Yes, I do believe that most of the current talk about monopoly, like all the current talk about the dire effects of saving, is nothing but radical ideology and has no foundation in fact.

capitalism is being killed by its achievements.

A study of Marx begins most conveniently with the first volume of Das Kapital

In spite of a huge amount of more recent work, I still think that F. Mehring’s biography is the best, at least from the standpoint of the general reader.]

But it is perhaps superfluous to insist on the shortcomings of a theory which not even in the most favorable instances goes anywhere near the heart of the phenomenon it undertakes to explain, and which never should have been taken seriously.

A little reflection will convince the reader that this is not a necessary or natural thing to do. In fact it was a bold stroke of analytic strategy which linked the fate of the class phenomenon with the fate of capitalism in such a way that socialism, which in reality has nothing to do with the presence or absence of social classes, became, by definition, the only possible kind of classless society, excepting primitive groups.

The exaggeration of the definiteness and importance of the dividing line between the capitalist class in that sense and the proletariat was surpassed only by the exaggeration of the antagonism between them. To any mind not warped by the habit of fingering the Marxian rosary it should be obvious that their relation is, in normal times, primarily one of cooperation and that any theory to the contrary must draw largely on pathological cases for verification.

But nothing in Marx’s economics can be accounted for by any want of scholarship or training in the technique of theoretical analysis. He was a voracious reader and an indefatigable worker. He missed very few contributions of significance. And whatever he read he digested, wrestling with every fact or argument with a passion for detail most unusual in one whose glance habitually encompassed entire civilizations and secular developments.

To his powerful intellect, the interest in the problem as a problem was paramount in spite of himself; and however much he may have bent the import of his final results, while at work he was primarily concerned with sharpening the tools of analysis proffered by the science of his day, with straightening out logical difficulties and with building on the foundation thus acquired a theory that in nature and intent was truly scientific whatever its shortcomings may have been.

Both Ricardo and Marx say that the value of every commodity is (in perfect equilibrium and perfect competition) proportional to the quantity of labor contained in the commodity, provided this labor is in accordance with the existing standard of efficiency of production (the “socially necessary quantity of labor”). Both measure this quantity in hours of work and use the same method in order to reduce different qualities of work to a single standard.

Both answer critics by the same arguments. Marx’s arguments are merely less polite, more prolix and more “philosophical” in the worst sense of this word.

The labor theory of value, even if we could grant it to be valid for every other commodity, can never be applied to the commodity labor, for this would imply that workmen, like machines, are being produced according to rational cost calculations. Since they are not, there is no warrant for assuming that the value of labor power will be proportional to the man-hours that enter into its “production.”

To begin with, the doctrine of surplus value does not make it any easier to solve the problems, alluded to above, which are created by the discrepancy between the labor theory of value and the plain facts of economic reality.

Marx relies on the competition between capitalists for bringing about a redistribution of the total “mass” of surplus value such that each firm should earn profits proportional to its total capital, or that individual rates of profits should be equalized.

If we place ourselves on Marx’s standpoint, as it is our duty in a question of this kind, it is not absurd to look upon surplus value as a “mass” produced by the social process of production considered as a unit and to make the rest a matter of the distribution of that mass. And if that is not absurd, it is still possible to hold that the relative prices of commodities, as deduced in the third volume, follow from the labor-quantity theory in the first volume. Hence it is not correct to assert, as some writers from Lexis to Cole have done, that Marx’s theory of value is completely divorced from, and contributes nothing to, his theory of prices.

For Marx, saving or accumulating is identical with conversion of “surplus value into capital.” With that I do not propose to take issue, though individual attempts at saving do not necessarily and automatically increase real capital. Marx’s view seems to me to be so much nearer the truth than the opposite view sponsored by many of my contemporaries that I do not think it worth while to challenge it here.]

Now this tendency of the capitalist mechanism to equilibrate itself is surely not above question and any assertion of it would require, to say the least, careful qualification. But the interesting point is that we should call that statement most un-Marxian if we happened to come across it in the work of another economist and that, as far as it is tenable, it greatly weakens the main drift of Marx’s argument. In this point as in many others, Marx displays to an astonishing degree the shackles of the bourgeois economics of his time which he believed himself to have broken.]

Finally, the idea that capitalist evolution will burst—or outgrow—the institutions of capitalist society (Zusammenbruchstheorie, the theory of the inevitable catastrophe) affords a last example of the combination of a non sequitur with profound vision which helps to rescue the result.

Or capital in the Marxian system is capital only if in the hands of a distinct capitalist class. The same things, if in the hands of the workmen, are not capital.

Marxists claim that their system solves all the great problems that baffle non-Marxian economics; so it does but only by emasculating them.

Moreover, as every lawyer and every politician knows, energetic appeal to familiar facts will go a long way toward inducing a jury or a parliament to accept also the construction he desires to put upon them. Marxists have exploited this technique to the full. In this instance it is particularly successful, because the facts in question combine the virtues of being superficially known to everyone and of being thoroughly understood by very few.

If however we shake off the blinkers and cease to look upon colonization or imperialism as a mere incident in class warfare, little remains that is specifically Marxist about the matter. What Adam Smith has to say on it does just as well—better in fact.

For instance, the consistent support given by the American people to protectionist policy, whenever they had the opportunity to speak their minds, is accounted for not by any love for or domination by big business, but by a fervent wish to build and keep a world of their own and to be rid of all the vicissitudes of the rest of the world. Synthesis that overlooks such elements of the case is not an asset but a liability.

Big business has been able to take advantage of the popular sentiment and it has fostered it; but it is absurd to say that it has created it.

Matters become infinitely worse if, flying in the face of fact plus common sense, we exalt that theory of capital export and colonization into the fundamental explanation of international politics which thereupon resolves into a struggle, on the one hand, of monopolistic capitalist groups with each other and, on the other hand, of each of them with their own proletariat. This sort of thing may make useful party literature but otherwise it merely shows that nursery tales are no monopoly of bourgeois economics.

The attitudes of capitalist groups toward the policy of their nations are predominantly adaptive rather than causative, today more than ever. Also, they hinge to an astonishing degree on short-run considerations equally remote from any deeply laid plans and from any definite “objective” class interests. At this point Marxism degenerates into the formulation of popular superstitions.7

This superstition is exactly on a par with another that is harbored by many worthy and simple-minded people who explain modern history to themselves on the hypothesis that there is somewhere a committee of supremely wise and malevolent Jews who behind the scenes control international or perhaps all politics. Marxists are not victims of this particular superstition but theirs is on no higher plane.

The badge of Scientific Socialism which according to Marx is to distinguish it from Utopian Socialism consists in the proof that socialism is inevitable irrespective of human volition or of desirability. As has been stated before, all this means is that by virtue of its very logic capitalist evolution tends to destroy the capitalist and to produce the socialist order of things.8

The capitalist or any other order of things may evidently break down—or economic and social evolution may outgrow it—and yet the socialist phoenix may fail to rise from the ashes.

This should also solve the problem that has divided the disciples: revolution or evolution? If I have caught Marx’s meaning, the answer is not hard to give. Evolution was for him the parent of socialism. He was much too strongly imbued with a sense of the inherent logic of things social to believe that revolution can replace any part of the work of evolution.

in the long run they could never create enough to save the average person from an extremely hard life.

Creating value is not enough—you also need to capture some of the value you create.

by “monopoly,” we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute.

If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother’s recipe—your business is unlikely to survive.

Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets:

Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets:

Do outsized profits come at the expense of the rest of society? Actually, yes: profits come out of customers’ wallets, and monopolies deserve their bad reputation—but only in a world where nothing changes.

If your industry is in a competitive equilibrium, the death of your business won’t matter to the world;

All Rhodes Scholars had a great future in their past.

Sometimes you do have to fight. Where that’s true, you should fight and win. There is no middle ground: either don’t throw any punches, or strike hard and end it quickly.

However, disruption has recently transmogrified into a self-congratulatory buzzword for anything posing as trendy and new.

Grandmaster José Raúl Capablanca put it well: to succeed, “you must study the endgame before everything else.”

“half luck, half good timing, and the rest brains.”

Today the whole Eurozone is in slow-motion crisis, and nobody is in charge.

The indefinite pessimist can’t know whether the inevitable decline will be fast or slow, catastrophic or gradual. All he can do is wait for it to happen, so he might as well eat, drink, and be merry in the meantime: hence Europe’s famous vacation mania.

Whether you were born in 1945 or 1950 or 1955, things got better every year for the first 18 years of your life, and it had nothing to do with you.

a whole generation learned from childhood to overrate the power of chance and underrate the importance of planning.

Gladwell at first appears to be making a contrarian critique of the myth of the self-made businessman, but actually his own account encapsulates the conventional view of a generation.

Finance epitomizes indefinite thinking because it’s the only way to make money when you have no idea how to create wealth.

To Nozick, any voluntary exchange must be allowed, and no social pattern could be noble enough to justify maintenance by coercion.

It starts with the professors who often become part-time consultants instead of full-time employees—even for the biotech startups that begin from their own research.

Jobs saw that you can change the world through careful planning, not by listening to focus group feedback or copying others’ successes.

Actually, there’s no evidence that Einstein ever said any of those things—the quotations are all apocryphal.

The error lies in expecting that venture returns will be normally distributed: that is, bad companies will fail, mediocre ones will stay flat, and good ones will return 2x or even 4x. Assuming this bland pattern, investors assemble a diversified portfolio and hope that winners counterbalance losers.

First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.

VC investment accounts for less than 0.2% of GDP. But the results of those investments disproportionately propel the entire economy. Venture-backed companies create 11% of all private sector jobs. They generate annual revenues equivalent to an astounding 21% of GDP.

Less obvious but just as important, an individual cannot diversify his own life by keeping dozens of equally possible careers in ready reserve.

You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.

Most people act as if there were no secrets left to find. An extreme representative of this view is Ted Kaczynski, infamously known as the Unabomber. Kaczynski was a child prodigy who enrolled at Harvard at 16. He went on to get a PhD in math and become a professor at UC Berkeley. But you’ve only ever heard of him because of the 17-year terror campaign he waged with pipe bombs against professors, technologists, and businesspeople.

Religious fundamentalism, for example, allows no middle ground for hard questions: there are easy truths that children are expected to rattle off, and then there are the mysteries of God, which can’t be explained.

Free marketeers worship a similar logic. The value of things is set by the market. Even a child can look up stock quotes. But whether those prices make sense is not to be second-guessed; the market knows far more than you ever could.

Physics, for example, is a real major at all major universities, and it’s set in its ways. The opposite of physics might be astrology, but astrology doesn’t matter. What about something like nutrition? Nutrition matters for everybody, but you can’t major in it at Harvard. Most top scientists go into other fields. Most of the big studies were done 30 or 40 years ago, and most are seriously flawed.

“Thiel’s law”: a startup messed up at its foundation cannot be fixed.

Actually, a huge board will exercise no effective oversight at all; it merely provides cover for whatever microdictator actually runs the organization. If you want that kind of free rein from your board, blow it up to giant size. If you want an effective board, keep it small.

However, anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned.

START WITH A THOUGHT EXPERIMENT: what would the ideal company culture look like? Employees should love their work. They should enjoy going to the office so much that formal business hours become obsolete and nobody watches the clock.

Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?

But there are two general kinds of good answers: answers about your mission and answers about your team.

People at a successful startup are fanatically right about something those outside it have missed.

Whatever the career, sales ability distinguishes superstars from also-rans. On Wall Street, a new hire starts as an “analyst” wielding technical expertise, but his goal is to become a dealmaker. A lawyer prides himself on professional credentials, but law firms are led by the rainmakers who bring in big clients. Even university professors, who claim authority from scholarly achievement, are envious of the self-promoters who define their fields.

Americans fear technology in the near future because they see it as a replay of the globalization of the near past. But the situations are very different: people compete for jobs and for resources; computers compete for neither.

And that’s the point: computers are tools, not rivals.

Social entrepreneurs aim to combine the best of both worlds and “do well by doing good.” Usually they end up doing neither.

Elon describes his staff this way: “If you’re at Tesla, you’re choosing to be at the equivalent of Special Forces. There’s the regular army, and that’s fine, but if you are working at Tesla, you’re choosing to step up your game.”

And in 2001 there was a similar inconsistency in statements made by officials at the Bank of Japan, who warned that quantitative easing would be ineffectual, but also that such a policy might lead to runaway inflation.

Fed adopted money supply targets in 1979, inflation fell to relatively low levels, where it has remained ever since.

Part of the problem was beyond their control. The “interest rate approach” to monetary policy is much easier to understand than the quantity of money approach—in fact it’s virtually the only approach used by the general public and the news media.

Monetarists understood at a theoretical level that what mattered was not so much the current change in the money supply, but rather the expected change in the future path of the money supply.

But monetarism was developed before the rational expectations revolution, and hence this insight was never fully incorporated into empirical monetarist analyses such as the Monetary History.

New Keynesianism is distinguished by its more sophisticated understanding of the potency of monetary policy and also its awareness that long-run wage and price flexibility give the economy a self-correcting mechanism.

Both of these insights can be seen as a belated recognition that Keynes misinterpreted both the apparent failure of the Fed’s 1932 open market purchases, and also the chronically high interwar unemployment rates triggered by policies such as the NIRA.

I believe that there is a much simpler explanation: Japan did not experience a liquidity trap but was instead successful at maintaining an inflation target of roughly 0 to -1 percent per annum.

Twice during the past decade, the Bank of Japan tightened monetary policy as the (core) inflation rate was approaching zero, from below.

When Ben Bernanke was asked in 2009 why the Fed didn’t aim for a higher inflation target, he didn’t claim the Fed was unable to generate higher inflation but rather argued that it would be undesirable.

In my view, this crisis has been misdiagnosed in a very similar way to the Great Depression. As in the 1930s, the current recession was associated with a severe drop in nominal spending (relative to trend), caused by excessively tight money. Of course, the mainstream view is that the recession was caused by a financial crisis, and that monetary policy was actually relatively expansionary.

More research needs to be done to explain why mar kets seemed to respond more bearishly to vague and uncertain fears of future devaluation than to expectations of imminent devaluation.

Virtually any neoclassical labor market model would predict that the announcement of a mandated 22 percent wage increase would reduce output sharply.

One would like an explanation that is rooted so deeply in the interwar political and economic systems that in retrospect, the Depression seems almost inevitable. But we would also like an explanation that would not have been obvious to the financial markets in mid-1929. This is not easy to do.

If there is a root cause to the Great Depression, it lies somewhere in the painful birth of the modern world, the difficulty that societies had in letting go of their emotional attachment to the “barbarous relic,” and moving to a more mature, and interventionist, monetary policy regime.

Temin is probably right that even had the interwar gold standard been relatively well managed, its eventual demise was both inevitable and desirable.

Capitalism was widely discredited by 1932.

During the 1932 campaign, even Hoover was discussing the need for a program like the National Industrial Recovery Act (NIRA)—and without the policy being accompanied by currency depreciation.

The fast-moving and extremely complex events of the interwar period simply do not allow us to resolve the age-old dispute between the “great man” and “deep historical forces” views of history, a debate that may tell us more about historians than it does about history.

Had either alternative strategy been followed, and a modest depression resulted, that alternative would have almost certainly received historical censure.

Here I should emphasize that not just my analysis of 1933, but the entire narrative in Chapters 2 through 10 hinges on monetary policy strongly impacting both prices and output almost immediately. If I am wrong, if policy has little or no immediate impact, then this entire narrative is essentially worthless.

I have found repeated links between policy shocks and contemporaneous movements in financial market prices, commodity prices, the WPI, and monthly industrial production. We know that all of these variables (with the possible exception of the policy shocks that I tried to identify) were highly correlated during the Depression. It makes no sense to argue, for instance, that monetary policy shocks had an immediate impact on stock and commodity prices but only impacted the WPI and industrial production with a long and variable lag. The series are simply too closely entangled.

At the risk of seeming to contradict myself, however, I continue to find much merit in Eichengreen and Temin’s view that the gold standard constrained U.S. policymakers in the early 1930s. But I would emphasize the psychological aspects of those constraints more than the technical aspects.

Previous studies have focused on the debate over the extent to which the international gold standard “constrained” monetary policymakers. This study adds several new perspectives to that analysis. First, policymakers do have some discretion, but only to the extent to which they can impact the world gold reserve ratio in the long run.

When there is too little money, monetary tightness doesn’t seem to be the problem. Interest rates are low and the public may be hoarding lots of cash. It’s much easier to argue that depressions are the inevitable hangover from a preceding bout of speculation. Today, most economists agree with Cassel; when nominal GDP falls in half, monetary policy has been far too tight, regardless of the level of interest rates.

And gold flows between any two countries might reflect either an expansionary policy in the country losing gold or a contractionary policy in the country receiving gold.

I make two provocative claims in these three chapters. First, that in the absence of other policy initiatives, the devaluation of the dollar might have essentially ended the Depression by late 1934.

And second, that Roosevelt’s policy of increasing wages may have extended the Depression by nearly seven years and thus caused roughly half of all man-years of unemployment during the period from 1929 to 1941.

serious doubts arose as to the expansionary potential of monetary policies implemented in an environment where some linkage to gold was maintained.

The causality probably ran both ways, with banking troubles leading to fears of devaluation, and fears of devaluation leading to currency hoarding, and thereby triggering more banking holidays.

It is also important to recall that during this period, the federal government was perceived by investors as having a much greater ability to influence real asset prices than is the case today.

Yet, the only discernable macroeconomic consequence of this crisis would be a modest dip in industrial production during March 1933.

Even in the 1930s, it was widely understood that financial markets were not capable of withstanding great uncertainty over the soundness of a currency. That is why it was (and still is) standard operating procedure for policymakers to deny any intention of devaluation right up to the last minute.

now able to adopt expansionary policies without fear of a run on the U.S. gold stocks, markets reverted to their traditional pattern of welcoming lower discount rates.

one could argue that when deciding whether to construct a new building what matters is the expected price at which one can sell or rent the project, not the current rents paid by tenants under long-term contracts.

In the next chapter we will see how a mere two weeks after FDR torpedoed the World Monetary Conference, the National Recovery Administration (NRA) began to force wages much higher, which negated most of the benefits flowing from the policy of dollar depreciation.

I hope to show that the impact of the NIRA was much greater than almost anyone else has suspected—preventing what otherwise would have been a near full recovery by late 1934 or early 1935.

It is interesting to update Fisher’s model to the 1923–1935 period. The correlation between predicted output and actual output falls from .941 during 1915–1922, to .256 during 1923–1935.

The primary purpose of the NIRA was to establish industrial codes that would serve to prevent “ruinous” competition by setting minimum levels for wages and prices.

Consider the following hypothesis: rather than being a single event, “the” Great Depression was actually two distinction depressions. The first, demandside depression, ended in late 1934, by which time output had returned to its “natural rate.” A second, supply-side depression, began in late July 1933, sharply depressed the natural rate of output, and lasted for eight more years.

although real wages were highly countercyclical throughout the entire interwar period, nominal wages were essentially acyclical between 1920 and 1933 (when labor markets were relatively unregulated) and then became highly countercyclical for the remainder of the 1930s. In other words, higher wages don’t reduce output when they reflect market forces (such as productivity gains) but do depress output when they reflect nonmarket factors. Although hardly definitive, this pattern is exactly what one would expect if New Deal policies began generating autonomous wage shocks in 1933.

The “new information” received from July 19 to 21 was not precisely a 22.3 percent wage shock but rather an increase in the perceived likelihood of such a shock. This means that the three-day stock price collapse may significantly understate the overall impact of the Blue Eagle program on equity values.

A few have gone even further than Temin and Wigmore, arguing that the NIRA and AAA may have actually contributed to the recovery from the Depression.

A second difference is that most studies have relied on quarterly or annual data, not monthly data. Even using quarterly data, the production spike in July 1933 seems far less dramatic, and with annual data, this mini-business cycle is completely obscured.

I have argued that both dollar devaluation and the NIRA had extraordinarily powerful effects on output, but that the two policies roughly cancelled each other out.28 This means that a researcher focusing on monetary policy might see only modest evidence of the expansionary potential of the dollar depreciation program. Similarly, someone focusing only on the NIRA would tend to underestimate its contractionary impact.

And even if researchers did look at both monetary and wage policy, they may have used the wrong indicator of monetary policy. For instance, Weinstein (1981) did observe that in the absence of the NIRA, monetary expansion should have led to even more rapid economic growth during the mid-1930s. But Weinstein relied on money supply figures as a policy indicator, rather than the price of gold, and thus greatly underestimated the extent of monetary stimulus in 1933.

And finally, many other researchers seem to have underestimated the U.S. economy’s ability to self-correct. Great Contractions are so rare that we don’t really know much about the economy’s properties at 25 percent unemployment. Although economists sympathetic to Roosevelt often point out that recovery from the Depression was rapid, I cannot help agreeing with Cole and Ohanian’s (2004) view that the recovery was surprisingly anemic.

the United States was not “forced” off the gold standard; in fact, its holdings of gold were the largest in the world. Rather, the decision to talk down the value of the dollar was made pursuant to the broader macroeconomic objectives of the Roosevelt administration

On September 21, a New York Times headline reported that “ROOSEVELT CHECKS INFLATION DEMAND.”4 Stocks fell by a total of 7.7 percent on September 20 and 21, and the following day’s New York Times (p. 27) attributed the decline to “the disappointment of those traders who had counted too heavily of the prospect of currency inflation.”

To a much greater extent than today, the (inverse of the) price of gold was viewed as the value of the dollar.

If Roosevelt did operate under the assumption that any legal devaluation was likely to be permanent, then he would naturally have been reluctant to firmly commit to a new par value until it was clear that this value would be consistent with his price level objectives. When viewed from this perspective, Roosevelt’s policy options were quite limited. The traditional tools of monetary policy included discount loans and open market operations, but these were under the control of the Federal Reserve.

The November 17 New York Times (p. 2) reported rumors that President Roosevelt was trying to force France off the gold standard. Even if this story was fictitious, there is little doubt that the policy of dollar depreciation was putting the franc under great stress, and this was during a period when budgetary problems in France had already caused an outflow of foreign capital.

Recall that immediately after the dollar began depreciating in April, prices rose sharply while nominal wages were almost unchanged,

Under these circumstances, price level increases would raise nominal stock prices by pushing up the nominal value of corporate assets and could raise real stock prices if the higher commodity prices led to expectations of economic recovery.

Roosevelt listened to a variety of advisors and occasionally supported mutually incompatible policies.

It would be extremely difficult to discriminate between the gold hoarding caused by fear of dollar depreciation and hoarding due to factors such as fear of French devaluation.

Pearson, Myers, and Gans quote Warren’s notes to the effect that when the summer of 1934 arrived without substantial increases in commodity prices: The President (a) wanted more inflation and (b) assumed or had been led to believe that there was a long lag in the effect of depreciation. He did not understand—as many others did not then and do not now—the principle that commodity prices respond immediately to changes in the price of gold. (1957, p. 5664)

Most modern macroeconomists continue to make this mistake, taking a wait and see attitude toward initiatives such as “quantitative easing,” whereas the inflation expectations embedded in the Treasury Inflation-Protected Securities (TIPS) markets provided immediate evidence that the policy was nowhere near sufficient.

1933 contained not one, but two of the most dramatic policy experiments ever conducted by the U.S. government.

Another important lesson from 1933 is that the only avowedly inflationary policy ever pursued by the United States was accompanied by rapid inflation in all of the price indices, despite high unemployment.

And the fact that the recovery aborted immediately following a government-mandated 22 percent wage increase (a classic adverse supply shock) provides additional confirmation of the basic aggregate supply/aggregate demand (AS/AD) model.

Mankiw and Reis identify “three key facts” of modern business cycle theory: 1. “The Acceleration Phenomenon … inflation tends to rise when the economy is booming and falls when economic activity is depressed.” 2. “The Smoothness of Real Wages … real wages do not fluctuate as much as labor productivity.” 3. “Gradual Response of Real Variables … The full impact of shocks is usually felt only after several quarters.” (2006, p. 164)

In the preceding three chapters we have seen evidence of rapid inflation in an extremely depressed economy, rapid change in real wages (even before implementation of the NIRA), and industrial production responding almost immediately to monetary shocks.

Monetary policy doesn’t get much more exogenous than this: One morning (it was Friday, November 3), when Morgenthau came to the bedside tense with worry over some pressing problem and suggested that the [gold] price change that day be considerably greater than the 10 to 15 cents of immediately preceding days, Roosevelt promptly announced that the increase would be 21 cents. Why that figure? Because “three times seven” is a lucky number, said Roosevelt, his face straight but his blue eyes twinkling at Morgenthau’s recoil from such frivolous dealing with a serious matter (quoted in Davis, 1986, p. 294)

There are three generally accepted characteristics of a gold standard: maintenance of a fixed price of gold, free convertibility of the currency into gold, and adherence to the rules of the game—that is, a relatively stable gold reserve ratio. While prior to 1933, the United States did conform to the first two criteria, it did not even come close to adhering to the rules of the game. After 1934, the dollar was no longer freely convertible into gold, but its market price was still fixed, and changes in the monetary base were closely correlated with changes in the monetary gold stock.

In this account of the Great Depression, the two-and-a-half year period from February 1934 to September 1936 represents the eye of the hurricane. The purchasing power of gold was fairly stable, and (because the dollar was pegged to gold) a stable gold market meant a relatively stable price level. As gold flowed back from the gold bloc to the United States, the world gold reserve ratio declined. Thus, the deflationary impact of private gold hoarding (as well as currency hoarding) was roughly offset by the inflationary impact of gold flows.

From this perspective, those arguing that the Fed should have been more expansionary during 1934–1936 are actually arguing that the Fed should have taken it upon itself to repeal FDR’s high wage policy.

The economic impact of the 1937 gold scare, in particular, has not received the attention that it deserves. This eighteen-month period is one of the best examples of how the gold market approach to aggregate demand can provide insights not available from the traditional monetary or expenditure approaches.

By 1937, he had combined an anti-inflationary program with a policy of high wages, a poisonous combination for the equity markets.

And the December 28 New York Times (p. 23) was echoing the conventional wisdom when it suggested (five years prematurely) that, “1936 has proved unmistakably the definite ending of the cycle of depression.”

On February 5, Roosevelt announced his intention to pack the Supreme Court with six additional justices

The court packing scheme was the first of a series of steps that greatly strained relations between the Roosevelt administration and the much more conservative financial community during 1937–1938.

The fear that we were headed for “another 1929”11—that is, a speculative bubble—led the administration to impose curbs on federal purchases of commodities and durable goods as a way of restraining inflation.

Several articles noted that the relatively high buying price of gold created an excess supply of gold for the same reason that price support programs for wheat led to grain surpluses. There was speculation that the gold sterilization policy would eventually collapse under the pressure of market forces, and that a revaluation of the dollar was almost inevitable.

important differences, however, between gold and wheat markets. First, the medium-term (i.e., one to five years) elasticity of supply of gold is almost certainly far lower than for wheat. More importantly, unlike wheat, gold was the medium of account in the United States, and thus FDR could not change the dollar price of gold without having a profound impact on the entire price structure.

Because the 1937 gold panic was in some respects the mirror image of the devaluation scares of 1931–1932, it might have been expected to increase the U.S. price level.

He took President Roosevelt sharply to task for having failed to foresee in January 1934 that the devaluation of the dollar by 41 percent would lead to such a superabundance of gold. If, however, we look at Professor Cassel’s earlier writings, we find that he himself failed to foresee such developments, even at much later dates.

We read in the July 1936 issue of the Quarterly Review of the Skandinaviska Kreditaktiebolaget the following remarks by Professor Cassel: “There seems to be a general idea that the recent rise in the output of gold has been on such a scale that we are now on the way towards a period of immense abundance of gold. This view can scarcely be correct.” … Thus the learned Professor expected a mere politician to foresee something in January 1934 which he himself was incapable of foreseeing two and a half years later.

The intelligentsia generally picks up on a problem some time after market participants become aware of the problem.

In addition, both Soviet production and private dishoarding turned out to be smaller than what was projected during the height of the panic.

THE 1937–1938 CONTRACTION was roughly comparable in depth and duration to the 1920–1921 contraction, which makes it one of the most severe downturns of the twentieth century.

the French government had chosen to import gold rather than let the franc appreciate.

As with Hoover, FDR’s commitment to the gold standard prevented him from offering any effective policies for boosting the price level.

During the following week, stocks continued to rise on rumors of additional inflationary steps and on April 14 FDR announced a policy of gold desterilization as well as a reversal of the reserve requirement increase from the previous May.

These steps initiated the third phase of the administration’s macroeconomic policy. An expansionary policy was in place for most of FDR’s first term, gradual moves toward a contractionary policy began in mid-1936, and now the administration had switched back to an expansionary policy:

On the contrary, the denials aided market sentiment. (6/21/38, p. 29, emphasis added) The final sentence of the New York Times quotation is particularly interesting. The implicit assumption is clearly that devaluation rumors would normally boost the stock market, but that this time the market was aided by the suppression of those rumors. What the stock market most wanted was clarity. A devaluation of the dollar would boost prices, but decisive steps to restore confidence in the dollar would lessen gold hoarding, and this would also tend to raise prices.

Monetarists emphasize how the high levels of excess reserves reduced the money multiplier, and suggest that the Fed should have targeted the broader monetary aggregates.

The extraordinarily high demand for excess reserves tended to indirectly increase the demand for monetary gold, thus preventing the rapidly growing gold stocks from having the inflationary impact one might have normally expected.

Thus, the Depression was over even before the United States entered the war.

This points to another important lesson: that it is easy to confuse a lag in the impact of monetary policy with delays caused by something very different, a delay in the public’s willingness to accept that the policy change will persist.27

Does this more nuanced interpretation make the gold hoarding merely an endogenous factor, with no causal role in the ensuing depression? I think not,

The Fed’s decision to begin paying interest on reserves in October 2008 almost certainly contributed to the extraordinary increase in the demand for excess reserves (although it wasn’t the only factor). The Fed’s rationale was that they wanted to keep control over the Fed funds rate as they injected large amounts of liquidity into the banking system. This essentially meant that they wanted to prevent nominal rates from immediately falling to zero. Thus, the effect was contractionary, and at almost the worst possible time.

If we have learned anything from our study of the Depression, as well as the situation in Japan during the 1990s, it is that nominal rates are not a reliable indicator of the stance of monetary policy.

In short, low nominal interest rates may just as well be a sign of expected deflation and monetary tightness as of monetary ease.

But when prices started falling in late 2008 the Fed refused to adopt a higher inflation target in the United States. As a result, 2009 saw nominal GDP fall at the fastest pace since 1938. Let’s hope this is the last time the Fed adopts a policy aimed at encouraging money hoarding in the midst of a recession.