the Great Depression Steve, Some economic historians would claim that the depression of the late 1830s and early 1840s was more severe than that of the 1930s, but it is hard to compare over such long time distances, with very different economies and societies. Your statement that Market success--characterized by stable and sustainable growth levels, generally falling price levels, and increasing real incomes--is the norm in the absence of state intervention. could be regarded as true, but only to the extent that it is vacuously true, as it applies to the empty set. The complete "absence of state intervention" has not been observed in recorded history, which makes the extreme free marketers free to refuse to acknowledge all inconvenient statistics, and blame them on the government. But early Victorian Britain is probably the closest any economy has come to "the absence of state intervention." The worship of private enterprise and denigration of government actions were on a scale that even Ayn Rand would have applauded. And it was on a gold standard, with the Peel Act of 1844 making it about as pure a gold standard as even a purist might want. Yet what do we see? Here are some statistics, taken from B. R. Mitchell, "International Historical Statistics: Europe, 1750-1988," 3rd ed., 1992, and W. L. Thorp, "Business Annals," 1926 (all for the UK alone): year GDP price index brief characterization 1835 471 84.5 prosperity; stock exchange panic 1836 508 95 prosperity; financial panic 1837 484 94 recession; panic; depression 1838 519 98 depression 1839 549 104 depression 1840 510 102.5 depression 1841 481 98 depression 1842 459 89 depression 1843 459 80 depression; revival 1844 506 81 mild prosperity 1845 537 83 prosperity (GDP is in current prices, in millions of pounds, Table J1 of Mitchell, price index is the whole sale price index, Table H1 of Mitchell, and the "brief characterization" is from Thorp) The main point is that that the economy was subject to pretty strong fluctuations, far more dramatic than what we have seen in recent decades (so that the Great Moderation was definitely real, at least up until last year). But there is more to this story, and the fluctuations can't be blamed on the gold standard. You may object that the table is inconsistent, with the "brief characterization" not supported by the numbers. Well, yes, and this brings up an important point that I expect only some readers of this list will appreciate, primarily the ones who were raised in the India of a couple of decades ago, where the prosperity depended on the monsoon. The UK of the early 19th century was still heavily dependent on agriculture (and other countries even more so). And no monetary policy can compensate for harvest failure if the population depends heavily on the harvest, especially in those early days, when transportation options were limited. (The Irish Potato Famine starts just about when the table above ends, in which about a million people die. That is an extreme example, and there are many aspects to the Famine, so I won't go into that.) As a simplistic illustration, suppose you and one other chap live on an island, and he does all the farming, while you produce the tools, clothing, etc. for this small economy of two people, but that you use a fixed stock of gold as a medium of exchange. Some kind of equilibrium exists under normal conditions. But suppose that one year the harvest fails, and the other chap gets in only half the wheat, corn, chickens, ..., that he normally can spare for consumption. Your work just as hard as always, and produce just as much. Naturally, in your little economy, food prices will go up, with each spade you make fetching fewer chickens than it used to under normal circumstances. So in money terms, there will be wild fluctuations, difficult to capture in statistics (especially if statistics collection is fragmentary or non-existent, as it often was in the UK then). The main point, though, is that while the farmer will get more of your output than he normally gets, both of you will see a much diminished standard of living, since there is half as much food available. So under the gold standard there was price stability, but only over very long periods of time. Over intervals of a few years, meaning half a dozen or more, you would normally see extreme fluctuations, ones that affected different segments of the society in different ways, and which made it hard to tell just what was happening. And of course, on top of the fluctuations coming from agriculture, there were the fluctuations caused by the internal dynamics of the free markets, which led to booms and busts of their own. Just a couple of additional (amusing ?, instructive ?) points: 1. The era of the gold standard provides some of the strongest historical evidence of the benefits of low inflation. New gold discoveries, such as the California Gold Rush, preceded the periods of fastest and smoothest economic growth. (This is obviously a great simplification of a complicated story that can be presented in other ways, too.) 2. One noticeable development over the last couple of centuries is that the financial industry has gotten much better at extracting money from taxpayers. When the mid-1820s mania in Britain burst, the merchants and bankers went hat in hand to the government, asking for help. They were told to go fly a kite, and a painful depression followed. But just a few years after the 1844 act that made the gold standard very strict, there was a major financial crisis in October 1847, and the British government authorized the Bank of England to break the law. That did the trick (plus the Keynes-like stimulus that was provided to the economy by railway investors pouring money into their lines in the (vain) hopes of making a fortune in the Railway Mania that was still raging), but it did not involve any government expenditure. What's happening today, with a US Secretary of the Treasury asking for $700 billion to put into banks, and asking for it in a matter of days, was inconceivable then. Andrew RSS Feed: <http://www.warpspeed.com/wordpress> ------------------------------------------- Archives: https://www.listbox.com/member/archive/247/=now RSS Feed: https://www.listbox.com/member/archive/rss/247/ Powered by Listbox: http://www.listbox.com