The Gold Index, April 1933 – February 1934, Courtesy of Scott Sumner
By Mike Kimel
The Gold Index, April 1933 – February 1934, Courtesy of Scott Sumner
I’ve been having a bit of a back and forth with Scott Sumner of The Money Illusion over the degree to which monetary policy, in particular the devaluation of the dollar, affected the economy in 1933. (My most recent post on the issue is here.)
In private correspondence, Sumner provided me with the draft for three chapters of a manuscript he is working on. I can safely say that whether or not I agree with his findings, Sumner has done his homework – the draft is meticulously researched and abounds with details corroborating his findings. Of particular interest to me was a Table 8.2, which shows weekly figures for a number of series from April 15, 1933 to the first week of February, 1934. Sumner has graciously agreed to let me post that table. I don’t want to freeride on his efforts to much, so I’m only reproducing the first few columns.
I believe the most interesting thing in the table is – what has been the cause of some discussion between the two of us – is the Gold Index. From the footnote to the table in the manuscript:
The gold index is the Annualist Index of Commodity Prices measured in gold terms.
Sumner collected that data manually from old trade journals. I haven’t been able to find that data online. What the data shows, to quote Sumner, is that “an ounce of gold could buy more internationally traded goods in 1934 than 1933. That’s what the 815 to 650 is showing—falling prices in gold terms.”
Here’s a graph of the series:
Addendum by Ken: Here’s the Gold Index data listed above with the Vertical Axis rescaled:
I think this relates to my comment in our e mail conversation from several days ago. If more internationally traded goods could be purchased relative to the price of gold, would it have the opposite effect on our exports? Being the largest net exporter in the world at that time, it would seem that exports should show a corresponding decline for the same period. (I understand that other factors could affect the data.) If the argument is that we could purchase more goods, it would be nice to know if we did, or did not and was the price the driving facotr. I tried to look up the tables you suggested, but I couldn’t figure out how to bring them up. For the record, I’m not an economist, historical or otherwise. Just an interested observer.
So stuff was getting more expensive? This means price rising do to demand (short supply)? 99% of the population had income below the personal consumption? Debt driven price increase or relative dollar devaluation?
The BEA really has made the NIPA tables harder to work with. Let’s try again.
Go here: http://www.bea.gov/iTable/index_nipa.cfm
Hit “begin using data”
Click on table 1.1.5
On the upper right corner, click on “options”
Click on “annual: and “All years” and hit update.
Table 1.1.6 has inflation adjusted figures, but its more sparsely populated in the the 1930s.
Exports and imports stayed constant in 1933. They jumped in 1934, but then so did growth overall.
FDR and many others at the time (and Sumner and some economic historians today) feel that a price rise was necesary to get the economy moving again. FDR apparently put a lot of effort into getting a price hike going. Sumner feels there was a devaluation of the dollar relative to gold and that was an integral part of that effort.
I should have added… as I noted in the last post I wrote, in many ways the price of the dollar remained fixed against gold the entire time. However, particularly after Britain went off the gold standard, the US dollar’s link to gold started becoming untenable. Everyone knew it had to break sooner or later. Plus, as I noted a few posts back…. the government had started buying stuff and it was made clear it would buy a whole lot more. At first that just meant inventory got sold. But very quickly that meant “we gotta tool up” – hiring people, buying stuff, etc. That boosts prices, and boosting prices is easy when they’ve fallen so far so fast.
Ah, one more thing I noted a few posts back… the fact that industrial and wholesale prices went up so much more than consumer prices is a further tip-off. Sumner’s story has no reason I can see why that would happen. My story does: the government wasn’t buying consumer goods.
Mike I will shamelessly point out again, that I think I kind of got to the crux of this whole Sumner debate here
I understand you have another approach which is cool, everyone does. But to me the real issue is the punch line. What is Sumner’s overlying point? He believes FDR getting off the gold standard was responisble for the recovery of prices and production. He was arguing about Sidelsky’s book about Keynes which seems to argue otherwise.
Myself I don’t think Sumner’s is wrong in principle about monetary policy, but disagree with his monetarist idea that monetary policy is the whole story.
To me Eggerson got it most right when he argued that they were both imporotant.
“What ended the Great Depression in the United States? This paper suggests that the recovery was driven by a shift in expectations. This shift was triggered by President Franklin Delano Roosevelt’s (FDR) policy actions. On the monetary policy side, Roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre-Depression
levels. On the fiscal policy side, Roosevelt expanded real and deficit spending which helped make his policy objective
credible. The key to the recovery was the successful management of expectations about future policy.
In percentage terms he “estimates that New Deal-fiscally stimulative-policies where 55% responsible for the recovery in output between 1933-37 and 70% responsible for the recovery in inflation during the same period”
I haven’t had the time to read the Eggertson piece, and it won’t get done until the weekend.
That said, I have what I suspect a different way of approaching the problem, and I think I can show his 55% number is short. Very short. I don’t particularly care about the recovery in inflation as I frankly think it was a consequence rather than a cause.
I’ll try to write that up this weekend. As I said in another set of comments, its not difficult.
You think Eggertsson was short in saying 55 percent of recovery was due to the NIRA-and other New Deal policies? If that’s what you’re saying then you must think monetary policy had very little to do with it.
So what if I might ask do you see as a cause? The only important causes are what we can understand led the the recovery that we saw in 33-37. Not sure what you’re getting at. For my part I think that Eggertsson is right that both monetary and fiscal had a part to play in the recovery.
If you have a very differnt view than hopefully you’ll reveal it this weekend if you can’t sooner.
What you said to Daniel Becker gives me futher pause, “FDR and many others at the time (and Sumner and some economic historians today) feel that a price rise was necesary to get the economy moving again. FDR apparently put a lot of effort into getting a price hike going. Sumner feels there was a devaluation of the dollar relative to gold and that was an integral part of that effort”
Are you implying that a price rise wasn’t necessary to get the economy rising again? I believe it’s important whether you say its an effect or a cause.
I don’t think it is. I grew up in South America in the 70s and 80s. What I observed is that people get used to triple and quadruple percent a year price inflation because there is no choice. I imagine they could get used to the much slower price deflation seen in the US during the 1929-1932 period even more easily. Yes, there is the question of who benefits – creditors or debtors – but prices are signals and people react accordingly if a regime has been going on a while. By 1932, Americans had more than enough practice figuring out how to deal with deflation.
A week or two ago I had someone insist that rapid economic growth is not possible in a deflationary environment. And yet there are examples of it happening. China, for example, may have had the world’s fastest growth from 1998 to about 2003, and it was going through deflation at the time.
Well perhaps your experience3 in South America where you suffered very high rates of inflation have made you partial to this view. It’s interesting. I mean the reality is that in the U.S. there is no history of inflation.
The only time in our history we have had meaningful peace time inflation was the 70s. Actually Sumner himself would agree with you here. He has pointed out that both China that you mentioned in the period of 1998-2003 but also Japan in the same period had deflation and one of the economy’s (China) had tremendous growth while Japan stagnated.
His gloss on this is what matters is less inflation than his Nominal GDP-ie, NGDP. That is real GDP plus the inflation rate. His point would be that while China had deflation it still had very high NGDP while Japan did not.
I am speechless, This may be the dumbest post by Mike “linear regression” Kimel yet. Gold has no intrinsic value.
Unemployment stayed above 10 percent for most of the 1930s. You would think that once the economy reached a certain level it would not be that hard to get back to where it had been. Yet the Hoover/Roosevelt stimulus did not achieve this until just before the outbreak of WWII. Keynesiamism and money illusion all seem to be ideas from times when economists theories didn’t really work.
I’m not sure what you mean by “made you partial to this view.” I am merely noting that I’ve noticed that after a few years of craziness of whatever brand, people get used to the craziness. By 1933 people were used to deflation. Fixing deflation wasn’t necessary for fixing the real problem, growth.
I’m not sure your point. I personally don’t agree with Sumner. I figured given I had been arguing with him, as a courtesy, I’d present the data that he uses to make his case. As a further courtesy, I didn’t point out what I thought was wrong with the data having already pointed out some of those things in past posts.
So if you don’t like the data, don’t blame me. It isn’t my case I was making. Nor is there a linear regression in sight in this post.
Mike is your website being targeted by trolls?
Mike by “partial to this view” I meant due to your experience in South American economies that suffered from epidemic levels of inflation you are more sensitive to it as a problem.
My point was that inflation fears in the U.S. today are very overblown. We really had only one time during the 70s when inflation was high during peacetime.
I know you are planning to write more where you elaborate on your own view and I look forward to reading that.
To be honest with you right now I don’t get what your underlying punchline is. I get Sumner’s point and partially agree with it partially don’t. As a monetarist he minimizes the use of fiscal stimulus and claims it had no postiive impace during the Depression. On this I disagree with him.
Eggertsson’s view is roughly mine in that both fiscal and monetary stimulus have their place in a Depression.
If I understand you right you agree about fiscal stimulus but may even discount monetary stimulus based on your claim that Eggertsson’s 55% percent number is way too low.
Mike I have another gloss on this. I know you plan to write somethiing at some point and look forward to it. For now http://diaryofarepublicanhater.blogspot.com/2011/11/very-latest-on-sumner-kimel.html
For the price of one I also have weighed in on another Sumner dispute between him and Krugman http://diaryofarepublicanhater.blogspot.com/2011/11/krugman-vs-sumner-and-fallacy-of.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29
“Gold has no intrinsic value” Mr. Bill
I don’t see how that is relevant, but it certainly isn’t true. Gold has intrinsic characteristics that make it valuable in many industrial applications, electrical conductivity being only one that is well known. It has several superficial though still intrinsic characteristics that make it valuable in the production of jewelry. It rarely reacts to contact with skin. It is malleable and has an inherent lusterous look making it very popular. The value of gold is psychological only in so far as its quantity and availability is difficult to determine easily. That results in uncertainty of supply and variability of perceived value. Gold does, however, have its own intrinsic value.
Jack you are right on both counts. It does have inrinsic value and it’s not at all relevant to the discussion. I suspect that Mr. Bill along with Stillborn are Right wing trolls-notice how they kept sending the same exact message
Stillbnorn’s multiple comments deleted
FDR used Bernard Baruch advise on war mongering and economics. Baruch owned nearly one third of the worlds Silver options in 1933. After the government confiscated gold at $20 an ounce the Government raised the price to $35 an ounce. The price of Silver followed shortly and Bernard Baruch made a fortune. So not only did FDR lie his way into war, he lied about why he was confiscating the American peoples gold as well.