WEBVTT NOTE 'America’s Great Depression' 50th Anniversary 1 00:00:00.000 --> 00:00:05.560 My remarks are focused on a very small section of America's Great Depression 2 00:00:05.560 --> 00:00:10.760 and that is Rothbard's definition of the money supply. So he reformulates the 3 00:00:10.760 --> 00:00:13.760 definition of the money supply 4 00:00:13.760 --> 00:00:15.600 in four pages, 5 00:00:15.600 --> 00:00:20.320 from pages 87 to 91, and he does it as a way of 6 00:00:20.320 --> 00:00:26.760 improving his historical analysis. 7 00:00:26.760 --> 00:00:32.100 He starts with Mises. Mises defined money as a general medium of exchange. 8 00:00:32.100 --> 00:00:37.580 But if you look at Human Action, you'll see that Mises only includes 9 00:00:37.580 --> 00:00:41.520 currency and demand deposits, checking accounts, checkable deposits, 10 00:00:41.520 --> 00:00:43.880 as components of the money supply. 11 00:00:43.880 --> 00:00:45.500 And in fact, 12 00:00:45.500 --> 00:00:51.280 Mises explicitly excluded savings deposits at commercial banks and savings banks, 13 00:00:51.280 --> 00:00:54.860 and he categorized them along with high-grade bonds, blue-chip stocks, and even 14 00:00:54.860 --> 00:00:59.020 and stocks of commodities as secondary media of exchange. 15 00:00:59.020 --> 00:01:04.860 So he denied the moneyness of these other assets. 16 00:01:04.860 --> 00:01:16.860 Well, Rothbard, what he desired to do, he wanted to stick to Mises' theoretical definition of money as a general medium of exchange. 17 00:01:16.860 --> 00:01:23.860 But he wanted to formulate an empirical aggregate that was consistent with that definition. 18 00:01:23.860 --> 00:01:28.260 As I said, he did this in order to advance his historical research. 19 00:01:28.260 --> 00:01:31.380 He doesn't make a big deal out of it. He doesn't act like it's an innovation in any way. 20 00:01:32.700 --> 00:01:36.940 It wasn't an exercise in theoretical innovation for its own sake. 21 00:01:38.060 --> 00:01:39.900 He was doing it as a working economist. 22 00:01:42.300 --> 00:01:50.460 So, these are two statements that reflect his criteria or his standard for identifying monetary assets. 23 00:01:50.460 --> 00:02:00.960 One, demand deposits only function as money because they are considered perfect money substitutes, that is, they readily take the place of money at par. 24 00:02:00.960 --> 00:02:03.960 And then elsewhere in that small section he writes, 25 00:02:03.960 --> 00:02:10.960 The distinguishing feature of a money substitute is that people believe it can be converted at par into money at any time on demand. 26 00:02:10.960 --> 00:02:16.960 But on this definition, demand deposits are by no means the only money substitute. 27 00:02:16.960 --> 00:02:46.960 And here's what he includes, just to get to it, or actually, this is a more, I later wrote an article formalizing Rothbard's definition of the money supply, and so I did it in these terms, I said for an item to be included in the money supply or monetary aggregate, it has to fulfill a number of conditions or criteria, must be routinely and universally accepted in exchange for goods and services, it must serve as a final means of payment in all transactions, 28 00:02:46.960 --> 00:02:52.960 Transactions, completely discharging the debt. That would only include currencies. 29 00:02:52.960 --> 00:02:59.960 I then added Rothbard's criterion, his new criterion, in which he said, 30 00:02:59.960 --> 00:03:03.960 or it must be an instantly convertible claim to the general medium of exchange, 31 00:03:03.960 --> 00:03:07.960 that is to currency under fiat standard, to paper currency, 32 00:03:07.960 --> 00:03:13.960 meaning that it must be interchangeable with the general medium of exchange on demand at par. 33 00:03:13.960 --> 00:03:18.960 That's a more formal statement of Rothbard's criteria. 34 00:03:18.960 --> 00:03:20.960 So this is what Rothbard included. 35 00:03:20.960 --> 00:03:23.960 In red are the ones that are extremely controversial. 36 00:03:23.960 --> 00:03:28.960 So he included what used to be called time deposits, which we now know as savings deposits, 37 00:03:28.960 --> 00:03:31.960 because he's looking at the 1920s and 30s. 38 00:03:31.960 --> 00:03:36.960 He also included savings deposits not only at commercial banks but at mutual savings banks, 39 00:03:36.960 --> 00:03:41.960 some of which were mutually owned, owned by the depositors during this period of time. 40 00:03:41.960 --> 00:03:53.960 He also included shares of savings and loan associations, which were legally institutions that were owned by the shareholders, that is, the savers. 41 00:03:53.960 --> 00:03:56.960 That was the formal legality of it. 42 00:03:56.960 --> 00:04:09.960 He also included shares and savings deposits of credit unions, and then, the most controversial item, cash surrender liabilities of life insurance companies, that is, equal net policy reserves. 43 00:04:09.960 --> 00:04:17.960 The amount of money that people could borrow against their life insurance policies, as they accumulated savings in those policies. 44 00:04:17.960 --> 00:04:20.960 So, as I said, those two were controversial. 45 00:04:20.960 --> 00:04:32.960 The monetarist Richard Timberlake, and also, not directly, but also Leland Yeager, have alleged that Rothbard's definition of the money supply was contrived. 46 00:04:32.960 --> 00:04:40.500 Okay, in order to make it appear, in order to make money growth appear greater than it actually was in the 1920s 47 00:04:40.500 --> 00:04:42.500 I left out the word money growth 48 00:04:43.440 --> 00:04:50.600 This ploy according to them enabled Rothbard to characterize the 1920s as an inflationary decade, decade vis-a-vis 49 00:04:51.880 --> 00:04:55.680 Friedman and Schwartz who claimed that it was not by any means an inflationary decade 50 00:04:56.040 --> 00:05:01.180 Okay, and thus to be able to apply the Austrian business cycle theory to explain the Great Depression 51 00:05:01.180 --> 00:05:08.780 Depression. So it was a contrivance of Rothbard's. So the first objection, Timberlake 52 00:05:08.780 --> 00:05:13.320 objected to Rothbard's inclusion of shares of savings and loan associations 53 00:05:13.320 --> 00:05:17.700 in the money supply. And why did he do that? He said they are not money because 54 00:05:17.700 --> 00:05:22.300 they cannot be spent on ordinary goods and services. To spend them, one needs to 55 00:05:22.300 --> 00:05:28.540 cash them in for other money. Notice he says other money. They are money, but he 56 00:05:28.540 --> 00:05:30.540 I wouldn't use the term other money. 57 00:05:35.540 --> 00:05:37.540 Now, what were the responses? 58 00:05:37.540 --> 00:05:41.540 Well, savings and loan share accounts back in the 1920s and 30s, 59 00:05:41.540 --> 00:05:43.540 they were actually called building and loan associations. 60 00:05:43.540 --> 00:05:47.540 They later took on the name in the US of savings and loan associations, 61 00:05:47.540 --> 00:05:50.540 all of which collapsed in 1989, 1990. 62 00:05:52.540 --> 00:05:57.540 They were indistinguishable, really, from commercial bank savings deposits. 63 00:05:57.540 --> 00:06:09.540 They were redeemable on demand, at par. You couldn't write checks either on the savings deposits at commercial banks, nor could you write checks on the share accounts. 64 00:06:09.540 --> 00:06:15.540 But in both cases you could simply go down and withdraw them from the banks. 65 00:06:15.540 --> 00:06:45.540 So, and both technically were able to delay withdrawal according to the bylaws of savings, okay, that there were a notice of withdrawal bylaws that said, well you have to give us 30 days notice if you want to withdraw, they were not enforced, okay, by the 1920s these were not enforced, there were dead letters, so to speak, and the savings and loans advertised every withdrawal payable on demand, 66 00:06:45.540 --> 00:06:56.860 So they were willing, enabled, and in de facto, they did allow withdrawal upon demand. 67 00:06:56.860 --> 00:07:04.980 The other response is that savings and loans shareholders had to first exchange their shares for money before they could spend on goods and services. 68 00:07:04.980 --> 00:07:09.660 Okay, but so do savings deposits at commercial banks. 69 00:07:09.660 --> 00:07:16.300 And Timberlake included savings deposits at commercial banks in his definition of the money supply. 70 00:07:16.300 --> 00:07:19.380 Again, they were indistinguishable. 71 00:07:19.380 --> 00:07:25.940 And also Timberlake does not object to an inclusion of savings deposits at a third institution, mutual savings banks. 72 00:07:25.940 --> 00:07:34.500 Some of which were owned by their depositors, technically legally owned. 73 00:07:34.500 --> 00:07:37.900 So they were identical to the savings alone in economic function. 74 00:07:37.900 --> 00:07:43.400 and also, as I said, some of them were technically owned by their depositors. 75 00:07:43.400 --> 00:07:46.600 There's a Friedman and Schwartz connection here. 76 00:07:46.600 --> 00:07:51.200 If you go back, you can see where Timberlake took his position from. 77 00:07:51.200 --> 00:07:57.800 Savings and loans are not banks as defined in a legalistic way 78 00:07:57.800 --> 00:08:03.400 in accordance with the definition of banks agreed upon by Federal bank supervisory agencies 79 00:08:03.400 --> 00:08:06.700 since holders of funds in these institutions are, for the most part, 80 00:08:06.700 --> 00:08:13.100 Technically shareholders, not depositors, but one of the lessons that Mises always insisted on was that 81 00:08:13.820 --> 00:08:18.860 Economic was always interested in the essence of a phenomenon, not the legal technicalities 82 00:08:19.140 --> 00:08:23.420 Okay, so we so technically in a legal sense their shareholders 83 00:08:23.420 --> 00:08:30.420 So what you can still withdraw these savings on demand at par and therefore they should be part of the money supply 84 00:08:30.420 --> 00:08:36.740 In fact, Friedman and Schwartz were forced to admit that those who place funds with these institutions quote 85 00:08:37.180 --> 00:08:42.220 Clearly may regard such funds as close substitutes for bank deposits as we define them 86 00:08:42.780 --> 00:08:46.540 Okay, so they're admitting the case. They're essentially savings deposits 87 00:08:48.980 --> 00:08:55.740 And then Timberlake objects to the cash surrender liabilities of life insurance companies on the same grounds 88 00:08:56.260 --> 00:08:59.180 Okay as his objections to the inclusion of savings and loan shares 89 00:08:59.180 --> 00:09:06.180 Rothbard argued that the cash surrender values of life insurance policies are immediately cashable claims against insurance companies 90 00:09:06.180 --> 00:09:14.180 and he said that they function like depository institutions, they collect funds from the public and then they make loans and investments 91 00:09:14.180 --> 00:09:21.180 while they contractually promise to allow the policyholders to borrow against these policies 92 00:09:21.180 --> 00:09:35.180 policies. So Rothbard says they're economically in precisely the same position as savings depositors or thrift institution shareholders, so he includes them, okay. 93 00:09:37.180 --> 00:09:50.180 This is the most controversial aspect of Rothbard's definition, and I don't really defend it myself. In fact, when I discussed with him my article that I wrote on the money supply, 94 00:09:51.180 --> 00:09:56.220 He said, yeah, it's a real gray area. He said, you know, at this point, we should leave it out. 95 00:09:56.220 --> 00:10:00.660 And so I did. I'm a little uneasy with it, so I left it out. 96 00:10:00.660 --> 00:10:06.380 But it's been the subject of undue derision by the monetarists. 97 00:10:06.380 --> 00:10:09.780 And we can respond to that, though. 98 00:10:09.780 --> 00:10:14.940 First of all, many mainstream economists in the 1960s and 70s noted the moneyness 99 00:10:14.940 --> 00:10:17.300 of the 100 00:10:17.300 --> 00:10:47.300 Net Life Insurance Reserves, okay, and you can see that money in banking textbooks, and second, if you exclude them from the money supply, it does not significantly change the rate of growth of the money supply in the 20s, so it doesn't affect Rothbard's case, so I'll finish up, there's just a bunch of examples of different economists who claim that these Net Life Insurance Reserves are in fact money-like, okay, they can be drawn at any time, 101 00:10:47.300 --> 00:10:53.500 time simply by allowing the policy to lapse, they're near money on a poor saving accounts, 102 00:10:53.500 --> 00:10:59.340 Haynes said that, Burstein said they're readily convertible into cash, almost as liquid as 103 00:10:59.340 --> 00:11:04.980 a mattress full of currency, and they satisfy the precautionary motive, and then there's 104 00:11:04.980 --> 00:11:07.500 others. 105 00:11:07.500 --> 00:11:15.100 So Rothbard wasn't alone, it was not a ploy, I mean in the 50s and 60s, 60s and 70s, there 106 00:11:15.100 --> 00:11:19.900 To others, the Keynesian economists were thinking in those terms. 107 00:11:19.900 --> 00:11:30.460 And finally, even if we exclude it from the money supply, we find that with the item included 108 00:11:30.460 --> 00:11:38.660 Rothbard's money supply told about 61% or the growth told 61% from mid-1921 to 28, yielding 109 00:11:38.660 --> 00:11:42.740 an annual rate of 8.1% increase in money supply. 110 00:11:42.740 --> 00:12:02.740 But if we exclude it, the money supply increased by about 55% and there was an annual rate of 7.3%, it doesn't affect the inflationary nature of the 1920s, and I'll stop here, so you don't have to put that up.