In 1951 the pressure was on to rein in inflation, soaring into double
digits.  Tsy Secy John Snyder entered into an accord with new Fed Chair Wm.
McChesney Martin to temper the Fed's previous mission of supporting the
price of Tsy bonds by its "Open Market Operations".  The new mission
included controlling the price level.

	Thanks to a strong political reaction against inflation, controlling
prices took priority.  It was a political bargain, a shift not quite
tectonic, but powerful, and with enough backing to last for many years. The
original "Accord" became a "Compact".

	Creeping inflation continued, however, and after 1970 began to
gallop. This time Pres. Carter in 1979 apptd Paul Volcker Chair of the Fed
with a new and stark remit to stop inflation dead, which he did. Interest
rates soared; S&Ls collapsed.

	I recite that familiar history just to express surprise that no one
in this interesting and learned thread has mentioned it.  It seems central
to causing and curing inflation, regardless of "spirals". 

	It also is worth stressing that the power of most labor unions was
broken during the period covered.  If there ever was a wage-price spiral it
is now just a bogeyman.

Mason Gaffney

-----Original Message-----
From: Societies for the History of Economics [mailto:[log in to unmask]] On
Behalf Of Roger Sandilands
Sent: Saturday, February 27, 2016 4:15 AM
To: [log in to unmask]
Subject: Re: [SHOE] Is there a history of cost-push or wage-price spiral
analysis?

Per contra James Ahiakpor, I think it is transparently obvious that the Fed
failed in its classical duty to be a proper lender of last resort during the
Great Depression. Just because it accommodated the public's increased
preference for cash rather than bank deposits does not gainsay this.

What happened is that in order to meet the public's demand for cash, the
banks were forced to borrow from the Fed. And because the Fed did so little
to relieve the banks of their consequential indebtedness, many of them
closed and the survivors' repugnance to debt led them to contract their own
lending. The result was a one-third decline in the community's total means
of payment - defined sensibly as cash plus bank deposits subject to transfer
by cheque to make payments every bit as effectively as if they were using
notes and coin [and properly excluding bank reserves not in circulation from
a sensible definition of money].

Is James seriously suggesting that if the public had $2bn more cash but $4bn
less in the banks, they would feel they had just as much money as before?
That they would feel the Fed was doing its job properly? And that they would
not be inclined - or forced - to reduce their spending? And that if the
banks remained heavily in debt they too would continue to lend as before to
maintain the community's circular flow of income?

Even Mill (Principles, 3, XI, para 2) agreed that the maintenance of a flow
of "credit" - by which he meant "money substitutes" in the form of bank
deposits that were means of payment - was indispensible in "making a
corresponding addition to the aggregate production of the community".

On this criterion, the Fed was grossly delinquent. As Lauchlin Currie wrote
in The Supply and Control of Money in the United States (Harvard 1934:
146-47):
    "Much of the current belief in the powerlessness of the reserve banks
appears to arise from a complete misreading of the monetary history of
1929-32. It is generally held that the reserve administration strove
energetically to bring about expansion throughout the depression but that
contraction continued despite its efforts. Actually the reserve
administration's policy was one of almost complete passivity and
quiescence." [Cited in David Laidler, Fabricating the Keynesian Revolution,
1999: 236]

But James asks: "So wherein lies the validity of the claim that the Fed
failed to act as a lender of last resort?"

The answer: Only by defining and monitoring money in the narrow sense of
currency - and also by treating non-circulating bank reserves as money. And
also, I would add, by treating interest-bearing time (savings) deposits as
though they have the same economic effect on the circular flow as
non-interest-bearing demand (transactions) deposits held for differing
motives, hence differing turnovers.

With a one-third drop in the money supply, prices also fell drastically. And
faster than did money wages. So real wages of those in employment rose. Ah,
so it was the workers who were to blame for the Depression??

As a postscript, one of those who thought this way was Harvard's Joseph
Schumpeter. Lauchlin Currie (who was Schumpeter's teaching assistant) told
me that JAS's sole anti-depression policy prescription was to favour wage
cuts - for Harvard's tea ladies, not for the faculty whose real incomes
therefore rose. This accorded, said Currie acerbically, with his belief that
"a gentleman cannot live on less than $50,000 a year."

- Roger Sandilands
--------------------------
James Ahiakor wrote:
   I tried very much to avoid getting into this discussion, but I couldn't
resist because of Tom Humphrey's latest contribution.  He employs our modern
(Keynesian) definition of money and "money stock" to interpret Henry
Thornton's monetary analysis along the lines of Milton Friedman.  It is
misleading.  He argues:

So I guess Thornton did indeed anticipate bank failure and money stock
contraction resulting from the Fed's failure to act as a lender of last
resort in the Great Depression of the 1930s.

Thornton (1802, 90), along with the other classics, including David Hume,
Adam Smith, and David Ricardo, defined money as specie and banknotes as
money substitutes or "paper credit."   The notion of "the money stock," be
it M1 or M2, is not to be found in their works.  M1 and M2 include the
public's "savings," be they the regular savings deposits or checkable
deposits.  The Fed did expand its liabilities (notes) by about 25%, from $4
billion to $5 billion between 1930 and 1933 (Irving Fisher 1935); Friedman
and Anna Schwartz (1963, 24-29) also report that currency in circulation
rose from $3.78 billion in January 1930 to $5.57 billion by March 1933.   So
wherein lies the validity of the claim that the Fed failed to act as a
lender of last resort during the Great Depression?   From where did the
money, properly so called, arise for the public to hold its additional
quantity?  Perhaps, it is noteworthy that Friedman (1960, 88-89) also
acknowledges that "Under present circumstances, even the stock of money is
not directly controlled by the [Federal Reserve] System.  The System
controls directly its own earning assets."

As for the wage-price spiral argument, it belongs firmly with Keynes and his
followers, just as Richard Lipsey has noted.  It is all in Keynes's
tradition of rejecting the classical quantity theory of money as the
explanation of the price level and its changes.  In the classical analysis,
an increase in nominal wage rates does not by itself raise the price level.
That would rather put pressure on profits.  Thus, following David Ricardo's
explanation of that mechanism, J.S. Mill chides those who would argue
otherwise, noting:
"There is no mode in which capitalists can compensate themselves for a high
cost of labour, through any action on values or prices.  It cannot be
prevented from taking its effect on low profits" (3: 479).  Mill (3: 699;
italics added) further explains:

"The doctrine, indeed, that a rise of wages causes an equivalent rise of
prices, is, . self-contradictory: for if it did so, it would not be a rise
of wages; the labourer would get no more of any commodity than he had
before, let his money wages rise ever so much; a rise of real wages would be
an impossibility.  This being equally contrary to reason and to fact, it is
evident that a rise of money wages does not raise prices; that high wages
are not a cause of high prices.  A rise of general wages falls on profits.
There is no possible alternative."

What von Mises should have argued regarding unions raising wage rates is
this: Unions may succeed in raising the (nominal) wage rates of their
members, but that may also lower the wage rates of non-unionized workers
because of the increased rate of unemployment that would result from the
raised union wages.    Mises's argument is one of the unfortunate results of
some Austrians' disputing classical monetary analysis.

James Ahiakpor

On 2/26/2016 7:06 AM, Thomas Humphrey wrote:
Robert,

Henry Thornton in 1802 obviously could not anticipate all the events of the
Great Depression that happened 128 years after he wrote. And he most
certainly did not postulate a downward wage-price spiral in his analysis,
which can be found on pp. 118-19 of the standard Hayek edition of his
(Thornton's) Enquiry Into the Nature and Effects of the Paper Credit of
Great Britain. Instead, Thornton said that a one-time fall in prices would
result from a monetary contraction. But nominal wages would remain
unchanged. Nominal wages would remain unchanged because workers would
interpret the price fall as being temporary (albeit perhaps for a protracted
period of time), and would anticipate a later reflation of the price level.
(Why lower wages in the face of a price fall anticipated to be temporary and
subsequently reversed?)

Thornton was arguing that conventional domestic monetary contraction might
not be the best way to deal with a balance-of-payments deficit and resulting
outflow of gold. For the monetary contraction would, by causing a price fall
which in the face of sticky nominal wages would produce rising real wages,
lead to a fall in real output and employment in all sectors, including the
export sector, of the economy. And depression in the export sector, Thornton
held, was hardly the best way to correct the balance-of-payments deficit
causing the gold outflow.

Thornton applied that same reasoning to argue that monetary expansion, not
contraction, was the proper way to handle financial crises and panics when
the demand for base money was increasing as bank depositors sought to
convert deposits and notes into coin and bankers sought increases in their
reserve/deposit ratios. Without monetary expansion to meet the increased
monetary demand, the result would be monetary contraction, price falls,
rising real wages, layoffs, and falling real activity. In this way,
recession would follow from financial panics. Bank failures would also
occur. So I guess Thornton did indeed anticipate bank failure and money
stock contraction resulting from the Fed's failure to act as a lender of
last resort in the Great Depression of the 1930s. But, to reiterate, he did
not anticipate the concept of a downward wage-price spiral. Instead he
postulated a one-time rise of real wages owing to the fall of prices in the
face of unchanged nominal wages. One must look elsewhere for the origins of
the "spiral" idea.
--Tom Humphrey