Two new 1920-21 posts

1. This is from Bob Murphy, criticizing Krugman for dismissing the lessons of the American downturn but not the British. I think I should have come up earlier in the discussion... like, after him and Tom Woods. I do not know as much about the British case, but I do know that in 1923 Keynes was quite comfortable with recent Fed policy and not comfortable with recent BOE policy, and the reason was the point and other European currencies were more overvalued after the war than the dollar. This does not seem like an irrelevant fact in sorting all this out. Krugman is not the first guy to differentiate between the two cases.

2. This is from LK, and it discusses open market operations in the early 20s. Remember this is a somewhat new approach. Before then, the Fed relied mainly on the discount rate which is the rate that it charges banks. After this point, it relied more exclusively on open market operations, which influence the federal funds rate, which is the rate that banks charge each other. LK's conclusion (and I agree) is that the Fed caused the 1920-21 recession to end the war-time inflation, and then the Fed ended the 1920-21 recession by taking its boot off the economy's neck. The whole affair was somewhat haphazard, of course.


One of the things that I said in the RAE paper was that a profitable project for an Austrian would be to try to actually chart out changes in the capital structure associated with war-time monetary policy. Is this even in the cards? Will anyone take up that task? One would also think that you'd want to see a turn in the cycle emerging from the realization of entrepreneurs (particularly at the long end of the capital structure) that they don't have the resources that they thought they did. The former might be possible, but the latter seems very challenging to me in light of what we know what caused the break in inflation and the descent into depression. Any takers?