WEBVTT NOTE America’s First Business Cycle: A Reappraisal of the Recession of 1797 and the Macroeconomic Events of the 1770s 1 00:00:00.000 --> 00:00:08.000 It's my great pleasure to be here today. Like Mark said, I was a student here. I was actually a summer fellow. 2 00:00:08.000 --> 00:00:16.000 And now to be returning as a lecturer is something that I always wanted to do and I'm very happy about that. 3 00:00:16.000 --> 00:00:25.000 My talk is about the recession of 1797 and specifically I'm going to be arguing that it was created by 4 00:00:25.000 --> 00:00:28.000 Credit Expansion on the part of the First Bank of the United States. 5 00:00:30.000 --> 00:00:38.000 So I've envisioned this as a kind of continuation of a Rothbardian research program. 6 00:00:38.000 --> 00:00:46.000 So those of you familiar with Austrian economics know Rothbard bequeathed to us two active research agendas, at least two. 7 00:00:46.000 --> 00:00:53.000 One being applied anarcho-capitalism, which is near and dear to my heart, but I'm not going to be talking about that today. 8 00:00:53.000 --> 00:00:59.900 and the other one is Revisionist Economic History, which is what I am going to be engaged in. 9 00:00:59.900 --> 00:01:07.680 So I have a picture here of Alexander Hamilton and I was at a talk a couple years ago where 10 00:01:07.680 --> 00:01:15.560 Tom DiLorenzo was presenting his book on Hamilton's Curse and he described Hamilton as a rat who 11 00:01:15.560 --> 00:01:17.200 betrayed the American Revolution. 12 00:01:17.200 --> 00:01:22.840 Now I don't know about you, but I was offended by this because in my opinion, Professor 13 00:01:22.840 --> 00:01:33.800 Dr. DiLorenzo was far too kind to Alexander Hamilton. 14 00:01:33.800 --> 00:01:40.720 The Bank of the United States opened its doors for operation in December of 1791, and the 15 00:01:40.720 --> 00:01:49.760 first recession in American history happened in December of 1796, and it was a mere five 16 00:01:49.760 --> 00:01:55.360 five years after the creation of de facto central banking in the United States. 17 00:01:55.360 --> 00:02:00.720 Now what interests me about this connection is it hasn't really been explored by any Austrian 18 00:02:00.720 --> 00:02:01.720 economist. 19 00:02:01.720 --> 00:02:07.800 So in Tom D. Lorenzo's book, he argues that Hamilton bequeathed to us a legacy of central 20 00:02:07.800 --> 00:02:12.920 banking which has resulted in macroeconomic fluctuations that we're still dealing with 21 00:02:12.920 --> 00:02:13.920 today. 22 00:02:13.920 --> 00:02:19.200 However, he doesn't specifically relate the first recession in United States history to 23 00:02:19.200 --> 00:02:26.080 2, Central Bank Expansion. So what I see myself doing is kind of pinning the tail on the donkey. 24 00:02:26.080 --> 00:02:30.000 In this case, the donkey being the arrogant, overweening Alexander Hamilton and the economic 25 00:02:30.000 --> 00:02:40.920 program of the Nationalists. So, okay, let me just, many of you don't know anything about 26 00:02:40.920 --> 00:02:45.960 the recession of 1797. Many of you probably aren't aware that there was a recession in 27 00:02:45.960 --> 00:03:05.320 1797. So by way of introduction, sorry about that. So by way of introduction, I'm gonna 28 00:03:05.320 --> 00:03:11.100 begin with some historical details about the recession. This is Robert Morris, the infamous 29 00:03:11.100 --> 00:03:18.640 This is Robert Morris, who was the sort of guiding father of Alexander Hamilton in his 30 00:03:18.640 --> 00:03:29.720 nationalist party, and in February 1798, after a spectacular fall from fortune, Morris, who 31 00:03:29.720 --> 00:03:34.020 was the famed financier of the revolution and was previously one of the wealthiest men 32 00:03:34.020 --> 00:03:37.860 in America, was arrested and put in debtors' prison. 33 00:03:37.860 --> 00:03:42.100 So he and his partner John Nicholson had issued $10 million in paper debt claims, and when 34 00:03:42.100 --> 00:03:48.380 this paper pyramid collapsed, he was ruined and the economic loss was felt by his extensive 35 00:03:48.380 --> 00:03:52.260 list of creditors, which included pretty much every one of prominence in America at that 36 00:03:52.260 --> 00:03:55.260 time. 37 00:03:55.260 --> 00:03:58.540 Morris and Nicholson weren't alone in their fate, they're just the biggest players in 38 00:03:58.540 --> 00:04:01.140 a recognized bubble of speculation. 39 00:04:01.140 --> 00:04:05.900 This bubble began to burst in late 1796, leaving a flurry of economic failure and distress 40 00:04:05.900 --> 00:04:10.900 So Jefferson proved prescient when he wrote, quote, 41 00:04:10.900 --> 00:04:16.900 The prison is full of the most reputable merchants, and it is understood that the scene has not yet got to its height." 42 00:04:16.900 --> 00:04:19.900 So that was a letter to Madison. 43 00:04:19.900 --> 00:04:25.900 The contemporary Theodore Sedgwick was delighted by the bursting of this bubble. 44 00:04:25.900 --> 00:04:27.900 He said, quote, 45 00:04:27.900 --> 00:04:31.900 The bursting of this bubble is a very happy circumstance, 46 00:04:31.900 --> 00:04:37.100 So vast numbers, and among them, many worthy people are involved in ruin by it." 47 00:04:37.100 --> 00:04:40.300 So he's sort of like the Murray Rothbard of this day, I can just imagine Murray. 48 00:04:40.300 --> 00:04:49.060 He's like, you've got to flush out those malinvestments. 49 00:04:49.060 --> 00:05:00.620 So the ruin of these well-prominent traders wasn't contained in them alone, but it was 50 00:05:00.620 --> 00:05:08.040 There's actually more widespread economic downturn and as you can see from these figures on GDP 51 00:05:08.040 --> 00:05:22.420 per capita, GDP fell from a peak of $1,284 in 1796 to $1,216 in 1798 which was a decrease 52 00:05:22.420 --> 00:05:28.540 of about 5.3% and industrial production fell as well. 53 00:05:28.540 --> 00:05:35.660 This is the index by Davis that's a little less suspect than the GDP figures that we have. 54 00:05:35.660 --> 00:05:39.800 And it shows a fall in industrial production of a little over 7%. 55 00:05:39.800 --> 00:05:45.620 So the nascent American economy was experiencing its first recession. 56 00:05:45.620 --> 00:05:47.880 So what caused this recession? 57 00:05:47.880 --> 00:05:54.780 So I'm going to argue that it was caused by big expansion on behalf of an over-expansion 58 00:05:54.780 --> 00:05:57.080 by the engagement by the Bank of the United States. 59 00:05:57.080 --> 00:06:06.000 So, when it began operations, it immediately started to pump in new injections of credit 60 00:06:06.000 --> 00:06:10.360 into the economy with an initial capitalization of 2 million. 61 00:06:10.360 --> 00:06:16.400 I'll show you numbers in a minute here, but it reached a number of about 7 million by 62 00:06:16.400 --> 00:06:21.120 1794, and this was on top of an original money supply of like 10 to 15 million, so that's 63 00:06:21.120 --> 00:06:24.320 a pretty significant increase. 64 00:06:24.320 --> 00:06:30.800 So obviously all this credit expansion resulted in inflation and a reduction in interest rates. 65 00:06:30.800 --> 00:06:40.760 So the inflation sort of created, I guess, a marginal disincentives, I guess, to saving 66 00:06:40.760 --> 00:06:50.120 and lending, and there was malinvestment, we'll get to that, and this sort of over-expansion 67 00:06:50.120 --> 00:06:56.360 was brought back into heel through the price species flow mechanism. 68 00:06:56.360 --> 00:07:01.320 In other words, there was an overexpansion which created disparities in the price level 69 00:07:01.320 --> 00:07:05.680 between America and other economies. 70 00:07:05.680 --> 00:07:12.840 So this caused a reduction in net exports, and to pay for the trade balance, the species 71 00:07:12.840 --> 00:07:14.940 was exported abroad. 72 00:07:14.940 --> 00:07:23.820 There was a credit contraction and a monetary contraction, you know, beginning in late 1796, 73 00:07:23.820 --> 00:07:33.940 and I guess the highly leveraged traders experienced a credit crunch and they began suffering economic 74 00:07:33.940 --> 00:07:34.940 failures. 75 00:07:34.940 --> 00:07:41.940 I suppose I should say a couple words really quick about the Bank of the United States 76 00:07:41.940 --> 00:07:42.940 itself. 77 00:07:42.940 --> 00:07:50.940 It sort of represents the culmination of Hamilton's liquidity expansion scheme of the 1790s. 78 00:07:50.940 --> 00:07:54.340 So there was multiple planks of this program. 79 00:07:54.340 --> 00:08:00.920 The most pertinent ones to this discussion were the assumption of the state and continental 80 00:08:00.920 --> 00:08:05.540 congress debts that were issued to finance the revolution. 81 00:08:05.540 --> 00:08:11.820 So Hamilton, of course, wanted to assume these debts to create a class of special interests 82 00:08:11.820 --> 00:08:20.020 that would support the federal government and he wanted to benefit Northeastern mercantilist 83 00:08:20.020 --> 00:08:21.020 interests. 84 00:08:21.020 --> 00:08:30.180 And so as part of his speculation scheme, the individuals who wanted to buy into the 85 00:08:30.180 --> 00:08:37.820 stock of the first bank of the United States had to pay three-fourths in newly created 86 00:08:37.820 --> 00:08:43.780 Government Debt, bonds, you know, debt instruments, bonds, and then the bank itself would also 87 00:08:43.780 --> 00:08:48.660 provide the means to sort of pay back its obligations, so it's like the circularity. 88 00:08:48.660 --> 00:08:54.460 I think Tom DiLorenzo has it right when he calls it a bank job. 89 00:08:54.460 --> 00:09:03.380 So I guess the first question we have to explore is, was the expansion that took place just 90 00:09:03.380 --> 00:09:06.660 a normal credit expansion or was it an over expansion? 91 00:09:06.660 --> 00:09:10.020 So expansion of credit in and of itself isn't necessarily a bad thing, right? 92 00:09:10.020 --> 00:09:15.740 In an advancing economy, that's what we want, it causes increased wealth. 93 00:09:15.740 --> 00:09:21.220 The problem is only if there is an over-expansion, which is why central banking is bad. 94 00:09:21.220 --> 00:09:28.860 So in the early 1790s, a lot of historians and economists have argued that American accounting 95 00:09:28.860 --> 00:09:31.380 was credit constrained, it was liquidity constrained. 96 00:09:31.380 --> 00:09:37.820 So in other words, individuals, traders or merchants might have ideas for business ventures 97 00:09:37.820 --> 00:09:41.820 that would potentially be profitable, would probably be profitable, but they're unable 98 00:09:41.820 --> 00:09:45.980 to obtain financing because of the lack of scarce VC. 99 00:09:45.980 --> 00:09:52.260 And so this expansion by the US, far from being a bad thing, was actually just a means 100 00:09:52.260 --> 00:09:59.700 in which people could accomplish the gains from trade, intermediated through the financial 101 00:09:59.700 --> 00:10:02.200 System of the Bank. 102 00:10:02.200 --> 00:10:06.500 And so I've labeled that the benign expansion hypothesis. 103 00:10:06.500 --> 00:10:11.980 And you know, there's some truth to the fact that the economy was credit constrained, but 104 00:10:11.980 --> 00:10:17.020 in opposition to this benign expansion hypothesis, I want to offer up my alternative malignant 105 00:10:17.020 --> 00:10:23.260 expansion hypothesis, in which I claim that the BUS overexpanded, sending it to a classic 106 00:10:23.260 --> 00:10:29.340 trade cycle, the sort that, you know, Ricardo would have talked about. 107 00:10:29.340 --> 00:10:33.820 So whenever you're engaging in this sort of applied historical work, you have to ask your 108 00:10:33.820 --> 00:10:34.820 two self two questions. 109 00:10:34.820 --> 00:10:38.540 One, does the economic theory you're using make sense? 110 00:10:38.540 --> 00:10:40.620 And then two, you know, did it actually happen? 111 00:10:40.620 --> 00:10:44.940 So this is sort of like the difference between validity and applicability and praxeological 112 00:10:44.940 --> 00:10:46.620 law. 113 00:10:46.620 --> 00:10:53.740 And so on the first step, subject of the theoretical potential for an overexpansion by the Bank 114 00:10:53.740 --> 00:10:57.860 of the United States, first I have to explain what overexpansion means. 115 00:10:57.860 --> 00:11:03.980 means an expansion of credit beyond the amount that people would want to hold at the price 116 00:11:03.980 --> 00:11:09.340 of par with species, so it's just basically surplus. 117 00:11:09.340 --> 00:11:15.340 And normally, under conditions of unrestricted or free competition in banking, the expansion 118 00:11:15.340 --> 00:11:24.220 of credit is limited by marginal rising costs of keeping deposits and notes in circulation. 119 00:11:24.220 --> 00:11:28.780 And so there's increasing marginal costs of getting people to hold on to your notes, there's 120 00:11:28.780 --> 00:11:32.740 declining marginal benefits, say of making loans. 121 00:11:32.740 --> 00:11:40.260 And so the most profitable level of expansion for any given bank is given by equating the 122 00:11:40.260 --> 00:11:47.780 marginal benefits and the marginal costs of the bank expansion. 123 00:11:47.780 --> 00:11:52.920 So in this way, competition is what provides the check against an overexpansion. 124 00:11:52.920 --> 00:11:58.840 So, if one bank engages in expansion beyond the profit maximizing level, then it suffers 125 00:11:58.840 --> 00:12:05.640 a loss of reserves to other banks in the banking system or, you know, so either, if I put out 126 00:12:05.640 --> 00:12:09.520 a bunch of notes that people don't want, they either present it back to me for direct redemption 127 00:12:09.520 --> 00:12:14.200 of specie or, probably more probably, they deposit it in their bank account at their 128 00:12:14.200 --> 00:12:18.640 own bank and then that bank, you know, takes the claims, gives it back to the first issuing 129 00:12:18.640 --> 00:12:24.640 Bank and asks for it to honor the redemption of its notes and either way the over-expanding 130 00:12:24.640 --> 00:12:29.920 bank will suffer a loss of reserves and is forced to contract. 131 00:12:29.920 --> 00:12:40.060 Now a sort of competitive check on the over issuance of credit doesn't exist with respect 132 00:12:40.060 --> 00:12:45.120 to a central bank or a bank that enjoyed legal privileges like the first bank of the United 133 00:12:45.120 --> 00:12:46.120 States. 134 00:12:46.120 --> 00:12:50.120 The Bank of the United States wasn't a central bank quite in the sense that we understand that today. 135 00:12:50.120 --> 00:12:53.120 It didn't regulate the commercial banking system. 136 00:12:53.120 --> 00:12:59.120 Although, for that reason, Richard Timberlake and others have argued that it couldn't have been intended to be a central bank. 137 00:12:59.120 --> 00:13:04.120 On the other hand, it did sort of start engaging in monetary policy right off the start, right from the start. 138 00:13:04.120 --> 00:13:14.120 So, in an article by Colin Sill and Wright, they talk about, you know, there was this sort of expansion set off a financial panic in 1792 in Hamilton 139 00:13:14.120 --> 00:13:18.800 Hamilton as part of the treasury along with the bank engaged in sort of an early form 140 00:13:18.800 --> 00:13:20.260 of open market operations. 141 00:13:20.260 --> 00:13:26.240 So you can see that it's sort of a quasi-central bank. 142 00:13:26.240 --> 00:13:32.600 My preferred definition of a central bank is any bank that enjoys exclusive legal privileges 143 00:13:32.600 --> 00:13:36.160 and is also the government's banker. 144 00:13:36.160 --> 00:13:40.480 So under this definition then the first bank of the United States would be a central bank. 145 00:13:40.480 --> 00:13:42.560 Now what specifically were its legal privileges? 146 00:13:42.560 --> 00:13:48.000 Well, the first one was an exemption on unit banking. So at the time, if you wanted to 147 00:13:48.000 --> 00:13:51.720 start a bank, you usually had to get a charter from the state and you weren't allowed to 148 00:13:51.720 --> 00:13:57.400 branch across states or usually even to have multiple branches within the same state. So 149 00:13:57.400 --> 00:14:03.840 obviously this is going to weaken the banking system quite a bit. But in terms of the first 150 00:14:03.840 --> 00:14:09.680 bank of the United States, they want to overcome this sort of weak banking system, this hurdle 151 00:14:09.680 --> 00:14:14.720 to having strong banking, so they wanted to set up a more centralized bank that would 152 00:14:14.720 --> 00:14:20.520 have branch offices in several states, so like first five cities and then seven, right, 153 00:14:20.520 --> 00:14:22.640 and so on. 154 00:14:22.640 --> 00:14:27.680 And the second legal privilege that it had was its notes were accepted in payment of 155 00:14:27.680 --> 00:14:29.960 custom duties, so you could pay your taxes in it. 156 00:14:29.960 --> 00:14:34.420 This is kind of like a quasi-legal tender status privilege. 157 00:14:34.420 --> 00:14:40.400 And so, the upshot of all this is that the Bank of the United States notes were useful 158 00:14:40.400 --> 00:14:44.060 in ways that the notes of other banks were not. 159 00:14:44.060 --> 00:14:48.380 They were good as gold for most purposes, including paying your taxes, and so what this 160 00:14:48.380 --> 00:14:53.620 means is that if the Bank of the United States, the central bank, was to engage in an over-expansion, 161 00:14:53.620 --> 00:14:56.940 it wouldn't immediately be disciplined by competition. 162 00:14:56.940 --> 00:15:01.300 The other banks, on the contrary, would find it advantageous to hold these notes as reserves. 163 00:15:01.300 --> 00:15:09.300 Why? Because it's sort of a cheaper substitute for gold, or it was actually silver at this time, for specie. 164 00:15:09.300 --> 00:15:16.300 So, on the theoretical side at least, it seems to me that there could be an overexpansion. 165 00:15:16.300 --> 00:15:19.300 So the question is, was there an overexpansion? 166 00:15:19.300 --> 00:15:24.300 Well, in order to engage this empirical evidence, I'm going to ask a couple of questions first. 167 00:15:24.300 --> 00:15:28.300 How big was the expansion, compared to the existing money supply? 168 00:15:28.300 --> 00:15:35.300 But the key, you know, link in my argument is going to hinge on whether or not you think it's big enough to have influenced prices. 169 00:15:35.300 --> 00:15:41.300 So, you know, the wholesale level of prices, interest rates and international trade. 170 00:15:44.300 --> 00:15:51.300 Well, let's see how big it was. So here's the selected items from the balance sheet of the first bank of the United States. 171 00:15:51.300 --> 00:16:03.300 in the United States. The red note is the banknotes and deposits, and you can see it starts off at basically zero in 1791, and then shoots up immediately to about two or three million. 172 00:16:03.300 --> 00:16:17.300 There's this sort of minor contraction that takes place, and in 1792, around March of 1792, there was actually a securities, the first securities bubble popped in the United States, 173 00:16:17.300 --> 00:16:21.100 so some economists have argued that it was this contraction that caused that 174 00:16:21.100 --> 00:16:25.520 but you can see it's relatively minor right it's sort of almost an uninterrupted 175 00:16:25.520 --> 00:16:35.320 expansion all the way until 1794 and so you see by 1794 it's a peak of about 7 176 00:16:35.320 --> 00:16:39.620 million ish and it kind of tapers off right for some of the remaining years 177 00:16:39.620 --> 00:16:49.620 And, as you can see, here's a graph of the monits and select monetary components. 178 00:16:49.620 --> 00:16:54.620 This is the graph I just showed you, basically, of the U.S. banknotes and deposits. 179 00:16:54.620 --> 00:17:03.620 And, you know, this is the amount of specie, and then this is the M1, or whatever, the full money supply. 180 00:17:03.620 --> 00:17:16.620 And you can see that it's basically going to be an inflation all the way until 1795 and then there's suddenly the deflation after that. 181 00:17:16.620 --> 00:17:19.620 So there's kind of like this wild swing in prices. 182 00:17:19.620 --> 00:17:25.620 As evidence of that, here's the CPI inflation rate over the 1790s. 183 00:17:25.620 --> 00:17:29.620 You can see in the early half, inflation was below 5%. 184 00:17:29.620 --> 00:17:40.220 And then after the US goes into business, it shoots up to double digits, 10%, 14%, and then suddenly it collapses. 185 00:17:40.220 --> 00:17:46.820 So just to anticipate my argument, a sudden swing is probably not a good thing for economic activity. 186 00:17:46.820 --> 00:17:53.120 Same with wholesale prices, they're even more volatile than the average price level. 187 00:17:53.120 --> 00:18:08.120 So, you have, you know, a negative 30 percent, wholesale price is falling by 30 percent in 1791 and then all of a sudden it shoots up to 60 percent and then shoots back down to negative 30 percent, right? 188 00:18:08.120 --> 00:18:18.120 Well, what's the consequence of, for the moment I just want to concentrate on the expansion, so, and the inflation. 189 00:18:18.120 --> 00:18:21.120 So what's going to be the immediate consequence of this inflation? 190 00:18:21.120 --> 00:18:30.320 Well, you would assume that the, if the market, it enters the market at a specific point, 191 00:18:30.320 --> 00:18:37.700 right, so there's a cancel on effects and presumably, if it enters in the market for 192 00:18:37.700 --> 00:18:41.640 loanable funds and the market's going to clear after increasing the supply, then the price 193 00:18:41.640 --> 00:18:44.000 has to fall and that's all I'm showing here. 194 00:18:44.000 --> 00:18:49.440 So what I'm saying is that these are, this is just a calculation of the real yield. 195 00:18:49.440 --> 00:18:56.800 So interest rate data is difficult to find in the 1790s, but this is the real or inflation 196 00:18:56.800 --> 00:19:07.500 adjusted yield, this red line, oh sorry, this is the real yield or the inflation adjusted 197 00:19:07.500 --> 00:19:15.280 interest rate basically, so the standard methodology is the rate on US treasuries represents sort 198 00:19:15.280 --> 00:19:19.480 sort of like the riskless inflation rate, well that's not necessarily the case here 199 00:19:19.480 --> 00:19:24.160 because all these U.S. 6% bonds were new and maybe there was a risk premium, but in that 200 00:19:24.160 --> 00:19:31.600 case then, you know, some of that, it would actually be, this line would be too high. 201 00:19:31.600 --> 00:19:35.000 So it's actually, you know, good for my argument, not bad. 202 00:19:35.000 --> 00:19:41.880 So you can see that starting around 1792-ish, you know, the real interest rate takes a steep 203 00:19:41.880 --> 00:19:46.440 Nose Dive actually becoming negative. And so you have to think about what kind of 204 00:19:46.440 --> 00:19:50.680 incentive is this going to give to entrepreneurs and what I'm like I had 205 00:19:50.680 --> 00:19:55.360 no direct evidence of this here right but I'm arguing that this expansion 206 00:19:55.360 --> 00:20:02.520 creates a deviation in the you know interest rate and it's making it lower 207 00:20:02.520 --> 00:20:06.920 than what the natural rate is so the actual rates lower than the natural rate 208 00:20:06.920 --> 00:20:13.240 and you're gonna get malinvestment, classical sort of BUS style cycle. I mean 209 00:20:13.240 --> 00:20:19.240 in 1795 the real interest rates like negative ten percent so if I'm you know 210 00:20:19.240 --> 00:20:24.120 trying to make an investment and I know that I'm gonna be paying back money 211 00:20:24.120 --> 00:20:29.000 that's worth ten percent less than the money I borrowed let's say and this is 212 00:20:29.000 --> 00:20:32.000 like free money you know they're paying me to take out a loan why wouldn't I 213 00:20:32.000 --> 00:20:42.160 right so so sort of makes sense so okay so I'm so there's this over expansion 214 00:20:42.160 --> 00:20:47.000 the BUS well what corrects the over expansion so I just argued that it's 215 00:20:47.000 --> 00:20:51.320 not going to be by competition but as an economist we know if there's a 216 00:20:51.320 --> 00:20:56.600 disequilibrium it's there's going to be forces that tend to bring it back 217 00:20:56.600 --> 00:20:59.920 into equilibrium right or at least into line with what people's preferences are 218 00:20:59.920 --> 00:21:07.920 and in this case the correction mechanism is brought about by the price-species flow mechanism so as I 219 00:21:07.920 --> 00:21:14.720 was explaining earlier you know the differential in price levels causes people you know Americans 220 00:21:14.720 --> 00:21:19.520 to purchase more foreign goods foreigners to purchase less American goods you have to clear 221 00:21:19.520 --> 00:21:26.360 the trade deficit you export money abroad right but the problem with this well there's two problems 222 00:21:26.360 --> 00:21:36.280 The first one is that the process of adjustment is slow, so I'm arguing this takes several 223 00:21:36.280 --> 00:21:41.800 years for this whole dis-coordination to work itself out, and it requires a sort of painful 224 00:21:41.800 --> 00:21:45.160 monetary contraction to take effect. 225 00:21:45.160 --> 00:21:48.720 And the other thing is the loss of reserves aren't limited to the over-issuing bank but 226 00:21:48.720 --> 00:21:54.640 affects the banking system as a whole, so foreigners are asking, or people are making 227 00:21:54.640 --> 00:21:59.040 Purchases Abroad, and to pay for that they're asking any species, and the species is coming 228 00:21:59.040 --> 00:22:05.160 from wherever their bank is, not necessarily the over-issuing bank. 229 00:22:05.160 --> 00:22:11.520 Well okay, so those are actually a decline in x-axis, first of all let's take a look 230 00:22:11.520 --> 00:22:16.520 at the current account, actually the capital account, well either one, or the opposite. 231 00:22:16.520 --> 00:22:46.480 So, all right, well, we noticed that inflation sort of hit it, here's where the expansion, like the credit expansion sort of tapered off, 1794, where the sort of price swing began, and around 1794, 1795, well, you know, there's exportation of species of 13 million dollars, that's basically the same as the drug that I showed you earlier in the monetary components, right? 232 00:22:46.520 --> 00:22:57.520 So where is the gold going? Like earlier I showed you that, you know, the species was declining, or where did it go? 233 00:22:57.520 --> 00:23:03.520 Well, presumably people aren't melting down silver to make candlesticks, right? It's going overseas. 234 00:23:03.520 --> 00:23:08.520 And that's just what I'm showing you here. 235 00:23:08.520 --> 00:23:24.080 okay so why was this a problem well you can see starting in 1795 there's this 236 00:23:24.080 --> 00:23:28.040 correction that I explained before the prices start falling and the real 237 00:23:28.040 --> 00:23:36.400 interest rates shoot up and so so the real interest rates start shooting up 238 00:23:36.400 --> 00:23:42.560 and at the time what you have is people are mostly borrowing in accordance with 239 00:23:42.560 --> 00:23:46.760 the real bills doctrine right so there's short-term lending and so if I'm 240 00:23:46.760 --> 00:23:52.960 financing you know my enterprise I'm basically borrowing short and then have 241 00:23:52.960 --> 00:23:58.920 to keep rolling it over well what happens to these traders you know 242 00:23:58.920 --> 00:24:02.040 starting well just look at it you know what what when would you predict the 243 00:24:02.040 --> 00:24:26.040 problem is going to set in, it's going to set in around 1797. So the entrepreneurs go and they're trying to refinance basically and they're suffering from a lack of credit or at least they can only find credit to continue. 244 00:24:26.040 --> 00:24:30.500 do their enterprises at really high interest rates basically so they complain about the 245 00:24:30.500 --> 00:24:31.500 lack of money. 246 00:24:31.500 --> 00:24:34.000 The money is expensive is I think what they call it. 247 00:24:34.000 --> 00:24:39.840 So basically what the problem is is that this credit crunch is squeezing them out and they 248 00:24:39.840 --> 00:24:46.600 all start failing. 249 00:24:46.600 --> 00:24:50.800 I just briefly want to talk about some alternative explanations. 250 00:24:50.800 --> 00:25:00.240 So this recession hasn't been talked about too much by either historians or economists. 251 00:25:00.240 --> 00:25:05.260 The Nobel Prize winner Doug North basically ignores it, right? 252 00:25:05.260 --> 00:25:11.480 So in his book, his early work on economic growth, he's looking at this period, you know, 253 00:25:11.480 --> 00:25:21.160 early from like 1792 to 1860, and he argues that, you know, this was a period of, you 254 00:25:21.160 --> 00:25:26.240 know, very strong sustained economic growth in the United States, and he sort of ignores 255 00:25:26.240 --> 00:25:31.800 the temporary deviations, he's sort of aware that there was like this minor contraction 256 00:25:31.800 --> 00:25:42.120 that took place, but he just sort of assumes it away and argues that it was just following 257 00:25:42.120 --> 00:25:43.120 events overseas. 258 00:25:43.120 --> 00:25:47.260 So here's the quote, it says, quote, one lead look no further than to events in Europe 259 00:25:47.260 --> 00:25:50.960 to account for almost every twist and turn in the fortunes of the American economy during 260 00:25:50.960 --> 00:25:52.760 these years, close quote. 261 00:25:52.760 --> 00:25:56.800 I think this sort of ignores the overlooks. 262 00:25:56.800 --> 00:26:01.640 I guess he wasn't really interested in macroeconomic fluctuations, but it sort of just overlooks 263 00:26:01.640 --> 00:26:08.640 and the potential of things going on in the domestic economy to create this coordination. 264 00:26:08.640 --> 00:26:16.840 And there's this other guy, Richard Chu, he's a historian who wrote an article very recently 265 00:26:16.840 --> 00:26:21.160 and he argues that the recession was caused when the Bank of England suspended specie 266 00:26:21.160 --> 00:26:27.160 payments in February of 1797 and then that combined with French privateering during the 267 00:26:27.160 --> 00:26:31.560 The Quasi-War and the Yellow Fever sort of combine to create this, like, you know, perfect storm. 268 00:26:31.560 --> 00:26:34.600 And to me, this is kind of a historian's explanation. 269 00:26:34.600 --> 00:26:39.720 So usually, you know, if there's a problem, right, they don't have, usually don't have theory, economic theory. 270 00:26:39.720 --> 00:26:42.400 So they say, well, what happened before that could have caused it? 271 00:26:42.400 --> 00:26:45.840 Anything that looks bad, they sort of just latch on to. 272 00:26:45.840 --> 00:26:52.320 And in this case, the Yellow Fever, well, you know, there's war and disease basically throughout this period. 273 00:26:52.320 --> 00:26:54.680 So why specifically does it happen now? 274 00:26:54.680 --> 00:26:59.920 and the argument that the Bank of England suspension of specie payments caused the 275 00:26:59.920 --> 00:27:03.760 depression might make sense but remember it's kind of hard to understand how 276 00:27:03.760 --> 00:27:09.040 suspension of specie payments in February 1797 can cause an economic 277 00:27:09.040 --> 00:27:14.600 contraction that began in February 1796, or I mean in December of 1796. 278 00:27:14.600 --> 00:27:18.520 So the timing is kind of off for his explanation. I'm not going to argue that this 279 00:27:18.520 --> 00:27:22.400 suspension of specie payments by England didn't influence things. I mean obviously 280 00:27:22.400 --> 00:27:28.800 that's going to be the problem because this domestic economy that's already experiencing 281 00:27:28.800 --> 00:27:36.800 problems getting credit, now it's sort of its other alternative source of credits removed 282 00:27:36.800 --> 00:27:43.320 and so there's nowhere for people to get money to complete these sort of investments that 283 00:27:43.320 --> 00:27:44.320 they have. 284 00:27:44.320 --> 00:27:50.320 Not just for like in 30 seconds, I just want to show what was this overinvestment or malinvestment. 285 00:27:50.320 --> 00:27:57.080 Well, it's kind of hard to, and the evidence is kind of sparse, but here is just a preliminary 286 00:27:57.080 --> 00:28:04.140 table of highly capital-intensive industries that went bankrupt over, so this is the year 287 00:28:04.140 --> 00:28:08.240 where they started, these are the failure rates, so particularly in manufacturing, most 288 00:28:08.240 --> 00:28:13.200 of these large, particularly like the SMM, Society for Useful Manufacturers, went belly 289 00:28:13.200 --> 00:28:18.720 up, and so it seems like there's some, there's definitely some evidence that maybe it's not 290 00:28:18.720 --> 00:28:25.320 Not just a sort of overinvestment story a la Lucas, but there might actually be a discoordination 291 00:28:25.320 --> 00:28:33.800 in the inter-twin-poral structure of production, as argued by sort of macro-based macroeconomics 292 00:28:33.800 --> 00:28:36.640 or capital-based macroeconomics. 293 00:28:36.640 --> 00:28:42.600 So in conclusion, I just want to say that I hope I've persuaded you into looking into 294 00:28:42.600 --> 00:28:52.120 So this in more detail, other Austrian scholars. I believe the recession of 1797 295 00:28:52.120 --> 00:28:57.960 comes through the failure of legally privileged central banking, first by artificially lowering 296 00:28:57.960 --> 00:29:03.320 interest rates and stimulating investment and discoordination, and then by creating 297 00:29:03.320 --> 00:29:09.720 accounting-wide contraction as the credit was forced to come back into equilibrium. So thank you. 298 00:29:12.600 --> 00:29:14.600 Thank you very much.