflation being good, right now we’re at record NGDP. Same question to you as I put to Sumner: do you think inflation now will somehow allow the USA to achieve even *greater* GDP? Why? Money illusion short term leads to long term shifts in aggregate supply and demand? Articulate your crazy thoughts on paper–with your own hand, not a cut-and-paste–and see if they make sense.

    @Ben J- I realize real bills is not the same as Sumner’s proposal, but, if you accept money neutrality and super-neutrality (except in extreme cases of hyperinflation or default), as I do, all these monetary rules merge into one meaningless rule. Monetarism just does not matter.

    @Jeff–you can profit your faulty memory by reviewing Michael D. Bordo Working Paper 11714, found on the net, and reading the paragraphs therein that debunk your misconceptions. There are also people who believe Smoot-Hawley tariffs caused the Great Depression, sorry to hear if you’re one of them.

  35. Gravatar of Jeff Jeff
    3. April 2015 at 04:52

    I’ve been a student of economics since long before I started work on my degrees in it in 1979. In these nearly 40 years, I’ve learned stuff about microeconomics, macroeconomics, econometrics, finance, game theory, antitrust, monetary theory, and a mess of other subfields.

    In all that time, I’ve tried to maintain the attitude that I can learn something from just about anyone. Even MF has an occasional insight buried deep within his excessive verbiage, and he at least has a consistent viewpoint.

    I say all this as a preface to my real point, which is: Ray, you are really, really stupid. You are so stupid that you haven’t the slightest idea of how little you actually know. You throw around quotes and paraphrases pulled out of context with no idea of what they mean. You pretend you understand the thought of giants like Friedman and Sims when you clearly don’t. You think Bordo and Meltzer, of all people, are anti-monetarists. It appears that your sole purpose in being here on this site is to relieve your boredom by seeing how many people you can irritate.

    Ray, economics can be a fascinating subject. You seem to have a lot of time on your hands, and you are able to read and write. Start out slow, read a good introductory textbook like Mankiw, and read it slowly. Go over everything in there several times. If you spend 20 hours a week on it, it should take you about a month. If you get through faster than that, you cheated and didn’t really master it.

    If you are still interested in the field after that, you’ll know where to go to learn more. If you’re a fast learner, after a couple of years of disciplined study, you may have something to contribute to the conversations here.

    Of course, I don’t expect you to actually do any of this. You’re just another worthless troll who gets off on wasting other people’s time. So just do us all a favor and go away.

  36. Gravatar of benjamin cole benjamin cole
    3. April 2015 at 05:12

    Flow 5: I enjoyed your commentary on the issuance of paper money. But let us suppose a large underground economy. Let us suppose more paper money is issued, albeit while other aspects of the money supply contract. Then let us suppose that the velocity of paper money is very high. Then let us further suppose that a great deal of money has been printed in the last 10 years. In this case I think we could assume that paper money in circulation might have an inflationary impact.
    in fact I think the US has generated a larger underground economy in the last 10 years. Moreover a lot of money has been printed and put into circulation. It still has not led to inflation. Why? We no longer have an inflation-prone economy.

  37. Gravatar of flow5 flow5
    3. April 2015 at 07:29


    Sorry I couldn’t dumb-it-down enough just for you. Targeting N-gDp will minimize disorderly and disruptive markets, smooth aggregate demand in the face of transitory prices, and provide higher incomes and output in the long run.

    But AD doesn’t = N-gDp (only in Keynesian economics). Roc’s in money flows, or aggregate monetary purchasing power = roc’s in all transactions (where N-gDp is simply a proxy).

    The problem is the Fed’s transmission mechanism. The “desk” can’t adjust the money stock on a week-to-week, or even on a month-to-month basis, in order to compensate for the sudden and wide swings in the distributed lag effect of money flows.

    The Fed doesn’t have to jack up prices to boost R-gDp or N-gDp. Reg. Q ceilings could be re-imposed on the CBs driving savings back through the intermediaries (where savings are put to work). 1966 is the paradigm. This would raise NIMs for savers, CBs, & NBs and selectively boost R-gDp.

    Note that the expiration of the FDIC’s unlimited transaction deposit insurance demonstrates this re-orientation.

  38. Gravatar of flow5 flow5
    3. April 2015 at 07:40

    Benjamin Cole:

    “Then let us suppose that the velocity of paper money is very high”

    Currency has never had a signiicantly higher relative turnover as compared to bank deposits (not even during the Great-Depression).

    The currency-deposit ratio changes when inflation changes.

  39. Gravatar of TravisV TravisV
    3. April 2015 at 08:23

    Prof. Sumner,

    Were you recently at a CATO event?

  40. Gravatar of Ray Lopez Ray Lopez
    3. April 2015 at 13:11

    @Jeff–seems reading comprehension is a problem for you, a perpetual student, as I explicitly said Meltzer is a monetarist (“Meltzer is a diehard monetarist I might add”- Ray Lopez). The rest of your post is a lame attempt at trolling, ad hominem and appeals to authority.

    @flow5 – your first paragraph is merely an assertion. I can assert, without proof, that the earth is center of the galaxy but I must prove it to have any credibility (for you astrophysicists out there, it is the center of the universe but I digress). You will note I source my statements, unlike some here.

  41. Gravatar of ssumner ssumner
    3. April 2015 at 14:26

    Thomas, Any constraints on the Fed were self-imposed.

    Jeff, Good summary.

    Ray, You caught me, I’m a secret Marxist.

    Jeff, Yes Ray is clearly an idiot, but good for a few laughs.

    Travis, Yes, in DC.

  42. Gravatar of benjamin cole benjamin cole
    3. April 2015 at 16:08

    Flow 5–What is the velocity of paper money today in the United States? And how do you know?

  43. Gravatar of flow5 flow5
    3. April 2015 at 16:19


    I ran roc’s against debits, then DD turnover X m1.

  44. Gravatar of flow5 flow5
    3. April 2015 at 16:21


    “merely an assertion”

    Get real. Higher output is no assertion.

  45. Gravatar of Jeff Jeff
    3. April 2015 at 16:39

    Scott, let me know the next time you’re going to be in DC.

  46. Gravatar of TravisV TravisV
    3. April 2015 at 18:17

    Ben Bernanke: “Germany’s trade surplus is a problem”

  47. Gravatar of benjamin cole benjamin cole
    3. April 2015 at 18:31

    Flow 5: what?
    The Fed has an antique study that paper money circulates 20 times a year. What is your estimate?

  48. Gravatar of flow5 flow5
    4. April 2015 at 06:31


    where’s this going? get to the point.

  49. Gravatar of ssumner ssumner
    4. April 2015 at 09:34

    Jeff, I do appreciate the offer, but here’s the problem. If I decide to go to DC in say 4 months, what are the odds that I will recall an invitation about 100 posts back? Especially given that I have a horrible memory.

    I do sometimes meet up with commenters, but to be honest they either need to comment super often, or know me in some context outside blogging, for the invitation to stick in my mind. But I’ll do my best to keep your name in mind. Are you an economist or policymaker of some sort?

    And comment more often, so I better recall your name. 🙂

  50. Gravatar of Jeff Jeff
    4. April 2015 at 10:05

    I am an economist at the Fed in DC, although mostly I do programming.

  51. Gravatar of ssumner ssumner
    4. April 2015 at 10:07

    Jeff, Thanks, that fact will make it easier for me to remember your name.

  52. Gravatar of flow5 flow5
    5. April 2015 at 06:58


    “We no longer have an inflation-prone economy”.

    To estimate a turnover rate for currency (based on questionable estimates for currency to begin with), would be tantamount to methodological reductionism (spinning my wheels), where the theoretical “proof is already in the pudding”.

    Today’s turnover figure for currency held by the non-bank public is substantially higher. Currency is constantly re-circulated thru the banking system’s tills. Virtually as soon as the cash that’s withdrawn from banks for the payment of goods & services, it is returned by businesses and middlemen, etc. As the volume of business expands, so does the volume of currency required to make payments, & so does its expenditure rate. Changes in the currency-deposit ratio is a good market-timing signal (pinpointed the July 21st 2011 stock market turn).

    As “Worn notes are systematically destroyed by Federal Reserve Banks during ordinary currency processing”, perhaps an estimate can be assigned to how many times it’s handled, and this can somehow be translated into a turnover figure based on its age?

    I seldom use absolute figures. What I did was compare rates-of-change in money flows using just demand deposit turnover (bank deposit activity), vs. roc’s in demand deposit turnover + currency held by the non-bank public (currency outside the banks). One result was better (but not historically substantive).

    Undocumented spending activity has always been the subject of undue speculation. An increase in the proportion of currency in circulation could be indicative of higher economic activity in the underground economy, an increase in immigrant workers, illegal activity in the proverbial “black market” (absent record-keeping – manifesting tax avoidance), etc., prior estimates put the volume c. 9% of N-gDp.

    Or conversely it might also be indicative of our historically low interest rates, & an indifference, & or the convenience of hand-held money, on the part of consumers – where they now keep their money (e.g., steering clear of the recently, Great-Recession imposed, higher bank service charges, overdraft fees, minimum bank balances, ATM surcharges, etc.).

    But just as high interest rates and expectations of higher prices have been both cause and effect of rising rates of Vt, the converse is also true. Pundits that impose negative rates are more likely re-learn Gresham’s law, or Alfred Marshall’s “Money Paradox”.

    The change in currency outstanding and its subsequent utilization since the Great-Recession however is a deflationary sign, not a hot pocket of Zimbabwe hyperinflation.

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