Printing Money and Spending it.

Printing Money and Spending it.A Monetarist Look

At the Great Depression

Stock Market Crash

Unemployment

Frictionally unemployed?

Structurally unemployed?

Cyclically unemployed?

Bread Lines in New York

Prices were either too high or zero.

Food Lines in Paris

Oklahoma Dust Bowl

Make-shift Housing

Migrants Going West

Migrant Family in California

Despondency

Dorothea Lange's "Migrant Mother," destitute in a pea picker's camp, because of the failure of the early pea crop. These people had just sold their tent in order to buy food. Most of the 2,500 people in this camp were destitute. By the end of the decade there were still 4 million migrants on the road.

Per-capita GDPRelative to the 1889-1929 Trend

10 years

Publication of John Maynard Keynes’s General Theory

Query: Was Keynes’s book really a “general theory” or was it a tract for the times?

Per-capita GDPRelative to the 1889-1929 Trend

10 years

Waning of “animal spirits”?

Sticky-Price Spiraling Downward of Income and Expenditures?

Monetarism

as appliedto the Great Depression

The equation of exchange is so near and dear to Milton Friedman’s heart that he

A. tasteful appearance on his head stone.

B. spelled out in pansies in flower garden.

C. parody to the popular Y.M.C.A.

D. vanity license plate number.

Gribouillis économiques

Gregory MankiwFormer ChairmanCouncil of Economic AdvisorsGeorge W. Bush Administration

GREG MANKIW’S BLOGRandom Observations for Students of Economics

September 16, 2006: Curious question from Mankiw: “How can you identify my car?”

mvpy writes:

You know, I hate to spoil things, but I must say, I think Milton Friedman has a better plate. This is from an article I came across:

"Years ago, trying to find the Friedman’s apartment in San Francisco, I knew I was in the right location when I spotted a car with the number plate MV = PT."

A. Delaique writes:

Milton Friedman's licence plate was MV = PQ, not MV = PT. Picture here : http://gribeco.free.fr/article.php3?id_article=12

Anonymous writes:

That's pretty ridiculous..

Canée writes:

I love economists.

Monetarism MV = PQ

Monetarism MV = PQ

18-30 monthsThis is the Quantity Theory of

Money.

Monetarism MV = PQ

18-30 monthsIn the long run, increases in M

affect nothing but P (and W).

MV = PQ18-30 months

Monetarism

In the long run, decreases in M affect nothing but P (and W).

MV = PQ

Monetarism

35% 35%Suppose M falls from $45 billion to $30 billion.

Abstractly considered

P must fall proportionally to avoid a recession.

MV = PQ

Monetarism

35% 15% 24%25%

Historically considered: 1929-1933

The phenomenon of bust and depression was observed and argued about long before the Great Depression and long before Keynes wrote his General Theory.

A fully satisfying explanation requires that we consider the phenomenon of boom, bust, depression, and recovery.

But sorting out the differences between Milton Friedman and Maynard Keynes can be achieved with the narrower focus, i.e., bust and depression.

This focus suggests two questions in need of an answer:

2. Why did it take so long for markets to adjust to the changed market conditions? If prices, wages, and interest rates needed to adjust, why didn’t they adjust?

1. What caused the bust? What was the triggering mechanism? What change in market conditions required adjustments of some kind on an economywide scale?

Keynes claimed it was a waning of animal spirits.

Friedman pointed to the collapse in the money supply.

Keynes claimed it was price and wage-rate stickiness.

Friedman pointed to perverse government policy.

Consider policies pursued by Hoover and Roosevelt:

. High-wage policies (Hoover)

. Crop-Destruction Program (Roosevelt)

. Potatoes, pork, cotton, dairy.

“Roosevelt did not forget agriculture. On May 12, 1933, Congress passed the Agricultural Adjustment Act (AAA). The Act had two goals—to raise farm prices quickly and to control production so that prices would stay up over the long term.”

“In the AAA’s first year, though, the supply of food outstripped demand. The AAA could raise prices only by paying farmers to destroy crops, milk, and livestock. To many, it seemed shocking to throw away food while millions of people were going hungry.” “The New Dealers claimed the action was necessary to bring prices up.”

From The American Journey, 2003, p. 724.









. Cartelization of Industry (Roosevelt)

. Railroads, Steel, Banking

. Blue Eagle Program (Roosevelt)

. Make-Work Projects (Roosevelt)

. WPA, CCC, “Give a Man a Job”

Social Security Program (Roosevelt)

Undistributed Profits Tax (Roosevelt)

CCCCivil Conservation Corp

Make-Work Projects

New Deal-era promo for the NRA (National Recovery Administration).Producer: Metro-Goldwyn-MayerFeaturing: Jimmy Durante

Click the “Blue Eagle” for the 2 min. 49 sec. video.

Keynesianism vs

Monetarism

MonetarismA Summary view:

In 1929, the Federal Reserve blundered monumentally in allowing the money supply to fall.



Had the blundering not been compounded by further blundering, P would have fallen and there would have been a short-lived recession (18-30 months?).



The Hoover administration instituted a “high-wage policy.”

Prices, which reflected high labor costs, were also propped up.



The Roosevelt administration further propped up prices through its NRA legislation, involving crop destruction, cartel arrangements, and the “Blue Eagle” program.



The Roosevelt administration worked through unions to prop wages up. It was more “successful” in blocking wage declines than in blocking price declines.



All told, there was a double blunder with a catastrophic twist:

M collapsed; P and W were propped up--W more successfully than P.



The “real wage rate” (W/P) rose, and unemployment peaked at 25%.

The Great Depression lasted for a decade (1929-1939).


Keynesianism MV = PQ

MV = P(QC + QI)

Keynesianism MV = PQC + PQI Y = C + I

MV = P(QC+QI)

Keynesianism

Prices are “sticky downward.”

Investment suffers from a waning of “animal spirits.”

Consumption falls as the economy spirals downward.

MV = P(QC+QI)

Keynesianism

People begin to hoard money (“V” falls) and may even become “fetishistic” in their money-hoarding propensities.

Keynes believed that the velocity of money was subject to dramatic and unpredictable change.

He believed that people “hoard” money, more so some times than others. (increased hoarding means a decrease in velocity.)

In extreme episodes, people may be overcome by the “fetish of liquidity,” the fetish often accompanying the waning of animal spirits.

MV = P(QC+QI

+QG)

Keynesianism

The government should increase the money supply enough to offset people’s “fetishistic” propensities and….

MV = P(QC+QI

+QG)

Keynesianism

…to finance the fiscal policy (such as an increase in government spending) required to drive the economy back to its full-employment level of income.

Printing Money and Spending it.Monetarism and Keynesianism

Historically Considered

Printing Money and Spending it.

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